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Misunderstanding Part 4 - A New Perspective on RINs: The Tax-and-Subsidize Interpretation

What has been the most controversial topic in the U.S. refining industry over the last 10 years? Well, it’s a matter of opinion but, judging from time spent in earnings conference calls, law offices, courtrooms, congressional committees, the White House, and other forums of business and political debate, Renewable Identification Numbers — or RINs — would have to be a top contender for that prize. In today’s RBN blog and the final episode of this series, we consider two differing viewpoints on the effects of the RIN system and specific disagreements — or are they misunderstandings? — about the financial consequences of RINs that have dominated the debates and legal cases.

RINs are tradable environmental credits that serve to subsidize the use of renewable fuel components like ethanol in motor fuels to meet federal mandates on renewable fuel use. (See Part 1 of this series for background on the Renewable Fuel Standard, or RFS, which is the governing regulation.) Figure 1 is a flow diagram for the RIN system that we have used in each blog in this series to help explain how RINs work.

As you can see, the RIN system is complicated and is therefore easily misunderstood. We have subdivided it into color-shaded sections to emphasize how the RIN is a two-part tax-and-subsidize system. Simply put, the RIN is both a tax on refined fuel, paid by refiners (blue-shaded section), and a subsidy granted to blenders of renewable fuel (green-shaded section), whose purpose is to force renewables into fuels. We call this the “tax-and-subsidize interpretation.” The blue- and green-shaded sections illustrate how the tax part and the subsidy part work — these are explained in more detail in Part 1 (tax) and Part 2 (subsidy) of this series. In Part 3, we showed how the RIN system accomplishes its purpose to effectively force ethanol into gasoline, and how that affects the price of the E10 gasoline (90% gasoline, 10% ethanol) that most of us use to fuel our cars, SUVs, and pickups.

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