Rolling Back the Write Down of the Renewable Mandate for 2014: The RINs Market Rings the Bell Again
by Scott Irwin (University of Illinois) The EPA is apparently going to finalize 2014 RFS rules in the near future. This will at least temporarily bring the tumultuous process to an end that started with the release of the preliminary RFS rulemaking for 2014 on November 15, 2013. The preliminary rulemaking signaled a major shift in EPA policy. The shift essentially involved writing down the renewable (ethanol) mandate to the level of the E10 blend wall as well as substantial cuts in the advanced mandate. This left the proposed total for the RFS in 2014 at 15.21 billion gallons compared to the statutory total of 18.15 billion gallons. Not surprisingly, the proposal has been hugely controversial and the subject of an intense lobbying campaign by those that support and those that oppose the policy shift.
Several previous farmdoc daily articles have examined the behavior of RINs market prices as an indicator of the future direction of EPA policy. One article (October 10, 2013) showed that RINs traders likely had information about the write down of the renewable mandate for 2014 as early as July 2013. Later articles (February 19, 2014; March 5, 2014) highlighted the increasing odds that the EPA would reverse the proposed write down of the renewable mandate for 2014 in final rulemaking. For example, it was estimated in February 2014 there was about an 80 percent probability of the EPA reversing the write down of the renewable mandate. The purpose of today’s article is to examine the latest signals from the RINs market about EPA final rulemaking for 2014, and in particular, determine how much can be implied about the size of the likely rollback in the cuts to the renewable mandate.
The evidence is overwhelming that the EPA is going to roll back the cuts to the renewable (ethanol) mandate in the final 2014 RFS rulemaking. The really interesting question at this point is the size of the rollback, or equivalently, the absolute level of the renewable mandate for 2014. Reports in the trade press in recent months suggest the final 2014 renewable mandate will be between 13.4 and 13.8 billion gallons. Some information on this question can be inferred from the relationship between D6 ethanol and D4 biodiesel RINs prices and the projected size of the “renewable gap” relative to the available stock of RINs. A key fact is that the ratio of D6 to D4 RINs prices has averaged 0.93 since mid-June 2014. This is the longest sustained period of the ratio being above 0.90 since early July 2013. This fact suggests that the RINs market is pricing in a renewable mandate that is higher than 13.8 billion gallons. This may be due to new information about the likely final level of the renewable mandate in 2014 or accounting for the possibility that a court decision eventually restores the renewable mandate to its full statutory level of 14.4 billion gallons in 2014 and 15 billion gallons thereafter. READ MORE and MORE and MORE (Biodiesel Magazine)