Greenhouse Gas Emission Credits - Sometimes a Costly Proposition

Much has been discussed about the federal government’s renewable fuel program involving the issuance and trading of Greenhouse Gas (GHG) emission credits. Congress created the Renewable Fuel Standard (RFS) program to reduce greenhouse gas emissions and expand the nation’s renewable fuels sector while reducing reliance on imported oil. This program was authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007 (EISA). EPA implements the program in consultation with U.S. Department of Agriculture and the Department of Energy.

The RFS program is a national policy that requires a certain volume of renewable fuel to replace or reduce the quantity of petroleum-based transportation fuel, heating oil or jet fuel. The four renewable fuel categories under the RFS are:

Biomass-based diesel
Cellulosic biofuel
Advanced biofuel
Total renewable fuel

The 2007 enactment of EISA significantly increased the size of the program and included key changes, including:

Boosting the long-term goals to 36 billion gallons of renewable fuel
Extending yearly volume requirements out to 2022
Adding explicit definitions for renewable fuels to qualify (e.g., renewable biomass, GHG emissions)
Creating grandfathering allowances for volumes from certain existing facilities
Including specific types of waiver authorities

Program Compliance Basics

Obligated parties under the RFS program are refiners or importers of gasoline or diesel fuel. Compliance is achieved by blending renewable fuels into transportation fuel, or by obtaining credits (called “Renewable Identification Numbers”, or RINs) to meet an EPA-specified Renewable Volume Obligation (RVO).

EPA calculates and establishes RVOs every year through rulemaking, based on the Clean Air Act volume requirements and projections of gasoline and diesel production for the coming year. The standards are converted into a percentage and obligated parties must demonstrate compliance annually.

Each fuel type is assigned a “D-code” – a code that identifies the renewable fuel type – based on the feedstock used, fuel type produced, energy inputs and GHG reduction thresholds, among other requirements. The four categories of renewable fuel have the following assigned D-codes:

Cellulosic biofuel is assigned a D-code of 3 (e.g., cellulosic biofuel) or D-code of 7 (cellulosic diesel)
Biomass-based diesel is assigned a D-code of 4
Advanced biofuel is assigned a D-code of 5
Renewable fuel (non-advanced/conventional biofuel) is assigned a D-code of 6 (grandfathered fuels are also assigned a D-code of 6)

Since RINs are the credits that obligate parties use to demonstrate compliance with the standard, obligated parties must obtain sufficient RINs for each category in order to demonstrate compliance with the annual standard.

More information on RINs:

RINs are generated when a producer makes a gallon of renewable fuel
At the end of the compliance year, obligated parties use RINs to demonstrate compliance
RINs can be traded between parties
Obligated parties can buy gallons of renewable fuel with RINs attached. They can also buy RINs on the market
Obligated parties can carry over unused RINs between compliance years. They may carry a compliance deficit into the next year. This deficit must be made up the following year.

The RFS program’s four renewable fuel standards are nested within each other. In other words, the fuel with a higher GHG reduction threshold can be used to meet the standards for a lower GHG reduction threshold. For example, fuels or RINs for advanced biofuel (i.e., cellulosic, biodiesel or sugarcane ethanol) can be used to meet the total renewable fuel standards (i.e., corn ethanol).

Renewable Identification Number (RIN) Data for Renewable Fuel Standard Program

Renewable Fuel Standard (RFS) regulations require renewable fuel producers and importers, gasoline and diesel refiners, renewable fuel exporters, Renewable Identification Number (RIN) owners, and any other regulated party to submit all RIN generation information and other RIN transactions into the EPA Moderated Transaction System (EMTS). Using data generated from EMTS, EPA provides aggregated monthly data on RIN generation and renewable fuel volume production for specific fuel categories.

EPA regularly posts aggregated RFS data on its website, including:

RIN generation summary https://www.epa.gov/fuels-registration-reporting-and-compliance-help/spreadsheet-rin-generation-data-renewable-fuel
RIN generation and renewable fuel volume production (by fuel type and by month) https://www.epa.gov/fuels-registration-reporting-and-compliance-help/spreadsheet-rin-generation-and-renewable-fuel
Available RINs (to-date) https://www.epa.gov/fuels-registration-reporting-and-compliance-help/spreadsheet-available-rins-date-renewable-fuel
RIN retirements https://www.epa.gov/fuels-registration-reporting-and-compliance-help/spreadsheet-rin-retirement-data-renewable-fuel
RIN separation https://www.epa.gov/fuels-registration-reporting-and-compliance-help/spreadsheet-rin-separation-data-renewable-fuel
RIN annual sales/holdings https://19january2017snapshot.epa.gov/fuels-registration-reporting-and-compliance-help/annual-rin-salesholdings-summary_.html

UNITED STATES v. NGL Crude Logistics, LLC

With the forgoing explanation in mind, the United States Department of Justice, working in conjunction with the federal EPA, civilly sued NGL Crude Logistics and Western Dubuque Biodiesel in the United States District Court for the Northern District of Iowa in October 2016 alleging that NGL, earlier known as Gavilon LLC, failed to retire approximately 36 million RINs when it sold biodiesel to co-defendant Western Dubuque for reprocessing; that NGL caused Western Dubuque to commit prohibited acts that led to the generation of approximately 36 million invalid RINs; and that NGL violated the law when it transferred approximately 36 million invalid RINs to third parties.

Recently, in September 2018, a proposed consent decree was lodged with the federal district court requiring NGL, if approved by the court, to pay a $25 million civil penalty and to purchase and retire 36 million RINs to resolve the civil claims alleged in the government’s complaint through the date of its lodging (or filing) with the court.

The EPA reports¹ the following underlying facts to support its allegations against NGL Crude Logistics LLC:

The settlement resolves allegations made in an October 4, 2016, Complaint against NGL for violations of the RFS2 regulations. The EPA and the DOJ alleged that in 2011, NGL, then known as Gavilon, LLC, entered into a series of transactions with Western Dubuque, LLC that resulted in the generation of more than 36 million invalid biomass-based diesel RINs.

The allegations were as follows: NGL purchased biodiesel with RINs from other companies, separated and sold the RINs to third parties, and then sold the biodiesel to Western Dubuque as a methyl ester "feedstock." Methyl esters are a class of chemical compounds that include, but are not limited to, biodiesel.

See: https://www.epa.gov/enforcement/ngl-crude-logistics-llc-clean-air-act-settlement

Western Dubuque then reprocessed this "feedstock" and generated a second set of RINs for the reprocessed fuel. Western Dubuque sold all of the biodiesel it produced from NGL’s “feedstock” and RINs it generated in 2011 to NGL. The EPA and the U.S. Department of Justice also alleged that Western Dubuque violated a number of RFS2 regulations because the RINs it generated were not produced using a qualifying feedstock or qualifying process. The United States settled it claims against Western Dubuque on October 4, 2016. See: the Western Dubuque Biodiesel, LLC case at: https://www.epa.gov/enforcement/western-dubuque-biodiesel-llc-clean-air-act-settlement

What exactly was the harm resulting from NGL’s fraudulent RIN reporting activity? According to the EPA, biomass-based diesel RINs represent renewable fuel that displaces petroleum diesel fuel and achieves GHG emissions reductions. When two RINs are generated for the same volume of fuel, the invalid RINs distort the actual GHG emissions achieved. This has a negative impact on the goals of the RFS program and the integrity of the RIN market.

The EPA estimates that the illegal generation of RINs in this case resulted in excess greenhouse gas emissions of about 151,319 metric tons of carbon dioxide equivalent emissions.

In a statement released by NGL on September 27, 2018, the company said the following:

NGL Energy Partners LP and the U.S. Environmental Protection Agency reached an agreement in principle regarding the settlement of a lawsuit brought by the EPA against one of NGL’s subsidiaries, NGL Crude Logistics, LLC and another company, Western Dubuque Biodiesel, LLC. NGL announced that it has finalized the settlement, memorialized in a Consent Decree, which remains subject to final approval by the Court. NGL believes that the terms of the settlement protect NGL’s business interests, and once approved, the Consent Decree will end more than four years of investigation and litigation regarding the conduct of NGL Crude’s predecessor, Gavilon, LLC. The lawsuit was initially filed in October 2016 and related to alleged civil violations of the Clean Air Act’s renewable fuel standard regulations allegedly committed by Gavilon and WDB. The alleged violations occurred during 2011 at a time when NGL did not own Gavilon and when Gavilon was under different management. NGL purchased Gavilon from Gavilon Energy Intermediate, LLC in December 2013, some two years after the alleged conduct and at a time when Gavilon Intermediate was owned by Ospraie Management, LLC, General Atlantic LLC and Soros Fund Management LLC. NGL was not involved in any way in the alleged violations. In determining to settle the EPA action under the terms of the Consent Decree, NGL considered, among other factors, the ongoing expense and operational impacts to NGL of continuing to defend the lawsuit as well as the uncertainty associated with the outcomes of litigation. NGL believes that the Consent Decree is in NGL’s best interest, as it will end a long and expensive regulatory dispute; prevents the continued expenditure of legal costs; and works to protect the best interest of NGL’s investors, and its employees and their families.²

The NGL settlement is not unique when dealing with the subject of RINs. For instance, EPA and the U.S. Department of Justice achieved a settlement with Chemoil Corporation in 2016 that required the company to retire 65 million renewable fuel credits to resolve alleged violations of the RFS program.³ The then market value of the credits -- along with an additional 7.7 million renewable identification numbers (RINs) already retired by Chemoil in the lead up to the settlement -- was more than $71 million. Chemoil agreed to also pay a $27 million civil penalty under the settlement, the largest in the history of the EPA’s fuel programs.

EPA and the U.S. Department of Justice (DOJ) alleged that Chemoil exported at least 48.5 million gallons of biodiesel from the United States in 2011, 2012, and 2013, without retiring the approximately 72.7 million biomass-based diesel RINs for that fuel. The EPA discovered the alleged violations as a result of tips from RFS program participants. EPA and DOJ also alleged related reporting violations in this case. The EPA estimates that Chemoil’s violations resulted in a failure to achieve a reduction of emissions equivalent to 305,579 metric tons of carbon dioxide in the United States, nearly double the impact resulting in the NGL case.

The NGL and Chemoil cases only illustrate how expensive participation in the EPA’s renewable fuels program can be when “fudging” on RINs. For more information, call our Sioux Falls, Sioux City, or Omaha office today.