Baby the RINs Must Fall, Part 3 - Examining the Odds and Timing of a Potential RINs Price Crash

U.S. production of hydrogenated renewable diesel (RD), which is made from soybean oil, animal fats and 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 push RD production levels well past the mandates set by the Renewable Fuel Standard (RFS), potentially triggering a sudden crash in Renewable Identification Number (RIN) prices that — if it happens — would rock the market. In today’s RBN blog, we estimate the likelihood and possible timing of such a market-shaking event.

As we discussed in Part 1 of this series, hydrogenated RD is a type of biomass-based diesel being produced either in greenfield facilities or in repurposed refinery units previously used to make petroleum-based diesel and gasoline. RD 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 U.S. biomass-based diesel supply beyond the mandated levels set by the Environmental Protection Agency (EPA). That would be uncharted territory for the fuels market, which has been under the grip of binding renewable fuels volume mandates for 10 years.

In Part 2 we analyzed the implications of crossing that boundary. Theoretically, it could trip a switch that would cause a decrease in the price of D4 (biomass-based diesel) RINs. Recall from our Misunderstanding? series that a RIN is a 38-digit number that’s generated when certain types of renewable fuels are produced. The RIN can then be unbundled and sold to producers or importers of non-renewable fuels to satisfy obligations under the RFS. If the supply of renewable fuel increases beyond the RFS mandates, prices for RINs would drop. In other words, demand for a RIN depends on there being a shortage of biofuel supply compared to the applicable mandate, that shortage is what compels refiners to bid for that RIN, and refiners’ RIN purchases are what fund the subsidy. (This tax-and-subsidize scheme is called a cross-subsidy.)