Politics & Policy

Fraud and Biodiesel Credits

They’re an infeasible means for the EPA to regulate renewable-fuel production.

Rodney Hailey started Clean Green Fuel in March 2009 to sell biodiesel credits to companies trying to meet their quotas for renewable-fuel production. Situated within a market that is required by law to expand ever year, Hailey’s company seemed poised to prosper. And it did, at least on paper, selling 32.2 million credits worth $9 million. Translated, that means that Clean Green Fuel was under agreement to produce about 21.4 million gallons of biodiesel.











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On June 25, federal courts convicted Hailey of fraud, the first such case associated with the sale of RINs, or renewable identification numbers. It appears that, after founding Clean Green Fuel, he rented a garage and bought pipes and blending equipment. But the one-man, one-shed operation never blended any biomass-based biofuel. His pipes were connected to nothing. Hailey now faces up to 484 years in prison.

RINs were created by the 2007 Energy Independence and Security Act, which mandated that companies that refine, import, or blend fossil fuels (the “obligated parties,” in the bill’s legalese) blend a certain, annually increasing amount of biomass-based diesel from 2008 to 2022. RINs are a way of tracking how much biodiesel these companies create. One gallon of corn-starch ethanol is worth one RIN; of agri-biodiesel, 1.5 RINs; and of cellulose ethanol, 2.5 RINs.

#ad#The numbers are transferable. Whenever a gallon of biodiesel changes hands, so does the RIN associated with it. The numbers can also be purchased. A company — a mining company, say — that blends fuels but doesn’t deal primarily in fossil fuels might blend its own biodiesel and then sell the associated RINs to an obligated party. In this case, RINs serve the same function as carbon credits — a way for companies to pay others to be environmentally friendly.

As the annual biodiesel mandates have risen over the years, so has each company’s quota and, no surprise, the value of RINs. At the outset, one credit was worth about $0.15. By 2010 the cost had risen to about $0.50. In 2011, it reached $1.38. In effect, if a gallon of diesel qualified for a RIN credit, it cost $1.38 less than another gallon of diesel. On top of the biodiesel tax credit (worth $1.00 per gallon of biomass-based diesel), RINs became an increasingly attractive option. Between 2008 and 2010, about 350 million credits were generated annually. Last year, there were 1.6 billion.

A small but growing cottage industry has sprouted around RIN credits, including everything from producers and buyers of the credits to RIN consultants and verification websites.

Because of cases like Hailey’s, this market might soon collapse. Absolute Fuel, by contrast, at least tried to produce biodiesel. The company lost $500,000 between 2009 and January 2010 while attempting to generate biofuel out of a plant in Texas. A second batch made in August 2010 in a different Texas plant was deemed unusable. But that didn’t stop Absolute Fuel from selling an estimated $40 million worth of credits, representing approximately 36 million gallons of biodiesel.

All told, Clean Green and Absolute Fuel sold credits to 30 companies, including BP, ConocoPhillips, Citgo, Exxon Mobil, Shell, and Sunoco. In April, the EPA fined these 30 obligated parties — the amounts of the fines ranged from $3,000 to $350,000 — for not meeting their quotas. Add the 60 million invalid credits sold by the company Green Diesel and the total of invalid credits reaches 140 million. And that number could double, according to a letter to EPA administrator Lisa Jackson from House Energy chairman Fred Upton (R., Mich.), Oversight and Investigations Subcommittee chairman Cliff Stearns (R., Fla), Energy and Power Subcommittee chairman Ed Whitfield (R., Ky.), and Representative Michael C. Burgess (R., Texas).

On July 13, at a hearing that the House Energy Committee held to discuss RIN fraud, a number of industry leaders said that the problem had created a crisis of confidence, costing them $200 million and threatening the very existence of the industry. They blamed the EPA for exacerbating the fraud by allowing companies under investigation to continue dealing in what were revealed to be invalid credits. It took a year for the EPA to gather enough evidence to convict Clean Green Fuel, for example.

In response, Phillip Brooks, director of the EPA’s air-enforcement division, said that the obligated parties had not done due diligence. Beyond assuming guilt before it had gathered evidence, the EPA could have done little to stop these three companies until it formally issued notices of violation. For that reason, the administration plans to revise its procedure for vetting entrants into the market and prosecuting cases of fraud, but the administration hasn’t guaranteed that it will have a plan in place for 2013.

Ken Greene of the American Enterprise Institute thinks this verification problem might simply be endemic to all energy-credit trading. “Fraud has permeated virtually all of these kinds of credit-trading systems, because they create a situation where you can capture the rents at relatively little risk of being caught,” he says. “So, you claim to produce solar power, but instead, you just set up diesel generators and pump power into the grid, claiming the higher price guaranteed for renewables.” It’s the “same with biofuels.”

And so fixing the biodiesel-credit program may prove to be infeasible. In 2007, RINs looked like an adequate instrument for measuring renewable production. But if the flaws in the system leave the government no way to monitor that instrument, biodiesel credits will become an increasingly unlikely means for the EPA to regulate the renewable-fuel standard.

— Nash Keune is a Thomas L. Rhodes Journalism Fellow at the Franklin Center.

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