Can U.S. EPA's renewable fuel standard be amended to minimize market vulnerabilities and increase transparency? During today's OnPoint, Doug Parker, president at E&W Strategies and the former head of EPA's Criminal Investigation Division, explains why he believes regulatory and oversight changes are needed to achieve the environmental goals of the RFS. Parker recently completed a report on fraud in the renewable fuels market for Valero Energy Corp. Valero is part of the lawsuit against EPA's RFS.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Doug Parker, president at E&W Strategies and the former head of EPA's Criminal Investigation Division. Doug, thank you for joining me.
Doug Parker: Good to be here.
Monica Trauzzi: Doug, while at EPA you worked on enforcement initiatives in the renewable fuel sector. You've recently completed a white paper that targets fraud in the renewable fuels market. It's a report that was prepared for Valero, and it should be noted that Valero is part of the lawsuit against EPA on the RFS.
What do you believe are the key issues with the RFS that are causing fraud to occur, and where is the program most vulnerable?
Doug Parker: Well, I think it boils down to really three areas and three areas that are fixable. The first point, it's really a matter of having effective oversight resources. EPA has disinvested in those resources in recent years, and it's very difficult to be the cop on the beat if there aren't enough cops for the beat.
Secondly, the market for RINs is tremendously opaque. It is unlike any other commodity market out there in terms of people being able to understand where and how these RINs are generated. So increasing transparency is important.
I think thirdly taking a hard look at the regulations. Currently the program is set up with a rather obtuse sounding point called the point of obligation. That area has really become the focus of where I think you can make a difference in the fraud and compliance.
Currently refiners and importers are responsible. They are the responsible parties for essentially buying the RINs at the end of every year, but they have essentially little or no influence on how renewable fuel is blended and overseen. That's really a fundamental problem in the market that I think is continuing to make it open for fraud and exploitation.
Monica Trauzzi: So to your knowledge is there ongoing fraud happening?
Doug Parker: Absolutely.
Monica Trauzzi: How has the fraud become more sophisticated or has it become more sophisticated over time?
Doug Parker: I'd say initially when we saw this back in 2010-2011 I would characterize it almost as mom and pop fraud that made a lot of money. Individual folks were able to essentially hang out a shingle, claim they were producing renewable fuel when they weren't. They simply generated credits and sold them.
The agency focused more on it. There was some level of third-party verification and certainly criminal enforcement increased with EPA's criminal division, DOJ, et cetera.
The agency though as it moved to increase this third-party verification and oversight, the criminals looked at the amount of money in the renewable fuel sector and they became more sophisticated. So you'd see schemes where multiple entities across the country were organized to ship fuel that didn't have RINs but claimed it had RINs, massive bookkeeping scams all to the tune of making hundreds of millions of dollars illegally.
So as the agency tried to tighten up the regulations, the fraudsters got increasingly more complex, but in my view, the way it's structured with the current point of obligation, that door remains open for fraud.
Monica Trauzzi: So the fraud goes well beyond what's been reported in the media?
Doug Parker: Yes. I think what you'll see in the media is everything that's been formally charged and anyone in the law enforcement or prosecutorial world will tell you that what's public is not the full picture of what's going on. So there's clearly ongoing criminal investigations. There will be more prosecutions to come. So for those who would say, "Look, the problem has really been resolved," I think is not an accurate picture of it.
Monica Trauzzi: Is it specific to biodiesel or ethanol as well?
Doug Parker: It's largely been focused on biodiesel, but what I think you'll see as the agency is increasing the requirements for renewable fuel and particularly ethanol, the regulations are structured so that if there becomes a shortage of ethanol RINs, then those who need RINs can go down and buy biodiesel RINs. You can essentially go backwards in that, but you can't use ethanol RINs to supplant biodiesel RINs.
Now it sounds a little complicated, but what it basically tells us is that the fraud has been centered in the biodiesel market and that market is about to dramatically increase because those who have to go out and buy RINs can essentially buy biodiesel RINs to make up for the scarcity in ethanol RINs.
So driving the ethanol market further will drive the scarcity and will drive people into a market that's been susceptible to fraud.
Monica Trauzzi: You believe there are initial indications that there may even be collusion by auditors to conceal fraud in the sector?
Doug Parker: I think so.
Monica Trauzzi: What evidence is there?
Doug Parker: I think based on the historical patterns we saw, the agency responded in a rulemaking fashion early on by having third-party engineers come in and assess a facility to basically say, "This is a facility that in fact can produce this amount of biodiesel." A check on the system.
We found that engineers colluded in certain instances and were part of the criminal scheme. I anticipate that we'll see similar collusion further down the road with auditors. I think in some of the most recent criminal cases we've seen where the QAP program, the auditors have been hoodwinked themselves.
So there are cases where some may make the unwise decision to be involved in the criminal conduct. We've also seen that it's in by no means a foolproof program.
Monica Trauzzi: How does the fraud benefit the program's emissions reduction goals?
Doug Parker: Well, several years back a colleague indicated that kind of back in the envelope, that even back in 2011 when the fraud was emerging, they estimated it was, in terms of the fraud, probably contributed an additional two coal-fired power plants to emissions that weren't being reduced.
So as fraud accelerates, you can imagine smart folks can get their back-of-the-envelope estimates again and figure out what the lack of carbon reduction is coming from an inefficient program. I think that's an important story to tell here.
An inefficient program is not going to meet the policy goals including reducing the greenhouse gases, which was a critical policy goal of this.
Monica Trauzzi: So you think the program as is can be restructured into a better place? Do you think there's a political appetite to do that right now?
Doug Parker: I don't think there's a political appetite for some. Folks get invested in certain programs as they get further established. I think it makes sense from a policy standpoint to revisit it, and it can be revisited in a way that enhances the policy goals, which is continued energy independence and a reduction in greenhouse gases, but you have to build a highly functioning regulatory program. EPA is not attuned to overseeing markets like the SEC or CFTC is. This is a different program than they're generally used to focusing on, but with the right regulatory changes and the right level of oversight, you can get to the policy goals you need to and really continue to advance advanced biofuels as part of our energy mix.
Monica Trauzzi: Very interesting. We'll end it there. Thank you for coming on the show.
Doug Parker: Thank you.
Monica Trauzzi: Thanks for watching. We'll see you back here tomorrow.
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