Brent D. Yacobucci
Section Research Manager
The federal Renewable Fuel Standard (RFS) was established in the Energy Policy Act of 2005 (EPAct) and significantly expanded in the Energy Independence and Security Act of 2007 (EISA). The RFS requires the use of renewable biofuels in transportation fuel. For 2012, the RFS requires the use of 15.2 billion gallons of renewable fuel. Within the larger mandate, there are submandates (“carve-outs”) for advanced biofuels, including at least 1 billion gallons of biomassbased diesel fuel (BBD) in 2012. By 2022, the RFS requires the use of 36 billion gallons of renewable fuels, including 21 billion gallons of advanced biofuels.
The RFS is a market-based compliance system in which obligated parties (generally refiners and/or terminal operators) must submit credits to cover their obligations. These credits – Renewable Identification Numbers, or RINs – are effectively commodities that can be bought or sold like other commodities. For each gallon of renewable fuel in the RFS program, one RIN is generated. Each RIN is a 38-digit number, with blocks of digits corresponding to various data, including the year the RIN was generated, the producer of the fuel, and the type of fuel. RINs are valid for use in the year they are generated and the following year.
From the beginning of the RFS program, there have been concerns with RIN generation and the RIN market. As the RINs are essentially numbers in a computerized account, there have been errors and opportunities for fraud. Because of concerns over transposed digits, invalid characters, allegations of double-counting (intentional or unintentional) and other errors and inaccuracies, when EPA finalized rules for the RFS as expanded by EISA (the “RFS2”), EPA also established a new in-house trading system in an effort to address these concerns. All RIN transactions must be cleared through this in-house system, called the EPA Moderated Transaction System (EMTS). From the beginning of the RFS2 EPA has maintained that all due diligence remains the duty of obligated parties. Under this “buyer beware” system those purchasing or receiving RINs must certify their validity on their own, and they are responsible for any fraudulent RINs they pass on to other buyers or submit to EPA for compliance.
In late 2011 and early 2012, EPA issued Notices of Violations (NOVs) to three companies that the agency alleges fraudulently generated a combined 140 million biodiesel RINs in 2010 and 2011. Because of these RIN fraud cases, EPA is looking at establishing a system whereby RINs can be certified by third parties registered with EPA. (EPA may be considering other options but this is the only one the agency has publicly discussed.) EPA is considering whether such certification would provide obligated parties with an “affirmative defense” if RINs are later found to fraudulent – i.e., obligated parties would not be liable for penalties under the Clean Air Act for the use of such RINs. Key questions include whether such an affirmative defense would also eliminate the requirement to purchase make-up RINs. EPA expects to issue a proposed rule in late 2012 or early 2013, with a final rule some time in mid-2013.
In addition to agency action, at least one bill has been introduced that would amend the compliance system. H.R. 6444 would require EPA to establish a RIN certification system and would preclude the agency from later invalidating any certified RINs. Thus, under the bill, any RIN found subsequently to be fraudulent would still count toward an obligated party’s compliance, without penalties.
Date of Report: November 16, 2012
Number of Pages: 19
Order Number: R42824
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