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Savings from Economic Incentives

The 1990 Clean Air Amendments require that gasoline with a 2.8 percent oxygen content be marketed in 39 cities during the winter months beginning in 1992 and reformulated gasoline with an oxygen content of 2 percent be marketed by 1995 during the summer months in 9 cities. Additional cities decided to "opt in" to the reformulated gasoline requirements, increasing to nearly one-third of the gasoline supply the amount that must be reformulated. As part of the oxygenate requirement, the 1990 Amendments allow refiners and blenders to trade oxygen credits (assuming that the applicable regions adopt EPA rules for trading). Potentially, this trading provision could save refiners up to $150 million per year, calculated as follows. The oxygenated fuel requirements apply to as much as 30 billion gallons of fuel annually; the cost of adding oxygen is approximately 3 cents per gallon; and trading might save as much as one-half cent per gallon.

Of all regions where trading could take place, only a portion of the Philadelphia area has approved the EPA oxygenate trading rules. And in that region no trades have taken place. While there are undeniable potential gains from trading, refiners have not pressured administrators of the RFG program to adopt trading rules. One could speculate on the reason. Trading would lower the cost of producing RFG for high cost producers whose costs in turn are the primary determinant of market prices according to standard economic theory. Consequently, while consumers of gasoline would benefit from lower market prices, trading of oxygenate credits would lower refining profits.

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