RINs and the ethanol supply chain: an alternative view

Figer, Luiz

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https://hdl.handle.net/2142/26021 Copy

Description

Title

RINs and the ethanol supply chain: an alternative view

Author(s)

Figer, Luiz

Issue Date

2011-08-25T22:09:17Z

Director of Research (if dissertation) or Advisor (if thesis)

Paulson, Nicholas D.

Department of Study

Agr & Consumer Economics

Discipline

Agr & Consumer Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• ethanol
• transportation
• supply chain
• Renewable Identification Number (RIN)
• Biofuel
• Biofuel Mandate
• carbon credit
• optimization
• compliance costs
• corn

Abstract

Biofuels are meant to be an environmental friendly alternative for the use of fossil fuels. This idea led to the use of subsidies in order to support their production and use. In the USA, the EPA is in charge of establishing mandates to obligated parties and enforcing compliance. Renewable Identification Numbers (“RIN”) are generated for every gallon of biofuel produced in or imported by the USA. This number is the accounting mechanism with which the obligated party, blenders and refiners, can show that their obligation is fulfilled. RINs can only be used for compliance after they are separated from their underlying batches of biofuel. The blending of this batch or part of this batch of biofuel with gasoline or diesel triggers the separation event. At this point, the obligated party that has the separated RIN can use it for compliance, store it according to some rules and constraints or sell it to a different party. In the end of each yearly period, parties need to send enough RINs to fulfill their individual mandate of each biofuel type. A party, therefore, can meet the mandate without physically blending, or blend above the mandate and sell their excess RINs. Because some refiners should have lower ethanol sourcing costs than others, it is expected that they will be able to trade RINs, therefore decreasing total mandate compliance costs. Ethanol sourcing costs will be one of the predominant factors in defining which parties will blend, which will buy the RINs and the market value of RINs in the future. Furthermore, this factor has been neglected in the existing literature on RINs, and the results of this thesis show that there is much to understand from a comprehensive analysis of how transportation costs and the ethanol supply chain may influence the RINs market. This thesis analyzes the role of logistics in the ethanol supply chain, comparing outcomes when a RINs market exists to a baseline case where RINs are not available. The results are obtained for 2 different levels of blending margin, B, which is defined as the price of gasoline, PxGas, minus the price of ethanol, PxEth. The findings suggest that, under certain values of B, the existence of a RINs market decreases the total amount blended. Total savings from RINs are estimated to be up to 50% of the total transportation costs in the ethanol blending sector, or up to $400 million.

Graduation Semester

2011-08

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Copyright and License Information

Copyright 2011 Luiz Figer

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