In an effort to prevent fraud that threatens to undermine the
Renewable Fuel Standard ("RFS") program, and to restore
faith in the trading system established to facilitate RFS
compliance, the United States Environmental Protection Agency
("EPA") published final regulations for a renewable
identification number ("RIN") quality assurance program
on July 18. This codifies a voluntary program to ensure that RINs
are valid and clarifies responsibility for replacing RINs if they
are later determined invalid.
RINs are used to track RFS compliance. Pursuant to this program, a
designated percentage of gasoline and diesel fuel produced or
imported into the United States must be renewable fuel, cellulosic
biofuel, biomass-based diesel, or advanced biofuel (collectively,
"Renewable Fuel"). A RIN is assigned to each batch of
Renewable Fuel. Regulated parties can demonstrate they have met the
RFS requirement for each reporting period by either acquiring the
Renewable Fuel itself with the attached RIN, or by acquiring RINs
alone.
EPA issued the rule in response to several high-profile
enforcement cases that invalidated more than 140 million RINs for
biomass-based diesel. These cases resulted in criminal charges
against individuals and companies that generated fraudulent RINs,
and civil enforcement against the refiners and marketers who
unwittingly bought the fraudulent RINs and used them to demonstrate
compliance. The enforcement actions also spawned a variety of civil
lawsuits among participants in the RIN trading market, with
plaintiffs seeking compensation from traders and other parties who
sold RINs that turned out to be invalid. The rule also addresses
what EPA perceived as inequities in the RIN market for small
Renewable Fuel producers.
Last year, EPA proposed a quality assurance program for RINs
that included standards for ensuring that RINs were valid and for
clarifying who is responsible for replacing RINs subsequently found
to be invalid. After reviewing comments, EPA finalized a voluntary
RIN quality assurance program that provides the RIN user with an
affirmative defense to an EPA civil enforcement action citing the
transfer or use of fraudulently generated RINs. To obtain the
affirmative defense, the party transferring or using the fraudulent
RINs will need to establish:
- The RINs were verified by an independent third-party auditor in accordance with an EPA-approved quality assurance program;
- The RIN owner did not know or have reason to know that the RINs were invalidly generated prior to being verified by the independent third-party auditor;
- The auditor or RIN owner informed EPA within five business days of discovering that the RINs in question were invalidly generated;
- The RIN owner did not cause the invalidity;
- The RIN owner did not have a financial interest in the company that generated the invalid RIN; and
- The RIN owner replaced the invalidated RINs with valid RINs.
Putting responsibility for replacing the invalidated RIN on the
owner who used it to demonstrate compliance is a significant
difference from the more robust auditing option discussed by EPA in
the proposed rule. The proposed option would have placed
responsibility for replacing the invalidated RIN on the third-party
auditor. EPA ultimately decided to abandon this option in the final
rule because it wanted to offer an incentive for the RIN owner to
provide "significant robust oversight" of the auditors
and because of the perceived difficulty that the third-party
auditors may have in obtaining sufficient financial assurance to
replace invalidated RINs. RINs audited pursuant to the more robust
program in the proposed rule between February 21, 2013, and
December 31, 2014, however, will remain as validly audited RINs
that need to be replaced by the auditor if they are later
invalidated.
In order to be approved by EPA, quality assurance plans must
include procedures to verify that:
- Feedstocks used in the production process meet the definition of renewable biomass;
- The production process is consistent with that in the EPA Moderated Transaction System for the purchase, sale, and transfer of RINs;
- The renewable fuel produced has been designated for qualifying uses;
- RINs are separated from the actual renewable fuel; and
- The renewable fuel has been sampled, as appropriate, to confirm any of the requirements identified above.
An entity must register with EPA prior to conducting any RIN
audits in order to qualify as an independent third-party auditor.
The registration materials must include documentation that the
audit team includes both a professional engineer and a certified
public accountant along with professional liability insurance
(although the final rule, unlike the proposed rule, does not
specify the required level of coverage). Although EPA does not
envision that every member of the audit team with be either a
professional engineer or a certified public accountant, the
engineer and accountant will both need to certify audit
reports.
To demonstrate that they are an independent third party, audit
teams cannot be owned or operated by any renewable fuel producer
(including any employee, subsidiary, or obligated entity). In
addition, the auditor must not own, buy, sell, or trade RINs, or
have any interest or appearance of interest in any renewable
fuel-producing business. If any invalid RINs are discovered during
an audit, the auditor must notify both EPA and the generator of the
RIN within one day.
The auditors must conduct an on-site visit at the renewable fuel
facility at least two times per calendar year (and no less often
than once every 200 days) to verify the RINs from that facility.
The on-site visit must be overseen by a professional engineer and
must include an inspection or evaluation of all physical attributes
of the facility necessary to verify compliance with the quality
assurance plan elements.
The new rule is effective on September 16. As noted above, the
final rule allows for the continued use of RINs that were verified
pursuant to either the more robust ("Option A") or less
stringent ("Option B") procedures identified in the
proposed rule as long as those RINs were verified between February
21, 2013 and December 31, 2014. A key difference between RINs
verified pursuant to Option A and to Option B is that the auditor
is obligated to replace any subsequently invalidated RINs pursuant
to Option A, while the party using the RINs is obligated to replace
any subsequently invalidated RINs pursuant to Option B. The
validation program ultimately finalized by EPA is relatively
similar to Option B.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.