Update on U.S. Biomass-Based Diesel Production and the D4 RINs Market
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In this our first article on Renewable Identification Numbers, or RINs, which are tradeable electronic certificates for complying with the Renewable Fuel Standard (RFS), we provide a timely update on U.S. biomass-based diesel (BBD) production in 2016 as well as an introduction to the biomass-based RINs. Look for updates on all of the four nested categories (i.e., total renewable, advanced, cellulosic, and BBD) in the renewable fuels’ RINs market in future issues.
The Renewable Fuel Standard under the Energy Independence and Security Act (EISA) stipulates that each year the Environmental Protection Agency (EPA) is required to release a proposed and final rule specifying the mandates for the next compliance year. The EPA submitted its proposal for the 2017 RFS to the White House Office of Management and Budget on April 15, 2016. This proposal contains renewable volume obligations (RVOs) for renewable fuel, advanced biofuel, and cellulosic biofuel. Also, this proposal rule includes the volumetric requirement for BBD for 2018. The EPA ruling issued on November 30, 2015, contained RVOs for renewable fuel, advanced biofuel, and cellulosic biofuel only up to 2016 and the 2017 RVO for biomass-based diesel. The volumetric requirement for BBD is set at 1.9 billion gallons for 2016 and 2.0 billion gallons for 2017. We can now expect that EPA is on track to issue its final rulemaking for the 2017 RFS mandate by November 30, 2016, which is the statutory deadline. But EPA has missed the deadline repeatedly in the recent past. Whether the EPA will increase the BBD volume obligation of 2.0 billion gallons in 2017 to above 2.0 billion into 2018 is yet to be seen.
The EPA has established a RINs trading system as a mechanism for obligatory parties in BBD to demonstrate compliance with the volumetric obligations. The RINs trading system is also designed to give obligated parties flexibility in the means that they use to achieve compliance. RINs are generated by BBD diesel producers or importers. A unique RIN is attached to each gallon of BBD that is produced. RINs are attached to the fuel until the fuel is purchased by an obligated party. The obligated party can be any refiner that produces gasoline (or diesel) or any importer that imports these fuels. Once the fuel gets to an obligated party, RINs are then separated from the fuel and can be independently bought or sold until retired to meet an obligated party’s biodiesel RVO.
The BBD volumetric standard is enforced through the trading of D4 RINs. The D4 RIN is used by the EPA to track BBD diesel trading by assigning a unique RIN to each gallon of BBD that is produced. However, D4 RINs differ from ethanol (D6) RINs in that a D4 RIN is worth 1.5 of the ethanol (D6) equivalent. EPA provides aggregated monthly data on RINs (price and quantity traded) and fuel production through EPA Moderated Transaction Systems (EMTS). EMTS displays the total production of BBD (in gallons) and quantity of D4 RINs generated in each month. Note that D4 RINs account for both biodiesel and renewable diesel.
As shown in Figure 1, BBD (i.e., both biodiesel and renewable diesel) production in March 2016 was 165.086 million gallons. This was an increase of 31.2 million gallons from the February 2016 volume and an increase of 40.5 million compared with the volume in March 2015. As seen in Figure 1, the March production exceeded the average monthly production that is necessary to achieve the 1.9 billion gallon RFA mandate set by EPA last November. Hereafter, the average monthly production has to be in the 164 million range for the rest of the year to achieve the 1.9 billion mandate in 2016.
Biodiesel production was 135.195 million gallons in March 2016, an increase of 20.829 million gallons from production in February 2016. Non-ester renewable diesel production was 31.737 million gallons, a significant increase of 14.02 million gallons from the volume in February 2016.
BBD D4 RINs theoretically represent the marginal cost of complying with the RFS (Irwin and Good, 2015). The price of D4 RINs indicates the gap between the cost of producing another gallon of BBD diesel and the price of BBD that is needed to influence consumers to buy another gallon (Pouliot and Babcock, 2014). It turns out that the RIN price is equal to the difference between a renewable fuel’s supply price and its demand price (Burkholder, 2015).
Daily average spot market prices for D4 RINs are displayed in Figure 2 along with the prices of D6 ethanol RINs. D4 RINs traded mostly lower, in the $0.80 range in March and the first half of April 2016. Notice that D4 RINs prices are trading above the ethanol RINs prices, as this difference represents a higher production cost for biodiesel compared with ethanol. Historically, D4 and D6 RINs prices follow each other very closely in the marketplace. An excellent discussion of the theoretical relationship between relative prices of D4 and D6 as well as recent RIN price behaviors can be found in Irwin and Good (2015). After the EPA’s final ruling for RFS on November 30 2015, the D4 RINs price increased substantially, as shown in Figure 2. Also, a swift run-up in RINs prices leading up to the November 30 deadline was evident.
There is a substantial amount of literature describing the many factors that affect RIN prices (Irwin and Good, 2015) and the effect of RIN prices on gasoline prices and market participants (Pouliot and Babcock, 2014; Burkholder, 2015; Knittel et al., 2015).
How do we understand the recent behavior of D4 prices (see Figure 2) as it relates to determining the price of D4 RINs? It turns out that there are three major factors that affect the price of D4 RINs:
- The first factor is the price of biodiesel feedstocks. The price of feedstocks is the main driver of the cost of producing biodiesel and therefore a key determinant of biodiesel prices. Conceptually, lower feedstock prices will increase the price of D4 RINs; conversely, higher feedstock prices will decrease the price of D4 RINs. For example, lower soybean oil prices will decrease the cost of producing biodiesel and in turn can trigger relatively higher RIN prices.
- The second factor that determines the price of D4 RINs is the blender’s tax credit. Conceptually, assuming all others factors are unchanged, reinstating the biodiesel tax credit can decrease the price of D4 RINs. Note that blenders initially bear the cost of complying with the mandate in the biodiesel market, but the tax credit will partially offset the compliance cost, thereby reducing the D4 RIN price. EPA reinstated the blender’s tax credit retroactively for 2014 and 2015 and extended it to 2016 in the final rule making of November 30, 2015. This will soften the price of D4 RINs, assuming all other factors are unchanged.
- The third factor that determines the price of D4 RINs is the volumetric mandate. The higher the volumetric requirement, the higher the price of D4 RINs and vice versa.
Further RINs Analysis
Understanding the behavior of D4 biodiesel RINs is very important in the current renewable fuel marketplace because D4 RIN prices drive D6 ethanol RIN prices when the ethanol mandate exceeds the blend wall. A detailed analysis of the current debate on how these RINs prices impact retail gasoline prices is planned for a future issue, with a focus on how ethanol D6 RIN prices impact E10 and E85 prices. Some argue that there is no effect on changes in D6 RIN prices to changes in E10 prices or E85 prices. However, some also argue that high RIN prices may lead to significant increases in gas prices for motorists. We will delve into the details on this debate while updating readers on EPA EMTS renewable fuel production and RINs data. Stay tuned.
As always, we look forward to your helpful comments and suggestions. Send comments to firstname.lastname@example.org.
Burkholder, D., 2015. “A Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effects.” Office of Transportation and Air Quality, U.S. Environmental Protection Agency.
Decision Innovation Solutions, 2016. In-house data collection, Urbandale, Iowa.
Irwin, S., and D. Good, 2015. "RINs Gone Wild? (Round 2)." farmdoc daily (5):224, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 4.
Knittel, C.R., B.S. Meiselman, and J.H. Stock, 2015. “The Pass-through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard.” NBER working paper series: 21343, National Bureau of Economic Research, Cambridge, MA.
Pouliot, S., and B.A. Babcock, 2014. “Impact of Increased Ethanol Mandates on Prices at the Pump.” CARD Policy Brief 14-PB 18, Center for Agricultural and Rural Development, Iowa State University, January.
U.S. Environmental Protection Agency, EPA Moderated Transaction System (EMTS).