US Biofuel Market Model: Analysis of the Environmental Protection Agency's 2014 Recent Rulemaking Activities Adam Christensen, PhD NSF SEES Fellow Department of Geography and Environmental Engineering Sauleh Siddiqui, PhD Assistant Professor Department of Civil Engineering Support: NSF Grant # 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 Model Multiple Markets Multiple Players Individual Incentives Regulations Production Models Biofuel Production Land Use Refinery Costs Prediction Models Gasoline Demand Diesel 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 TradeoffsMultiple PartiesCompromise 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

Optimization Problem Complementarity Problem Karush-Kuhn-Tucker Conditions Multiple Optimization Problems 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 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 lowEPA midEPA highTynerIrwinStatute Cellulosic (revised to ) (revised to ) (revised to 0.006) (proposed range ) Biomass- Based Diesel (revised to 1.28) (proposed 1.28) (proposed 1.28) Advanced Fuel Renewable Fuel Volume Scenarios Considered these scenarios with and without biodiesel tax credit for 2014 Base case for calibration Units: 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 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 Median Range –  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: – 43dc8d b19-820d-20f6c0be506d 43dc8d b19-820d-20f6c0be506d All documentation and amendments offered at the Committee stage can be found here: – a032-52ff e0a a032-52ff e0a938

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: – d/?id= aa10-44f6-be9a-c87ba450dfda d/?id= 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