RIN Fundamentals — 20 FAQs
It is to force more renewables into fuels
It provides a subsidy that lowers the cost of renewable components of fuels, and the lower cost draws more renewables into fuel.
The subsidy is funded by a tax paid by refiners and importers on the refined fuels they produce. In the case of the fuel called E10, which is the 10% ethanol / 90% refined gasoline we use in our cars, the tax is imposed on the refined gasoline called BOB (Blendstock for Oxygenate Blending) which makes up 90% of the E10 blend.
It has almost no effect on an individual refiner's profit because the market price of the refiner's BOB product increases by an amount that almost exactly offsets the RIN tax.
To get the market price does not require pricing power. The market price adjusts automatically through the collective actions of everyone in the market.
It goes to the blender in a higher cost for the BOB he buys, and from there is passed through to consumers in a higher cost of the BOB component of the blended E10.
No. It seems like they should, except the higher cost of the BOB component is almost exactly offset by the RIN discount.
This is where the subsidy comes in. When a blender buys a gallon of ethanol, it comes with an "attached" RIN. The blender redeems the RIN by blending the ethanol into fuel and then selling the RIN into the RIN market for cash.
No. It seem like it should be, except the blender is forced to apply the RIN cash as a credit to reduce his blend cost of ethanol, which effectively discounts the cost of ethanol blended into fuel, and that is the RIN subsidy.
This is forced by competition in the market for E10. All blenders receive RIN cash when they blend E10. If any one of them tries to keep their RIN cash, competitors will use their RIN cash to discount their E10 price, steal market share and increase their profit. This competition among blenders reduces the E10 market price to a new equilibrium E10 price at which the RIN cash windfall has been squeezed out of everyone.
There is no effect - the RIN tax which is baked into the price he pays for BOB and the RIN cash he gets from selling the RIN cancel.
Yes. This is called a cross-subsidy, where an increased cost for one component subsidizes a discount on the other component – like when a professional member of an industry society pays an inflated membership fee to subsidize a discounted fee for student members.
Blenders are driven to buy and blend more ethanol and less BOB than they would otherwise. That is to say, it accomplishes the purpose of the RIN.
It is almost exactly zero because the increase in the blender’s cost of BOB is almost exactly equal to the decrease in the blender’s cost of ethanol.
The RIN tax is actually a tax on a bundle of RINs which come in different categories, and in our example case of E10, the RIN subsidy only involves one of those categories -- because of that difference, they don't exactly cancel.
It has no effect. The ethanol producer receives the market price of ethanol which is set by the supply and demand for ethanol in that market. The RIN discount only affects the blender’s cost for ethanol.
The blender’s cost is not a price, it is part of a blend cost calculation done by the blender to calculate his profit on a blended gallon. This is like when you use a manufacturer’s coupon at a store – the store gets the full sticker price but your buying decision is based on your actual cost after applying the coupon.
The confusing part is about the automatic adjustments in the market prices of BOB and E10. Unlike the payment of the tax, and the receipt of the RIN cash, those market price adjustments are not deliberate actions taken by any individual or company, they occur by the forces of supply and demand; and they cannot be measured directly, because that would require measuring the difference between an actual price and a price that would have been without the RIN system, and the “would have been” price cannot be measured
The impact is to increase the aggregate demand for ethanol and reduce the aggregate demand for BOB. This will cause the least-economic BOB supply to become non-profitable, forcing it out of the market, and will bring otherwise non-profitable ethanol supply into the market. These changes will affect different refiners and ethanol producers differently, in ways that must be analyzed at the aggregate market level, versus at the level of individual producers.
Yes. It artificially increases the blend cost of BOB and artificially decreases the blend cost of ethanol which, together with the workings of the law of supply and demand in the competitive BOB and E10 markets, forces more ethanol and less BOB into fuel than would occur if pure economic forces were left to work on their own.
Hoekstra Trading LLC
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