EPA Fuel Regulation: Saving the Renewable Fuels Program

By Elisabeth Hutchinson

Last summer, news broke that supposed ethanol producers were fraudulently reaping the benefits of Congress’s efforts to encourage America’s use of renewable fuels through the Renewable Fuels Standard (RFS) Program. The sale of fraudulent renewable fuel credits, known as Renewable Identification Numbers (RINs), was so pervasive that it amounted to roughly 140 million fraudulent credits, or approximately 10% of RINs traded annually.

Enforcing the original RFS program’s liability regime, the EPA held both the buyers and sellers of these fraudulent RINs strictly liable—buyers had to replace millions of dollars of fraudulent RINs notwithstanding their good faith belief that the RINs were valid, and sellers were required to make multi-million dollar restitution payments.

In response to public outcry over the scandal and the perceived unfairness of the strict liability regime in the face of widespread fraud, the EPA began to reevaluate the structure of RFS program’s traditional liability scheme. Following months of negotiations with representatives of both the conventional energy and renewable fuels industries, in late February 2013, the EPA released a proposed rulemaking to save the RFS program.

Under the proposed system, RIN producers have the option to verify their RINs using an approved quality assurance program. If a buyer then purchased a verified RIN, the buyer would have an affirmative defense against liability for civil penalties for the transfer or use of invalidly generated RINs. This is the appropriate path forward for the RFS program. The traditional structure of the RFS program threatens the viability of the program by undermining the program’s perceived legitimacy. Instead, the proposed regulations establish a liability scheme that meaningfully considers the culpability of parties and institutionalizes a means for compliance.

While it could be argued that it is not the EPA’s job to cater to the needs of industry by providing an affirmative defense or that buyers should be responsible for their failure to exercise due diligence, the reality is that the current RFS program threatens the vitality of the renewable fuels industry itself. Following the scandal, buyers are refusing to purchase RINs from small to mid-size producers for fear of liability. Thus, the traditional structure does not “punish” major energy companies for their failures. Instead, it threatens the very viability of small and mid-size biodiesel producers who may be the innovators in the industry.

The fraud offered the EPA a wake-up call.  The Agency should embrace the proposed changes as a means to save both the RFS program and the renewable fuels industry itself.

E. Hutchinson

Elisabeth (Liz) Hutchinson is a current third-year law student at University of Denver Sturm College of Law.  Prompting this piece, Liz worked with the US EPA Office of Enforcement and Compliance Assurance in the Fuels Program when the fraud scandal broke last summer.  She is currently interning with the US Department of Justice in the Environmental Enforcement and Defense Sections.  Following graduation, Liz will clerk for Judge John R. Webb of the Colorado Court of Appeals for the 2013-2014 term.  She hopes to practice environmental and natural resources law in Colorado thereafter.  Liz can be reached at erusso13@law.du.edu and welcomes professional connections on LinkedIn.

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