[Below is a guest post by Bill Lapp & Dave Juday]
Millions of American motorists across all income levels could be impacted this year by an indirect fuel tax that could amount to as much as $11.5 billion, all due to failures of the Renewable Fuel Standard (RFS) — the nation’s flawed biofuels mandate.
Under the RFS, which was expanded under the 2007 Energy Independence and Security Act (EISA), two broad categories of biofuels — conventional biofuel from corn, and so-called advanced biofuel from sources including Brazilian sugar ethanol and biodiesel made from vegetable oil and rendered animal fats — were to be steadily phased into the gasoline supply over 15 years. Now, just five years into the schedule, the program is nearing its breaking point. The barometer indicating the pressure under which the biofuels mandate operates is an arcane mini-cap-and-trade system for biofuel compliance credits known as renewable identification numbers (RINs).
Basically, the system works like this. Each gallon of biofuel is assigned a 38-digit code known as a RIN, which effectively act as a serial number that tracks that gallon of biofuel through the supply chain, from production to the retail fuel market. RINs are detached from the biofuel once it is purchased or blended by a refiner, and eventually are turned into the US Environmental Protection Agency (EPA) by refiners to demonstrate their compliance with the RFS. Alternatively, refiners with excess RINs can sell them on a secondary market to other refiners who are short of their compliance obligations.
Consider, conventional ethanol RINs that sold at about four cents per gallon in December — and at about one cent a year ago — rose to a high of $1.06 in March. Currently they are about 70 cents. Likewise, advanced ethanol and biodiesel RINs are also now trading at 75 cents and 80 cents respectively.
With a 10 percent blend of biofuels mandated by the RFS and an average cost of RINs at more than 70 cents, the implicit cost could reach more than 7 cents per gallon for every retail gallon of gasoline and diesel fuel purchased. Across the whole fuel supply, this could equate to an annual hidden tax on motorists of more than $11.5 billion. And that could grow. As Goldman Sachs has warned, “we believe that the risk to RIN prices is skewed to the upside over the near term.”






