Publications: Notes at the Margin

Renewable Fuels Pass-Through Controversy; Hot Money and Hot Energy Markets (September 20, 2021)


This week's report covers two topics. First, we explore the controversy regarding the pass-through of the renewable fuel program costs to gasoline and diesel consumers. Second, we dive into the money managers’ participation in natural gas futures markets.


We start by examining the pass-through of the renewables’ cost to gasoline prices. We addressed this subject previously in the June 28 Notes at the Margin. There, we argued that the program’s cost was being passed through fully to consumers. Our analysis echoed the earlier and much more comprehensive research by Kalt (1975) and more recently by Knittel, Meiselman, and Stock (2017). This week the Renewable Fuels Association (RFA) issued a short study on the pass-through. The press release summarized the results in its headline: “RFA Analysis: Retail Gas Prices Not Affected by Renewable Fuel Standard Credits.”


Here, we reexamine the pass-through subject. Our conclusion can be characterized by a line often attributed to Mark Twain: “Figures don’t lie, but liars figure.” The RFA analysis has likely been prepared to influence the Environmental Protection Agency’s review of the Renewable Fuel Standard (RFS) for 2022 and beyond. Our analysis reaffirms the work of Knittel and his coauthors. The renewable fuel program’s costs are fully passed through to consumers. As we explain, the conclusion is important because the renewables’ cost, as measured by the price of renewable identification numbers (RINs), is identical to a carbon tax. Our further conclusion is that a carbon tax levied on petroleum product producers would also be fully passed on to consumers.


The second part of the report addresses increased investor activity in natural gas futures. The rise in energy costs in Europe and Asia over the past few weeks has led to warnings of very high prices this winter. Commodity Futures Trading Commission data indicate that passive investors are rushing into the market. Interestingly, senior European politicians such as Mario Draghi, Italy’s prime minister and former European Central Bank head, are acting to limit price increases. Severe market dislocations may follow.


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