Biomass-Based Biodiesel Prices--How Much Does Policy Matter?

Our analysis suggests that the imposition of an antidumping duty that restricts biomass-based diesel (BBD) imports from Argentina and Indonesia would add about $0.15 per gallon to the average price of BBD in 2018. In addition, an EPA remedy to the court ruling invalidating the interpretation of "inadequate domestic supply" that increased BBD demand by 500 million gallons in 2018 would also add $0.15 to the equilibrium price of BBD. The price impact of each of these policy alternatives is relatively small at about four percent, with a combined impact of about 8.5 percent. While the estimated price impact is modest, it is not economically trivial when applied to 3.5 billion gallons of total BBD consumption. There are two fundamental reasons why the BBD price impacts are rather modest. The first is the flatness of the total supply curve. More technically, the total supply curve is extremely price elastic. With an estimated elasticity of four, only a one percent increase in price is required to increase BBD quantity by four percent. The second reason is that the shift in the total supply curve due to the import restrictions considered here is relatively small.It is important to recognize that our identification and estimation of the supply curves depends entirely on data only from 2016. In addition, results of our analysis would differ if supply curves are non-linear beyond the largest observed annualized values we used in estimating the curves. Our estimates of the price impacts of alternative BBD policies should be considered in light of these potential limitations. Upcoming farmdoc daily articles will examine the potential impact on D4 biodiesel and D6 ethanol RINs prices of restricting BBD imports and increasing RFS requirements. The RINs price implication of converting the blender tax credit to a producer tax credit will also be examined.