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


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US Biofuel Market Model : Analysis of the Environmental Protection Agency's 2014 Recent Rulemaking Activities. Sauleh Siddiqui , PhD Assistant Professor Department of Civil Engineering. Adam Christensen, PhD a [email protected] NSF SEES Fellow

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

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Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

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

[email protected]

NSF SEES Fellow

Department of Geography and Environmental Engineering

Support: NSF Grant #1215839

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Outline

Outline

  • What is the RFS?

  • Guiding Principles

  • Model Assumptions

  • Description of Model

  • Results


Outline1

Outline

  • What is the RFS?

  • Guiding Principles

  • Model Assumptions

  • Description of Model

  • Results


Guiding principles

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”


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

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.


Why equilibrium modeling

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


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

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


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Complementarity Models

Optimization Problem

Multiple Optimization Problems

Karush-Kuhn-Tucker Conditions

Complementarity Problem


Model assumptions

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

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

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


What about attached rins

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


Volume scenarios

Volume Scenarios

Considered these scenarios with and without biodiesel tax credit for 2014

Units: Billion Gallons

Base case for calibration


Calibration procedure

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

2011 – CBOT Ethanol

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


Result 1

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%


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA LOW

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA LOW

With Biodiesel Tax Credit


Result 2

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


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA LOW

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA LOW

With Biodiesel Tax Credit


Result 3

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.


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Irwin

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Irwin

With Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Tyner

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Tyner

With Biodiesel Tax Credit


Result 4

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.


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA HIGH

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA HIGH

With Biodiesel Tax Credit


Result 5

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.


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA LOW

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA HIGH

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Tyner

No Biodiesel Tax Credit


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

Irwin

No Biodiesel Tax Credit


In summary

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

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


In a nutshell

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

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


Us biofuel market model analysis of the environmental protection agency s 2014 recent rulemaking activities

EPA MID

Biodiesel Tax Credit extended to December 31, 2015


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