# D4T – The world’s first licensed theoretical value of an environmental credit

Hoekstra Trading has studied Renewable Identification Number (RIN) pricing and economics since 2020 and reported on this topic in our Annual Research Reports and other publications.

The RIN is a complex financial instrument. It is:

- a tax
- a subsidy
- a mandate
- a tradable, bankable asset
- a contingent claim
- a family of credits
- a
*nested*family

It is a financial derivative whose value derives from and depends on the prices of other commodities.

Like many other financial derivatives, the theoretical price of a RIN can be quantified using options pricing theory. And it is well proven that options pricing theory works well for this purpose.

## RIN models

The RIN system is a price control system, analogous to other control systems. Physical control systems have multiple parts like control valves, relief valves and circuit breakers set to activate at preset limits with sometimes shocking effects. Like physical control systems, the RIN price control system can be described by a model consisting of equations and diagrams.

One model of the RIN system consists of 26 equations and 26 unknowns. When you solve that system of equations, you get the production rate and price of every stream and every RIN in the system. That model predicts sometimes strange RIN price behavior like the Big Bang, which is our name for the 100-fold (that’s 100-fold, not 100%) step increase in the D6 RIN that occurred in 2013 when the quantity of ethanol in E10 gasoline hit the “blend wall”, a limit that is defined as a boundary in one of the 26 equations.

## Attractor and D4T

Hoekstra Trading’s **ATTRACTOR** spreadsheet calculates the theoretical price of a D4 RIN using options pricing theory as defined in this academic article. The underlying economic model assumes perfect competition among market participants who produce, buy, sell, and trade to maximize their profits.

After 3 years of successful real-time use, we named the spreadsheet **ATTRACTOR**. We observed that, while the D4 RIN market price often deviates substantially from the calculated theoretical price (which we named “D4T”), the market price and D4T tend to attract each other. That is what happened last year when the RIN price nosedived by 50% in a short time, and then dove further in 2024, a nosedive that was foreseeable and was foreseen and predicted by Hoekstra Trading clients using **ATTRACTOR**.

Hoekstra Trading did not develop the theoretical model that underlies **ATTRACTOR**, we found it in 2020 while digging through piles of academic literature on RIN economics. Similarly, the other models we’ve been discussing were developed by economics professors and graduate students who spent years developing them while getting PhD’s. We found and replicated their published models and packaged them in user-friendly spreadsheets suitable for use by RIN practitioners.

D4T is a quantitative theoretical reference price for those wanting to understand, interpret, or anticipate market price movements, and those whose financial or other forms of well-being depend on the price of the D4 RIN.

In 2023, Hoekstra Trading entered a data acquisition agreement with Bloomberg Finance LP that grants Bloomberg a license to use, display, and deliver Hoekstra Trading’s D4T value to Bloomberg users. That makes it the world’s first licensed theoretical value of an environmental credit, and D4T is now available with weekly updates to Bloomberg subscribers with terminals.

## Land of confusion

Given the complexity of the RIN price control system, it is not surprising there is confusion about RIN price behavior.

Like other control systems, the RIN should be understood with reference to the equations and diagrams that describe the system. If you focus on one part of the system to the exclusion of others, you risk missing important effects caused by the interacting parts. For example, if you see the RIN as simply a tax, or simply a subsidy, or simply a mandate, you are missing important parts. If you do that, or rely on intuitive feel, you risk being blindsided and shocked.

That’s why I have asked, in previous posts and publications:

That would be a good thing to insist upon. But it appears it has not been done by executives involved in making the billion dollar capital investments driving the current renewable diesel boom, or by any leaders among their subordinates, boards of directors, investors, or financiers.

In 2020, frustrated by the confusion and contradictions surrounding “RINsanity”, I did it myself.

## The basics

I know refining leaders do not accept surface level understanding of critical refining process units or the systems that control them (thank goodness!). In a refinery, if you get blindsided and shocked because you were working with surface level understanding of the system and its controls, that will be considered a failure and, if you are lucky, you will be required to go back and learn about its basics, even if that requires some study that involves reference to equations and diagrams, which are readily available.

Similarly, leaders of renewable diesel companies should not accept surface level understanding of the critical price control system that under-girds the success of their renewable diesel business segments and their billion dollar capital investments, even if that requires some study and reference to equations and diagrams, which are readily available.

## Recommendation

You should get Hoekstra Research Report 10 which includes the Attractor RINs pricing spreadsheet and six months of unlimited consultation and is available to anyone immediately at negligible cost. Why not send a purchase order today?

Anyone with a stake in RINs pricing and economics should get Hoekstra Research Report 10

## Attractor update

The Attractor spreadsheet shows the D4 RIN market price (gold points) and the “D4T” theoretical value (white line) updated through last Friday. The theoretical value of a hypothetical D4 RIN with 1 year remaining life (D4T) is $0.28.

Hoekstra Trading clients use this spreadsheet to compare theoretical and market prices, analyze departures from theoretical value, and identify trading opportunities on the premise RIN market prices will be attracted toward their fundamental economic values.

Get the Attractor spreadsheet, it is included with Hoekstra Research Report 10 and is available to anyone!

George Hoekstra [email protected] +1 630 330-8159