A pair of oil industry groups this week offered a proposed timeline to U.S. EPA for addressing fraud in the biodiesel credit-trading market, according to a white paper given to EPA officials and obtained by E&ENews PM.

The American Petroleum Institute and American Fuel & Petrochemical Manufacturers are urging EPA to issue a final rule by the end of the year that would create a system in which EPA would register third parties that certify whether renewable fuel credits are valid. The action would provide oil refiners with a defense against liability if fuel credits they purchase are found to be fraudulent.

The paper is in response to several high-profile fraud cases in the market for renewable identification numbers (RINs), or the unique 38-digit numbers tied to gallons of biodiesel that can be bought and sold to comply with federal renewable fuel mandates.

In all, EPA has accused three companies of faking about 140 million credits worth $150 million. On June 25, a federal jury found a Maryland man guilty of selling $9 million worth of fake renewable fuel credits with one of those companies, Clean Green Fuel LLC (E&ENews PM, June 25).

"It is expected that the proposed system will minimize risk for invalid RINs and will identify and report to EPA, in a timely manner, any producer that could not be successfully validated," the industry groups wrote in the paper, which is dated Tuesday.

Under EPA regulations, biodiesel producers and refiners that are obligated to meet biofuel targets are both held responsible if credits are found to be invalid. This "buyer beware" policy has pushed refiners toward larger, name-brand biodiesel producers, leaving smaller producers without a market for their credits.

The refiners have faulted EPA for the uncertainty in the marketplace and for waiting a year to tell them about the first fraud case.

EPA is planning to work on a draft rule over the next couple of weeks that will include an affirmative defense mechanism for obligated parties, according to an industry source involved in the discussions. The agency will likely meet with obligated parties and biodiesel producers in drafting the rule.

The two oil industry groups have laid out a timeline that has EPA sending a proposed rule to the Office of Management and Budget by July 31 and a final rule submitted by Oct. 31. This aggressive timeline is almost certain to slip; the industry source said it will likely be four to five months before the agency issues a final rule.

The goal is to have a rule in place at or near the beginning of next year in order to provide certainty for all the stakeholders involved. Refiners are also looking for a written assurance by EPA that the rule would apply retroactively to the beginning of the year should it be delayed.

Still up in the air is whether biodiesel producers or the third-party certifiers would be responsible if validated credits turn out to be fraudulent and whether obligated parties would be required to purchase more RINs to make up for ones that are invalid.

The oil industry groups strongly oppose putting any liability on oil refiners for using RINs that have been validated.

"If obligated parties retain the risk of having to replace RINs, the incentive to only purchase RINs from trusted providers will remain," the groups write.

EPA did not respond to a request for comment on whether it is considering the proposed rulemaking.

At a congressional hearing last week on the fraud cases, EPA's Byron Bunker, acting director of the compliance division in the Office of Transportation and Air Quality, expressed a goal of having something in place by Jan. 1 but declined to commit to the date (E&ENews PM, July 11).