US Ethanol Market Analysis: RIN Works to Meet Biofuel Mandates

A new paper authored by two Iowa State University economists concludes that the ethanol market system based on renewable identification number (RIN) works effectively and as intended in tracking compliance with the US biofuel mandate.

The RIN market was created as a tradable commodity to aid in the enforcement of the federal mandate to increase renewable fuel consumption under the Renewable Fuel Standard (RFS). Each RIN represents one gallon of ethanol that has been produced and introduced into the market place and ownership of RINs proves compliance with the federal mandate by obligated parties which includes gasoline producers and importers.

The RIN prices have increased recently with higher biofuel mandates set in 2014 and 2015, prompting the petroleum industry to propose a relaxed federal mandate in order to deflate RIN prices. But the study authors, Bruce Babcock and Sebastien Pouliot, disagree and say that the market has reacted exactly as it should by signaling tight supply of RINs relative to anticipated demand. RIN prices can be reduced by increasing ethanol consumption by expanding market access to E85 (85 percent ethanol blended fuel), the authors say.

According to the authors, the higher the RIN price the greater the incentive to find lower-cost alternatives of meeting mandates. Costs can be lowered either by decreasing biofuel production costs or by increasing the value of biofuels in the market place. They conclude that rather than volatility and high prices being a sign that something was wrong with RIN markets or RFS, RIN prices did their job by signaling that higher ethanol mandates were coming and would be costly to achieve.