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

1. US Biofuel Market Model: Analysis of the Environmental Protection Agency's 2014 Recent Rulemaking Activities SaulehSiddiqui, PhD Assistant Professor Department of Civil Engineering Adam Christensen, PhD adam.christensen@jhu.edu NSF SEES Fellow Department of Geography and Environmental Engineering Support: NSF Grant #1215839 1 of 109

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

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

4. Guiding Principles • 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”

5. Model Focuses on Market Players Our Model Multiple Markets Multiple Players Individual Incentives Regulations Prediction Models Gasoline Demand Diesel Demand Production Models Biofuel Production Land Use Refinery Costs Note: It is not necessary to input supply and demand curves as part of optimization problems. …similar to FASOM.

6. 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

7. Complementarity Model Framework Policy Tradeoffs Multiple Parties Compromise Data Decision Model “Solution” Multiobjective Optimization Equilibrium Problems Game Theory Math • Equilibrium occurs when endogenous variables adjust such that agents cannot do any better

8. Complementarity Models Optimization Problem Multiple Optimization Problems Karush-Kuhn-Tucker Conditions Complementarity Problem

9. 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)

10. 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

11. Market Structure EPA D4 RIN Market D5 RIN Market D6 RIN Market Obligated Parties (Refiners) Separated RIN Market Diesel (unblended) Market BOB Market Blender Biofuel Markets Ethanol Market Biodiesel Market Gasoline Market Consumer Demand Diesel Market Importer of Ethanol Biodiesel Producers Ethanol Producers Consumer Demand

12. What about Attached RINs? • No data exists on Attached RIN prices • Value of RIN separation is passed upstream to biofuel producer through higher biofuel purchase price

13. Volume Scenarios Considered these scenarios with and without biodiesel tax credit for 2014 Units: Billion Gallons Base case for calibration

14. 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

15. 2011 – CBOT Ethanol On to some results… similar to public comments, but more detail…

16. 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%

17. EPA LOW No Biodiesel Tax Credit

18. EPA LOW With Biodiesel Tax Credit

19. 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

20. EPA LOW No Biodiesel Tax Credit

21. EPA LOW With Biodiesel Tax Credit

22. 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.

23. Irwin No Biodiesel Tax Credit

24. Irwin With Biodiesel Tax Credit

25. Tyner No Biodiesel Tax Credit

26. Tyner With Biodiesel Tax Credit

27. 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.

28. EPA HIGH No Biodiesel Tax Credit

29. EPA HIGH With Biodiesel Tax Credit

30. 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.

31. EPA LOW No Biodiesel Tax Credit

32. EPA HIGH No Biodiesel Tax Credit

33. Tyner No Biodiesel Tax Credit

34. Irwin No Biodiesel Tax Credit

35. 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

36. 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=67094f10-5056-a032-52ff-257830e0a938

37. 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

38. Joint Committee on Taxation - Score • April 3, 2014 JCT Score can be found here: • http://www.finance.senate.gov/legislation/download/?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

39. EPA MID Biodiesel Tax Credit extended to December 31, 2015