EPA Finalizes Voluntary Quality Assurance Program for Renewable Fuel Credits

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By Andrew Childers  

July 2 — The Environmental Protection Agency finalized a voluntary third party auditing program to ensure the validity of renewable identification numbers (RINs) petroleum refiners use to demonstrate compliance with the annual renewable fuel standard.

Refiners that choose to have their RINs verified would be eligible for an affirmative defense should those renewable fuel credits later turn out to be fraudulent, the EPA said in the final rule released July 2 (RIN 2060-AR72). RINs are serial numbers attached to batches of renewable fuels that can be traded as credits under the renewable fuel standard.

The final rule would give petroleum refiners two options from which to choose for verifying the validity of RINs generated between Feb. 21, 2013, and Dec. 31, 2014.

Under the first, more stringent verification program, the third party auditors would be obligated to retire or replace any RINs later deemed to be invalid. The second, less stringent option, would place the burden on obligated parties and not on auditors to retire or replace any fraudulent RINs.

Refiners would still have the option to purchase RINs that haven't been verified.

Less Stringent Option Favored

After Jan. 1, 2015, the EPA said it will only offer the less stringent verification option. Potential auditors and some small biodiesel producers told the agency that the costs associated with the more rigorous verification program would be too expensive to be viable.

According to the EPA, only one out of four auditors that participated in an informal pre-registration program said he or she would accept the RIN replacement liability associated with the more rigorous verification program. Of the 480 million RINs that were informally verified through February 2014, less than 20 percent were subject to the more rigorous auditing requirements, according to the EPA.

Ben Evans, a spokesman for the National Biodiesel Board, told Bloomberg BNA July 2 the EPA's rule should provide clarity and accountability in the RIN market. However, fuel producers and petroleum refiners said they were still reviewing the final rule.

Rule Includes Affirmative Defense

The final rule includes an affirmative defense for anyone except the generator of the RIN for any civil liability for a RIN that has been verified by a third party auditor.

“We're pleased that EPA took these important steps to provide more regulatory certainty for companies that make good-faith purchases of biofuel credits,” American Petroleum Institute spokesman Carlton Carroll said in a July 2 statement.

RIN holders would need to submit a report to the EPA within 30 days of discovering their credits may be invalid. The report must show that the RIN had been verified by an auditor and that the holder didn't cause the RIN to be invalid or have any indication it may be invalid in order to claim an affirmative defense.

While obligated parties that purchase verified RINs that later turn out to be invalid won't face any civil penalties, they will still be required to purchase additional credits to demonstrate compliance with the renewable fuel standard, the EPA said.

“Obligated parties that want the protection of an affirmative defense but would rather contract on their own terms regarding replacement of invalidly generated RINs should find this approach more flexible and appealing,” the EPA said. “Additionally, smaller producers could be drawn to this because the cost to participate in the quality assurance program under the [quality assurance plan] would be relatively small.”

Exemption Allowed

The rule will exempt up to 2 percent of petroleum refiners's annual blending mandate in 2014, 2015 and 2016 from the requirement to replace invalidated RINs. The EPA said the limited exemption is due to uncertainty in forecasts of gasoline and diesel production.

The rule will take effect 60 days after it is published in the Federal Register. The EPA proposed the rule in February 2013 (78 Fed. Reg. 12,158).

Fraudulent RINs Spur Rule

The EPA proposed the quality assurance rule after 30 companies agreed to a settlement with the agency in 2012 for purchasing fraudulent RINs. In September 2013, three companies and six people were indicted for allegedly orchestrating a $100 million scheme involving the sale of biofuels and fraudulent claims that the fuels were eligible for tax credits (United States v. Wilson, S.D. Ind., No. 13-00190, 9/17/13; Sec. and Exch. Comm'n v. Imperial Petroleum Inc., S.D. Ind., No. 13-1489, 9/18/13).

In June, Philip Joseph Rivkin of Houston was indicted by the Justice Department on 68 charges, including wire fraud, money laundering and mail fraud, for allegedly selling more than $29 million in fake renewable fuel credits to ConocoPhillips, Tesoro Corp., Citgo and other oil companies (United States v. Rivkin,S.D. Texas, No. 14-250, 6/19/14).

To contact the reporter on this story: Andrew Childers in Washington at achilders@bna.com

To contact the editor responsible for this story: Larry Pearl in Washington at lpearl@bna.com

The EPA's final rule is available at http://epa.gov/otaq/fuels/renewablefuels/documents/qap-fr-07-02-14.pdf.

For more information, contact Deborah Adler-Reed in the EPA's Office of Transportation and Air Quality at 734-214-4223 or adlerreed.deborah@epa.gov.

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