The first contribution of this paper is estimating the extent to which the RIN tax, the LCFS diesel tax, and the CFP diesel tax have been passed through to wholesale diesel prices since 2015. To estimate pass through of the RIN tax, I take the approach used in Knittel et al. which exploits the fact that wholesale diesel and jet fuel prices only differ in their RIN obligation. Their sample covers 2013-2015, whereas mine covers 2015-2021, therefore providing a larger and more recent sample to leverage. I find that refiners, on average, fully passed through the cost of their RIN obligations to wholesale diesel prices over the last six years. The issue of RIN pass through has been of particular interest recently. RFS compliance costs reached an all-time high in 2021, strengthening the already substantial concern of potential harm on consumers and the refining industry, especially amidst a global pandemic. Senator Pat Toomey and his senate colleagues sent a letter to the Environmental Protection Agency – the administrator of the RFS – asking them to waive or reduce the 2020 volume requirements to mitigate the unduly burden placed on consumers and refiners via RFS compliance costs.EPA responded in kind, reducing the 2020 mandate retroactively in 2021. Still, some in the refining industry have argued that the RFS has made it harder to produce gasoline and diesel domestically, according to a recent article in Reuters. Refiners have indeed seen much larger RFS bills this year; one Pennsylvania refinery had a $350 million RIN obligation in the first three months of 2021, 500% higher than their total 2019 of $58 million.In 2021, refiners paid an implicit tax upwards of 20 cents per gallon of gasoline and diesel. Smaller refiners have been granted exemptions by EPA for their RIN obligations for several years. However,cannabis grow racks prior work suggests that smaller refineries have been able to pass through the cost of their RIN obligations at the same rate as large refineries .
This also comes at a time when gasoline and diesel prices have both reached their highest levels since 2014. The Biden administration has announced that the Department of Energy will release 50 million barrels of oil from the Strategic Petroleum Reserve to combat the high fuel prices. As of November 2021, the average retail price of diesel is $3.72/gallon and gasoline, $3.49/gallon. The unprecedented growth in RIN prices due to the soybean boom in 2020 and 2021 mentioned above raises speculation as to whether that period is driving any result of incomplete pass through. However, I present results where that period is dropped from the sample and find lower rates of pass through, not higher, especially in San Francisco. In fact, the striking increase in compliance costs during that period were largely passed through in most U.S. regions. Refiners in California and Oregon face an additional cost due to deficit obligations under the LCFS and CFP, respectively. In California, the additional cost is double for diesel; the implicit tax associated with their deficits were also upwards of 20 cents per gallon of diesel under the LCFS. In this paper, I find that refiners have passed through little to none of the LCFS tax to wholesale diesel prices. However, I find that the LCFS tax has been fully passed through to rack prices by blenders, which suggest that refiners have exercised their ability to trade their deficit obligations downstream. This suggests that LCFS compliance costs are borne by retailers and/or consumers. Due to data limitations, I am unable to estimate the pass through of the implicit CFP tax. The second contribution of this paper is estimating the extent to which implicit subsidies from the RFS, LCFS, and CFP are passed through to rack prices of blended diesel. Pass through of RIN subsidies to bio-diesel has been acknowledged but sidestepped in previous work due to data limitations and the unknown interactions of the RFS and the Blender’s Tax Credit .
The BTC awards blenders a $1 tax credit against their federal liability for every gallon of bio-diesel blended in the U.S. and it is realized in addition to the RIN, and the LCFS credit or CFP credit in California and Oregon, respectively. The BTC was implemented in 2005 and expired four times since, but retroactively reinstated each time. When expired, blenders and bio-diesel producers formed contracts to share the expected future credit and had potentially unknown impacts on the blenders’ margins and RIN prices. However, with straightforward assumptions about the BTC, I can identify the pass through of RIN subsidies to blended diesel prices. This subsidy pass-through analysis undertaken here is most like Pouliot et al. in the existing literature, which studies pass through of ethanol RIN subsidies to blended gasoline prices at racks across country. They find incomplete pass through in some regions and attribute it to lack of salience about how the subsidies impacted profit margins. I extend their empirical framework to estimate the pass through of RIN, LCFS, and CFP subsidies to blended bio-diesel prices at fuel terminals in eight U.S. cities. I utilize daily pricing data from the Oil Price Information Service and Bloomberg on rack prices and spot prices of diesel, bio-diesel, RINs, and LCFS and CFP credits to calculate daily profit margins for blenders. If a subsidy is fully passed through, blenders’ profit margins should move one-for-one with changes in said subsidy. There are significant heterogeneities in the pass through of bio-diesel subsidies across space, time, and policy. RIN subsidy pass-through is complete in the Midwest, incomplete on the West Coast, Gulf Coast, and East Coast. These results are somewhat consistent with Pouliot et al., ; they find incomplete pass-through only in the eastern U.S. This was due to an extreme event at the end of their sample in 2015 — the Exxon Mobil refinery explosion in California. My sample follows the explosion and accounts for the LCFS, allowing for more precise estimates of pass through on the West Coast. The finding that pass through is still incomplete on the East Coast may suggest that incomplete RIN subsidy pass through stems from a mechanism other than lack of salience.
As with pass through of the RIN tax, pass through of the RIN subsidy is less complete when dropping the time period with the shock to RIN prices. LCFS subsidies exhibited significantly less variation over my sample, making it difficult to recover precise estimates of pass through. However, I find that, on average none, of the LCFS subsidy is passed through to rack prices of blended diesel in California urban centers. In smaller California cities, complete pass through of the LCFS subsidy pass cannot be ruled out. After the LCFS subsidy grew to significant levels, pass through was lower, indicating lack of salience wouldn’t explain the results of incomplete pass through. LCFS subsidy pass through is lower for blends with higher bio-diesel content, which is consistent with market power in higher blends . CFP subsidy pass through is estimated even less precisely but the findings resemble a similar pattern as the LCFS. Taken together, the results outlined above can be summarized as follows. The RFS largely operates as intended in the diesel sector, however, findings are consistent with local market power in fuel blending on the coasts. With incomplete pass through of RIN subsidies in some markets and complete pass through of the tax, it may be that blenders are raising RFS compliance costs for consumers. California and Oregon exhibit less than complete RIN subsidy and LCFS subsidy pass through,cannabis drying racks which suggest blenders exercise local market power. On average, only 68 percent and 66 percent of the combined subsidies are passed through in California and Oregon, respectively. The remainder of the paper is structured as follows. Section 1.1 provides background information and institutional context on the RFS, LCFS, CFP, and the. Section 1.2 describes markets for diesel and biomass-based diesel. Section 1.3 describes the data used to execute the empirical strategy. Section 1.4 describes the empirical strategy for and presents results from estimating pass through of the implicit taxes from the RFS, LCFS, and CFP. Section 1.5 describes the empirical strategy for and presents results from estimating pass through of the implicit subsidies from the RFS, LCFS, and CFP. Section 1.6 concludes and discusses policy implications of the findings.The RFS was enacted in the 2005 Energy Policy Act and was revised and expanded as part of the Energy Independence and Security Act of 2007, sometimes referred to as RFS2. The RFS is administered by the U.S. Environmental Protection Agency and specifies a fraction of U.S. petroleum transportation fuel consumption that must be displaced by renewable fuels. Using projections of gasoline and diesel consumption from the Energy Information Administration , the mandate is communicated as a volume of renewable fuels for the upcoming two years. These volumetric mandates are called Renewable Volume Obligations . RVOs are set separately each for conventional , advanced , BBD , and cellulosic categories.
Refiners or fuel importers, the obligated parties under the RVO, can either produce biofuels or purchase credits, called Renewable Identification Numbers , generated from the production of renewable fuels. Each refiner must retire a certain number of each type of RIN each year for each gallon of gasoline or diesel that they sell. For example, in 2018, for every 100 gallons of gasoline or diesel sold, refineries had to retire a total of 10.67 RINs, including at least 2.37 advanced biofuel RINs, 1.74 bio-diesel RINs, and 0.16 cellulosic RINs. The remaining 8.14 RINs that must be retired can be of any category, but typically come from corn ethanol RINs and BBD RINs. Corn ethanol is the lowest-cost renewable fuel, however the E10 blendwall forces the market to use the next lowest-cost option, BBD, for much of the conventional RVO. Since refiners must purchase RINs for every gallon of gasoline and diesel they sell, RINs act as a tax that is used to subsidize renewable fuels. The magnitude of the taxes and subsidies depend on the economics of the underlying fuel markets. Since each category relies on different types of renewable fuels, each type of RIN has its own market price. Generally, the market price for each type of RIN reflects the expected cost of supplying the marginal gallon of the relevant renewable fuel needed to meet the RVO, relative to the cost of gasoline or diesel. Since advanced and cellulosic biofuels are much more expensive than conventional biofuels, the market price for their RINs are relatively expensive. Since BBD has been used to satisfy the conventional RVO, the market price for D6 RINs have converged to the market price for D4 RINs. RINs can be traded freely before being retired for annual compliance, and 20 percent of RINs generated in one year can be banked compliance in the next year. In an efficient RIN market, these features cause future expectations around fuel markets and policy to influence RIN prices. Lade et al., show that RIN prices follow a random walk and respond quickly to EPA announcements that change expectations around future compliance. The point of policy incidence is at the fuel terminal for the RFS. The fuel terminal is the midpoint in the supply chain of RINs. Renewable fuel producers generate RINs with every gallon of renewable fuel they supply. When RINs are generated, they are “attached” to the renewable fuel, meaning that whoever purchases that fuel receive the RIN certificate with the purchase. Terminals purchase the renewable fuels with the attached RINs and blends the renewable fuel with petroleum, which separates the RIN from the fuel. When the RIN is separated, it can be traded freely. When blenders separate RINs, they sell them to refiners who must retire RINs to EPA for compliance. Since blenders can sell RINs once separated, they are willing to pay a premium for renewable fuels. Figure 1 shows the movement of fuel and RINs through the supply chain in the context of diesel.RINs can be generated by domestic BBD producers, foreign BBD producers, and domestic BBD importers. The majority of bio-diesel consumed in the U.S. is produced domestically. In 2016, nearly a quarter of bio-diesel was imported, however in recent years imports fell below an eighth of total consumption – 10 percent in 2020. Almost no RINs generated from U.S. bio-diesel consumption are awarded to foreign producers.