Publications: Papers

The Renewable Fuel Standard: How Markets Can Knock Down Walls (January 2014)

 

The RFS requires a certain percentage of ethanol be blended into motor fuel, and creates a credit pricing system to rationalize that process. The price of these credits—called Renewable Identification Numbers or RINs—spiked last year, causing much consternation in oil markets and in some policy circles in Washington. Nevertheless, even that episode showed that the basic policy works as intended, insofar as the higher RIN prices stimulated a substantial jump in sales of 85% ethanol gasoline blends (E85) purchased by owners of flex-fuel vehicles (FFVs). Cheered on by some segments of the oil industry, however, the Obama Administration proposed a retreat from the ethanol percentage requirements for 2014, apparently spooked by the prospect that high RIN prices might be blamed for high gasoline (E10) prices or some unspecified distortions in the market. This is particularly ironic, given that the RIN price is the primary vehicle for stimulating additional ethanol use to achieve the objectives of the program, and that the overall impact of the program is to reduce U.S. gasoline prices. This study shows that the concern regarding the effects of RIN prices on motorists is misguided and clearly refuted by market evidence.

 

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