Price discontinuities in the market for RINs

Abstract

In the last few years, a market has emerged for Renewable Identification Numbers (RINs), a unique 28-character alphanumeric code assigned to each domestically produced and imported gallon of renewable fuel. As with many commodity markets, the arrival of new information can lead to unexpectedly rapid changes – or jumps – in prices; this suggests that RINs prices may follow a more complex process than geometric Brownian motion (GBM). We investigate the potential presence of jumps, as well as time varying volatility in the spot price for RINs. Our results demonstrate that allowing for jumps and time-varying volatility provides statistically important improvements in the modeling of prices, relative to GBM. Both jumps and time varying volatility can contribute to the fatness of the tails in the distribution of price returns, which has implications for investments in capital projects linked to renewables.