Fake biofuel credits prompt push for better screening system

After at least three companies sold fraudulent biodiesel credits to refiners and gasoline importers, lawmakers are looking to revamp the federal government’s system for verifying and tracking the use of renewable fuel.

At issue are scams tied to Renewable Identification Numbers that are assigned to batches of biodiesel, and which can trade separately from the biofuel they represent. The government requires that the nation’s fuel supply include a percentage of biofuels. Refiners and gasoline importers that buy RINs can get credit for meeting these mandates without actually purchasing the fuel.

The federal government so far has identified more than 140 million invalid RINs — not associated with actual biofuels — believed to have been generated by three biodiesel companies, including one in Houston. The Environmental Protection Agency has ordered refiners that bought the fake credits to pay fines and replace the invalid RINs by purchasing new, genuine ones.

The EPA is working on regulations that would revamp the system for tracking the credits and give refiners and gasoline importers that buy invalid RINs an affirmative defense against fines if the RINs they purchased were validated by a third-party auditor.

But it appears unlikely the changes will be made by Jan. 1, when refiners hoped a new system would be in place.

Rep. Pete Olson, R-Sugar Land, is introducing legislation Thursday that may prod the EPA to move faster. The bill would give the agency a Jan. 1 deadline for establishing a system for EPA or third-party certification of the biodiesel credits. Once sold, those pre-authorized credits would be considered valid, even if they were later determined to be fake.

He said the fraudulent RINs are crowding out legitimate biodiesel startups as they struggle to market their product to wary refiners now more comfortable doing business with proven firms.

Olson, who opposes the underlying renewable fuel standard that mandates biodiesel use, said the agency has been slow to respond to the “massive fraud.”

“I oppose the RFS and support its repeal, but as long as it is around, we should make it free of fraud,” he said. “Several innocent RIN traders have been forced into bankruptcy and many petroleum companies and refineries no longer buy credits from small or emerging renewable fuel producers for fear of fraud.”

Reps. Gene Green, D-Houston, Marsha Blackburn, R-Tenn., and Jim Matheson, D-Utah, are cosponsoring the measure.

Green has worked separately to push the EPA to change its approach. EPA Assistant Administrator Gina McCarthy outlined the agency’s framework for new RIN regulation for Green in August, after a conversation with the lawmaker.

“We understand that many in industry are seeking a resolution to these market uncertainties before making purchasing decisions for RINs in the new year,” McCarthy told Green in an Aug. 14 letter. “To that end, on an expedited basis, the EPA expects to issue a proposal before the end of 2012, with a final action as soon as possible in 2013.”

The EPA’s Moderated Transaction System tracks credits now. The agency requires a third-party engineering review of biofuel producers before they can generate RINs, but no regulatory system verifies that the firms are turning out the amount of fuel they say they are after that initial assessment.

The industry also has launched a voluntary verification service.

For now the onus is on buyers to make sure the credits they purchase are valid, and they’re on the hook for fraud unearthed even years later.

Olson’s bill would shift the pressure to the EPA to make sure validations by the agency and third-party auditors hold up.

At a House Energy and Commerce Committee hearing this summer, small biodiesel producers told lawmakers they were struggling to sell their legitimate fuel credits to skeptical refiners and gasoline importers.

Jennifer Case, the CEO of San Diego-based New Leaf Biofuel, said the market for her product based on used cooking oil dropped in November 2011, when the EPA first announced it was going after scam artists selling bad credits.

“Overnight, our customers were unable to sell the RINs we attached to our fuel, which meant New Leaf and other small producers lost the ability to sell biodiesel for a competitive price,” Case told the panel. “Nearly eight months later, New Leaf is still struggling to obtain a fair value for the RINs we generate.”

She continued:

“Once the fraud was announced, the distributors who purchased New Leaf’s fuel were unable to sell New Leaf’s RINs. Neither the brokers nor the obligated parties felt comfortable owning RINs of any small producer. Obligated parties decided that the best way to avoid owning fraudulent RINs was to purchase only from the large, well known producers . . . that could and would be required to provide indemnity should the RINs turn out to be invalid.”

Olson’s legislation is unlikely to advance out of the House this year as a stand-alone bill, but it serves as a signal to the EPA that lawmakers are watching. Congress also appears likely to tackle broader issues surrounding the renewable fuel standard next year.

Rodney Hailey was convicted this summer of selling more than $9 million in fake fuel credits from his Maryland garage, without ever producing a drop. Neighbors became suspicious after seeing a Lamborghini and other expensive cars in his driveway.