Compliance Path and Impact of Ethanol Mandates on Retail Fuel Market in the Short Run

Past studies have examined the impact of ethanol mandates with a long-run perspective and were thus able to assume away short-run rigidities and some of the specifics of the biofuel mandates. These studies have been of limited use in informing current policy debates because the short- to medium-run reality is one of strong regulatory and infrastructure rigidities that restrict how ethanol can be consumed in the United States. Our objectives in this paper are to provide a more coherent framework than currently exists to model and understand how compliance with ethanol mandates in the short run cannot be met with conventional gasoline blends, how compliance impacts fuel prices and consumer and producer welfare, and also to measure the size of the transfer that occurs between refineries and ethanol producers through the market's Renewable Identification Numbers (RINs). In a model calibrated to 2015 data, we find that the effects of increasing ethanol mandates that are physically feasible are close to zero on the retail price of gasoline. This result is robust to different gasoline prices, supply elasticities, and export-demand elasticities. Increased mandates can have a large negative effect on the price of high-level ethanol gasoline blends such as E85 if the mandates are increased to approach consumption capacity.