Thresholds and Regime Change in the Market for Renewable Identification Numbers

The coupling of RIN prices appears to be the result of an ethanol market subject to RFS mandates that exceed the blend wall and non-binding mandates in the biodiesel market. It is thought that the ethanol mandate is binding beyond the market absorption ability, and thus the primary drivers of D6 ethanol RIN price are unobserved thresholds in renewable volume obligations, and deterministic variables such as corn price and ethanol blend margins. In regard to the market for biodiesel, the hypothesis is that biodiesel producers are over-complying with the RFS biodiesel mandates to meet an ethanol mandate which has crossed some threshold in proximity to the ethanol blend wall. Therefore biodiesel mandates are essentially non-binding. Nonlinear threshold models are applied to address nonlinearities occurring in the prices. These types of models are well suited to handling nonlinearities and regime changes, such as those which occur with RFS revisions. A candidate set of models are fitted to the data and model selection techniques are carried out to determine the most appropriate fit