Las Vegas (Platts)--7Feb2013/827 am EST/1327 GMT

The US Environmental Protection Agency's proposal to reform the market for renewable fuel credits would exempt refiners from having to replace some invalid credits in the first two years of the program, an agency official said Wednesday.

Byron Bunker, director of EPA's compliance division, told the National Biodiesel Board that the agency proposed the limited exemption to encourage refiners to buy Renewable Identification Numbers (RINs) under the new system in an effort to restore liquidity to the RINs market.

Under the exemption, refiners that buy a certain type of RIN that later turn out to be invalid would not have to replace those credits as long as they fall below a threshold equivalent to 2% of their annual Renewable Fuel Standard obligation. The protection only applies in 2013 and 2014.

The RFS requires refiners, blenders and fuel importers to inject a certain amount of renewable fuel into the US gasoline and diesel pools, either through direct blending or by buying RINs on the open market.

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Bunker told the biodiesel trade group's annual conference that regulators wanted to give an incentive to spur participation by both refiners and biofuel producers as the RIN verification program gets off the ground.

"Effectively it's a limited exemption," he said. "There's a couple of reasons we did that. One, to encourage people to go buy RINs. And secondly, if the number of invalid RINs was 2% or less, it's probably not worth the administrative effort of the agency and the auditor to hunt those down."

On January 31, EPA issued its long-awaited proposal for fixing the RINs market after three fraud cases zapped its liquidity and made it impossible for some US biodiesel producers to sell their credits.

The biofuel and refining industries are still working to understand the 153-page policy that covers a host of RIN issues, including minimum requirements for third-party RIN auditors, clarification to rules governing biofuel exports and new data disclosures about biofuel facilities.

The element of the policy that has gotten the most attention from RINs buyers and sellers is a three-tiered system of credits.

EPA proposed two new categories of RINs that would offer refiners and other obligated parties different levels of protection from invalid credits, depending on how much effort they put into verifying them.

EPA WANTED ALL SIDES TO HAVE 'SKIN IN THE GAME'

The gold-plated RIN -- which EPA dubbed QAP-A after the quality assurance program -- would get issued to fuel made at a facility undergoing near-constant monitoring by a third-party auditor. The scrutiny would include regular check of the plant's feedstocks, production process and other factors to make sure the RIN represents actual fuel.

The QAP-A credit would likely cost more than other RINs, but it comes with the highest level of liability protection for refiners. If the credits are discovered to be invalid after a refiner buys them, the auditor would be on the hook for replacing them.

"We wanted the auditor -- who's standing in, really, for the whole oversight -- to have some skin in the game," Bunker said. "By having some responsibility to replace, the concern that they will ever have to pay out against it is motivating [them] to do their job well."

The second RIN created by the policy, called QAP-B, would require only quarterly monitoring by an auditor. Given the lower level of scrutiny, the credits are expected to cost less than QAP-A credits.

But refiners, not auditors, would have to replace any invalid QAP-B credits. These are the credits that come with the 2% exemption in the first two years of the program.

Both new types of RINs would shield refiners from civil penalties previously slapped on obligated parties that used fake credits for compliance.

At the bottom of the three RIN categories, the proposal left in place the current "buyer beware" system that makes the refiner or blender responsible for any civil liability and replacement obligation for bad RINs, even if they had nothing to do with generating the bogus credits.

EPA is accepting comments on the proposal through April 18.

Bunker said he hopes to have the final rule in place in the second half of the year.

--Meghan Gordon, meghan_gordon@platts.com
--Edited by Geetha Narayanasamy, geetha_narayanasamy@platts.com

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