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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 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 prices 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 US fuel supply system.

Suggested Citation

  • Scott H. Irwin & Kristen McCormack & James H. Stock, 2018. "The Price of Biodiesel RINs and Economic Fundamentals," NBER Working Papers 25341, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25341
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    References listed on IDEAS

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    1. Gabriel E Lade & C -Y Cynthia Lin Lawell & Aaron Smith, 2018. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 707-731.
    2. Christopher R. Knittel & Ben S. Meiselman & James H. Stock, 2017. "The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(4), pages 1081-1119.
    3. Irwin, Scott, 2017. "The Profitability of Biodiesel Production in 2016," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 7, March.
    4. Irwin, Scott & Good, Darrel, 2017. "How to Think About Biodiesel RINs Prices under Different Policies," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 7, August.
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    Cited by:

    1. Gerveni, Maria & Hubbs, Todd & Irwin, Scott, . "Renewable Diesel and Biodiesel Supply Trends over 2011–2022," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 13(68).
    2. Herath, N. & Tyner, W.E., 2019. "Intended and unintended consequences of US renewable energy policies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 115(C).

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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