U.S. Struggles To Rescue Green Program Hit By Fraud

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 EPA 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 resell 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 EPA has said in announcements over the last year. 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 five 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 EPA announced settlements with oil companies that had submitted invalid RINs sold by two of the three fraudulent producers. The penalties, amounting to thirty 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 EPA 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 EPA 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 EPA to guarantee that the refiners will not be penalized if RIN credits they buy turn out to be false. The EPA 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 EPA 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.

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