EPA Targets Renewable Fuel Fraud

On February 21, 2013, the U.S. Environmental Protection Agency (EPA) proposed a new approach to assure compliance with renewable fuel volume standards and minimize fraud. The proposal offers an alternative voluntary quality assurance program (QAP) to combat fraudulently procured Renewable Identification Numbers (RINs), which have been the source of problems in the past. Comments on the proposal are due April 18, 2013. This column explains the proposal and why a new option is needed.
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ENFORCING VALID RINS
Under the current approach, parties subject to the Renewable Fuel Standard (RFS) can demonstrate compliance in one of two ways: by acquiring the required volumes of renewable fuels together with the associated RINs, which are assigned by the renewable fuel producer or importer to each batch of renewable fuel produced or imported; or by acquiring only the RINs without the associated fuel. A valid RIN indicates that a certain volume of qualifying renewable fuel was produced or imported. The RFS program also includes provisions stipulating the conditions under which RINs are invalid, the potential liability carried by a party that transfers or uses an invalid RIN, and how invalid RINs must be treated.

According to EPA, the basis of its treatment of invalid RINs is the concept of "buyer beware," in which all regulated parties are urged to take steps to verify that the RINs they acquire are valid; all parties in the value chain are liable should invalid RINs be transferred or used. Last year, the EPA reached a settlement with approximately 30 companies that allegedly purchased fraudulent RINs. The settlement required gasoline and fuel refiners and importers to pay millions of dollars in penalties. EPA believes that the consequence of such fraudulent RIN purchases is that smaller renewable fuel producers have difficulty selling their RINs.

The new voluntary third-party QAP for verifying RIN validity is an alternative to the "buyer beware" approach.  Even before the enforcement actions, EPA had been seeking ways to prevent fraud in this area.

THE NEW APPROACH
Under the new QAP proposal, if certain conditions are satisfied, the buyer would be able to assert an affirmative defense that would preclude liability for penalties otherwise associated with the purchase or transfer of invalid RINs. Entities may select one of two options for RIN verification through a QAP. These options would provide, according to the EPA, flexibility in how parties choose to manage the risk of transferring or using invalid RINs and costs. In this regard, EPA is proposing:

•    Minimum requirements for QAPs, including verifying type of feedstocks, that volumes produced are consistent with amount of feedstocks processed, and that RINs generated are appropriately categorized and match the volumes produced.
•    Qualifications for independent third-party auditors.

•    Replacement instruments or other mechanisms that would provide assurance that invalid RINs are replaced with valid RINs.
•    Requirements for audits of renewable fuel production facilities, including minimum frequency, site visits, review of records and reporting.
•    Conditions under which a regulated party could assert an affirmative defense to civil liability for transferring or using an invalid RIN.
•    Identification of the party or parties responsible for replacing invalid RINs with valid RINs and the timing of such replacement.
•    Changes to the EPA-Moderated Transaction System (EMTS) that would accommodate the QAP.

EPA proposed that the QAP option be applicable at the beginning of 2013. EPA also has proposed modifications to the exporter provisions of the RFS program to ensure that an appropriate number and type of RINs are retired whenever renewable fuel is exported. Finally, EPA has proposed new provisions to address RINs that become invalid downstream of a renewable fuel producer.

Interested stakeholders should review the proposal. It appears to be a good solution to a thorny problem.