By Omid Karami, ASA Senior Economist, & Matt Herman, Iowa Soybean Association Chief Officer, Advocacy & Demand

"The Stone Age did not end because the world ran out of stones, and the Oil Age will not end because we run out of oil." This line, often attributed to a former Saudi oil minister, captures a truth the United States grappled with in 1973 long before today's headlines: the question was never whether the oil would last, but rather the risks of depending so heavily on it.

The current energy shock is an expensive reminder that depending solely on petroleum is a risky way to fill a gas tank. Two decades ago, before the shale revolution, the U.S. was even more exposed to foreign oil. And there was a second problem: soybean and corn production per acre was growing at a faster pace than demand.

Somewhere in that tension, an idea took root. What if the nation could grow its own fuel? Not drill for it but farm it. Turn soybeans into biodiesel, corn into ethanol, and plant the seeds of energy independence. So, Congress passed the Renewable Fuel Standard (RFS) in 2005 and expanded it just two years later. The premise was simple: require the country's fuel supply to include a growing share of renewable fuel and let the market figure out the most efficient allocation. It was part energy policy, part farm policy, and part climate policy.

Almost overnight, the RFS became the most important policy in the United States supporting biofuel investment. In many ways, it reshaped U.S. agriculture and fuel markets for the better. To facilitate an efficient market for compliance with the RFS, a currency was created: Renewable Identification Numbers (RINs). When a producer makes a gallon of qualifying renewable fuel, a unique RIN is generated and attached to it. When the biofuel is blended into petroleum fuel, the RIN "detaches" and becomes a tradable credit with real-world value.

Under the RFS, soybean oil is an approved feedstock for biodiesel, renewable diesel, jet fuel, and heating oil. When producing renewable diesel, other co-products such as renewable naphtha and renewable liquefied petroleum gas (LPG) are also produced. Under current RFS approvals by EPA, naphtha and LPG produced from all commercial fats and oils such as distillers corn oil and sorghum oil, canola oil, and used cooking oil are eligible for RIN credits, while the same co-products produced from soybean oil do not receive RIN credits[1]. In practice, this means a renewable diesel facility using canola oil may generate RIN credits on eligible naphtha and LPG co-products, but when that same facility processes soybean oil, those same co-products do not generate RINs. When a feedstock can generate RINs only on the main fuel and not on eligible co-products, the total value per pound of feedstock falls. That can make soybean oil look less attractive to refiners even when the physical production yields are similar to those of other feedstocks.

This Economist’s Angle seeks to address the aspects of the RFS approved pathways which are not in line with current lifecycle assumptions for soybean oil used for renewable diesel production. The lack of co-product credits for renewable diesel produced from soybean oil has limited the value of soybean oil to refiners. Updated calculations by EPA would help ensure soybean producers receive the maximum benefit under the RFS. As soybean crushing increases to meet demand for sustainably produced fuel, assumptions about soy’s carbon intensity need to be updated to reflect the benefits of soy production on the environment. The current paper articulates how the lifecycle methodology for soybean oil-based biofuel can be updated to more accurately reflect the current emissions of the supply chain.

How a blitz to the market and outdated data created a market disadvantage

The roots of the problem go back to EPA’s original lifecycle analysis for soybean oil renewable diesel. At the time the analysis was conducted, EPA faced novel challenges. First, they had to estimate the emissions intensity of so-called indirect effects (e.g., indirect land use change) – the first such effort by anyone in government. Next, they were asked to evaluate the carbon intensity of a novel biofuel production process like renewable diesel. Both of these analyses, due to their novelty, contained significant uncertainty.

When the analysis was completed, it was clear that the only way soybean oil renewable diesel could achieve the 50% emission reduction relative to fossil fuels required by the RFS to qualify as biomass-based diesel was to rely on certain carbon accounting choices, principally the use of displacement rather than allocation for co-product accounting.

Under an allocation accounting approach, the emissions from the full production chain are divided among the renewable diesel, renewable naphtha and LPG according to a chosen basis, such as energy, mass or market value. The co-products then carry a share of the renewable process emissions. However, under a displacement approach, the co-products are treated as substitutes for petroleum products, and the avoided petroleum emissions are credited back to the main renewable diesel pathway. Currently, the displacement approach is used for renewable diesel produced from soybean oil. Displacement can be a valid lifecycle method. However, the co-products are treated as avoided fossil products rather than as separate renewable fuels with their own allocated share of process emissions. This means the co-products are accounted for as fossil fuel, thus failing the GHG threshold test by assumption and being ineligible for RINs.

Figure 1 summarizes the differences between displacement and allocation approaches. Accordingly, co-products account for 9% of the total volume (Figure 1 – Section 1). While the CI score of the renewable diesel from soybean oil is 30 gCO₂eq/MJ under the energy allocation approach (Figure 1 – Section 2), it is 26.3 gCO₂eq/MJ under the displacement approach, showing a 3.7 gCO₂eq/MJ difference.

ASA has compiled updated modeling that shows soybean oil renewable diesel and its co-products can meet the applicable 50% greenhouse gas reduction threshold under energy allocation. Under these assumptions and methodology, renewable naphtha and LPG produced from soybean oil in the renewable diesel production process would be eligible for D4 RINs, like those same co-products produced from non-soy feedstocks. This matters as compliance credits shape feedstock demand, crush economics, rural investment, and the value of soybean oil in the domestic fuels market. When outdated life cycle carbon intensity assumptions leave soybean oil co-products outside the RIN system, farmers bear the opportunity cost.

Figure 1. Energy allocation vs displacement approach in CI estimation of renewable diesel from soybean oil (AI generated graph)

The economic angle for soybean farmers

The value of these lost RINs is not trivial and places soybean oil at a measurable disadvantage to non-soy feedstocks. In the illustrative production slate used for this analysis, 91% of output is renewable diesel, 4.5% is naphtha, 3.5% is LPG, and 1% is unrecovered fuel gas. On a per-gallon-of-renewable-diesel basis, that translates to about 0.049 gallons of renewable naphtha and 0.038 gallons of renewable LPG. Using illustrative equivalence values of 1.4 RINs per gallon for naphtha and 1.1 RINs per gallon for LPG, and a RIN price[2] of $2.06, the missed co-product value is about $0.23 per gallon of renewable diesel or $0.33 loss per bushel of soybeans if all the lost value went back to the soybean farmer. Those numbers should not be read as a fixed market forecast. RIN prices move, production yields differ by plant, and individual facilities may have different co-product dispositions. But the direction is clear: excluding soybean oil co-products from RIN generation reduces the value a refiner can capture from each gallon of soybean oil-based renewable diesel. That reduced value can flow back into lower bids for soybean oil and weaker support for soybean demand.

What ASA is asking EPA to reconsider

The RFS has been an innovative solution to issues in petroleum and crop markets. However, the implemented carbon accounting has not kept pace with what we now know about renewable diesel from soybean oil.

EPA has relied on displacement accounting—an acceptable carbon accounting method that made sense when renewable diesel was a new, less-understood pathway, and there was far greater uncertainty in indirect emissions.

Here we showed that when updated indirect effects are included and the allocation approach is applied, the RINs generated from the naphtha and LPG co-products would be worth an estimated $0.23 per gallon of renewable diesel — which translates into roughly $0.33 per bushel of soybeans.

This requires only that EPA revisit the older assumptions behind the soybean oil renewable diesel analysis using updated lifecycle data, current process performance, and a co-product accounting method consistent with the treatment of similar feedstocks. In effect, it asks only that soybean oil be treated the same as comparable feedstocks.

[1] https://www.epa.gov/renewable-fuel-standard/approved-pathways-renewable-fuel

[2] This is RIN price at the time of writing this article. The results change in the case of using a different RIN price.