Interplay between various government policies and economic drivers in the private sector can create a complex, sometimes confusing, biodiesel market environment. This has been especially true the past year as the renewable fuels standard transitioned into its second phase (RFS2), and the blenders credit for biodiesel was allowed to lapse. While several unique challenges have been posed to those in the biodiesel industry, things are looking up as 2011 approaches.

Regarding federal mandates and incentives for biodiesel, National Biodiesel Board CEO Joe Jobe said it's important to note that the RFS2 and the biodiesel tax incentive are two separate and distinct, yet complimentary, federal policies. "The RFS2 volumes mandated by law must be implemented regardless of the status of the biodiesel tax incentive," he said.

The tax credit for biodiesel is designed to complement the RFS2 program. "The tax incentive helps makes biodiesel price-competitive in a manner that is familiar and proven in the marketplace, and provides a powerful incentive to use biodiesel at levels beyond the minimum amounts required by RFS2," Jobe continued.

Renewable identification number (RIN) credit values have begun to rise, filling the financial gap created by the tax credit loss. RINs are used by the EPA to track obligated parties' compliance with the RFS2. They are attached to each eligible gallon of biofuel that is produced, and transferred to obligated parties when that fuel is purchased. The price of RINs has been very low, however, their value has risen in recent months.

While the RFS2 was originally scheduled to be implemented Jan. 1, 2009, it was not launched by the U.S. EPA until this July 1. As a result, EPA issued combined volume requirements for 2009-'10 that must be met this year. Due to the way the volume requirements were formatted for the 2009-'10 transition period between the RFS1 and the RFS2, obligated parties have been able to use carry-over RINs from 2008 and 2009 to meet their volume requirements, said Jon Scharingson, director of marketing at Renewable Energy Group Inc. "This situation will not carry forward into future years because all 2008 and 2009 RINs will be used or retired going into 2011," Jobe said. "This situation was unique to the first year of the program and the transitional rules from RFS1 to RFS2. Thus, we are hopeful that the volume requirements under the program for next year will be stable and readily apparent to stakeholders in the marketplace."

The price history of biodiesel RIN values seems to underscore this phenomena. According to Clayton McMartin, president of Clean Fuels Clearinghouse and founder of RINSTAR, the value of biomass-based diesel RINs has increased significantly since the beginning of the year. "This trend can be attributed to two primary factors: the new renewable fuel standard and the lapse of the biodiesel tax credit," McMartin said. "The RFS2 set demand for biodiesel in 2010. However, the failed tax credit has had a dramatic downward impact on overall biodiesel supply. Consequently, the price of [biodiesel] RINs has increased."

According to Scharingson, the increased value of RINs is helping to overcome the financial implications of the expired tax credit. "2010 biodiesel RINs were trading at approximately 60 cents per RIN," he said, noting that 1.5 RINs are generated per gallon of biodiesel. "That's a value of about 90 cents per biodiesel gallon, so that offset 90 percent of the blenders tax credit." However, Scharingson also said RIN values are expected to fall once the tax credit is reinstated.

In addition to federal policies, state mandates and incentives are also working to drive biodiesel demand. Although state mandates do play a role in creating and maintaining local and regional markets for biodiesel, Scharingson said that state incentives are even more powerful. "In places like Illinois, which has 6.25 percent tax abatement, those state incentives have really created a majority of the market demand that we've seen for biodiesel in the U.S. during 2010." Furthermore, Scharingson noted that states with mandates will consume the vast majority of RFS2 volume requirements in the near-term.

While there has been some speculation that the lack of the biodiesel tax credit may drive obligated parties to use biodiesel imports for RFS2 compliance, neither Jobe nor Scharingson think that will happen.

"There is no question that our industry has had a couple of very tough years," Jobe said. "However, these trials will ultimately yield a stronger, healthier industry. The people who are involved in the biodiesel industry believe in their product because they know that biodiesel is one of the only alternative energy technologies that actually delivers what it promises. Biodiesel stakeholders are scrappy and innovative and those who count them out will be sorely mistaken. So take heart, biodiesel nation. We ain't done yet. We're just getting started."