U.S. Struggles to Rescue Green Program Hit by Fraud

U.S. Struggles to Rescue Green Program Hit by Fraud
October 12, 2012 | posted by The Institute

Source: NewYorkTimes.com

By MATTHEW L. WALD

WASHINGTON — A Maryland man is awaiting sentencing for what may seem an unusual crime: selling bogus renewable energy credits and using the $9.3 million in illicit proceeds to buy jewelry and a fleet of luxury cars.

In a similar case in Texas, a man has been indicted for selling a whopping $42 million in counterfeit credits. He bought real estate, a Bentley and a Gulfstream jet.

As a result of such cases, the Environmental Protection Agency is scrambling to retool a program that relies on such credits to encourage the use of cleaner diesel fuel in engines. The refining industry has meanwhile seized on the schemes to argue that government fuel mandates don’t work and the rules should be relaxed or scrapped.

Under the E.P.A. program, initiated in 2009, a producer who makes diesel fuel from vegetable oils and animal fats receives renewable energy credits for every gallon manufactured. The producer can then sell the credits to refiners, who pay millions of dollars for them under a government mandate to support a minimum level of production.

The credits can also be resold, a commonplace activity in the arena of corporate compliance with federal environmental rules.

The problem is that at least three companies were selling bogus credits without producing any biodiesel at all, the E.P.A. has said in announcements over the last year. Agency officials declined to comment for this article.

Now no one is certain how many of the credits are real. So far, more than $100 million in fraudulent credits have been identified, the refining industry estimates. That amounts to roughly 5 percent of the credits issued since 2009, but the percentage could rise as current investigations of other producers progress.

The credits are easier to counterfeit than hundred-dollar bills. Known as “renewable identification numbers,” or RINs, the 38-digit credits have no physical form and are traded electronically. Exxon Mobil, Marathon and Sunoco are among the many big companies that have bought bogus credits.

Last April, the E.P.A. announced settlements with oil companies that had submitted invalid RINs sold by two of the three fraudulent producers. The penalties, amounting to 30 cents per gallon of biofuel, ranged from a few thousand dollars to a maximum of $350,000.  The agency also required such companies to buy legitimate credits to replace them.

But the industry still argues that the penalties are unfair, saying that the unscrupulous vendors were implicitly approved by the E.P.A. when it listed them as producers on its Web site. The agency continued to list them there even after a federal investigation of the three companies began, Bob Greco, the American Petroleum Institute’s group director for downstream and industry operations, pointed out at a recent news conference.

The E.P.A. is now working on a rule detailing what a refiner must do to verify that the renewable energy credits it is buying are legitimate. The agency has promised a draft version by the end of the year, but the industry wants the agency to move faster, noting that a public comment period is needed before a rule is made final.

Oil companies, which are long accustomed to arm-wrestling regulatory agencies in Washington, want the E.P.A. to guarantee that the refiners will not be penalized if RIN credits they buy turn out to be false. The E.P.A. has signaled that it is prepared to do that, provided that refiners have done due diligence on the credits under whatever rule the agency adopts.

But it is unclear whether the agency will bow to another demand from the refiners: to drop an E.P.A. requirement that companies shop for valid replacement credits if they are found to be holding bogus ones. The oil companies argue that if they have to replace all the fake ones, a shortage of RINs could develop early next year.

OceanConnect, a company in White Plains, N.Y., that specialized in buying RINs from small producers and packaging them for bulk sales, has been sued by oil companies that bought credits that proved fraudulent.

Eric A. Rubury, the company’s president, said that even if the E.P.A. drops the fines, the replacement burden will amount to one. “They’re saying, O.K., we won’t charge you a couple of hundred thousand dollars of fines, but you still have to go out and buy six or eight million RINs,” he said. “The de facto fine is a combination of all of it.”

The fraud issue has also had reverberations in Congress, with Republican members of the House Energy and Commerce Committee raising pointed questions about the E.P.A.’s oversight of the program. In a letter to Representative Fred Upton of Michigan, the committee’s chairman, two assistant E.P.A. administrators explained the agency had taken a “buyer beware” approach, assuming that the oil companies would be well equipped to choose legitimate producers.

But in light of “recent developments,” the agency said, referring to the three fraud cases, “E.P.A. understands that a reassessment of this approach may be needed.”

Legitimate biodiesel producers, with a far smaller lobbying budget, are arguing that the new fraud rules will hurt them.

Since the existence of fraudulent credits became common knowledge late last year, many refiners have been bypassing the scores of small producers in favor of larger, household-name suppliers.

“If there’s a small producer they’ve never heard of, they’re going to be very reluctant to buy RINs from that producer,” said Ben Evans, a spokesman for the National Biodiesel Board, a trade association.

After the E.P.A. implicated two companies in fraud, “we were passed over” by big oil companies, said Leif C. Forer, a partner at Piedmont Biofuels, a small biodiesel biofuel producer in central North Carolina. “We could not sell RINs even if we said ‘We’ll give you the best deal you’ve ever heard of.’ ”

Even now, he said, Piedmont, which produces only about a million gallons a year, is getting about 68 cents a RIN, compared with a price in the 80-cent range for bigger producers.

Before purchasing credits, Mr. Forer explained, an oil company now pays someone to audit the producer. Checking out his small operation is just as expensive for the refiner as auditing a far larger one from which the company will buy far more credits, he said, which means that the refiner is willing to pay less.

If the new regulations require refiners to commission frequent on-the-scene audits of his business, Mr. Forer predicted, his predicament will worsen.