Small Refinery Exemptions and Biomass-Based Diesel Demand Destruction

The market impact of small refinery exemptions (SREs) granted under the RFS remains a highly contentious issue.  From a regulatory standpoint, there is no doubt that SREs opened a backdoor mechanism for the EPA to reduce the statutorily-mandated RFS volumes. However, there is sharp disagreement about the impact of SREs on the physical consumption of biofuels, particularly for ethanol.  The ethanol industry has argued vociferously that there has been substantial destruction of demand in the physical ethanol market due to the SREs.  However, a series of farmdoc daily articles in recent months showed that the physical use of ethanol declined little if any due to SREs.  This is not really all that surprising because ethanol prices generally have been low relative to gasoline, which means that ethanol is a price competitive component in E10 gasoline blends and the RFS conventional ethanol mandate is non-binding (up to the E10 blend wall).  The situation is much different for biomass-based diesel (BBD), because BBD prices are substantially higher than diesel prices, and consequently, the BBD mandate is highly binding.  In this case, the demand for biomass-based diesel in the physical market should be reduced by SREs.  The purpose of this article is to investigate the magnitude of BBD demand destruction in the physical market due to SREs.