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Tuesday, February 15, 2011

The Market for Biomass-Based Diesel Fuel in the Renewable Fuel Standard (RFS)

Brent D. Yacobucci
Specialist in Energy and Environmental Policy

The market for biomass-based diesel (BBD) fuel, most notably biodiesel, has expanded rapidly since 2004, largely driven by federal policies, especially tax credits and a mandate for their use under the federal Renewable Fuel Standard (RFS). Most expect that the majority of the BBD fuel quota in the RFS will be met using biodiesel produced from soybean oil. Biodiesel from other feedstocks, and other biomass-based substitutes (e.g., synthetic diesel from cellulosic feedstocks or algae) could play a larger role in the future, although currently these other alternatives are prohibitively expensive to produce in sufficient quantities.

Biodiesel production remains expensive relative to conventional petroleum-based diesel (even with tax credits), largely due to the reliance on soybean oil (a relatively expensive commodity) as a feedstock. Biodiesel and other BBD fuel production remains dependent on both tax incentives and the RFS mandates, as evidenced by a drop in production from 2009 to 2010. The expiration of the BBD tax credits after 2009 more than counteracted the increase in the RFS mandate from 2009 to 2010. Whether enough biodiesel production capacity will come online in 2011 to meet an even larger mandate remains to be seen.

The absence of the tax incentive for most of 2010, along with high soybean oil prices, caused 2010 biodiesel production to drop significantly—to the point that 2010 production may be below that needed to meet the RFS mandate. Any shortfall in supply for the 2010 BBD mandate may be met using credits generated in 2011, leading to even tighter markets going forward. These credits—referred to as RINs (Renewable Identification Numbers)—may be used by fuel suppliers to meet their obligations, banked for the next calendar year, or traded to other entities. In this way, analysis of the financial market for RINs may serve as a useful method for evaluating the overall market for BBD fuels. As BBD RINs become scarce, their price has increased dramatically (by nearly an order of magnitude over the past year). At some point, the value of the RINs may increase enough to bring idled production capacity back online or promote an increase in new capacity development and/or imports, especially if BBD producers expect RIN prices to stay high in the future.

This report discusses the current market for BBD fuels and their corresponding RINs under the RFS. It examines the role that the RIN market may play as an economic incentive for the production of biodiesel and other BBD fuels in the future. Lessons learned from the experience with the BBD quota and the associated RIN market may provide insights into the future RIN markets for other advanced biofuels and perhaps for the RFS as a whole.

Date of Report: February 11, 2011
Number of Pages: 15
Order Number: R41631
Price: $29.95

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