EPA’s Folly; Refiners’ Punishment

The Environmental Protection Agency’s (EPA’s) Renewable Identification Numbers, RINs, are causing the refining industry a lot of grief and the American public a lot of money.  If nothing changes, the grief and the money wasted could grow rapidly, damaging the economy and family budgets. RINs are a byproduct of the Renewable Fuels Standard that mandates a certain amount of biofuels (e.g. ethanol) to be produced and used by refiners each year. The purpose of RINs is to track biofuel sales. But, fake RINs have become a problem and refiners are caught in the middle. Refiners pay for the purchase of mandated biofuels via a RIN only to have it turn out fake and then be fined by EPA for not using the required amount of biofuels.

History of Biofuel Mandates and RIN Development

The Energy Policy Act of 2005 established the Renewable Fuel Standard (RFS), which mandated the use of at least 4 billion gallons of biofuels in 2006 and at least 7.5 billion gallons by 2012 to be blended into transportation fuels. Two years later, the Energy Independence and Security Act of 2007 vastly expanded the mandate to 9 billion gallons of biofuels in 2008, increasing to 36 billion gallons by 2022. It also stipulated that the 36 billion gallons should consist of not more than 15 billion gallons of corn-based ethanol and at least 16 billion gallons of cellulosic biofuels with additional requirements for other advanced biofuels.[i] Thus, fuel blenders must incorporate minimum volumes of biofuels in their transportation fuel sales regardless of market prices, or be fined. The fines are assessed on the refiner or blender, not the producer of the biofuel.

EPA is responsible for implementing the program and ensuring that the mandates are met for 4 specific categories of biofuels: advanced biofuels, biomass-based diesel, cellulosic ethanol, and total renewable fuels. Each year, EPA calculates blending standards for the 4 biofuel categories that refiners, blenders, and importers of gasoline and diesel fuels must meet with each company receiving a renewable volume obligation (RVO). The RVO is calculated by using the EPA standard for each of the 4 biofuel categories and applying them to the firm’s annual fuel sales. EPA checks that the mandate has been met through the RINs that each firm has. RINs were developed to deal with regional differences in biofuels production and availability and to ensure that the blending requirements have been met.

Source: Congressional Research Service, http://www.fas.org/sgp/crs/misc/R40155.pdf

A RIN is a unique number consisting of 38 characters that is initially issued by the biofuel producer or importer at the point of production or importation. Each qualifying batch of renewable fuel has its own RIN. RINs consist of

RIN=KYYYYCCCCFFFFFBBBBBRRDSSSSSSSSEEEEEEEE

Where

K	= a code that distinguishes RINs still assigned to a batch from those detached
YYYY	= the calendar year of production or import
CCCC	= the company ID
FFFFF	= the company plant or facility ID
BBBBB	= the batch number
RR	= the biofuel equivalence value
D	= the renewable fuel category
SSSSSSSS	= the start number for the batch of biofuel
EEEEEEEE	= the end number for the batch of biofuel

The latter 2 components of the RIN provide the number of gallons of biofuel in the batch, adjusted for its equivalence value. For example, a 1,000 gallon batch of biodiesel with an equivalence value of 1.5 would start with 00000001 and end with 00001500. When biofuels change ownership, the RINs are transferred and the Code K is updated accordingly. RINs are valid for the calendar- year generated, or they can be extended into the following year.

To deal with geographic and other differences among refiners, RINs can also be traded. If a blender has already met its mandated share, it can sell extra RINs to another blender who has not met its mandate. Thus, blenders that have not met their quota have the option to buy RINs instead, making them a replacement for an actual purchase of biofuel.

Some Issues with the Renewable Fuel Standard

The EPA Administrator has the authority to waive the requirements if there is inadequate domestic supply to meet the mandate, or if “implementation of the requirement would severely harm the economy or environment of a State, a region, or the United States.” In particular, EPA must make a market determination of the amount of cellulosic biofuel that will be available each year—a fuel that is not yet commercially available. The EPA has lowered the mandate for cellulosic biofuels tremendously, but is still vastly overestimating actual production.  As we explained, in an earlier post, even the amount mandated for 2012, 8.65 million gallons, does not exist commercially, necessitating refiners to pay fines.[ii]  For reference, EPA’s Moderated Transaction System shows zero gallons of cellulosic produced as of April of this year.

EPA had also lowered the amounts of cellulosic biofuel mandated for 2010 and 2011. In 2010, the law mandated 100 million gallons of cellulosic biofuel; EPA reduced the mandate to 6.5 million gallons, and in 2011, the law mandated 250 million gallons of cellulosic biofuel; EPA reduced the mandate to 6.6 million gallons. The USDA Office of Energy and New Uses projects that cellulosic biofuels are not expected to be commercially available on a large scale until at least 2015. But yet, the Renewable Fuel Standard mandates that 3 billion gallons of cellulosic biofuel be produced by 2015.[iii]

According to the Congressional Research Service, there are no large scale commercial cellulosic biofuel plants in operation in the United States. Moving an industry from the laboratory to commercialization is nontrivial as demonstrated  when two recipients with total grant funding of $113 million dropped out of the program—in at least one of those cases, the company determined that the risks outweighed the anticipated benefits.

Because current production costs are so high for some biofuels, especially cellulosic biofuels and biodiesel from algae, either significant technological advances or significant increases in petroleum prices are needed to make them competitive with gasoline. Without such cost reductions, requiring large amounts of biofuels will have the unfortunate consequence of raising fuel prices. The fees that refiners have had to pay for not blending non-existent ethanol are on a per gallon basis, $1.58 in 2010, $1.13 in 2011, and $0.78 for 2012. For 2011, the total fee paid by refiners and blenders is estimated at $6.8 million. EPA will announce the 2013 fee amount on November 30, 2012. The statutory minimum fee is 25 cents. The waiver fee formula is $3.00 per gallon less the wholesale gasoline price with the difference adjusted for inflation since 2008.  Thus, as the price of gasoline goes up, the fees go down, and vice versa.

Even corn-based ethanol has increased prices–food prices– due to the amount of corn that has been diverted from home and livestock uses to produce ethanol. Today, about 40 percent of corn production is used to make ethanol, making it the largest use for corn in the United States; in 2001, just 10 years ago, it was only 7 percent.

Source: Congressional Research Service, http://www.fas.org/sgp/crs/misc/R40155.pdf

U.S. taxpayers have supported the renewable fuel program through tax credits, subsidies, loans and grants. In 2011, federal subsidies were estimated at over $7.8 billion, of which almost $7.5 billion were tax credits. While most of these tax credits expired at the end of 2011, the $1.01 per gallon credit for cellulosic biofuels remains.  According to the Congressional Research Service, the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) provided authorized research programs, loans and grants in excess of 1 billion dollars to “support the nascent cellulosic industry.”[iv]

To make matters worse, the program is fraught with fraud and abuse. Due to the tradable nature of RINs, the requirement to produce non-existent biofuels and lax oversight from EPA, a market of fake RINs has developed. Dishonest producers have generated RINs without manufacturing any corresponding renewable fuel since they can be bought and sold like shares of stock. EPA puts the burden on refiners and importers to ensure the credits they purchase are valid, fining them for insufficient biofuel blending even though they paid for what they thought were legitimate RINs because the sellers were on EPA’s approved sellers list.

For example, Exxon paid a fine of $165,407; Shell, $110,331; ConocoPhillips, $250,000; and a unit of BP, $350,000. Janet Grothe, a spokeswoman for ConocoPhillips, said in an email, “ConocoPhillips purchased the RINs in good faith and was the victim of fraud committed by the seller. The civil settlement does not constitute an admission of liability.”[v]

Since November, 2011, the EPA has accused three companies (Clean Green Fuel of Baltimore, Absolute Fuels of Lubbock, Texas, and Green Diesel LLC of Houston) of selling RIN credits without producing any biofuel.  Each company sold between 32 million and 60 million RINs for a total of about 140 million fake credits, or about 10 percent of the annual credits.[vi] Some companies selling fake RINs remained on EPA’s approved sellers list even as the agency was investigating fraud charges.[vii] As of early June, the EPA issued “notices of violation” to 30 refiners and blenders that unknowingly bought fake RINs to comply with their production mandate.[viii]

Conclusion

Charles T. Drevna, president of the American Fuel & Petrochemical Manufacturers, recently said “EPA officials should have alerted members of my trade association when they suspected that some companies registered with the agency were producing fraudulent credits.  Penalizing refiners who unknowingly bought fraudulent RINs from sellers registered with EPA is unjust, irresponsible and bad policy because it punishes crime victims instead of criminals.”

To fix the problem the industry is proposing that EPA–or third parties that the agency chooses—administer a voluntary enhanced certification and validation program for RIN producers that buyers could use as a defense if fake RINs were issued.

The RIN situation once again shows EPA’s antipathy toward energy producers. EPA creates RINs, but fails to police the RIN market, allowing fraudulent RINs to be traded. Instead of stopping fraud, EPA fines the companies that were defrauded. EPA, not the refiners, should bear the burden of a program that EPA has failed to develop satisfactorily. This is just another example of what EPA Regional Administrator Al Armendariz’s disclosed regarding the agency’s policy of “crucifying” oil companies as an enforcement strategy.  In the end, however, targeting energy producers simply targets energy consumers…the American public whose tax dollars pay the salaries of the EPA officials whose policies bring public disdain on their own agency and contribute to declining public trust in governmental institutions.