EPA add-up RFS and the biodiesel blenders tax credit
Blenders Tax Credit, EISA, and Add-Up
A blender's tax credit, such as the $1.00 per gallon credit given to biodiesel blenders which expired at the end of 2013, gives an incentive to blenders to use more biofuel. The potential for reinstatement of the blender's credit was discussed on here. Under the EPA's previous method, the credit may simply make the mandate less costly to achieve. The tax credit for each gallon of biodiesel blended would tend to make D4 RIN prices lower. If the RFS was then easy to exceed or if obligated parties wanted extra RINs to carry into the next year, biodiesel use might rise but perhaps not very much. If extra biomass-based diesel was used beyond its own requirement, then it might displace ethanol used for advanced or overall requirements.
The proposed Add-Up method could change this story dramatically. If a tax credit makes biodiesel less expensive and broadens use, then the biomass-based diesel requirement might be increased in current or subsequent years under the Add-Up method. This is in contrast to the previous method, in which a tax credit simply made a fixed quantity less expensive to achieve. Any increase would be added to the broader advanced and overall requirements, too, so ethanol would not be displaced. Instead of making the RFS easier to meet, the tax credit could lead to a greater requirement. In practice, the blenders' credits and expanded mandates could largely offset each other, so RIN prices would be unchanged. However, we have yet to see how the Add-Up would actually work in practice.
What would happen if the biodiesel tax credit had not expired (or is reinstated) and the Add-Up method is adopted? Less costly biodiesel use might mean larger biomass-based diesel, advanced, and overall requirements. Perhaps the D4 RIN price would fall if there is still difficulty to meet the 1.28 billion gallon lower bound for this requirement. However, beyond that number, any further increase in biomass-based diesel use is cause to increase the broader requirements in the Add-Up. Under the Add-Up, factors which increase use, such as blenders' credits, could then also increase the use of feedstocks in the production of biofuels, increasing commodity prices.
The EPA proposal is largely silent with respect to the available stocks of RINs that could be used for the proposed 2014 mandates and mandates in 2013 were met in part through a draw down in RIN stocks as discussed on here. The proposed Add-Up method appears to be neutral with respect to RIN stocks, not accounting for their availability in determining proposed mandate quantities. D4 RIN stocks were quite large at the start of 2014, and those RINs will likely be used to help comply with the 2014 biodiesel mandate, but the available quantities are larger than can be used just for biodiesel compliance. This possibility is ignored in the Add-Up method. How to calculate the increase in biomass-based diesel use is not so clear in the event the biodiesel tax credit is continued.