Fraud and Biodiesel Credits
Posted 30 July 2012 - 10:04 AM
Rodney Hailey started Clean Green Fuel in March 2009 to sell biodiesel credits to companies trying to meet their quotas for renewable-fuel production. Situated within a market that is required by law to expand ever year, Hailey’s company seemed poised to prosper. And it did, at least on paper, selling 32.2 million credits worth $9 million. Translated, that means that Clean Green Fuel was under agreement to produce about 21.4 million gallons of biodiesel.
On June 25, federal courts convicted Hailey of fraud, the first such case associated with the sale of RINs, or renewable identification numbers. It appears that, after founding Clean Green Fuel, he rented a garage and bought pipes and blending equipment. But the one-man, one-shed operation never blended any biomass-based biofuel. His pipes were connected to nothing. Hailey now faces up to 484 years in prison.
RINs were created by the 2007 Energy Independence and Security Act, which mandated that companies that refine, import, or blend fossil fuels (the “obligated parties,” in the bill’s legalese) blend a certain, annually increasing amount of biomass-based diesel from 2008 to 2022. RINs are a way of tracking how much biodiesel these companies create. One gallon of corn-starch ethanol is worth one RIN; of agri-biodiesel, 1.5 RINs; and of cellulose ethanol, 2.5 RINs.
The numbers are transferable. Whenever a gallon of biodiesel changes hands, so does the RIN associated with it. The numbers can also be purchased. A company — a mining company, say — that blends fuels but doesn’t deal primarily in fossil fuels might blend its own biodiesel and then sell the associated RINs to an obligated party. In this case, RINs serve the same function as carbon credits — a way for companies to pay others to be environmentally friendly.
As the annual biodiesel mandates have risen over the years, so has each company’s quota and, no surprise, the value of RINs. At the outset, one credit was worth about $0.15. By 2010 the cost had risen to about $0.50. In 2011, it reached $1.38. In effect, if a gallon of diesel qualified for a RIN credit, it cost $1.38 less than another gallon of diesel. On top of the biodiesel tax credit (worth $1.00 per gallon of biomass-based diesel), RINs became an increasingly attractive option. Between 2008 and 2010, about 350 million credits were generated annually. Last year, there were 1.6 billion.
A small but growing cottage industry has sprouted around RIN credits, including everything from producers and buyers of the credits to RIN consultants and verification websites. Representative Tim Murphy (R., Pa.) estimates that 10,000 jobs are associated with RINs.
Because of cases like Hailey’s, this market might soon collapse. Absolute Fuel, by contrast, at least tried to produce biodiesel. The company lost $500,000 between 2009 and January 2010 while attempting to generate biofuel out of a plant in Texas. A second batch made in August 2010 in a different Texas plant was deemed unusable. But that didn’t stop Absolute Fuel from selling an estimated $40 million worth of credits, representing approximately 36 million gallons of biodiesel.
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