The RIN supply curves developed in the previous section show the importance of the level of the mandates on RIN price levels. Table 1 shows mandate levels for calendar years 2013 and 2014. The 2013 mandates are the latest proposed mandates from EPA although some believe that the volumes could still be subject to change. The 2014 biomass-based diesel mandate has not been determined. Throughout this analysis we assume that it will stay at its 2013 level. Total advanced biofuel mandates are as they were written into law by Congress. Other advanced mandates are simply equal to total advanced minus the biomass-based diesel mandates. The 2013/14 marketing year average is the weighted average of the calendar year 2013 and 2014 mandates with a one-third weight being given to 2013. Two key uncertainties for this analysis regarding mandates are whether EPA is going to reduce the advanced mandate for 2014 and the number of banked conventional RINs that are going to be used in the 2013/14 marketing year.
Biofuel Taxes, Subsidies, and Mandates: Impacts on US and Brazilian Markets / 29
Table 1. RFS Volumes
2013 2014 2013/14
(billion gallons)
Total Renewable Fuel 16.55 18.15 17.62
Conventional Biofuel 13.8 14.4 14.20
Total Advanced Biofuel 2.75 3.75 3.42
Biomass-Based Diesel
gallons of biodiesel 1.28 1.28 1.28
ethanol equivalent gallons 1.92 1.92 1.92
Other Advanced 0.83 1.83 1.50
Even though cellulosic biofuels has a mandate, the lack of production has led EPA to waive nearly all of it. To date, however, EPA has kept the total volume of advanced
biofuels constant. If EPA does this again in 2014, then the portion of the advanced mandate that can be made by sugarcane ethanol or biodiesel in excess of the biomass-based diesel mandate increases significantly by one billion gallons. If instead EPA were to reduce the total advanced volume by the cellulosic volume, then the other advanced portion would stay constant at 0.83 billion gallons, assuming that the biomass-based diesel mandate stays constant. Whether the 2013/14 weighted average mandate used in this analysis is 1.5 billion gallons or 0.83 billion gallons is primarily important for the amount of ethanol that will be mandated because, as shown in the previous section, high levels of ethanol assumption can only be consumed if the ethanol price is heavily discounted to consumers. These heavy discounts will be accomplished by high RIN prices.
The model used here is a one-year annual model. Thus it cannot directly account for how the incentive to bank or borrow RINs affects RIN prices. The RIN prices calculated by the model are simply the current year’s vertical distance between the supply curve for a biofuel and its demand curve. Thus, the mandates that are used in our model should reflect the actual volumes of biofuels consumed in the year. For biodiesel and sugarcane ethanol, the only divergence between the Table 1 mandates and the actual volumes that will be consumed will be if obligated parties decide to build their bank of advanced RINs by blending more of these biofuels than they are required to do because the current bank of advanced RINs is empty. Given the high RIN prices that we see today and the
uncertainty about the future of the RFS, it is unlikely that obligated parties will build their bank of these RINs, so it is safe to assume that the mandated volumes will be consumed.
But the bank of ethanol RINs is not empty. As of the beginning of 2013 there were approximately 2.4 billion banked conventional RINs available. Some portion of these RINs will be used to meet the 2013 mandate if current trends continue. But given continued growth in the conventional mandate, it is likely that obligated parties will not want this bank to go to zero at the end of 2014. If we assume that the stock of banked RINs will total one billion at the end of calendar year 2014, and that banked RIN use will be constant for all months in 2013 and 2014, then 700 million banked RINs will be used for each 12 month period. This means that in the 2013/14 marketing year, the level of the conventional mandate that will be met by actual consumption of ethanol will be 13.5 billion gallons.
Average results across the 500 model solutions are reported in Table 2 for the United States and Table 3 for Brazil. The first column of results are baseline results which assumes that the $1.00 per gallon US biodiesel tax credit is extended through the 2013/14 marketing year and that Brazil maintains its R$0.12 per liter reduction in the tax on hydrous ethanol. The second column of results assumes that the US biodiesel tax credit is not in place for the 2013/14 marketing year. Thus, subtracting the column 2 results from the column 1 results shows the impact of the tax credit. The third column of results assumes that the Brazilian ethanol tax reduction is not in place. Thus, the impacts of the tax reduction can be seen by subtracting the column 3 results from the column 1 results.
Baseline Results
Before discussing the impacts of the two policies analyzed, it is useful to examine the baseline results. In the United States, the combination of an average yield of 160 bushels per acre, harvested acreage of 89.5 million acres, and beginning stocks of 759 million bushels implies total corn supplies of more than 15 billion bushels. This much corn combined with USDA’s corn demand projections implies much lower corn prices and an abundance of corn to produce ethanol. Ethanol production averages 15.9 billion gallons, well in excess of mandated consumption levels. The excess production is exported. In Table 1 the US ethanol supply price averages only $1.80 per gallon. With an average wholesale gasoline price of $2.69 per gallon this means that US ethanol production costs will only be about 67 percent of the gasoline price. So even if ethanol
Biofuel Taxes, Subsidies, and Mandates: Impacts on US and Brazilian Markets / 31
Table 2. Results for the United States
Baseline No Biodiesel Tax Credit No Brazil Tax Reduction
Ethanol Quantities (billion gallons)a
Production 15.9 16.2 15.1
Exports 2.36 2.66 1.34
Consumption 13.88 14.33 13.96
Imports 0.31 0.82 0.40
Ethanol Prices ($/gal)
Demand Price 1.39 1.30 1.35
Supply Price ($/gal) 1.80 1.83 1.74
Biodiesel Production (million gallons) 1654 1,330 1616
Biodiesel Prices ($/gal)
Demand Price 2.47 2.47 2.47
Supply Price 5.22 4.54 5.13
RIN Prices ($/gallon-ethanol-equiv.)
Conventional (D6) 0.41 0.53 0.39
Advanced (D5) 1.16 1.28 1.11
Biodiesel (D4) 1.16 1.38 1.11
Corn Price ($/bu) 4.83 4.91 4.60
Soybean Complex Prices
Soybean ($/bu) 10.55 10.31 10.52
Soybean oil ($/lb) 53.34 48.17 52.74
Soybean meal ($/ton) 284.98 297.15 286.40
a
Production and consumption quantities are anhydrous-equivalent gallons of ethanol.
Table 3. Results for Brazil
Baseline No Biodiesel Tax Credit No Brazil Tax Reduction
Ethanol Quantities (billion gallons)a
Production 8.39 8.41 8.37
Fuel Consumption 9.88 9.70 8.81
Ethanol Prices ($/gal) b
Plant Price ($/gal) 2.07 2.09 1.98
Retail Price ($/gal) 2.94 2.97 3.06
Share of TRS to Ethanol 0.564 0.565 0.563
Sugar Production (million tons) 39.56 39.52 39.71
Sugar Exports (million tons) 26.96 26.92 27.10
World Sugar Price ($/lb) 0.219 0.220 0.211
a
Production and consumption quantities are hydrous-equivalent gallons of ethanol. b
is priced at its energy value (as it is in Brazil) there will be ample demand for US ethanol at this cost of production.17
With regards to biodiesel, production averages 30 percent over the biomass-based diesel mandate. This extra production is used to meet a large share of the advanced mandate, displacing imported sugarcane ethanol. Because both imported sugarcane ethanol and biodiesel are used to meet the advanced mandate in almost all of the model outcomes, the average D4 RIN price is equal to the D5 RIN price.
Biodiesel Tax Credit Results
The biodiesel tax credit increases the competitiveness of biodiesel relative to sugarcane ethanol, and imports of sugarcane ethanol to meet the US advanced mandate decline by an average of 510 million gallons. Because more Brazilian ethanol is consumed in Brazil, the tax credit reduces US ethanol exports to Brazil by an average of 300 million gallons; although, US exports to Brazil in the baseline case are projected to average more than they have ever been in the past at 2.36 billion gallons. Relatively low corn prices
combined with continued high gasoline prices and an elastic export demand set the stage for the US to be a major ethanol exporter across all three scenarios. The drop in demand for US ethanol exports decreases US production a small amount (300 million gallons) and the price of corn drops by an average of 8 cents per bushel. The biodiesel tax credit reduces US consumption of ethanol so the US ethanol demand price is 9 cents per gallon higher under the tax credit. The drop in ethanol production due to adoption of the tax credit reduces the ethanol supply price by 3 cents per gallon so the conventional RIN price is reduced by 12 cents per gallon because of the biodiesel tax credit.
The tax credit increases biodiesel production by an average of 324 million gallons. This increased production increases the soybean price by 24 cents per bushel, soybean oil prices by about 5 cents per pound, and reduces the soybean meal price by $12 per ton. Because the tax credit increases the biodiesel demand price by $1.00 per gallon of biodiesel, the biomass based diesel RIN price is decreased because of the tax credit. The difference in RIN price of
17
No capacity constraint was imposed on US ethanol production in the model. If the industry cannot produce in excess of 15.5 or 16 billion gallons, then average US exports will be cut and the price of corn will drop. This will create profits for the industry and an incentive to add capacity.
Biofuel Taxes, Subsidies, and Mandates: Impacts on US and Brazilian Markets / 33
22 cents per gallon of ethanol equivalent is less than the full amount of the tax credit because the supply price of biodiesel is 68 cents higher due to higher feedstock costs and higher required margins needed to produce that additional biodiesel.18
A combination of biodiesel and sugarcane ethanol met the advanced mandate in 491 of the 500 model solutions. The other nine were met solely with biodiesel. Thus, the D5 and D6 average RIN prices ar approximately equal at $1.16 per gallon. Without the tax credit, 278 of the 500 model solutions had imported sugarcane ethanol meeting all of the advanced mandate. Thus, without the tax credit the average D4 RIN price is 10 cents higher than the average D5 RIN price.
In Brazil, the biodiesel tax credit lowers the plant price of ethanol by two cents per gallon because of the drop in demand for Brazilian ethanol. From Table 2, ethanol exports to the United States drop by 510 million gallons as biodiesel takes a larger share of the advanced mandate. This drop in exports reduces the demand for U.S. imports. The net effect on ethanol consumption in Brazil is a decline of 180 million gallons. Because the price of ethanol is largely unchanged in Brazil, the impact of the biodiesel tax credit on sugar production, exports and world prices is small.
Brazil Tax Reduction Results
The decision by Brazil to reduce the tax on ethanol is an attempt to offset the negative effects on ethanol demand from Brazil’s policy of holding down gasoline prices below world market levels. Thus, the effect of the tax reduction is to increase the demand for ethanol. From Table 3, the average effect of the tax reduction (found by subtracting column 3 results from column 1 results) on Brazilian ethanol prices is to increase the plant price of ethanol by 9 cents (US) per gallon. Part of the tax reduction is passed along to consumers in the form of lower retail prices, which decrease by 12 cents per gallon. This reduction in retail price increases ethanol consumption in Brazil by 1.07 billion gallons (about 14 percent). As shown in Table 2, a large portion of this increased
consumption is accounted for by the large change in imports from the United States, and
18
To see where the $1.00 tax credit goes, on a gallon of ethanol equivalent basis, $1.00 of biodiesel is $0.67 per gallon of ethanol. The 68 cents per gallon of biodiesel change in the biodiesel supply price is 45 cents per ethanol-equivalent gallon. The change in RIN price is 22 cents per gallon of ethanol. Thus, the sum is 67 cents per gallon.
a smaller portion is accounted for by a drop in ethanol exports to the United States. This shows how the tax reduction makes Brazil a more attractive place to sell ethanol, whether it is produced in the United States or Brazil.
The tax reduction in Brazil increases US ethanol production by an average of 790 million gallons (5.2 percent). Because average US exports increase by about this amount and US imports from Brazil decrease, less ethanol is consumed in the United States. This drop in consumption increases the ethanol demand price by 4 cents per gallon. However, because the Brazilian tax reduction increases US ethanol production, the US supply price of ethanol increases by 6 cents per gallon because of higher corn prices. Thus conventional RIN prices increase by an average of 2 cents per gallon. Because the biodiesel tax credit is assumed to be in place in both the baseline set of results and in the results with no Brazil tax reduction, both biodiesel and sugarcane ethanol are used to meet the advanced mandate. Because the price of Brazilian ethanol increases due to the tax reduction, the cost of importing sugarcane ethanol increases so the D5 and D6 RIN prices increase by an average of 5 cents. Because the tax reduction increases the demand for biodiesel, the average price of soybean oil increases by 0.6 cents per pound, the price of soybean meal decreases $1.42 per ton, and the price of soybeans increase by an average of 3 cents per bushel.
The increased price of ethanol in Brazil because of the tax reduction causes Brazilian refineries to tilt slightly more towards ethanol and away from sugar. Brazilian sugar production drops by an average of 150,000 tons, almost all of which comes out of the export market. Thus world sugar prices average 0.8 cents per pound higher (3.8 percent) with the tax reduction in place than without it.