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The Price of Biodiesel RINs and Economic Fundamentals

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  • Scott H. Irwin
  • Kristen McCormack
  • James H. Stock

Abstract

The D4 RIN is the tradable compliance certificate for the biomass‐based diesel (BBD) mandate in the renewable fuel standard (RFS). Understanding the price dynamics of the D4 RIN is important for understanding the RFS because its price sets a ceiling on the ethanol RIN (D6) and because some observers have suggested that RIN price fluctuations are too large to be explained by economic theory. We use option pricing theory to develop a model of the D4 RIN in terms of its economic fundamentals: the spread between the price of biodiesel and petroleum diesel and the status of the biodiesel blenders’ tax credit. The resulting D4 fundamental price closely tracks actual D4 prices. We conclude that RIN price volatility arises because of the design of the RFS and intrinsic features of the U.S. fuel supply system.

Suggested Citation

  • Scott H. Irwin & Kristen McCormack & James H. Stock, 2020. "The Price of Biodiesel RINs and Economic Fundamentals," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 734-752, May.
    • Handle: RePEc:wly:ajagec:v:102:y:2020:i:3:p:734-752
    DOI: 10.1002/ajae.12014
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    References listed on IDEAS

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    Cited by:

    1. Gerveni, Maria & Serra, Teresa & Irwin, Scott H. & Hubbs, Todd, 2023. "Price connectedness in U.S. ethanol terminal markets," Energy Economics, Elsevier, vol. 124(C).
    2. Bruce A. Babcock, 2020. "Comment on “The Price of Biodiesel rins and Economic Fundamentals”: US Biofuel Policy Failures Reveal Limitations of Market‐Based Policy Instruments," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 753-756, May.
    3. Gabriel E. Lade & C.-Y. Cynthia Lin Lawell, 2021. "The Design of Renewable Fuel Mandates and Cost Containment Mechanisms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(2), pages 213-247, June.

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