D4 and D6 RINs on the Volatility of WTI Crude Returns

Abstract

Since the introduction of the Renewable Fuel Standard (RFS) in 2005 and its expansion in 2007, Renewable Identification Numbers (RINs) have played a key role in enforcing the policy of blending renewable fuels into the United States fuel supply. As tradable assets, RINs have developed their own markets. However, these RINs markets have received significant criticisms regarding their volatility and instability, with critics of the RFS implying that this instability may affect the markets of related fuel and oil products. This paper aims to study the effects of D4 and D6 RINs returns and the volatilities of those returns on the volatility of WTI crude oil returns. I use univariate and multivariate GARCH models to study the effects of D4 and D6 RINs returns and the volatilities of those returns on the volatility of WTI returns at a weekly frequency from July 1, 2010 to December 31, 2022. I find minimal evidence of a relationship between RINs returns and volatility of WTI returns, with only a single GARCH model suggesting that a one-unit increase in log returns of D4 RINs at time t-1 increases volatility of WTI returns by 3.3 percentage points. None of the other GARCH variations produce significant results. And from the multivariate GARCH models, I find no evidence of a relationship between the volatilities of D4 and D6 RINs returns and the volatility of WTI returns.