Sustainable Aviation Fuel: Episode 4

James Lawler: [00:00:00] Welcome to Climate Now, I’m your host James Lawler. This is the fourth episode in our series on Sustainable Aviation Fuels, or SAF. Our last couple of episodes gave you an overview of the SAF market, and we spoke with two different SAF producers creating SAF using two different methods. We also spoke with a SAF buyer. 

In today’s episode, we are going to dive into one of the mechanisms that makes the SAF market possible in the first place which is the RFS, or Renewable Fuel Standard, and the associated Renewable Fuel Identification Numbers. This is the foundation on which the renewable fuel credit market is built. And we’re going to get into all of this. 

The Renewable Fuel Standard is a program that was created by the U.S. Congress to expand the United States renewable fuel sector. The EPA, Environmental Protection Agency, manages the program by setting mandates for annual production volumes of renewable fuels. The EPA [00:01:00] tracks each gallon of sustainable fuel produced through something called a Renewable Identification Number, or RIN. 

That’s a unique number assigned to a given unit of renewable fuel. Now, the RIN system is, according to one of today’s guests, the most complex environmental credit ever designed, which is why we wanted to break it down for you in today’s episode as one of the most important drivers in the development of the SAF market. 

So today we’re bringing you two of the very few people outside of the EPA and academia that actually understand the RIN system. One of our guests today is George Hoekstra who will explain what a RIN is, how they work, and how this number is dominating earnings calls in the renewable fuels industry. George started his company, which is Hoekstra Trading, to conduct research and provide industry analysis products to the refining industry. You’ll also hear today from Brooke Coleman, who is the Executive Director of the Advanced Biofuels Business Council, about the history and politics of [00:02:00] RINs and the Renewable Fuels Standard. Brooke and I started off with a quick overview of biofuels.  

Welcome to Climate Now, Brooke. So what are biofuels? What does that term mean? Let’s start with the basics.  

Brooke Coleman: It’s a big category covering a lot of individual types of fuels. And the ones that are most common today are fermented alcohol fuels from corn and sugarcane in Brazil, which are substitutes for gasoline. 

And then you also have diesel fuel substitutes like biodiesel and renewable diesel made from different kinds of vegetable oil. All of them can be made into sustainable aviation fuel through multiple different processes that also includes gases. So many people refer to biogas, which is gasified biomass to displace fossil based natural gas. 

James Lawler: Okay, and that’s just methane. 

Brooke Coleman: Yeah, it’s pretty much identical to natural gas. 

James Lawler: So I’d love to get into 2005 when the first renewable fuel standard was promulgated and then 2007 when it was updated, right. [00:03:00] Explain the political landscape at the time. Who were the constituencies that came together and why did they come together around a standard for renewable fuels? 

Brooke Coleman: Yeah, the political impetus was an acute concern about remaining dependent on foreign oil. China was turning into a net importer of oil instead of an exporter. Saudi Arabia was deciding that maybe continuing to fix this problem of increasing demand by increasing production of oil was not in its best interest. 

You had speculators diving in and buying oil and so you had this acute political concern that the doubling and tripling of oil prices that happened in a very short period of time was going to continue. And so that energy security problem resonating, particularly on the more conservative side of the aisle, joined forces with the further left concerns about oil dependence and climate change emissions and to a degree, tailpipe emissions. 

And so there was a deal struck in which we would significantly reduce [00:04:00] our dependence on oil with renewable fuel. There were greenhouse gas standards built into the program, there were prohibitions against certain feedstocks like palm oil that would exacerbate the land use change impacts of this policy. So in the early years, the oil companies blended a lot of renewable fuel to replace MTBE. 

James Lawler: For any listeners unfamiliar with MTBE, Brooke is referring to methyl tertiary butyl ether, which is a chemical compound that was almost exclusively used as a fuel additive in motor gasoline. That is, until the early 2000s, when states started to phase out the additive due to its negative health effects, including respiratory illnesses and liver and kidney problems. 

Brooke Coleman: Yeah, so when they passed this program, one of the questions was, how are you going to track all these gallons of fuel? EPA wanted to know how they were going to enforce it, oil companies wanted to know how they were going to trade credits and the solution was to come up with something called the Renewable Identification Number, or RIN, that is kind of like a [00:05:00] VIN on your car. 

Each gallon of RFS fuel has a unique multi digit identification number. RINs are what make the RFS go around. And there was sort of a natural market demand for small amounts of biodiesel as well. So essentially, the RFS requirements likely to be met without a lot of market tension.  

James Lawler: So let’s go down the rabbit hole here with RFS and RINs, which is the mechanism that allows RFS to function. There’s not just one type of RIN, right? Brooke, can you explain what these types are and why we have them?  

Brooke Coleman: Yeah, you’ve got conventional biofuels, which is oftentimes, but not always, corn ethanol. You have cellulosic biofuels, which is a next generation biofuel made from things like agricultural residues and the fibrous parts of the plant. 

You have biodiesel. Each one of these categories has a different RIN category to it. Essentially, the [00:06:00] lowest carbon fuels, those with the highest carbon reductivity relative to petroleum become the most sought-after gallons.  

James Lawler: So Brooke, tell us how the renewable fuel standard is actually implemented in the marketplace. 

Brooke Coleman: So if an oil company is obligated to blend a million gallons of renewable fuel, they show compliance by retiring a million RINs. More or less, a RIN is a gallon under the RFS.  

James Lawler: Okay, so essentially the RINs represent an RFS currency, so they can be bought and sold. And if you have a blending obligation, then you have to purchase these RINs in order to retire them. 

Brooke Coleman: Yeah, that’s right.  

James Lawler: Okay, so now might be a good time to talk about Ds. D3, D4, D5, D6. 

Brooke Coleman: Yeah, so you’re going to have four categories, and you’re going to track it all with RINs.  

James Lawler: So, what are the four?  

Brooke Coleman: Okay. Okay, so cellulosic biofuels, Category 1, that is a D3 RIN. Category 2, biomass-based diesel or biodiesel, also renewable diesel, that is a D4 RIN. [00:07:00] Those are subcategories of an overarching category called unspecified advanced biofuels, and that is a D5 RIN. And then every gallon that is not advanced biofuels, inside of total renewable fuels, is conventional biofuels, which is a D6 RIN. And the way the regulation works is these RINs are all nested together. 

Nested basically means that D RINs can be used for different purposes. So D3 RINs, cellulosic biofuel RINs, are necessary to comply with the cellulosic biofuel pool. That’s logical, right? 

James Lawler: So I have my little card from the EPA this year. You need this many RINs from these three categories. And the nested concept just means that if I have a D4 obligation, the D3 counts against that. 

If I have a D5 obligation, the D3 and D4 counts against that. And if I have a D6, then the preceding three D’s count against the fourth D. D. It’s not totally [00:08:00] symmetrically nested. You have basically D3 and D4 at parity, basically, and that’s within D5 and that’s within D6, okay.  

Brooke Coleman: Correct, that’s right.  

James Lawler: Great. Oh my gosh. We’re achieving comprehension.  

Brooke Coleman: Yep. That’s right. And so the other way to look at is the other end of the pipe, which is if you have a D6 obligation, you can use any D RIN you want.  

James Lawler: Why does that nesting structure make sense when we’re talking about these different types of renewable fuels?  

Brooke Coleman: If you ask different people, they’ll come up with different answers on this one. 

In theory, the nesting feature usually results in the lower carbon RINs being higher price and therefore more valuable, which in turn in sense the purchase of those gallons. And if you nest them together like this, then the market’s going to want to go get the D3 first, then the D4, then fill out his D5 pool. 

And then if it has excess rinse in any of those categories, turn around and apply it to the D6 pool and then go find as many D six as it needs in excess of that. That was a feature that EPA [00:09:00] preferred in part because it wanted to incentivize the lowest carbon fuel. So the lower the number, the lower the carbon. 

James Lawler: Okay so give us the relative carbon intensities of these fuels starting from the cellulose.  

Brooke Coleman: Sure so to be eligible to get a RIN for a cellulose biofuel, a D3 RIN, your product has to be 60% lower carbon intensity than a petroleum fuel baseline. To receive a D4 and also a D5, your product has to be 50 percent better than petroleum. 

And in order to receive a D6, your product has to be a minimum of 20 percent better. And so when you fold that all together, you end up with a situation where obligated parties are desiring to fulfill their D3 obligation first and move down the chain that way, which creates a situation where the highest value RIN tends to be the D3. 

James Lawler: Now that we have that background on biofuels and the RIN system, here is George Hoekstra [00:10:00] of Hoekstra Trading to describe RINs in economic terms, along with their many attributes.  

George Hoekstra: It’s a credit that subsidizes the use of bio diesel and biofuels in the U. S. fuel supply. And without the subsidy, there would be no renewable diesel produced. You have to understand it as something that has seven attributes. It functions as a tax. It functions as a subsidy. That subsidizes the use of biofuels in the U.S. fuel supply. It functions as a mandated minimum quantity of biofuel to be produced. It is a financial asset that can be banked, traded, and borrowed. 

All of that in one. Now we can understand what a tax is, that’s like a sales tax on gasoline. We can understand what a subsidy is, that’s like the government. pays a certain amount for something that you buy to encourage demand for that thing. We know what a mandate is, it’s the government says, this much must be [00:11:00] done regardless of price or anything else. 

But this is all three of those at once. And that’s only three of seven. The fourth is called a contingent claim, which is a type of derivative. So RINs come in different maturities. Now, each one of those things I told you adds a new layer of complexity.  

James Lawler: So George, how does the RIN function to enable the production of Let’s say diesel from non-petroleum sources in the marketplace. 

George Hoekstra: When a gallon of renewable diesel is produced, you are granted a credit that you sell to the credit market. And that cash from the credit market is your subsidy. Now, where does the subsidy come from? It doesn’t come from the government. It’s funded by a tax on the production of conventional diesel. 

Producers of conventional diesel are required to purchase a certain number of these credits and turn them in at the end of the year to prove that they have paid [00:12:00] their tax obligation. And so the subsidy goes to the producer of the renewable fuel, and the subsidy is funded by the producer of a conventional petroleum fuel. 

And that’s the really unique and tricky part. So the government never touches any money in this whole process, the process runs by itself. You have to understand that this is a whole system where the prices of the RINS and the prices of the fuels are all interrelated, and that’s why it gets people so confused. 

James Lawler: Right, and the reason we’re interested in this is because, well, first of all, RINs and the RF, Renewable Fuel Standard, which is the law that created the RINs and this mechanism is absolutely critical for renewable fuel projects to work.  

George Hoekstra: Right.  

James Lawler: If you’re producing renewable fuels, the cost of doing so is several [00:13:00] times higher than producing the petroleum equivalent and those products would not be sellable without this standard. 

It sounds like, and I’d like your thoughts on this, it’s been a very successful program in that, you know, 60 percent of the diesel consumed in California is produced from soybean oil, which is just astounding, right? I guess before we dive further into the details of how this all works, how well does it work? 

George Hoekstra: It works as it was designed. And the problem is it’s not understood. If it works, you will produce the mandated quantities of biofuels. And we produce the mandated quantities of biofuels. The problem is it’s working exactly as designed and they think it’s broken because they don’t understand how it’s designed. 

James Lawler: Okay. So let’s, let’s dive into that a little bit. Tell us what a common complaint is from people who say the system is broken. What, how does that view reflect a lack [00:14:00] of comprehension of how the system was designed?  

George Hoekstra: Well, I’ll give you one example, the biggest one. In 2013, the price of one of the RINs called the D6 RIN, which pertains to use of ethanol and gasoline, went up by a hundredfold in two months. That’s a hundred-fold, not a hundred percent.  

James Lawler: Wow.  

George Hoekstra: That surprised the refining industry because suddenly they had like $16 billion a year in RIN costs, they were completely blindsided by it.  

James Lawler: Wow. 

George Hoekstra: That 100 fold increase in the price of the D six rim was completely predictable. And was exactly according to the design of the nested RIN system. What caused it is a situation where the industry could not utilize enough ethanol and gasoline to meet the mandate. And under those circumstances, by design, the D4 RIN would supplement the D6 in order to meet the D6 [00:15:00] mandate.  

James Lawler: If you think back to when Brooke explained the nested structure, the D6 RIN is one of those mandates that contains multiple kinds of renewable fuels and those fuels associated RINs. So D4 RINs count towards the D6 mandate. So you can think of a circle containing the D4 RINs being nested inside of D5, which is in turn inside of D6. Only after a renewable fuel gallon is sold does it count toward the mandate. But in the case of ethanol, only so much can be blended into traditional gasoline. 10 percent ethanol in a gallon of gasoline is approved by the EPA, for instance. 

 In 2013, the total renewable fuel requirement increased, and at the same time, gasoline demand fell, which meant that there wasn’t enough gas to blend the ethanol into. They hit this so-called blend wall. So when conventional diesel producers could not meet their renewable fuel requirements with the cheaper D6 [00:16:00] ethanol RINs, because there weren’t enough gallons of gas to mix that ethanol into, they had to substitute with much more expensive D4 RINs, which is a different fuel entirely. 

For more details on how conventional petroleum fuel producers responded to this development in 2012 and 2013, here’s Brooke on the political ramifications of fuel producers needing to pay that price increase between the D4 and D6 RIN.  

Brooke Coleman: For those refineries that were sitting out the program, and by that, I mean not blending anything and buying credits for a cent or two cents a RIN, you didn’t hear any squawking because the cost was so low that they didn’t care. In 2012 that changed and all of a sudden, the RFS started pushing oil companies to do what the RFS intended to do, which is grow renewable fuel markets outside of where the oil companies wanted them to be. And now you had pressure on RINs [00:17:00] and all of a sudden you had RIN prices jumping to 60 cents, 70 cents, 80 cents, and the refineries that were sitting the program out were suddenly looking at significant RIN cost exposure. And instead of going in and investing in renewable fuel infrastructure and blending more renewable fuel, they went to the White House and said, we’re not going to do it. And if you make us do it, we’re going to go out of business. 

And so in 2012, 2013, the Obama administration faced acute political pressure from Philadelphia Energy Solutions, a refinery in an important part of this country and put a lot of pressure on the administration to stop enforcing the program, which they ultimately did. So you got this critical moment in the growth of cellulosic biofuel between 2013 and 2016, you did not have RFS requirements on the oil companies. That’s a massive problem.  

James Lawler: That’s because of the pressure on the Obama administration to not enforce the [00:18:00] standard.  

Brooke Coleman: Yeah and what’s crazy is we got the RFS back on track at the very end of the Obama administration, and then the Trump administration came in and said, we’re going to enforce these numbers and then implemented a program where they were retroactively providing what were called small refinery exemptions to anybody that applied for them. 

So the Obama administration had trouble enforcing the rule. The Trump administration enforced it and then waived it in secret after they enforced it and the practical effect of that was demand uncertainty in the cellulosic biofuel space and also the renewable fuel space. I mean, we’ve lost biorefineries because of these acute political pressures. And even if you don’t like renewable fuels, even if you just think everything should be electric, there are lessons to be learned when regulated parties can wreak havoc on policies and create acute political pressure, the Biden administration came in and, and to their credit, put the RFS back on track. So those that survived the desperate years [00:19:00] are now in a situation where we are working on growth. 

James Lawler: I’m curious about how this policy has actually changed the market since its implementation. So since 2007, have we seen as a result a lot more innovation in the cellulosic biofuel arena.  

Brooke Coleman: I think the honest answer, having worked on this now for a long time, is that the RFS has worked very, very well for proven commercial technologies. 

I think it’s also safe to say the program has not worked well for cellulosic biofuels, but I don’t think that’s an RFS problem. The reason that cellulosic biofuels has not scaled at the rate that we wanted it to was RFS enforcement. This program, because of acute political pressures starting in 2013, was not enforced for [until] almost three years ago. 

James Lawler: Now, back to George on why the industry should have seen 2013 come [00:20:00] in.  

George Hoekstra: It was predicted, and was completely predictable, that if you have to produce D6 RINs beyond this maximum, it would be the D4 RIN that would have to be covering it. And it was known that that price was 100 times higher, but it happened in a matter of two weeks. 

James Lawler: Wow. And so if you were watching the RIN market closely, you might’ve said, uh oh, there’s going to be a problem. We’re going to have to start buying D4 RINs at a hundred times the price. And so how should that have gone as opposed to how it did go?  

George Hoekstra: What should have happened in a market where people understood what was happening and understood the system is they should have foreseen that. 

And price of the D6 RIN should have gone up well before you hit that wall. And one of the first things that got me interested in this was, I asked a professor, why didn’t people buy the D6 RIN far before the day of reckoning? And he said, that’s a question I’ve been asking myself for 10 years, I don’t know. And I believe I know the answer, [00:21:00] it’s because the big buyers didn’t realize that that was going to happen. 

James Lawler: If I was one of those big buyers and this happened to me, then the first thing I would do would be to make sure that this didn’t happen again, and that I had the right teams in place and really understood these RINs going forward, would you say that’s happened? Is there now much greater comprehension across the participants in this market since 2013? 

George Hoekstra: No, No, not at all. It is understood by people in the academic community, quite a lot of them, and by some people in government and EPA, and me and my clients, and I’m telling you that’s pretty much it. Because when I approach these professors, and I ask them, who from industry has approached you on this, because they had produced a mathematical model of the RIN system that describes this and they said, one person has approaches from industry about this. And that’s you talking to [00:22:00] me.  

James Lawler: So given that so few people understand this market and how RINs function, how did you end up so involved in this realm?  

George Hoekstra: I was totally confused by it. I had no interest in the renewable diesel market, but when I heard people talking about this, I was so confused myself and I was convinced they were all confused. And that made me decide I was going to spend three months doing nothing but studying it and talking to people who understood it in the academic world. But anyone who understands Economics 101, if they are willing to spend a few days to apply that to this process, they will understand it.  

James Lawler: So George, recently, you’ve been running a series of newsletters on the RINs market, the low carbon fuel standard in California, and the economics of producing renewable and essentially as a renewable fuel producer, one needs to think about, [00:23:00] you know, what the cost is of making the fuel and then the stack of revenue that one can expect, what you can get from your consumer of your fuel, what you can get from the RINs Market and what you can get from the low carbon fuel standard in California and some other western states. 

And so as a producer, you’re, you’re looking at that stack and something very interesting has happened recently where you have this upside-down economics going on and George, I’m wondering if you could explain what you meant by this and what the dynamic is that we’ve seen in the market for these renewable fuels. 

George Hoekstra: Yes. Well, I really said that in two senses, the upside down economics. The first is that if you’re producing renewable diesel made from things like soybean oil that costs 5 per gallon to produce, and you’re selling it as a substitute for petroleum diesel that sells for 2 dollars a gallon, that’s upside down market margin. Meaning you’re not going to [00:24:00] be in the market long making something for 5 and selling it for 2, but the other one is more nuanced. 

And what has happened recently is that the price of the RIN fell by enough that the subsidy went down by a lot, almost 2 dollars. During that same time, the market profitability of renewable diesel production improved. That happened because the feedstocks that they could handle were cheaper and the process technology was more efficient so they could produce it more efficiently. 

James Lawler: Industry got better.  

George Hoekstra: Things got better because of technological and economic improvements. But it turns out that the reduction in the value of the subsidy was much larger than the improvements in the inherent economics of the process. process. And as a result of that, the margin of the producers [00:25:00] went down substantially. 

So I call that upside down economics in the sense that there is a direct connection where improving the inherent efficiency of renewable diesel production will reduce the RIN value, that subsidy goes down instead of the margin going up. Here’s the way that works. The RIN covers exactly the amount of subsidy that’s necessary for the industry break even level to stay where it is. 

The RIN value is the difference between the market price and the cost to produce, there’s a direct connection between those two. So as the, as the industry influences the cost to produce, it directly reduces the subsidy they get out of the rent dollar for dollar. And that was not expected by the producers who were in the process of improving their efficiency. 

They’re accustomed to situations where if they get better at what they’re doing, that profit goes on the bottom line of the [00:26:00] industries that’s doing it. But in this system, that’s not the case. It is the people who get taxed who end up getting the benefit of improvements in the renewable diesel supply. 

And it’s a direct tradeoff between the RIN price and the margin that the producer gets. The subsidized price is what the supplier needs to get to break even.  

James Lawler: Right. So, for example, if I’m a renewable fuel producer and last year it cost me 6 dollars per gallon to produce renewable diesel, and the market will pay 2 dollars, the RIN value at that time would have been 4, allowing me to break even. 

And then let’s say this year I’ve made improvements in my production and can now produce at a cost of 5 dollars per gallon, so I’ve gained a dollar, right? Because I’ve gotten, I’ve gotten that much better, 16 percent better at producing the fuel. This year’s RIN would have to cover the difference between 5 dollars and 2 dollars, so the RIN value would go down to 3 dollars. And I’m still only breaking even because the RIN price is [00:27:00] inversely correlated to my production cost.  

George Hoekstra: You’re seeing the same amount of money because you’re seeing a lower RIN, but you’re seeing a higher market margin because of your lower cost.  

James Lawler: Right. So now my question is, you know, is that the way that we would want this kind of subsidy to work? So petroleum based producers are essentially benefiting from the greater productivity of the renewable fuel producers in the sense that they have a lower obligation, annual obligation to pay for each incremental improvement that the renewable fuel producers manage. Does that make sense in terms of policy design, in terms of system design? 

George Hoekstra: Well, I think from the policy design standpoint, it’s probably kind of neutral from the renewable diesel producer’s standpoint, they would prefer to keep a fixed subsidy instead of their subsidies shrinking whenever they make an improvement in their technology and economics. From the [00:28:00] petroleum fuel producers’ standpoint, they have complained a lot about the high cost of rinse. 

Like I told you about how they set off a firestorm in 2013 when they had to pay all of a sudden 19 billion dollars that they weren’t expecting.  

James Lawler: On an annual basis, what federal agency is responsible for fixing these production mandates for the different types of renewable fuels? Who does that and how do they do it? 

George Hoekstra: It’s the EPA, and they do it under a law called the Renewable Fuel Standard, and they set the mandate levels. For the different types of biofuels in the past, annually in the future, it’ll be less frequently, but the system itself and the way it operates does not change from year to year. If you read the original description in the original law, it’s pretty much the same today as it was back then. 

So their main deal is to set the mandates and in the course of doing that they need to analyze the market to try to figure out where the mandate [00:29:00] should be set.  

James Lawler: Well, George, maybe we could continue with a question about actual producers and how they’re being affected by these credit markets, and in particular Montana Renewables. 

So Montana Renewables has produced this very interesting chart, you’ve probably seen, that just shows kind of resiliency of margin in the face of moving low carbon fuel standard credits and, and RINs, prices, etc. And I’m, I’m wondering what you think of that view, because it, it struck me as very interesting that they could develop this comfort around a margin for their product. 

And maybe you could explain what that chart shows and what you think of it.  

George Hoekstra: I think what they’re doing is they’re taking the market price and making some kind of assumption that the RIN price is not going to go way down. That’s how I saw it, what they presented. As looking at it as a potential investor, that would have been the question I asked, how are you so confident that the RIN price is going to stay where it is? 

James Lawler: Very interesting. [00:30:00] This is sort of a philosophical question for you. I mean, you must have thought about this. A lot of money is riding on getting this RIN stuff right, you know, for investors, for companies. I mean, why do you think it’s sort of this neglected parameter in the modeling of companies that should really be fully on top of it? 

I mean, human beings can understand a lot of complicated stuff, right? I mean, we’ve built very complicated machinery. We can do complex things. We’ve, we’ve created complex financial instruments.  

George Hoekstra: Well, first thing I’ll say on that is what I can certainly say is that in my history, especially with Amico, who I worked for before BP bought Amico, this would not have happened. If your, Ernie’s conference calls were being dominated by discussions of the economics of RINs, somebody would be called in and say, we have to figure out this RIN thing.  

But I’ve asked people in these companies, you know, if, if you get burned and your stock price goes down like mad because you get blindsided by something like this, [00:31:00] who’s going to get hauled into the C suite and say, I thought you were supposed to be the expert on this, you’re supposed to be looking for the things that are going to be risks in the future. They gave me the name of people when I talked to those people and they said, my boss has me doing other work. Nobody steps up and put somebody in a corner office and says, don’t come out until you can explain this to me. I’m the person who did that. 

James Lawler: You know, I was recently at a sustainable aviation fuel and renewable natural gas conference in Houston, in which this topic of financing projects was one of the main. Discussion points and so there were a lot, you know, a lot of renewable natural gas or renewable diesel slash sustainably aviation full type project developers, the complexity of the subsidy market is 1 of the things that kept coming up. 

And I think maybe a growing realization of how hard it is to predict these markets. I mean, what advice might you have for project developers looking to raise money and thinking about these [00:32:00] subsidies? Are these things that can be modeled and can be explained and are they fundamentally predictable? It sounds like you think they are. 

George Hoekstra: My advice would be to look at the diagram that describes the full RIN system. Like you would look at the diagram of some other process. Any one of them, I think, they could certainly assign a person who could devote enough time to studying and understanding it to where they understand the idiosyncrasies of the brain system. 

It can’t be done in sound bites. It requires some effort. Much of what they consider risk is predictable. Now, the part that’s not predictable is the variables that operate within the system of the diagram. So I don’t believe you can predict the price of soybean oil. I don’t believe you can predict the price of diesel fuel. 

There’s a lot of things I can’t exactly predict what’s going to happen, but I should have my arms around the things I can predict and leave the uncertainty for the variables that I can’t predict, which in the case of RINs are mostly prices. [00:33:00] In investment analysis, if you don’t do the due diligence to differentiate between the things you can predict and those you can’t, there’s a lot of investor money being put at risk unnecessarily. I mean, my advice reduces to, sorry if I sound like a salesman, but get what I’ve got, and I didn’t invent it.  

James Lawler: Yeah. 

George Hoekstra: I found it and it’s got many tens of man years of graduate level work behind it and it’s fully quantified and it’s like now I have a map of my control system. I can understand basically how the control system works. 

James Lawler: This has been very interesting, George. I want to just ask you one more question, which is what do you think about the future of the SAF market? In the United States, meaning SAF production, this is sustainable aviation fuel. What do you think the next few years have in store when it comes to sustainable aviation fuel production? 

George Hoekstra: I think the price of SAF is [00:34:00] close to double the price of renewable diesel and the price of jet fuel is nowhere near double the price of diesel fuel. So it has a much bigger burden of subsidy requirement to overcome. And the one that renewable diesel has overcome was substantial. It’s clear that the airlines are now sensitive to the impact that that would have on them because fuel is a big part of airline costs and so there’s so much they can do to respond to political objectives and social pressures, et cetera. But the economics of it from the airline standpoint to me looks like a big hurdle to overcome as well.  

James Lawler: Well, can I ask you about that? Someone at the conference said, their conversation with an airline executive went something like the following. 

We’ll buy every drop of equivalently priced SAF that you can sell us. We will buy probably everything you sell us at the 20 percent premium to jet fuel. We will [00:35:00] probably buy a lot of whatever you could sell us at a 50 percent premium. We would not buy anything at 100 percent premium or something like that. So there’s some scale at which they’ll buy based on the appetite, even if it is priced above market.  

George Hoekstra: Let me just say, I wouldn’t invest in a company that accepts that deal and I think the only way I really would invest right now in SAF is if I knew I had guaranteed contracts with guaranteed prices for a fixed period of time that justifies that investment. Because otherwise I would say, what force is going to overcome that economic barrier? To me the question It becomes more a political question than an economic and technical question.  

James Lawler: Well, George, thank you so much for your time. This has been very, very fun. Thank you.  

George Hoekstra: It’s my pleasure and contact me anytime, James. 

James Lawler: That’s it for this week’s episode of Climate Now. If you’d like to learn more about [00:36:00] sustainable aviation fuel, check out our other episodes in this series where we explore many aspects of the SAF space from perspectives across the industry. As always, we love hearing from our listeners. To contact us, email contact@climate now.com. We read every email and we hope you’ll join us for the next conversation.