US Biofuel Market Model: Analysis of the Environmental Protection Agency's 2014 Recent

Rulemaking Activities

Adam Christensen, PhD

adam.christensen@jhu.edu

NSF SEES Fellow

Department of Geography and Environmental Engineering

Sauleh Siddiqui, PhD

Assistant Professor

Department of Civil Engineering

Support: NSF Grant #12158391 of 109

Outline

• What is the RFS?• Guiding Principles• Model Assumptions• Description of Model• Results

Outline

• What is the RFS?• Guiding Principles• Model Assumptions• Description of Model• Results

• RFS is important policy in the US… if nothing else, there is a lot of money involved in operating/complying with the RFS

• The nested structure/multiple markets (gas/diesel)/multiple market players all complicate the understanding of RIN prices– Effects of cost of compliance

• Build a compact tool that allows for different scenarios to be analyzed – “Least cost compliance strategy”

Guiding Principles

Our ModelMultiple MarketsMultiple Players

Individual IncentivesRegulations

Production ModelsBiofuel Production

Land UseRefinery Costs

Prediction ModelsGasoline DemandDiesel Demand

Model Focuses on Market Players

Note: It is not necessary to input supply and demand curves as part of optimization problems.

…similar to FASOM.

Why Equilibrium Modeling?

• Widespread use in energy markets• Endogenous parameters have easy to interpret

economic implications• Looking at policy analysis under different

scenarios, not necessarily predictions• Flexible to incorporate aspects of market

power, spatial dynamics, strategy• Can replicate network dynamics

Policy

Tradeoffs Multiple Parties Compromise

Multiobjective Optimization

Equilibrium Problems

Game Theory

Math

Decision ModelData “Solution”

Equilibrium occurs when endogenous variables adjust such that agents cannot do any better

Complementarity Model Framework

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Multiple Optimization Problems

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Complementarity Models

Model Assumptions

• Perfect foresight• Annual model• Inelastic demand for transportation fuels

– Can only produce E10 & E85, diesel/biodiesel blends– No biodiesel “blend wall,” model chooses blend %

• No imports/exports of biodiesel• No exports of corn ethanol• Aggregate US/industry players model• No land use changes

– Only fuels with approved pathways and are economically significant are included (no cellulosic RINS)

Treatment of E85

• No technical barriers to consumption of E85– Above a certain quantity there could be technical

limitations, but this is not captured at this time

• Quantity used to satisfy consumer demand is discounted by the energy content– Consumers value mpg

• E85 is actually an annual average and therefore only E74

Market Structure

Ethanol Producers

Biodiesel Producers

Importer of Ethanol

Obligated Parties

(Refiners)

Ethanol Market

Biodiesel Market

D4 RIN Market

D5 RIN Market

D6 RIN Market

Gasoline Market

Diesel Market

Consumer Demand

Consumer Demand

Separated RIN Market

Biofuel Markets

Blender

EPA

BOB Market

Diesel (unblended)

Market

• No data exists on Attached RIN prices

• Value of RIN separation is passed upstream to biofuel producer through higher biofuel purchase price

What about Attached RINs?

EPA low EPA mid EPA high Tyner Irwin StatuteCellulosic

2011 0 0 0 0 0 0.25 (revised to 0.0066)2012 0 0 0 0 0 0.5 (revised to 0.00865)2013 0 0 0 0 0 1 (revised to 0.006)2014 0 0 0 0.05 0 1.75 (proposed range 0.008-0.03)2015 0 0 0 0.08 0 3

Biomass- Based Diesel2011 0.8 0.8 0.8 0.8 0.8 0.82012 1 0.8 1 1 1 12013 1.28 1.28 1.28 1.28 1.28 1 (revised to 1.28)2014 1.28 1.28 1.28 1.28 1.28 1 (proposed 1.28)2015 1.28 1.28 1.28 1.5 1.28 1 (proposed 1.28)

Advanced Fuel2011 1.35 1.35 1.35 1.35 1.35 1.352012 2 2 2 2 2 22013 2.75 2.75 2.75 2.75 2.75 2.752014 2 2.2 2.51 2.05 2.75 3.752015 2 2.2 2.51 2.58 2.75 5.5

Renewable Fuel2011 13.95 13.95 13.95 13.95 13.95 13.952012 15.2 15.2 15.2 15.2 15.2 15.22013 16.55 16.55 16.55 16.55 16.55 16.552014 15 15.21 15.52 15.85 16.55 18.152015 15 15.21 15.52 16.58 16.55 20.5

Volume Scenarios

Considered these scenarios with and without biodiesel tax credit for 2014

Base case for calibrationUnits: Billion Gallons

Calibration Procedure

• Marginal costs follow a Golombek form• Golombek parameters are beta distributed– Following work by Bruce Babcock– Defined by 4 parameters (mean, std, min, max)

• Other parameters were calibrated to roughly reproduce RIN prices for 2011-2013

• Market prices were used to define historical distributions

• Distributions were frozen at 2013 values• 5000 draws, filtered out only optimal solutions

2011 – CBOT Ethanol

Mean 2.5810

Median 2.6180

Range 2.0620 – 3.0680

s 0.2014

On to some results… similar to public comments, but more detail…

Result #1

• Scenario EPA Low – it is likely that the 2014 D6 RIN price will decrease, by more than 50%

• Scenario EPA Low – it is likely that the 2014 D5 RIN price will decrease, by more than 50%

No Biodiesel Tax Credit

EPA LOW

With Biodiesel Tax Credit

EPA LOW

Result #2

• Under any scenario, the tax credit for biodiesel does decrease the D4 RIN price but by less than the adjusted value of the tax credit– Adjusted value = $1/1.5 = $0.66

No Biodiesel Tax Credit

EPA LOW

With Biodiesel Tax Credit

EPA LOW

Result #3

• Scenario Irwin or Tyner, it is likely that the D6 RIN price will increase.

• Under Irwin’s proposal, it’s also likely that the D4 and D5 RIN prices will increase.

• Should the tax credit be reinstated, some of this price increase of the D4 and D5 RIN prices can be mitigated.

No Biodiesel Tax Credit

Irwin

With Biodiesel Tax Credit

Irwin

No Biodiesel Tax Credit

Tyner

With Biodiesel Tax Credit

Tyner

Result #4

• Scenario EPA High – it is likely that the D6 RIN price will be similar to 2013 market prices.

• Under this scenario, it is also likely that the D5 prices will increase.

No Biodiesel Tax Credit

EPA HIGH

With Biodiesel Tax Credit

EPA HIGH

Result #5

• Scenario EPA Low – nearly eliminate the need to blend E85 alternative fuels.

• Scenario EPA High – refiners/blenders will have an incentive to continue to blend E85 fuels at slowly increasing volumes.

• Scenarios proposed by Tyner or Irwin encourage much more rapid deployment of E85 at the cost of higher D6 RIN prices.

EPA LOW

No Biodiesel Tax Credit

EPA HIGH

No Biodiesel Tax Credit

Tyner

No Biodiesel Tax Credit

Irwin

No Biodiesel Tax Credit

In Summary…

• Compliance paths have been mapped out, within the confines of our assumptions

• No recommendation on “correct volumes,” focusing on analysis only

• Model framework allows for expansion/relaxation of assumptions… but would benefit from partnerships

Senate Extenders Package

• On April 3, 2014 the Senate Finance Committee marked up a piece of legislation that contained tax extensions, some of which are fuel related. It was approved by a bipartisian voice vote.– Title: Expiring Provisions Improvement Reform and

Efficiency Act (EXPIRE) Act

• The press release can be found here:– http://www.finance.senate.gov/newsroom/chairman/release/?

id=43dc8d45-2748-4b19-820d-20f6c0be506d

• All documentation and amendments offered at the Committee stage can be found here: – http://www.finance.senate.gov/legislation/details/?id=67094f

10-5056-a032-52ff-257830e0a938

In a nutshell…

• “Second generation fuel” $1.01/gal credit reinstated to December 31, 2015– NOT given retroactively to fuel produced in 2014

• Biodiesel and renewable diesel $1/gal credit reinstated to December 31, 2015– Given retroactively to fuel produced in 2014

Joint Committee on Taxation - Score

• April 3, 2014 JCT Score can be found here:– http://www.finance.senate.gov/legislation/downloa

d/?id=68144306-aa10-44f6-be9a-c87ba450dfda

• Second generation fuel credit = $55m– 2014 = $15m, 2015 = $28m, 2016 = $12m– Indication of what JCT thinks will be produced

• Biodiesel/Renewable Diesel credit = $2.6b– 2014 = $945m, 2015 = $1.276b, 2016 = $344m

Biodiesel Tax Credit extended to December 31, 2015

EPA MID