RIN credit markets are likely to experience volatility next year as markets wait for the US Environmental Protection Agency (EPA) to finalize proposed biofuel blending targets that translated into steep losses for RIN values in early December.
The Argus Renewable Volume Obligation (RVO) fell sharply on 1 December as the agency unveiled targets that fell short of market expectations, prompting bearish concerns of oversupply in the face of softer demand.
The biomass-based diesel renewable fuels target was proposed at 2.82bn USG, up from the finalized 2022 obligation by 600mn USG. But with 10 renewable diesel facilities starting production in the US this year and another 13 slated to come online between 2023 and 2025, the EPA targets fell short of what participants expected. Many noted that increased renewable production could flood the market with a surplus of D4 RINs.
Following the release of the proposal on 1 December, D4 RINs fell steeply that same day by 16.25¢/RIN to 178.75¢/RIN. The value eventually bottomed out on 6 December at 168.5¢/RIN, hitting a four-month low.
2023 vintage D4 credits followed a similar trajectory, peaking on 28 November at 186.75¢/RIN and then sinking to an all-time low for their vintage year on 5 December at 156.75¢/RIN.
Too high, too fast?
Under the current EPA proposal, cellulosic biofuel targets are positioned to double from 720mn USG in 2023 to 1.42bn USG in 2024. Despite the higher targets, 2023 vintage cellulosic biofuel D3 credits were still pulled lower following the 1 December proposal in tandem with losses from adjacent RIN types.
2023 D3 values reached their highest ever at 251¢/RIN on 30 November before falling. Values bounced and at the end of December hover at 23 November levels around 235¢/RIN.
Much of the larger D3 targets hinge upon the approval of a new eRIN pathway, which would allow automakers to generate D3 RIN credits based on termed-up energy agreements made with renewable electricity producers, such as landfill biogas capture or renewable natural gas (RNG) producers. The eRIN pathway, which could be used to generate RINs as soon as 1 January 2024, also falls in line with President Joe Biden's agenda to redirect transportation vehicles away from fossil fuels.
However, market concerns remain that the doubling of the cellulosic biofuel obligation is too high too quickly.
An additional matter that could hamper RNG incentives and D3 RIN generation is the pressure it puts on the California Air Resources Board (CARB) to reduce reliance on biogas produced from dairy farming practices. Animal welfare and environmental interests have expressed concern that the processes used at large dairy farms to produce RNG are not conducive to environmental conservation or the well-being of livestock.
Despite the lower-than-anticipated proposal for biomass-based diesel and the high cellulosic targets, market participants say there is still room for revisions before the June 2023 finalization deadline. The finalized volumes for 2021 and 2022, for example, were lower than what had initially been proposed, meaning the door could still be open for more market swings in 2023 should the blending obligations undergo more adjustments.
The EPA will hold a public hearing on the new blending targets on 10 January.
