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This year, the RIN obligation for a refinery producing 100,000 barrels per day is about $25 million—a cost that will grow with increasing RFS obligations.

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RFS Policy Disaster

Beginning with a mandate for cellulosic ethanol that does not exist, refiners are forced to buy credits for a fictitious product. Ultimately, these costs have become an added gasoline tax passed on to consumers.

As for biofuel production that does exist, lax EPA oversight of Renewable Identification Number (RIN) purchase and trading has created a system that is susceptible to fraud.

And who foots the bill for this mess? The American consumer and taxpayer.

A Product That Doesn’t Exist, A Mandate That Can’t Be Met

Under the RFS, the EPA required that 16 billion gallons of cellulosic biofuels be blended into gasoline. The problem? Cellulosic biofuels do not exist for commercial purchase. This was confirmed by a 2011 National Research Council study that stated, “Currently, no commercially viable biorefineries exist for converting cellulosic biomass to fuel.”

No one disputes that cellulosic biofuels production is nowhere close to commercial production levels. Yet Congress still has not revised unrealistic RFS mandates, and the EPA continues to impose fees on refiners for not meeting them.

In light of production challenges, the EPA significantly reduced the 2010, 2011 and 2012 cellulosic biofuel requirements—but the mandate still requires refiners to blend more than 8 million gallons of nonexistent cellulosic biofuel this year.

The RFS requires companies to blend cellulosic biofuels or be forced to buy waiver credits (or pay a fee) for failing to blend the product. Because there is zero cellulosic production, and thus no alternative but to pay the fee, this has quietly turned into a revenue-raising device for the government.

Fraudulent Activity

Beyond cellulosic mandates, RFS also sets a mandate for biodiesel fuel. While biodiesel is available for commercial purchase, many refiners also purchase Renewable Identification Numbers (RINs)—renewable fuel credits associated with each gallon of fuel—from biofuels companies to comply with EPA’s mandate. Some biodiesel companies have sold fraudulent credits to unsuspecting companies, even though they produced no biodiesel.

Since last November, the EPA has accused multiple companies of selling RIN credits without producing the volumes of biodiesel that the credits were supposed to represent. A few examples:

  • Maryland’s Clean Green Fuel sold more than 32 million fake credits.
  • Absolute Fuels of Texas sold more than 48 million fake credits.
  • Green Diesel LLC sold more than 60 million fake credits, the biggest batch so far in the agency's probe.

Cumulatively, these fraudulent RINs constitute between 5 to 12 percent of all biodiesel RINs in the marketplace.The EPA is rightfully faulting the fraudulent sellers, but the Agency has wrongly adopted a “buyer beware” stance and issued “notices of violation” to 22 companies that unknowingly bought and used the fake RINs to comply with the RFS. The EPA has collected significant fines from these defrauded companies―in essence, punishing the victim.

Consumers and Refiners Unfairly Punished

Refiners are now stuck between a rock and a hard place. They are required to blend a nonexistent product—cellulosic biofuels—and have to pay a fee to the government because it does not exist. They are also required to purchase biodiesel RINs that may turn out to be fake, despite refiners' best efforts to verify authenticity. If RINs are found to be fake, refiners must pay a fee as punishment and purchase more RINs with no way of truly verifying authenticity. These added costs—estimated at $200 million for RIN fraud alone—are passed on to consumers, making the cellulosic and biodiesel mandates an invisible tax at the gas pump.

Instead of imposing unreasonable mandates that punish refiners and spur fraudulent activity from biofuels producers, the government should allow consumer choice and the free market to determine fuel use.