In 2007, US EPA began using renewable identification numbers (RINs) to track fuel producer compliance with the Energy Policy Act of 2005’s Renewable Fuel Standard (RFS), which calls for fuel blends to contain a minimum amount of renewable fuels. RINs quantify the biofuel, produced or imported, used in fuel blends. Fuel producers buy and sell them, and then submit them to demonstrate compliance.

The complexity of RIN markets and RFS compliance has come under scrutiny lately, as several instances of fraud have emerged. In 2010, two small biofuel producers – Clean Green Fuel and Absolute Fuels – started selling fraudulent RINs to fuel producers and to firms trading RINs on secondary markets. Allegedly, these two companies sold over 47 million fraudulent RINs, representing millions of gallons of biofuels that did not exist. Thirty-three U.S. fuel refiners have paid more than $3.6 million in penalties as a result.

The fraud has shaken some refiners, reducing confidence in small renewable fuel producers like those responsible for the fraudulent RINs. This decreased confidence has resulted in less business for small producers, and has essentially frozen the market for renewable energy credits, according to Eric Rubury, owner of OceanConnect, a firm that trades RINs. Wayne Lee, CEO of Lee Enterprises Alternative Fuels Consulting, has a similar view, saying  “…when the EPA started invalidating some of these RINs, it caused quite a problem for oil companies who then were understandably hesitant to purchase RINs.”

OceanConnect has filed a suit against the EPA, arguing that EPA’s response to the fraud has undermined the government’s goal to encourage biofuel industry growth and innovation, and asserting that the EPA should have better vetted the companies who sold millions of fraudulent RINs. EPA has maintained that refiners are ultimately responsible for due diligence and determining whether RINs are legitimate, and pointed out that 30 of the 33 companies who were penalized for using the fake RINs settled with the EPA.

Companies are not only liable for the penalties imposed by the EPA, but must also replace the fake RINs. That may prove expensive, given the high volume of RINs to be replaced and the current prices, about $1.45 per RIN, a twenty cent jump over prices last year, according to Argus.

Does such fraud tell a larger story about market-based compliance mechanisms? What solutions exist for eliminating or reducing fraud in RIN and REC markets? How can confidence in RIN markets be restored?