Biomass-Based Diesel Demand Destruction 2.0?

February 13, 2025

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by Scott Irwin (farmdoc daily) A farmdoc daily article last week (February 5, 2025) examined the possible impact of reductions in the conventional mandate under the U.S. Renewable Fuel Standard (RFS) on the demand for ethanol in the physical market. A previous episode with small refinery exemptions (SREs) in the first Trump Administration provides an important test case. Specifically, the aggregate blend rate for ethanol in the U.S. during the period of heaviest SRE activity—December 2017 through January 2020—was examined and no evidence was found that the blend rate fell systematically during this period. A reasonable conclusion is that SREs did not cause a reduction in the physical demand for ethanol in E10 gasoline blends. This is not surprising because ethanol is a price competitive component in E10 gasoline blends due to its value as an octane enhancer. The situation is quite different for biomass-based diesel (BBD), because it is much more expensive than petroleum diesel, and therefore, the BBD mandate under the RFS is highly binding. Consequently, SREs are expected to reduce the physical demand for BBD (FAME biodiesel + renewable diesel). The purpose of this article is to investigate the magnitude of BBD demand destruction in the physical market due to SREs during the first Trump Administration to better understand potential impacts if the second Trump Administration follows suit.

Analysis

The RFS was created under the Energy Policy Act of 2005 and was later modified and expanded under The Energy Independence and Security Act of 2007 (farmdoc daily, May 17, 2023). The 2005 version of the program is known as “RFS1” and the 2007 version as “RFS2.” Since its inception, the program has been administered by the U.S. Environmental Protection Agency (EPA). RFS1 included a provision to exempt small refineries (fewer than 75,000 barrels of average aggregate daily crude oil throughput) from the specified biofuel mandates based upon a finding of a disproportionate economic hardship for the small refinery (or refiner), and this provision was not changed in RFS2. The implementation of small refinery exemptions (SREs) has changed substantially over time. Initially, RFS1 provided a statutory blanket exemption for all small refiners through 2010. In 2011, EPA temporarily extended the blanket exemption through 2012 in response to demands from Congress for a reassessment of the impacts on small refineries (farmdoc daily, December 6, 2017). From 2013 through 2016, the Obama Administration awarded only a few SREs. This policy was reversed in 2017 by the first Trump Administration, with the EPA granting a total of 85 SREs for the 2016-2018 compliance years representing nearly 40 billion gallons of exempted gasoline and diesel volumes (farmdoc daily, September 19, 2019).

The retroactive manner in which the SREs were implemented without reallocation under the first Trump Administration effectively reduced the size of all mandates, including the BBD mandate. For example, the SREs awarded for 2017 reduced the BBD mandate from 2.1 billion gallons to 1.92 billion gallons (farmdoc daily, July 12, 2018). Additional SREs were awarded for the 2019 compliance year and expected SREs for the 2020 compliance year were part of the final EPA rulemaking for that year. However, a Tenth Circuit Court of Appeals decision in late January 2020 vacated most of the SREs granted in previous years and remanded the matter back to the EPA for further proceedings consistent with the opinion (farmdoc daily, March 12, 2020). While there has continued to be back and forth in the courts about SREs, the January 2020 decision marked the effective end of SREs having a major impact on the implementation of RFS mandates.

A series of earlier farmdoc daily articles (September 13, 2018; December 13, 2018; January 16, 2019: March 14, 2019) examined the impact of SREs on biofuel markets and found: i) little or no evidence of demand destruction for ethanol, and ii) substantial evidence of demand destruction for biomass-based diesel. However, these articles were published before January 2020, and therefore did not have complete data for the period when SREs potentially had their greatest market impact.

The first step of the present analysis is to define the period of greatest SRE impact during the first Trump Administration. The argument made at the time by many in the biofuel industry was that SREs impacted demand through incentives provided by RIN prices. (See the farmdoc daily article from May 24, 2023 for an overview of the RFS RIN compliance system.) Based on this logic, the relevant time window should start when SREs drove down RIN prices sharply.

In our most recent article on ethanol demand destruction (farmdoc daily, February 5, 2025), D6 ethanol RIN prices were used to date the beginning of the SRE period. Figure 1 presents weekly D6 ethanol RIN prices from April 3, 2008 through January 9, 2025. The figure shows that D6 prices peaked at just under $1.00 per gallon in late October 2017, and then started to plummet in December with the announcement of SREs. This suggests the impact of SREs on the physical demand for ethanol, if any, should have started around December 2017. Figure 2 shows weekly D4 BBD RIN prices from September 3, 2009 through January 9, 2025, and they suggest that the impact of SREs on the physical demand for BBD should have started around the same time, December 2017. Note that this is the same starting date we used in our earlier analyses of the impact of SREs on biofuel demand (farmdoc daily, September 13, 2018; December 13, 2018; January 16, 2019: March 14, 2019). We can date the end of the most active SRE period to January 2020 based on the court case discussed above. Both D4 and D6 prices began to recover shortly after the court decision was announced and ultimately reached highs of nearly $2.00 per gallon in June 2021.

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There is considerable uncertainty about how the U.S. Renewable Fuel Standard (RFS) mandates will be implemented under the new Trump Administration. One possibility is that the new Administration will follow the playbook from first Trump Administration and write down the mandates through the retroactive awarding of large numbers of small refinery exemptions (SREs). The previous episode with SREs provides a valuable test case regarding the potential for biomass-based diesel (BBD) “demand destruction” if this policy is repeated in the new Trump Administration. We examined the aggregate blend rate for BBD in the U.S. during the period of heaviest SRE activity—December 2017 through January 2020—and found strong evidence that the blend rate fell swiftly and systematically during this period. On average, the BBD blend rate during the SRE period fell by 1.3 percentage points, which is quite large given that the blend rate just before the SRE period began was about four percent. In gallon terms, total BBD demand declined 1.73 billion gallons due to the SREs. It is reasonable to conclude that SREs wreaked considerable demand destruction on BBD. The economic value of the demand destruction is estimated to be a loss of $6.7 billion. The BBD industry has much to fear if an SRE episode is repeated in the second Trump Administration.

References

Coppess, J. and S. Irwin. "EPA and the Small Refinery Exemption Issue in the Renewable Fuel Standard Mandates." farmdoc daily (10):46, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 12, 2020.

Coppess, J. and S. Irwin. "EPA 2019 RFS Proposed Rulemaking: What You See Is Not What You Get." farmdoc daily (8):128, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 12, 2018.

Coppess, J. and S. Irwin. "Another Wrinkle in the RFS: The Small Refinery Exemption." farmdoc daily (7):224, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 6, 2017.

Gerveni, M., T. Hubbs and S. Irwin. "Overview of the RIN Compliance System and Pricing of RINs for the U.S. Renewable Fuel Standard." farmdoc daily (13):95, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 24, 2023.

Gerveni, M., T. Hubbs and S. Irwin. "Overview of the U.S. Renewable Fuel Standard." farmdoc daily (13):90, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 17, 2023.

Gerveni, M., T. Hubbs, S. Irwin and S. Ramsey. "Revisiting the RIN Cliff." farmdoc daily (15):10, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 15, 2025.

Gerveni, M. and S. Irwin. "Policy Priorities for Biomass-Based Diesel." farmdoc daily (15):17, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 29, 2025.

Irwin, S. "Ethanol Demand Destruction 2.0?" farmdoc daily (15):22, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 5, 2025.

Irwin, S. "Clearing the Logjam on the RFS and SREs: A Simple Proposal." farmdoc daily (9):175, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 19, 2019.

Irwin, S. "Small Refinery Exemptions and Biomass-Based Diesel Demand Destruction." farmdoc daily (9):45, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 14, 2019.

Irwin, S. "Small Refinery Exemptions and E85 Demand Destruction." farmdoc daily (9):8, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 16, 2019.

Irwin, S. "More on Small Refinery Exemptions and Ethanol Demand Destruction." farmdoc daily (8):228, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 13, 2018.

Irwin, S. "Small Refinery Exemptions and Ethanol Demand Destruction." farmdoc daily (8):170, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 13, 2018.

Irwin, S. and D. Good. "Revisiting the Estimation of Biomass-Based Diesel Supply Curves." farmdoc daily (7):135, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 26, 2017.

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