Since 2007, federal regulators have overseen the growth of the biodiesel industry, which converts discarded animal fats, used cooking oil and other materials into fuel that can power cars, bulldozers and heavy-duty trucks.
The U.S. Environmental Protection Agency required large fossil-fuel refiners and importers to produce or purchase enough renewable fuels, including biodiesel, to account for up to 9 percent of total production. If the companies couldn’t produce the alternative fuels, they had to buy credits from others that did.
But in recent months, the credit-trading market has been rattled by fraud allegations, plummeting confidence and lawsuits. The EPA has identified more than 140 million fraudulent credits, a sizable figure considering that 1.6 billion credits were generated last year.
The turmoil has raised concern about the EPA’s system for subsidizing production of biodiesel, which has transformed into a complex web of trading in largely unregulated financial instruments.
The EPA has taken action against two Texas companies. Just this month, it notified Houston-based Green Diesel it was accusing the company of generating more than 60 million invalid credits, known as Renewable Identification Numbers, or RINs. That is the largest alleged transgression to date, the EPA said.
Absolute Fuels, of Lubbock, was hit in February with similar accusations on a smaller scale.
The EPA has invalidated the RINs both companies sold and notified the holders they must purchase new ones. An attorney for Green Diesel would not respond to questions, and representatives of Absolute Fuels could not be reached.
In the earliest RINs action, a Maryland man was accused in 2009 of using a computer to create and sell millions of credits without producing a gallon of biodiesel.
It was about a year before the EPA began investigating Rodney Hailey and his company, Clean Green, which continued producing and selling credits for months, according to a subsequent felony wire fraud indictment in federal court. In November 2011, the EPA notified the market that Clean Green’s more than 32 million credits were invalid. Hailey made more than $9 million during a 16-month period of the scheme, according to court records.
The EPA also fined the fossil-fuel producers that purchased the Clean Green RINs.
“The fact that EPA has not made a public statement about the validity of particular RINs is not, and should not be taken to be, evidence that those RINs are valid,” the agency said in an email statement. “Therefore, RIN purchasers may choose to perform whatever due diligence they feel is required to ensure that the RINs they handle are valid.”
The application process for producers requires a review from an outside engineer, but not the EPA itself. The agency statement said it does not have “the capacity” to certify the production of renewable fuels.
“Experience to date has shown that fact-checking, diligent questioning and site visits by potential RIN buyers can identify possible problems,” the EPA statement said.
Participating biodiesel producers register with the EPA and input the number of gallons they make into an online system. A producer can either sell its biodiesel and RIN to the same party or sell the fuel at a discount to a local user and sell the credit for a separate amount to another buyer.
Small producers like Edward Gaiennie, plant manager for Agribiofuels, of Dayton, Texas, say the third-party review could lend itself to fraud.
Others in the industry fault the entire process.
“The refiners and importers, they’re not only concerned with the fact that they’ve got a potential liability for a penalty from the EPA, but also the fact that these credits that they bought in good faith and paid good money for are all of a sudden worthless,” said Patrick Kelly, a senior policy adviser for the energy-industry-backed American Petroleum Institute.
Refiners have turned increasingly away from smaller biodiesel operations to larger companies, fearing the possibility of new violations, Kelly said.
Josh Wallace, plant manager for Aspen Biofuel in Portland, Ore., said the company is stuck with “a sizable amount of RINs that we’re unable to sell because the RINs marketplace just basically froze and locked up for small- and medium-sized producers.”
The number of active biodiesel producers fell from about 150 last year to 40 this year, likely because of the challenges many of them have faced in selling their RINs, said Eric Rubury, president of Ocean Connect, a RINs aggregator and dealer that is suing the EPA for failing to effectively crack down on biodiesel fraud.
Rubury’s firm is being sued by at least one company for selling credits the EPA has ruled invalid. Ocean Connect denies wrongdoing in the case.