Biodiesel RIN fraud causes industry, obligated parties anxiety
The renewable identification numbers (RIN) system was designed by the U.S. EPA to ensure that physical gallons of biodiesel are being produced and, in turn, blended by obligated parties to meet their biomass-based diesel volume requirements mandated under the federal renewable fuel standard, RFS2. In October, however, the EPA charged Maryland-based Clean Green Fuel LLC with fraudulently producing invalid RINs while Texas-based Absolute Fuels LLC is reported to have also allegedly produced invalid RINs. If proven guilty, the principal parties of each respective entity could face significant prison time and fines while obligated parties that purchased the invalid RINs could owe penalty fines for the violations and repurchase valid RINs in place of the fraudulent ones.
Clean Green Fuel owner, Rodney Hailey, was charged with carrying out a $9 million scam that involved the distribution of 32.2 million invalid RINs representing about 21.4 million gallons of biodiesel into the market, according to the U.S. Department of Justice. Separately, Absolute Fuels was charged with allegedly selling $40 million in fraudulent credits that represented 36 million gallons of biodiesel.
RINs generated by Clean Green Fuel entered the market prior to the launch of the EPA’s Electronic Moderated Transaction System in July 2010 as part of RFS2. In November, EPA subsequently issued 24 notices of violations alerting more than a dozen companies, including ExxonMobil and Royal Dutch Shell for allegedly holding the invalid RINs generated by Clean Green Fuel. In the EPA’s notices of violation (NOV), the companies were given 14 business days to replace the invalid RINs.
Through an Enviroflash alert also this month, the EPA stated, "More than 32 million RINs are alleged to be invalid because the company, Clean Green Fuel LLC generated the RINs and neither produced nor imported any renewable fuel whatsoever. Over 18 million of these RINs were used for compliance by the companies that received the NOVs. EPA's Office of Transportation and Air Quality is notifying the RFS regulated community that the remaining 14 million RINs still in circulation may be invalid for the same reasons as stated above, and that invalid RINs may not be used for compliance with the RFS program."
Under the Clean Air Act, the EPA is authorized to slap fines of up to $37,500 per day per violation onto obligated parties that hold invalid RINs. In the case with Clean Green Fuel, shortly after being issued with NOVs, the National Petrochemical and Refiners Association and American Petroleum Institute requested a meeting with federal regulators to dispute the allegations and to figure out how its members could feasibly comply with the 14-day deadline to buy valid RINs to replace fraudulent ones that could be potentially circulating in the market. While an obligated party can carry a RIN deficit into the next year, it cannot, however, carry a deficit over two consecutive years.
EPA notified the companies that accepted RINs sold by Clean Green Fuel but has yet to notify those who may have accepted RINs sold by Absolute Fuels, mainly because, in contrast to Clean Green Fuel, the company actually produced biodiesel, which could be a much more complex situation than that of Clean Green Fuel, said Jess Hewitt, CEO of Gulf Hydrocarbon, a buyer and aggregator of biodiesel based in Houston. Hewitt is also a RIN consultant for Arkansas-based Lee Enterprises.
“If a biodiesel plant is selling all their biodiesel RIN-less, that’s a clear signal that something is not going right,” Hewitt told Biodiesel Magazine. “Not all of the obligated parties know where their RINs are coming from, and many don’t deal directly with producers.”
Clayton McMartin, owner of Internet-based RIN verification site RINSTAR, said he saw the need to create his company in 2008 when he read EPA’s proposed rule back in 2006.
“This is a tail that’s wagging the dog,” McMartin said, “because what you have is a credit that’s getting in the way of the raw physical deal. There are some real concerns for everybody in the supply chain.”
When asked if the EPA should get more involved to enforce more stringent protocols, McMartin answered, “EPA is already involved with everybody’s commercial business. As a result, cash flow has suffered. Why would you want it even more involved based on these exceptional cases? I think it’s the worst thing that could happen to the industry.”