IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/21343.html
   My bibliography  Save this paper

The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard

Author

Listed:
  • Christopher R. Knittel
  • Ben S. Meiselman
  • James H. Stock

Abstract

The U.S. Renewable Fuel Standard (RFS) requires blending increasing quantities of biofuels into the U.S. surface vehicle fuel supply. In 2013, the fraction of ethanol in the gasoline pool effectively reached 10%, the ethanol capacity of the dominant U.S. gasoline blend (the “E10 blend wall”). During 2013-2015, the price of RINs—tradeable electronic certificates for complying with the RFS—fluctuated through a wide range, largely because of changes in actual and expected policy combined with learning about the implications of the E10 blend wall. RINs are sold by biofuels producers and purchased by obligated parties (refiners and importers), who must retire RINs in proportion to the petroleum they sell for surface transportation. As a result, RINs in effect serve as a charge on obligated fuels and a corrective subsidy for lower-carbon renewable fuels, and are neutral for fuels outside the RFS. In theory, RIN prices provide incentives to consumers to use fuels with a high renewable content and to biofuels producers to produce those fuels, and as such are a key mechanism of the RFS. This paper examines the extent to which RIN prices are passed through to the price of obligated fuels, and provides econometric results that complement the graphical analysis in Burkholder (2015). We analyze daily data on RINs and fuel prices from January 1, 2013 through March 10, 2015. When we examine wholesale prices on comparable obligated and non-obligated fuels, for example the spread between diesel and jet fuel in the U.S. Gulf, we find that that roughly one-half to three-fourths of a change in RIN prices is passed through to obligated fuels in the same day as the RIN price movement, and this fraction rises over the subsequent few business days. Using six different wholesale spreads between obligated and non-obligated fuels, we estimate a pooled long-run pass-through coefficient of 1.01 with a standard error of 0.12. We also examine the transmission of RIN prices to retail fuel prices. The net RIN obligation on E10 is essentially zero over this period, and indeed we find no statistical evidence linking changes in RIN prices to changes in E10 prices. We also examine the price of E85 which, with an estimated average of 74% ethanol, generates more RINs than it obligates and thus in principle receives a large RIN subsidy. In contrast to the foregoing results, which are consistent with theory, the pass-through of RIN prices to the E85-E10 spread is precisely estimated to be zero if one adjusts for seasonality (as we argue should be done), or if not, is at most 30%. Over this period, on average high RIN prices did not translate into discounted prices for E85.

Suggested Citation

  • Christopher R. Knittel & Ben S. Meiselman & James H. Stock, 2015. "The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard," NBER Working Papers 21343, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21343
    Note: EEE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w21343.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Severin Borenstein & Andrea Shepard, 2002. "Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 116-139, Spring.
    2. Matthew S. Lewis, 2011. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 409-449, June.
    3. Gabriel E. Lade & C.Y. Cynthia Lin Lawell & Aaron Smith, 2016. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp565, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    4. Lance J. Bachmeier & James M. Griffin, 2003. "New Evidence on Asymmetric Gasoline Price Responses," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 772-776, August.
    5. Severin Borenstein & A. Colin Cameron & Richard Gilbert, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 305-339.
    6. Radchenko, Stanislav & Shapiro, Dmitry, 2011. "Anticipated and unanticipated effects of crude oil prices and gasoline inventory changes on gasoline prices," Energy Economics, Elsevier, vol. 33(5), pages 758-769, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yin Chu & J. Scott Holladay & Jacob LaRiviere, 2017. "Opportunity Cost Pass-through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers," Working Papers 2017-02, University of Tennessee, Department of Economics.
    2. Moschini, GianCarlo & Lapan, Harvey & Kim, Hyunseok, 2016. "The Renewable Fuel Standard: Market and Welfare Effects of Alternative Policy Scenarios," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235721, Agricultural and Applied Economics Association.
    3. Yeh, Sonia & Witcover, Julie & Lade, Gabriel E. & Sperling, Daniel, 2016. "A review of low carbon fuel policies: Principles, program status and future directions," Energy Policy, Elsevier, vol. 97(C), pages 220-234.
    4. Pouliot, Sébastien & Babcock, Bruce A., 2017. "Feasibility of meeting increased biofuel mandates with E85," Energy Policy, Elsevier, vol. 101(C), pages 194-200.
    5. James B. Bushnell & Jonathan E. Hughes & Aaron Smith, 2017. "Food vs. Fuel? Impacts of Petroleum Shipments on Agricultural Prices," NBER Working Papers 23924, National Bureau of Economic Research, Inc.
    6. repec:ags:jlaare:267608 is not listed on IDEAS
    7. Mason, Charles F. & Wilmot, Neil A., 2016. "Price discontinuities in the market for RINs," Journal of Economic Behavior & Organization, Elsevier, vol. 132(PB), pages 79-97.
    8. Soren T. Anderson & James M. Sallee, 2016. "Designing Policies to Make Cars Greener: A Review of the Literature," NBER Working Papers 22242, National Bureau of Economic Research, Inc.
    9. Gabriel E. Lade & James Bushnell, 2016. "Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp570, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    10. Korting, Christina & Just, David R., 2017. "Demystifying RINs: A partial equilibrium model of U.S. biofuel markets," Energy Economics, Elsevier, vol. 64(C), pages 353-362.
    11. Erich Muehlegger & Richard L. Sweeney, 2017. "Pass-Through of Input Cost Shocks Under Imperfect Competition: Evidence from the U.S. Fracking Boom," NBER Working Papers 24025, National Bureau of Economic Research, Inc.
    12. repec:gam:jsusta:v:9:y:2017:i:11:p:2056-:d:118140 is not listed on IDEAS
    13. Zhong, Jia & Khanna, Madhu & Chen, Xiaoguang, 2017. "Going Beyond the Blend Wall: Policy Incentives for Fuel Consumers to Supplement the Renewable Fuel Standard," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258483, Agricultural and Applied Economics Association.
    14. repec:eee:eneeco:v:64:y:2017:i:c:p:45-54 is not listed on IDEAS
    15. Gabriel E. Lade & C.Y. Cynthia Lin Lawell & Aaron Smith, 2016. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp565, Center for Agricultural and Rural Development (CARD) at Iowa State University.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:21343. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.