Breaking Down RIN Exports Idea

Biofuel Groups Laud Year-Round E15 Move, But RINs on Exports Could Nullify Gains

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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If biofuel credits are attached to ethanol exports and EPA continues to grant an increasing number of small-refinery waivers to the Renewable Fuel Standard, about 180 million bushels of corn demand would be lost in 2018, one economist estimates. (DTN file photo by Jim Patrico)

OMAHA (DTN) -- Refiners hailed the news this week that EPA may consider allowing biofuel credits to be attached to ethanol exports as a way to reduce the cost of the credits, while ethanol industry groups said the proposal was a bad idea.

Though the White House meeting on May 9 yielded a partial victory for ethanol with the move to implement year-round E15 sales, there is the potential that attaching renewable identification numbers (RINs) to exports would nullify the E15 gain.

On Friday, Reuters reported that the White House is set to propose just a temporary waiver to allow E15 sales year-round, to attach RINs to exports, to reduce the number of small-refinery waivers granted and to push the volume obligations onto larger refiners.

Scott Irwin, an economist at the University of Illinois, said he doesn't believe attaching RINs to exports would hold up in court. Even if the agency implements such a policy, he said, the E10 market would not change either way. The biggest concern for biofuel interests would be the potential harm to E15 and E85 blends.

"We have not done any formal analysis, because we don't think it is a legal policy," Irwin said.

"I actually think the consequences are not very large even if it is somehow implemented. I start from the position that E10 volumes will be the same with or without the RFS. In other words, E10 is cost-competitive in the gasoline blend today. This implies that the domestic ethanol blend rate will not fall below 10% regardless of the policy changes with the RFS."

What would be at risk, Irwin said, is lost gains in allowing year-round E15 sales or E85 "due to the incentive effects of higher RIN prices." As a consequence, the future of advanced biofuels could become increasingly murky as their markets primarily would reside in higher blends.

If RINs are attached to exports, RIN stocks rise and their prices fall, Irwin said, which is exactly what refiners want.

The EPA has received at least 30 requests for small-refinery waivers to the RFS for 2018.

Irwin said there may be about 500 million gallons of combined ethanol usage at risk by attaching RINs to exports along with granting waivers. That would mean about 180 million bushels of corn demand could be at risk, he said, if the RIN idea is implemented.

The 38-digit RIN attached to a gallon of biofuel is important to both energy and agricultural markets. Gasoline refiners and importers must comply with the RFS by buying and submitting credits to the EPA, or face potentially heavy fines. Refiners and importers must secure enough credits by either blending fuel or buying credits.

EXPORT IDEA HARMFUL

Geoff Cooper, executive vice president of the Renewable Fuels Association, wrote in a May 10 blog post that attaching RINs to exports would have hurt ethanol demand in 2017.

Read the blog here: http://www.ethanolrfa.org/…

According to U.S. Energy Information Administration (EIA) data, about 14.37 billion gallons of conventional ethanol was consumed in the United States in 2017. The gap between domestic consumption and the 15-billion-gallon mandate is about 600 million gallons. Cooper said in his analysis that the so-called gap is what determines the price of RINs.

To close that gap, obligated parties can either blend other conventional biofuels such as biodiesel, use RINs banked from previous years, or they can carry forward their compliance deficit to the next year.

If RINs were attached to exports, however, Cooper said all of the 600 million gallons would have been exported in 2017. That would have led to lower domestic ethanol demand, and RIN prices would have tanked.

Oil interests have been shouting loudly for a fix to what they say are high RIN prices. Right now, exported ethanol does not carry the RIN with it, so as to promote domestic use of biofuels. Refiners like the export idea because it would essentially flood the market with RINs and keep prices low -- perhaps permanently.

On the flip side, biofuel interests say the idea means less ethanol would be available for domestic consumption and would hurt demand for both ethanol and corn domestically.

Further, attaching RINs to exports could spark trade retaliation from other nations who might claim American ethanol gallons have an unfair subsidy advantage.

VALERO STUDY

Valero Energy commissioned a study in August 2017 looking at the issue. According to the analysis by Charles River Associates, attaching RINs to ethanol exports could expand ethanol exports by 1.2 billion gallons.

"With RIN values for exports, the countries projected to see the greatest increases in imports of U.S.-produced ethanol include China, Brazil, Mexico and Canada," the report said.

The RFA's Cooper told DTN it would provide no incentive to expand exports.

"If domestic ethanol demand plus ethanol export demand is larger than 15 billion gallons, which it would be, then RIN prices would fall precipitously, and so RINs really wouldn't create any kind of new economic incentive to expand exports," he said. "The oil companies argue that RINs haven't done anything to incentivize expanded ethanol blending in the U.S., so why do they now argue that RINs would incentivize expanded ethanol exports?"

If obligated parties could easily meet the 15-billion-gallon RFS by blending E10 in the U.S. and exporting 1.5 billion gallons of ethanol, Cooper said, "then RINs would have very little value and there would be little or no incentive" to expand E15 and E85 blending.

"In fact, they could regress on E10 blending and still meet RFS requirements," he said. "We don't want or need a subsidy to expand exports. The U.S. is the world's low-cost producer and ethanol exports are growing without the help of a subsidy. Allowing RINs for exports may actually reduce U.S. ethanol exports, because trading partners would most certainly implement tariffs or other barriers in retaliation."

The Valero study, however, said the resulting lower RIN prices could be "enough to overcome diverse policy barriers, such as tariffs and domestic production subsidies."

Barclays, a British multinational investment bank based in London, wrote in an analysis on Wednesday that RINs on exports could potentially "solve the RIN deficit issue" and lead to "structurally much lower" RIN prices.

"Before 2013, D6 RIN price was consistently less than 5 cents to 6 cents, equivalent to transactional costs," Barclays said. "If the market is convinced there will be no shortage, we will not be surprised if D6 RINs would drop below 10 cents going forward."

Todd Neeley can be reached at todd.neeley@dtn.com

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Todd Neeley