This report gives a preliminary look at how FAPRI-MU RIN market projections could be represented as supply and use tables.Material in this publication is based upon work supported by the ERS, US Department of Agriculture, under Agreement No. 58-3000-8-0125

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       September 2009   Renewable Identification Number Markets: Draft Baseline Table    FAPRI-MU Report #07 -09        Providing objective analysis for 25 years www.fapri.missouri.edu               Published by the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri–Columbia (MU), 101 Park DeVille Drive, Suite E; Columbia, MO 65203 in September 2009. FAPRI–MU is part of the College of Agriculture, Food and Natural Resources (CAFNR).  http://www.fapri.missouri.edu  Material in this publication is based upon work supported by the ERS, US Department of Agriculture, under Agreement No. 58-3000-8-0125. Contact authors are Wyatt Thompson (thompsonw@missouri.edu), Seth Meyer (meyerse@missouri.edu), and Pat Westhoff (westhoffp@missouri.edu).   Any opinion, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the funding sources.   Permission is granted to reproduce this information with appropriate attribution to the authors and FAPRI–MU.   The University of Missouri–Columbia does not discriminate on the basis of race, color, religion, national origin, sex, sexual orientation, age, disability or status as a qualified protected veteran. For more information, call Human Resource Services at 573-882-4256 or the US Department of Education, Office of Civil Rights.     Quick overview of Renewable Identification Numbers (RINs)  The Energy Policy Act of 2005 required at least a mandated volume of biofuel use in the United States, called the Renewable Fuel Standard (RFS). The Energy Independence and Security Act of 2007 increased the overall RFS and created nested sub-mandates for advanced biofuels, biomass-based diesel, and certain cellulosic biofuels. A more generally accessible article outlining the nature of RINs and their relationship to the RFS is available elsewhere.11) the gap between the price that fuel blenders pay to buy biofuels and the prices of biofuels implicit in blended fuels,    The obligation to meet the mandates falls on fuel blenders, firms that buy input fuels to mix into final fuels that they sell to retailers. Renewable Identification Numbers (RINs) are the mechanism used to make sure each of these firms meets its share of all the mandates. Domestically produced and imported biofuels sold to fuel blenders in the U.S. can have RINs. Each fuel blender must acquire enough RINs to cover its share of the mandate.  The RINs are tradable. They are bought and sold so that the mandates will be binding or non-binding nation-wide. It is not necessary for every blender to use at least their share of the mandated amount of biofuels, but each blender is obliged to acquire RINs to meet their mandate either by buying the biofuels themselves or by buying RINs from other fuel blenders who use extra biofuels and sell extra RINs. RIN prices are affected by  2) the transaction costs of trading RINs, and  3) speculation about whether or not the mandates will be binding in the near future, as well as whether or not there will be a waiver.   The FAPRI-MU model represents the first component and part of the third component.  The price gap component is positive if a mandate is binding. A binding mandate is one that forces blenders to use more biofuels than they would otherwise. In that case, each additional gallon of biofuel blended is at a loss. Blenders have the option to blend biofuels at a loss or buy extra RINs from their peers. Blenders will bid the price of RINs up until it is at least as large as the loss on the marginal gallon. A high RIN price indicates that the mandate is binding. If the mandate is non-binding then the price gap is not positive. There would still be a transaction cost element because the price of the RIN must cover the costs of making a deal or else blenders with extra RINs will not bother selling them to blenders who want to buy the RIN. A RIN price is likely to rise if blenders expect that the mandate will become binding because                                                           1 Thompson, Meyers, and Westhoff. “Renewable Identification Numbers Are the Tracking Instrument and Bellwether of US Biofuel Mandates.” Eurochoices. www3.interscience.wiley.com/journal/122457318/issue. 2009.   they have some ability to store RINs for later use. Consequently, observed RIN prices are very unlikely to be zero even if all of the mandates are non-binding.  Introduction to the FAPRI-MU RIN Baseline Table FAPRI-MU 2009 baseline projections include markets for RINs that meet the overall, advanced, and biodiesel mandates.2 The economic models of these markets consist of equations that represent biofuel supplies (tied to the broader FAPRI-MU agricultural markets models), fuel blenders’ decisions, and final fuel demand. These equations are slightly revised relative to documentation available elsewhere.3 Key revisions relate to rollover and defining implicit RIN variables. FAPRI-MU uses this model to generate its baseline and policy analysis.4Equivalence values, the means to put all RINs on par with corn-based ethanol, are assumed to be one except for biodiesel, which was assumed to be 1.5 when the baseline was developed. If true, then a biodiesel RIN counts as 1.5 ethanol RINs when adding them up to compare to the  These projections are generated in the FAPRI baseline, but they have not been reported before. The August 2009 baseline projects markets forward to the 2014/15 marketing year, but was extended in part to illustrate how the RIN markets evolve through 2019/20. Highlights of RIN supply and use tables Nested mandates cause a RIN price hierarchy. Biodiesel and cellulosic RINs also count towards advanced and overall mandates. Advanced RINs automatically count towards the overall mandate. The reverse is not true: RINs that count towards the overall mandate do not automatically count towards any submandate; and an advanced RIN does not automatically meet either biodiesel or cellulosic mandates.  This nesting means that the price of a sub-mandate RIN can never be less than the price of a broader RIN. For example, an advanced RIN can meet either the advanced or the overall mandate but a RIN that counts against the overall mandate might not count as advanced, so the advanced RIN price cannot be less than the overall RIN price. In the table, advanced and conventional RIN prices are the same from 2009/10 to 2013/14.                                                           2 The cellulosic mandate is assumed to be waived in the 2009 baseline. 3 “Model of the U.S. Ethanol Market.” FAPRI-MU Report #07-08. July 2008. 4 “Impacts of Selected US Ethanol Policy Options” FAPRI-MU #04-09, May, 2009; "Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options" FAPRI-MU #06-08, June, 2008;  Thompson, Meyer, and Westhoff, "How Does Petroleum Price and Corn Yield Volatility Affect Ethanol Markets with and without an Ethanol Use Mandate?" Energy Policy, February, 2009; and Thompson, Meyer, and Westhoff, "Mandate Economics Applied to US Biofuel Policies," presented at the annual meeting of the IATRC, December 2008. For others, see http://www.fapri.missouri.edu.   advanced and overall mandates. Taking into account both the equivalence value and the RIN hierarchy, the biodiesel RIN price must be at least 1.5 times more than the price of an ethanol RIN that meets the advanced mandate. In these projections, the biodiesel RIN price is more than 1.5 times the advanced RIN price through 2013/14, then biodiesel RIN prices are set by their value as an advanced biofuel. The cellulosic mandate is assumed to be waived. Cellulosic biofuels are a component of two broader mandates, and both are reduced by the same amount as the cellulosic biofuels given the waiver. We assume the cellulosic RIN price equals its effective limit, or allowance value, imposed by legislation in the event of a waiver. One or more of the mandates are binding in most years of the simulations, particularly as they grow over time, but not all. If a mandate is not binding, then the price of RINs that meet that mandate fall towards zero, as in the case of the conventional RIN at the end of the period. (There would still be a price to cover transaction costs that we do not include here.) If a mandate is binding, then the value of RINs that meet that mandate will rise.  Rollover provisions are expected to allow up to 20% of one year’s mandate to be met by RINs issued in the previous year. Blenders have an incentive to overshoot the mandates in any year in order to have a buffer for the next one – behavior analogous to carry out of a commodity. We expect RIN rollover will depend on the RIN price and future increases in the mandated volume.  RINs not submitted to meet their own mandate at the end of one year can go to any of two or three other uses. First, they can be used for rollover up to the regulatory limit. Second, they can expire after at least one year without ever being used for compliance. The third option for all but overall RINs is that they can be used to meet a broader mandate. Submandate RINs used to help satisfy a broader mandate are demoted. The nested mandates means that biodiesel mandates automatically meet advanced or total mandates, as well as their own. The reverse is not true: overall RINs cannot be used to meet any submandate and advanced RINs cannot be used to meet biodiesel or cellulosic mandates.  Some advanced RINs are demoted in the early years to help meet the overall RFS and biodiesel RINs are demoted to help with the increasingly challenging advanced RFS by the end of the period. From 2018/19, the amount of conventional RIN carry out for the overall mandate hits the rollover limit, so the rest of these RINs above that limit expire. At that point, the conventional RIN price (ignoring transaction costs) falls to zero. We requested historical data, but none are yet available so all RIN data are estimated. Data are averaged over crop years, even though the mandates operate on a calendar year basis, to coordinate with feedstock market models.      Notes. Qualifying carry out RINs are those RINs not used for compliance with their designated mandate, not used for a broader mandate, and within the 20% rollover limit. RIN values reflect estimates of the core RIN value (price gap) and RIN rollover speculation , but do not include estimates of transaction costs or speculation about possible waiver for any of biodiesel, advanced, or overall mandates. The mandate for biofuels made from cellulosic and agricultural feedstocks (cellulosic) is assumed to be waived, so the number here reflects a lower level that is assumed to be used in this event, and the allowance value is used as the relevant RIN price.  Biofuel RIN Supply and Utilization: Crop Year09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20(Million gallons)Renewable Fuel Standard 12,277 13,440 14,431 15,404 16,362 17,524 18,409 19,137 19,913 20,737 21,279  Advanced biofuels 777 1,040 1,431 1,804 2,162 2,724 3,409 4,137 4,913 5,737 6,279    Cellulosic ethanol (waived) 11 24 64 137 245 391 576 804 1,079 1,404 1,779    Biodiesel 600 750 933 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000Biodiesel RFS RINs (Million RIN-gallons)  Production 617 765 925 1,002 1,011 1,007 1,063 1,143 1,216 1,282 1,332  Carry In 55 73 87 79 82 92 99 88 81 75 70  Use for biodiesel compliance 600 750 933 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000  Unused for this mandate 73 87 79 82 92 99 163 230 297 358 402      of which, carry out 73 87 79 82 92 99 88 81 75 70 71      of which, demoted 0 0 0 0 0 0 75 149 221 288 331Advanced RFS RINs  Production 1,212 1,527 1,847 2,051 2,217 2,610 3,383 4,129 4,899 5,698 6,301   Biodiesel (in ethanol gallons) 927 1,147 1,387 1,504 1,516 1,511 1,595 1,714 1,823 1,923 1,998   Cellulosic 11 24 64 137 245 391 576 804 1,079 1,404 1,779   Other Advanced 276 356 395 411 456 709 1,212 1,611 1,996 2,371 2,524  Carry In 130 184 267 343 380 429 315 289 281 267 228  Use for advanced compliance 777 1,040 1,431 1,804 2,162 2,724 3,409 4,137 4,913 5,737 6,279  Unused for this mandate 567 671 683 590 435 315 289 281 267 228 250      of which, carry out 184 267 343 380 429 315 289 281 267 228 250      of which, demoted 383 404 340 210 6 0 0 0 0 0 0Total RFS RINs  Production 12,658 13,897 14,764 15,233 16,021 17,091 18,413 19,661 20,837 21,769 22,964   Biodiesel (in ethanol gallons) 927 1,147 1,387 1,504 1,516 1,511 1,595 1,714 1,823 1,923 1,998   Cellulosic 11 24 64 137 245 391 576 804 1,079 1,404 1,779   Other Advanced 276 356 395 411 456 709 1,212 1,611 1,996 2,371 2,524   Conventional 11,446 12,370 12,917 13,182 13,804 14,481 15,030 15,532 15,938 16,070 16,663  Carry In 1,840 2,223 2,680 3,013 2,842 2,501 2,069 2,073 2,597 3,521 4,181  Use for total compliance 12,277 13,440 14,431 15,404 16,362 17,524 18,409 19,137 19,913 20,737 21,279  Unused for this mandate 2,223 2,680 3,013 2,842 2,501 2,069 2,073 2,597 3,521 4,552 5,866      of which, carry out 2,223 2,680 3,013 2,842 2,501 2,069 2,073 2,597 3,521 4,181 4,256      of which, expired 0 0 0 0 0 0 0 0 0 372 1,610RIN value (Dollars per RIN-gallon)   Biodiesel RIN 0.53 0.57 0.72 0.69 0.58 0.51 0.63 0.70 0.75 0.81 0.80   Cellulosic RIN allowance val. 0.74 1.03 0.92 0.84 0.79 0.75 0.70 0.66 0.62 0.58 0.53   Other Adv. RIN 0.07 0.03 0.01 0.05 0.11 0.34 0.42 0.47 0.50 0.54 0.53   Conventional RIN 0.07 0.03 0.01 0.05 0.11 0.17 0.18 0.14 0.06 0.00 0.00RIN compliance expend. (Million Dollars)   Total 1,145 809 814 1,492 2,383 3,519 4,150 4,005 3,269 2,903 3,134

Renewable Identification Number Markets: Draft Baseline Table

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