The Price of Biodiesel Rins and Economic Fundamentals

23 Pages Posted: 11 Dec 2018 Last revised: 14 Dec 2018

See all articles by Scott H. Irwin

Scott H. Irwin

University of Illinois at Urbana-Champaign

Kristen McCormack

Harvard University - Harvard Kennedy School (HKS)

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: December 2018

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.

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Suggested Citation

Irwin, Scott and McCormack, Kristen and Stock, James H., The Price of Biodiesel Rins and Economic Fundamentals (December 2018). NBER Working Paper No. w25341, Available at SSRN: https://ssrn.com/abstract=3298814

Scott Irwin (Contact Author)

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Kristen McCormack

Harvard University - Harvard Kennedy School (HKS) ( email )

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James H. Stock

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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