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Renewable Identification Numbers: A Supply-Chain Risk View

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  • Ghoddusi, Hamed

Abstract

Renewable Identification Number (RIN) is afloor-and-trade mechanism to enforce renewable energy standards in the U.S. transportation fuels market. Motivated by several real-world cases, this chapter offers a stylized dynamic stochastic optimization framework for the price behavior of RIN certificates. We show that RIN price can be formulated as an American spread option on the price of gasoline and ethanol. A closed-form solution is derived for the case of GBM price processes. The solution suggests that the market prefers accumulating RINs in the early periods and using them towards the end of the compliance period. We also discuss potential connections between the dynamics of the RINs market and firms’ operational decisions.

Suggested Citation

  • Ghoddusi, Hamed, 2020. "Renewable Identification Numbers: A Supply-Chain Risk View," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 14(1-2), pages 77-100, October.
    • Handle: RePEc:now:fnttom:0200000096-5
    DOI: 10.1561/0200000096-5
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    References listed on IDEAS

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    3. Nadarajah, Selvaprabu & Margot, François & Secomandi, Nicola, 2017. "Comparison of least squares Monte Carlo methods with applications to energy real options," European Journal of Operational Research, Elsevier, vol. 256(1), pages 196-204.
    4. James E. Smith & Kevin F. McCardle, 1999. "Options in the Real World: Lessons Learned in Evaluating Oil and Gas Investments," Operations Research, INFORMS, vol. 47(1), pages 1-15, February.
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