The Distinct Economic Effects of the Ethanol Blend Wall, RIN Prices and Ethanol Price Premium due to the RFS

Abstract

The ethanol blend wall and high RIN prices has become a controversial policy issue. We develop a model showing how RIN prices reflect the costs of overcoming the blend wall, namely biodiesel consumed in excess of its mandate and expansion of E85 sales. These costs are very high and are shown to be borne by producers and consumers of ethanol and gasoline. Although RIN prices reduce consumer prices of ethanol in both the E10 and E85 blends, the net price of E10 rises because obligated parties, who are required to purchase RINs, recoup the cost by passing on higher gasoline prices to blenders. This tax on gasoline production to pay for the subsidy on all ethanol consumption and RIN prices are a means of payment for “excess” RINs that are required to pay for costs overcoming the blend wall. Burkholder (2015) and EPA (2015) emphasize this first round subsidy that also increases ethanol market prices. But these papers downplay the overall increased costs of fuel to consumers due to RINs taxing gasoline producers, and the separate adverse market effects of a binding blend mandate. The latter has been missing in the debate where it is often implied that the RIN price represents the degree to which the ethanol mandate is binding. We show the RIN price represents the costs of overcoming the blend wall and the ethanol price premium due to the binding blend mandate reflects costs of the RFS itself. Our model determines RIN prices, the costs of overcoming the blend wall and the relationship with the ethanol price premium due to the binding mandate. We use economic theory consistent with the reality of the RFS and its associated complexities. From our empirical simulations, we find RIN prices went up because of the costs of the blend wall. Increasing the mandate with a blend wall caused E10 prices and market gasoline prices to increase, along with an increase in ethanol consumption and market prices. But ethanol and market prices would increase far more without a blend wall for the same increase in the mandated volume. In addition to the costs of overcoming the blend wall, our analysis finds the cost of the mandate price premium for ethanol to fuel consumers is $53.7 billion between 2007 and 2014, and to consumers of crops (including animal agriculture) by $285.4 billion per year worldwide. Our model also obtains the result that the RFS of the 2007 EISA is infeasible with exponentially increasing volume mandates under two situations. First, the E85 price goes to zero with ever increasing RIN prices. Second, when we assume costs of E85 sales expansion levels off at $2 per gallon with the ethanol price peaking and then slowly declines (with E85 and E10 consumption). This may explain why the EPA scaled back the RFS.