In response to a spectacular amount fraud, the Environmental Protection Agency (EPA) recently finalized regulatory provisions aimed to enhance the oversight of renewable identification number (RIN) generation. Published on July 18, the final rule details a voluntary quality assurance program that provides regulated parties a way to ensure the validity of RINs.
Quality Assurance Programs
To receive EPA-approval, quality assurance programs must be able to verify that the feedstock used to produce the renewable fuel meets the definition of renewable biomass. The production process must also remain consistent with the EPA Moderated Transaction System (EMTS).
The EPA tracks the designated percentage of renewable fuels into the national fuel mix through the use of (RINs) that are assigned by either a producer or importer to each batch of Renewable Fuel. Under the first iteration of the RFS, RINs were recorded and tracked via little more than Excel spreadsheets. The errors associated with manual entry and the complexity added by RFS2 (four renewable volume obligations and five types of RINS) led the EPA to develop an automated tracking system, the EMTS.
Today, the EMTS is the mechanism obligated parties use to generate, separate, buy, sell, transfer or retire RINs. The system offers parties who handle RINs immediate feedback, including if a submission fails and the status of a trade (expired, pending or denied). Users can also enter unique references that complement their internal tracking systems.
In general, the EPA takes a ‘‘buyer beware’’ stance in regards to RIN validity. Obligated parties are liable for the use or transfer of invalid RINS and are therefore responsible for verifying the vailidity of the RINs they acquire.
The new rule stipulates the liability carried by a party for the transfer or use of invalid RINs, specifies the conditions under which invalid RINs must be replaced, and notes the parties responsible for their replacement. Deemed an “affirmative defense,” the party that used or transferred fraudulent RINs must 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 have a financial interest in the company that generated the invalid RIN.
- The RIN owner did not cause the invalidity and replaced the invalidated RINs with valid RINs.”
To verify RINs, auditors must visit the renewable fuel facility a minimum of twice per calendar year (no less than once every 200 days). If invalid RINs are discovered, the auditor must notify both the generator of the RIN and the EPA within one day.
The audit team must include at least one professional engineer and one certified public accountant and hold professional liability insurance. Auditors must register with EPA prior to conducting an audit.
To qualify as independent, third-party auditors, audit teams cannot be owned or operated by a renewable fuel producer or its subsidiary. Auditors may not own, buy, sell or trade RINs. They are also prohibited from holding an interest in any renewable fuel-producing business.
These provisions will better address RINs that become invalid downstream. In turn, greater liquidity in the RIN market will bolster the renewable fuel mandate. The new rule takes effect September 16.