On July 2, 2014, EPA issued a final rule outlining the elements of a voluntary third party quality assurance program to ensure the validity of renewable identification numbers (RIN) petroleum refiners use to confirm compliance with the annual fuel standard. Under the final rule, petroleum marketers may choose between two options to verify the validity of RINs generated between February 21, 2013, and December 31, 2014. Importantly, 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. The final rule is available online.
On April 10, 2014, the U.S. Environmental Protection Agency (EPA) released its strategic plan through 2018. A copy of the plan is available online. It includes statements by EPA reinforcing its commitment to enhancing implementation of the Toxic Substances Control Act of 1976 (TSCA) and the federal Renewable Fuel Standard (RFS) over the next four years.
In the 99-page document, EPA reiterates its position supporting enhancing TSCA. To that end, EPA stresses that "[p]otential legislative action to reauthorize TSCA is both a key external factor and a key emerging issue. Consistent with the Administration's essential principles, EPA's authority under TSCA should be modernized and strengthened to increase confidence that chemicals used in commerce are safe and do not endanger public health and welfare."
In its strategic plan, EPA also states that it intends to continue to work to "streamline" the implementation of the federal RFS, "including the annual standard-setting process and new fuel pathway approvals." The Agency also asserts that it "will also strengthen its oversight of industry compliance with RFS standards and core fuels and fuels additive registration mandates through a voluntary third-party quality assurance program to verify that renewable identification numbers (RINs) have been validly generated. In addition, proposed modifications to the exporter provisions of the RFS program will help to ensure that an appropriate number and type of RINs are retired whenever renewable fuel is exported."
API, AFPM, and ExxonMobil urged EPA and the Office of Management and Budget (OMB) to eliminate the ability of biodiesel producers to sever RINs from batches of fuels produced as part of an upcoming final rule establishing a quality assurance program for the fuels credit market.
The rule, as proposed, would establish qualifications for third-party auditors who would determine the validity of the RINs. It would also establish audit procedures for renewable fuel production facilities, including minimum frequency, site visits, review of records, and reporting requirements. The rule is open for comment now, and EPA is requesting feedback on whether renewable fuel producers should be allowed to separate and sell their own RINs. The groups emphasized that allowing biodiesel producers to separate and sell fuel credits creates opportunities for fraud in the RIN market.
Biodiesel producers are authorized to sever RINs from fuel batches and sell them as credits to comply with the annual RFS blending mandates. This generates two revenue streams -- one from fuel sales, and another from RIN credit sales. This anomaly resulted from a settlement between 30 refiners and other companies and EPA in April 2013, where $3.65 million was paid to EPA in penalties for purchase of fraudulent credits. The National Biodiesel Board and the Renewable Energy Group emphasized that "[t]he biodiesel marketplace is not as mature as other biofuel markets" and "often the value of the RIN provides biodiesel producers with [their] only opportunity to create a margin."
On April 7, 2014, the U.S. Court of Appeals for the District of Columbia Circuit heard oral arguments in Monroe Energy, LLC v. EPA (No. 13-1265). In the case, Monroe Energy, a subsidiary of Delta Airlines, the American Petroleum Institute (API), and the American Fuel & Petrochemical Manufacturers (AFPM) are challenging EPA's final 2013 RFS rule. The plaintiffs' arguments include that the rule should be overturned because EPA improperly considered the availability of carryover Renewable Identification Numbers and illegally issued the rule in final nine months after the statutory deadline to do so.
Several large biofuels trade associations intervened in the case on behalf of EPA, including the Biotechnology Industry Organization, Renewable Fuels Association, Growth Energy, and the National Biodiesel Board. They asked the court to uphold the 2013 RFS rule, but to not address the bounds of EPA's discretion to reduce RFS volume requirements due to concerns related to the E10 "blendwall."
Plaintiffs have asked the court for an expedited ruling before the June 30, 2014, compliance deadline for the 2013 RFS requirements.
On February 25, 2014, EPA sent its final rule to "Establish a Voluntary Quality Assurance Program for Verifying the Validity of Renewable Identification Numbers Under the RFS2 Program" to the U.S. Office of Management and Budget (OMB) for final review. EPA is expected to take action to release the final rule as soon as OMB completes its review.
As proposed, the rule would be retroactive to January 2013. It is the result of efforts to help restore investor confidence in the Renewable Identification Number (RIN) market and address the argument of some Renewable Fuel Standard (RFS) opponents that RIN fraud indicates a flaw in the RFS policy. Since 2010, there have been five major cases in which millions in fake biodiesel RIN credits have been generated. Under the current system, refiners (not renewable fuel producers) who purchase the credits to meet their annual RFS requirements are responsible for replacing the fraudulent credits and are vulnerable to steep penalties for failure to do so.
Under EPA's proposed RFS Quality Assurance Program (QAP), a voluntary third party quality assurance program would be established that could be used to verify that RINs have been validly generated. The proposal would provide a recognized means for independent third parties to audit the production of renewable fuel and the generation of RINs. It would include among other provisions: minimum requirements for QAPs, including such things as verification of type of feedstocks, verification that volumes produced are consistent with amount of feedstocks processed, and verification that RINs generated are appropriately categorized and match the volumes produced; qualifications for independent third-party auditors; requirements for audits of renewable fuel production facilities, including minimum frequency, site visits, review of records, and reporting; and, conditions under which a regulated party would have an affirmative defense against liability for civil violations for transferring or using invalid RINs. In addition, it would provide two options that would be available for the verification of RINs through a QAP.
Generally, the refining and biodiesel industries are supportive of the proposal. The ethanol industry is generally concerned that it would create unnecessary financial burdens on its producers. Given the market, the proposed voluntary QAP has reportedly already become almost a requirement for all renewable fuel producers, even though the fraudulent cases all involve only biodiesel.
It is being reported that API and the Advanced Biofuels Association (ABFA) are working together on potential legislative language to increase the value of RINs associated with advanced biofuels and to allow them to help make up conventional RINs due to blend wall constraints under the federal RFS. According to news reports, the two groups are working to present this potential language to members of the House Energy and Commerce Committee who are working on developing legislation to modify the RFS.
Several of API's largest members, including Shell and BP, are working on projects to produce advanced biofuels. Reportedly, API and ABFA contend that increasing the value of advanced biofuel RINs and allowing them to help make up conventional RINs due to blend wall constraints would help spur investment in and development of advanced biofuels to help meet the RFS. All other major biofuels trade associations are advocating against any legislative change to the RFS. They argue that, however well-intentioned, opening the RFS up to amendment would make the law vulnerable to repeal, for which the oil industry is heavily lobbying.
In addition, several biofuels groups argue that there are sufficient RFS compliance options and solutions to the blend wall, which they say has been intentionally created by the oil industry that has chosen not to take steps to address it. For instance, these groups argue the oil industry could encourage greater investment in E85 and its distribution. While API is still advocating for RFS repeal, it is reported that the group recognizes that outcome is unlikely in this Congress. Reportedly, this is the reason the group is working with ABFA on the advanced RINs amendment.
On September 6, 2013, EPA's Office of the Inspector General (IG) issued a report finding that the Agency does not meet the control standards for monitoring some of the new programs and activities designed to prevent and reduce instances of fraudulently generated RINs under the federal RFS. EPA's one-page report summary is available online and its 23-page full report is available online.
The EPA IG findings come at a vulnerable time for the RFS and its allies. Trade groups representing the oil and gas industry, among others, have called on EPA to modify the RFS in several ways, including to protect against RIN fraud. Those groups, as well as the National Biodiesel Board, worked with EPA to design a new plan to help protect against RIN fraud. EPA issued a proposed rule outlining the plan in February of this year. A copy of the proposed rule as published in the Federal Register is available online. The plan is expected to be completed soon.
Renewable fuel and chemical company Aemetis, Inc. announced this week that EPA has approved its Renewable Fuel Standard (RFS) pathway to produce ethanol using grain sorghum and biogas with the Company's existing Combined Heat & Power system to generate D5 Advanced Biofuels Renewable Identification Numbers (RIN). This announcement means that additional fuel will qualify to fulfill the annual renewable volumetric targets under the federal RFS statute. It comes as EPA is preparing its proposed RFS volumes for 2014, which the Agency indicated it would likely reduce from those set in the statute to adjust for supply and the impending ethanol blendwall.
Aemetis' press release on the announcement is available online.