Working Paper: NBER ID: w25341
Authors: 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.
Keywords: Biodiesel; RINs; Renewable Fuel Standard; Economic Fundamentals; Option Pricing
JEL Codes: C32; Q11; Q42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| biodiesel and ultra-low-sulfur diesel (ULSD) price spread (Q31) | D4 RIN prices (Q31) |
| biodiesel blenders tax credit (H25) | D4 RIN prices (Q31) |
| RFS design and fuel supply system (L90) | RIN price volatility (Q31) |