Misunderstanding?, Part 2 - RINs as a Tax and a Subsidy

For several years now, no single topic has caused more angst in refiners’ quarterly earnings calls than the seemingly arcane topic of renewable identification numbers, or RINs, which can have a big impact on a refiner’s financial performance. RINs are a feature of the federal Renewable Fuel Standard (RFS), which requires renewable fuels like ethanol and bio-based diesel to be blended into fuels sold in the U.S. And depending on your point of view — farmer, refiner, blender, consumer, politician — you may have a very different perspective regarding RINs’ role as a tax and a subsidy. In today’s RBN blog, we dig into the fundamental aspects of RINs at the root of this long-running controversy and examine the role of RINs as a mechanism for forcing renewables into fuels.

In the first blog in this series, we explained that RINs are used to monitor compliance with the federal RFS, which was created by the Energy Policy Act of 2005 and expanded and extended by the Energy Independence and Security Act of 2007. In essence, the system works like this. A refiner or importer of “blendstock for oxygenated blending” (BOB) — the non-renewable gasoline mixed with ethanol to produce the E10 that most of us use to fuel our cars, SUVs and pickups — is obligated to acquire and retire an annual quota of RINs to fulfill its Renewable Volume Obligation, or RVO. A 38-digit RIN is created for and “attached” to each gallon of ethanol produced to blend with BOB, “separated” from the ethanol gallon when the gallon is blended with BOB, and “retired” to fulfill the BOB refiner or importer’s RVO. (Again, see Part 1 for a more detailed explanation.)

The cost to acquire RINs is what’s considered the “RIN tax.” How the RIN tax affects a refiner’s profit is the key point of contention. One camp, which we call Camp A, says it hurts a refiner’s profit and the other side, Camp B, says it doesn’t. Their disagreement hinges on one key question: Is the RIN tax passed through in a higher price for the non-renewable BOB the refiner sells to the downstream blender (displayed by the gray line in the yellow-outlined rectangle in Figure 1)? That disagreement about the RIN tax is one root of the controversy. But there’s another angle to the disagreement: RINs’ role as a subsidy (green-outlined rectangle), which we’ll consider today.

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