New Biofuel-Trading Venue Sees Untapped Demand in Green Revival

Source: By Kim Chipman, Bloomberg • Posted: Tuesday, November 24, 2020

The U.S. market for biofuel credits has long drawn calls for reform over lack of transparency. Trading-technology expert Julian Anstes says he has the answer.

Anstes and the firm he runs, London-based OTC Direct Markets Ltd., have developed an online trading platform set to go live Dec. 2 with at least 35 companies and 70 more in the pipeline, according to Anstes. OPIS by IHS Markit and brokerage Blackstar Markets LLC are partners.

The venue, OTC Direct, aims to make trading of renewable identification numbers — the credits oil refiners use to prove they have met annual U.S. biofuel-blending quotas — more liquid and transparent and less costly to trade. It also can trade credits tied to clean-energy programs in California and Oregon, and accommodate any future regional or national environmental markets as part of the shift to a carbon-neutral economy.

OTC Direct is debuting as the RIN market surges. Conventional ethanol RINs climbed 9.1% to 72 cents on Nov. 10, up from a 2020 low of 13 cents in January, after the declared victory of U.S. President-elect Joe Biden, who will take office having made unprecedented commitments to address global warming. While prices have since backed off, they’re still up almost eight-fold since the end of last year.

“Momentum is clearly building internationally to accelerate efforts to tackle climate change,” Anstes said in an interview. He declined to say whether the election outcome would add to that momentum. “We expect there to be considerable growth in the trading of environmental credits over the next decade.”

All RIN credit categories will be tradable on the platform, with one of the main goals being easier price discovery, said Anstes, who previously founded trading technology provider Elysian Systems, which was bought by the CME Group in 2010.

‘Rigged’ Market

RINs were initially created by the U.S. government more than a decade ago to give refiners and importers more flexibility in satisfying annual quotas for blending biofuels into gasoline. They morphed from a simple compliance tool into a financial commodity, with values swinging in concert with policy news from Washington.

The Environmental Protection Agency last year weighed options for overhauling the opaque RIN market amid complaints of hoarding, wild price swings and manipulation. Trades often are negotiated among companies, traders and brokers via email and instant messages. Billionaire Carl Icahn previously complained that the program structure is “rigged.”

“The biofuel-trading community will now have the transparency and price discovery to properly hedge their physical fuels,” said Justin Dirico, principal and head of broking at New York-based Blackstar Markets, which will provide users with execution of RIN futures.

Independent renewables trader Neil Shah said he is hopeful the biofuels market is moving toward “a more friendly environment.”

On Monday, Biden’s transition team said the President-elect will name former Secretary of State John Kerry as special presidential envoy for climate, in a sign Biden plans to fulfill promises to elevate the issue of global warming to the highest levels in his White House.

While President Donald Trump has drawn praise for championing corn-based ethanol, his EPA has been sharply criticized for its handling of the Renewable Fuel Standard, including its decisions to exempt more oil refineries from biofuel-mixing requirements.

“The RIN and biofuels markets suffered from economic and political uncertainty for the past four to five years,” Shah said. There’s now some “some fragile optimism.”

— With assistance by Jennifer A Dlouhy