Renewable Identification Numbers: A Supply-Chain Risk View

Renewable Identification Number (RIN) is a floor-and-trade mechanism to enforce renewable energy standards in the U.S. transportation fuels market. Motivated by several real-world cases, this chapter offers a stylized dynamic stochastic optimization framework for the price behavior of RIN certificates. We show that RIN price can be formulated as an American spread option on the price of gasoline and ethanol. A closed-form solution is derived for the case of GBM price processes. The solution suggests that the market prefers accumulating RINs in the early periods and using them towards the end of the compliance period. We also discuss potential connections between the dynamics of the RINs market and firms’ operational decisions.