U.S. production of hydrogenated renewable diesel (RD), made from soybean oil and animal fats like used cooking oil, is growing faster than expected. That may sound like good news for the renewable fuels industry, but it comes with the fear that the rapid growth might trigger a sudden crash of Renewable Identification Number (RIN) prices that — if it happens — would rock the market. In today’s RBN blog, we have a go at describing what that might look like.
As we discussed in Part 1 of this series, hydrogenated RD is a type of biomass-based diesel being made today in refinery units previously used to make petroleum diesel and gasoline. It has quickly overtaken the other type of biomass-based diesel — FAME biodiesel — in market share. (FAME biodiesel is produced by reacting triglycerides with methanol to make oxygen-containing fuel molecules called fatty acid methyl ester, or FAME.) In fact, RD’s rapid growth may soon bring the U.S. total biomass-based diesel supply beyond the mandated levels set by the Environmental Protection Agency (EPA). At that stage, the EPA can declare mission accomplished and move on to something else, right? Wrong. Because if those targets are surpassed, the RIN credit, which functions as the primary subsidy supporting the growth, would theoretically disappear (although market forces could prevent that from actually occurring). That’s like taking the training wheels off a bike — the rider might crash.
To make sense of what might happen to the biodiesel market were the training wheels to come off, the essential first step is to understand how the RIN functions in the fuels market. The RIN credit system is complex, as we covered in our Misunderstanding blog series. Fortunately, for today’s purposes, we can bypass all the regulatory lingo, detailed charts and tables, because we only need to know one fundamental feature of the RIN: it is not merely a tax, like a sales tax, or a subsidy, like a tax credit. It is both a tax and a subsidy. When a refiner buys a RIN, which is like paying a tax on the petroleum fuel they produce, that payment ends up subsidizing production of the applicable biofuel that would otherwise be uneconomical.
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