Optimal biofuel supply chain design under consumption mandates with renewable identification numbers

• We incorporate the RIN system into the design of a complete biofuel supply chain.
• We address the independent decisions of all non-cooperative stakeholders.
• We study both perfectly competitive and monopoly biofuel production markets.
• We point out that a rigid mandate on blenders may depress biofuel production.
• We propose a unit-RIN-based penalty scheme to avoid the above unintended impact.

The Renewable Identification Number (RIN) system is a tracking mechanism that enforces the U.S. Renewable Fuel Standard by monitoring obligated parties’ compliance with the biofuel consumption mandates. This paper incorporates the RIN system into the design of a biofuel supply chain that addresses independent decisions of non-cooperative farmers, biofuel manufacturers, and blenders. Game-theoretic models are developed to examine the impacts of the RIN system on individual stakeholders’ decisions (e.g., on farmland use, bio-refinery investment, biofuel production) and the competition between food and biofuel industries, in both a perfectly competitive scenario and a monopoly scenario. For the perfectly competitive scenario, Nash equilibrium can be obtained by solving a convex optimization problem. For the monopoly scenario, a bi-level Stackelberg leader–follower model is developed, from which we found that a rigid mandate on blenders may suppress the total biofuel production. To avoid such unintended consequences, a relaxed unit-RIN based penalty scheme is proposed and shown to improve the overall biofuel supply chain performance. Managerial insights are drawn from a numerical case study for the state of Illinois.