Here is a background paper that is circulating amoung industry leaders detailing why a price cap or a waver program for RIN's would lead to demand destruction.
RIN's 101
In their most simple form, RINs are a compliance mechanism for ensuring refiners (obligated parties) meet their obligations under the Renewable Fuel Standard (RFS). RINs essentially serve as a “proof of purchase” seal for obligated parties (oil refiners) to submit to the EPA demonstrating they’ve complied with the terms of the RFS.
RINs, the electronic signature for a gallon of renewable fuel, flow along with biofuel until it is blended with petroleum. Once blended, the RIN then magically “pops off” the fuel and you’re left with two products: (1) a blended gallon of fuel and (2) a RIN (this functions much like sulfur or lead credits in those environmental programs).
Refiners who blend biofuels, receive the RINs for free when the purchase the biofuel. Refiners who fail to blend enough renewable fuels to meet their obligation must obtain (purchase) additional RINs from refiners who blended more than necessary or purchase them from non-obligated blenders, like retail gas stations (i.e. Kum & Go—Kum & Go does not refine gasoline and add it to our fuel system, the only blend biofuel with already produced gasoline and diesel, so they do not have a “RIN obligation” like an oil refiner).
At the end of the year, the refiners must submit the requisite number of RINs to the EPA to prove they “did their part” in achieving the annual goals called from under the RFS. Failure to do so would result in rather large fines.
The Cost of RINs
In an attempt to undermine support for the RFS, some refiners who do not blend biofuels (and their petroleum trade association) have tried to claim that paying for RINs is hurting them – even in one case blaming their bankruptcy on RINs (like the PES refinery in the news of late).
However, every single independent expert who has looked at their issue in general, or the PES bankruptcy specifically, has concluded it is hog wash. Yes, the refiners must pay for RINs. But all agree that the refiner’s “crack spread” (fancy term for a refiner’s profit margin on the products they produce and sell) tracks the cost of RINs.
In other words, the price of RINs is baked into the profit margin. So in the end, the extra profit due to the RFS on the refiner’s product sales should be expected to be roughly the same as the cost of RINs they must purchase. When looking at both sides of the ledger, the impact of RINs balances out.
The Disconnect
Seeking to undercut the RFS, Senator Ted Cruz has called for capping RIN prices to help these refiners like PES who have to buy RINs. His rhetoric is focused on the cost of RINs, but his goal is to destruct demand for biofuels.
The Cruz proposal for a so-called “RIN price cap” is misleading. It is not a standard price cap that would simply limit what a RIN owner could charge for a RIN. It is much more destructive. It is actually a RIN waiver credit system. As Cruz described his misnamed plan, it would allow the EPA to issue unlimited artificial RINs at 10-cents apiece across all RIN codes (conventional, biodiesel, cellulosic, and advanced). These RIN waiver credits would not be tied to a physical gallon of renewable fuel, but they would be allowed for RFS compliance.
So for every RIN waiver credit issued, a gallon of renewable fuel demand would be destroyed. Real world demand would be set by the 15 billion gallon RFS reduced by the amount of waiver credits issued. This proposal being pushed by the White House absolutely reduces demand for biofuels, undercuts the 15 billion gallon RFS, reduces commodity prices and strikes a blow at the heart of the rural economy. Simply put, support for any plan that includes RIN waiver credits abdicates any promise to protect the RFS.
The Challenge
Perdue honestly believes that reports he would undermine the RFS are “fake news.” He probably means it when he said he supports the RFS and won’t do anything to hurt the RFS.
But in mid-December, Perdue said at the National Press Club: (paraphrase) Farmers don’t care about RIN prices. They care about volumes.
So he tells the President that addressing RIN prices won’t hurt farmers and he tells the farmers he supports the RFS and 15 billion gallons --- and he doesn’t realize those things are mutually exclusive.
In a nutshell, it is clear from his public and private comments that he doesn’t understand the “RIN price cap” idea is NOT actually a RIN price cap. The Cruz/White House proposal pitched to Grassley and Ernst is a RIN waiver credit program – a program that absolutely destroys demand.
[Side note. To be fair, if the proposal was a pure “RIN price cap” then Perdue is essentially correct to a point. A pure RIN price cap does not reduce demand – refiners would still have to turn in 15 billion RINs and there would be no artificial RINs. Farmers (although not blenders/retailers) would be held harmless. Of course, without the economic incentive of RINs, it’s hard to imagine enough retailers offering E15 and E85 to generate 15 billion RINs over the short-term when equipment investments are necessary. But because Perdue views this issue through the lens of demand, and because the RIN waiver credit scheme destroys both the economic incentive (because RINs would never sell for more than 10 cents) and the demand incentive (by generating artificial RINs that undermine the 15 billion gallon requirement) it is
better to discuss this issue with Perdue by focusing on demand destruction that would result from artificial waivers.]
We must get Perdue to understand that the Cruz/White House proposal is actually to allow EPA to issue 10-cent RIN waiver credits. These artificial credits would be allowed for refiner compliance but are NOT tied to actual biofuel blending. So every RIN waiver credit issued by the EPA DESTROYS DEMAND for biofuels, reduces farm income, and harms rural America
RIN waiver credits directly reduce the 15 billion gallon RFS obligation for refiners – the very RFS that Perdue promised to defend.
The Conclusion
So while we really appreciated Perdue’s strong comments in support of the RFS and 15 billion gallons for ethanol, if RIN waiver credits are allowed, refiners could “legally” meet their 15 BG obligation without actually blending 15 billion gallons of ethanol. Waiver credits directly reduce biofuels demand.
We need Perdue to oppose the RIN waiver credit program. He cannot back the package that the White House pitched to Grassley (with RIN waiver credits) and support not undercutting the 15 billion gallon RFS – those positions are mutually exclusive.
Side Issues
Pure Price Cap
I strongly recommend not worrying about the possibility that Perdue may turn the conversation to: “Well, then what about a pure RIN price cap? Can you support that?”
As noted above, that would reduce the value of RINs and hurt blenders/retailers who have invested in equipment to offer E15 and E85. It would reduce the incentive for future investments. However, because obligated parties would still be legally required to turn in 15 billion RINs, this really does them no good – it doesn’t ultimately destroy biofuel demand. As they would not be able to source RINs from 3rd parties, they’d be forced by economics to blend more directly.
To be clear, we do not support a pure RIN price cap. But it would be bad for refiners too, which is what Cruz didn’t push it. So we don’t need to die on that hill because the other side wouldn’t want it either. Just say if you want to reduce the cost of RINs, open up year-round blending of E15. That can be done without destroying the RFS through various RIN schemes.
The Level of a Price Cap
Perdue may try to discuss the level of a RIN price cap (whether “pure” or waiver credits). He might say, OK, ten cents is too low. What about 30 or 50 or 60 cents? Can you live with that?
The answer is no. The price for RIN credits would impact the size of the demand destruction, but there would still be demand destruction. If Perdue supports the 15 billion gallon RFS then even one waiver credit is too many