Scam-Ridden U.S. Biofuel Program Targeted for Fix by EPA

Photographer: Daniel Acker/Bloomberg

The EPA yesterday called for a mandate of 16.55 billion gallons for renewable fuels. Close

The EPA yesterday called for a mandate of 16.55 billion gallons for renewable fuels.

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Photographer: Daniel Acker/Bloomberg

The EPA yesterday called for a mandate of 16.55 billion gallons for renewable fuels.

The Environmental Protection Agency is proposing rules to expand the use of renewable fuels and thwart scams in a program hit by fraud and facing increasing criticisms from U.S. refiners.

The EPA yesterday called for a mandate of 16.55 billion gallons for renewable fuels such as ethanol for this year, up 8.9 percent from 2012 and in line with a target set by Congress. Parties have 45 days to comment before a final mandate is set. The agency also issued rules aimed at preventing scams, after the EPA determined that three separate companies sold fraudulent Renewable Identification Numbers, or RINs, for fuel they never produced.

“Following a number of high-profile RIN fraud cases, EPA expects its rulemaking to improve the overall liquidity in the RIN market and in particular make it easier for smaller renewable fuel producers,” the agency said in a statement.

A 2007 federal law requires that refiners such as Exxon Mobil Corp. (XOM) blend certain amounts of renewable fuels with gasoline each year, with the amount determined by their share of the fuel market. Instead of producing the fuels themselves, refiners can buy credits, or RINs, from other producers to fulfill their obligations.

Under the proposal issued yesterday, purchasers of the renewable-fuel credits would have them verified through third- party audits. The rule would also specify the conditions under which invalid RINs must be replaced, and by which party would be responsible to pay.

Photographer: Patrick Fallon/Bloomberg

Fermentation tanks stand at the Mid Missouri Energy ethanol plant in Malta Bend, Missouri. Close

Fermentation tanks stand at the Mid Missouri Energy ethanol plant in Malta Bend, Missouri.

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Photographer: Patrick Fallon/Bloomberg

Fermentation tanks stand at the Mid Missouri Energy ethanol plant in Malta Bend, Missouri.

Cellulosic Biofuels

The EPA also issued its proposal for 2013 quotas for the production of ethanol and related biofuels. As part of the overall total, refiners would have to make or purchase credits for 2.75 billion gallons of advanced biofuels, such as biodiesel, and 14 million gallons of cellulosic biofuels.

While the EPA’s standards to prevent fraud were worked out with both refiners and producers, those two groups are split on the overall merit of the program. Ethanol and biodiesel producers praised the EPA for preserving a program they say is increasing American energy independence and reducing greenhouse- gas emissions.

Refiners say they’re gearing up to press Congress to repeal the entire renewable-fuels legislation, as its usefulness has expired with the boom in domestic oil production. Newer, greener fuels from items such as farm waste or algae have been slow to materialize.

The “decisions by EPA are emblematic of an irreparable Renewable Fuel Standard and underscores the reasons why Congress should repeal the program,” Charles Drevna, president of the American Fuel & Petrochemical Manufacturers in Washington, said in a statement yesterday.

Court Decision

The cellulosic ethanol standard earned the most criticism. A federal court last week tossed out the agency’s requirement for cellulosic ethanol for 2012 as too onerous.

There was no commercial production of cellulosic biofuel last year, but that did not deter the government: It proposed raising the mandate to 14 million gallons from the 8.65 million gallons that was tossed out in court.

“The court recognized the absurdity of fining companies for failing to use a nonexistent biofuel,” said Bob Greco, a director of the American Petroleum Institute. By seeking to nearly double that quota, “EPA needs a serious reality check.”

The EPA said in its announcement that the cellulosic target is a “reasonable representation of expected production,” and is consistent with the court’s decision.

Refiners also have complained about the use of Brazilian ethanol made from sugar cane to meet the advanced biofuel mandate. Brazilian imports of the fuel have skyrocketed as domestic producers, which use corn, wrestle with higher costs caused by drought in the Midwest. Unlike the U.S.-grown corn ethanol, EPA classifies the sugar-cane variety as advanced because burning it produces less greenhouse-gas emissions.

“A lot of domestic producers are starting to cry about that and scream,” said Will Babler, a broker at Atten Babler Risk Management LLC in Galena, Illinois. “This just confirms it.”

To contact the reporter on this story: Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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