Podcast Script RINS Report


JENNIFER: Hello! My name is Jennifer Kaplan and I work in the congressional and public affairs unit within the Office of Inspector General at the U.S. Environmental Protection Agency. Joining me is Rich Jones, who worked on the audit that is the subject of today’s podcast. Welcome, Rich.

RICH: Glad to be here, Jennifer.

JENNIFER: Your team’s report is titled “The EPA Must Improve Controls and Integrate Its Information System to Manage Fraud Potential in the Renewable Fuel Standard Program.” I’ll be honest. I read this report but didn’t totally understand it. The subject matter seems quite technical and complex. 

RICH: That’s a fair observation.

JENNIFER: So I’m going to ask you to explain, in terminology that everyone can comprehend, why the Office of Inspector General conducted this audit, what your team found, what you recommended, and why everyone should care about this topic. Okay?

RICH: You got it.

JENNIFER: Great! Let’s start with some background. I know that Congress passed the Energy Policy Act in 2005, amending the Clean Air Act, and the new law required the EPA to develop a Renewable Fuels Program. What’s the purpose of that program?

RICH: The Energy Policy Act mandated that the EPA create a program to reduce greenhouse gas emissions by gradually expanding use of renewable fuels instead of petroleum-based fuel. Greenhouse gases include carbon dioxide, methane, nitrous oxide, and some synthetic chemicals. Those gases trap energy from the Earth, and the heat generated stays in the atmosphere. This greenhouse effect is a leading contributor to global warming and climate change.

JENNIFER: Renewable fuels come from renewable resources such as corn and sugarcane. They’re called renewable fuels because they come from resources that can be replenished. Is that right?

RICH: Correct. For decades, the United States relied heavily on non-renewable, petroleum-based fuels to power our cars, trucks, ships, trains, and airplanes, as well as to heat our residences and other buildings. Congress mandated that the EPA set an annual national standard through 2022 for increasing the amounts of renewable fuels used for transportation, heating, and jets. More renewable fuels are better for the environment and lessen U.S. dependence on foreign oil providers. Renewable fuels can be produced from biomass and biofuel sources like algae, vegetation and vegetable oil, and grease from restaurants; forest and agricultural residues; and corn. So moving toward renewable fuels is also good for farmers.
JENNIFER: Thanks, Rich. You mentioned that Congress required the EPA to introduce escalating amounts of renewable fuel through 2022. What happens now?

RICH: As of 2023, EPA is on its own to create renewable fuel obligations through the standard rulemaking process.

JENNIFER: Aha, okay. That brings us closer to the focus of the audit your team recently concluded. According to your report, EPA has set targets for the amount of renewable fuel each refiner and importer of gasoline and diesel fuel must meet each year.  

RICH: Yes, and the EPA keeps track of compliance through the use of renewable identification numbers. The Agency has created an external marketplace that involves not only refiners and importers, but renewable fuel producers and exporters and other entities. When renewable fuel is produced, renewable identification numbers are generated. Buyers of the renewable fuel often buy the fuel and attached renewable identification numbers as a package deal.  Refiners and importers must acquire enough renewable identification numbers to satisfy their compliance obligations with the EPA. Within the marketplace, there are also so-called “blenders,” which are companies that buy petroleum-based fuel and renewable fuel, blend these together, and then sell the resulting product to gas stations. Those blenders also handle renewable identification numbers, which can be separated from the renewable fuel after blending occurs. Separated renewable identification numbers also can be traded on the market.

JENNIFER: So restating what you just explained … Renewable identification numbers are valuable because they represent currency when submitted to the EPA. A renewable identification number represents credits toward meeting an annual compliance goal. And renewable identification numbers start out attached to renewable fuel products but can be separated from those products and sold or traded on their own. That sounds pretty complicated. 

RICH: It is complicated, and fraud is inevitable due to the value of renewable identification numbers in the market. As one more bit of background, back in 2013 and 2014, it was discovered that some small companies were reporting to EPA that they had created masses of renewable fuel when, in fact, they had not created anything. Some of these companies went so far as to establish large warehouses that were found to be empty. Consequently, EPA put controls in place to reduce the likelihood of that type of situation recurring. 

JENNIFER: The recent Office of Inspector General audit specifically examined how well the EPA is tracking both the generation and trading of invalid renewable identification numbers being used to demonstrate compliance with renewable fuel standards. How did your team do that?

RICH: Well, let me first say that EPA has a number of controls in place for its renewable fuel standard program. Many of these are working well and we recognize them in the Noteworthy Achievements section of our report. Our audit focused on two of the main controls. One is called the Moderated Transaction System, which is the EPA’s database of record for all renewable identification number transactions. The system functions as a ledger or bank that tracks renewable identification number generation, transfers between parties, prices, that kind of thing. The other EPA control we examined is called the Quality Assurance Program. It’s intended to provide assurance to marketplace participants that the renewable identification numbers they are buying are real and not fraudulent.

JENNIFER: Sounds good so far. What did the audit find?

RICH: We found a few deficiencies. Three were with the Moderated Transaction System. First, some transactions were reported nearly 250 days later than the five to 10 business days allowed. Timeliness is important because, in the absence of an early EPA screening, an invalid renewable identification number can be transacted again and again before a problem is identified.
Our second finding resulted from our setting up dummy companies in a test environment for the Moderated Transaction System. Our auditors were able to buy, sell, and transfer hypothetical numbers, and test system controls, just like in the real system. We identified one gap, which is that the system doesn’t compare a renewable fuel producer’s production capacity to the number of renewable identification numbers the company generated.  We were able to generate renewable identification numbers for a dummy company that had no production capacity. That flaw could be exploited for cheating.
Our third finding is that, although buyers and sellers maintain documentation of renewable identification number transactions, the EPA doesn’t typically obtain or cross-reference that documentation with the Moderated Transaction System to verify transactions entered. The EPA instead relies on the buyer beware marketplace and other controls to prevent the generation and trading of invalid renewable identification numbers.
Finally, our audit team determined that the EPA’s Quality Assurance Program does not have sufficient guardrails to ensure independence between the program’s audit providers and renewable fuel producers. In this program, renewable fuel producers hire third-party auditors to provide a stamp of approval that their renewable identification numbers are valid. But a producer may also be paying the same third-party auditor to perform other services, such as engineering reviews, which deepens the financial relationship between the producer and auditor and creates a situation where the auditor may be reviewing its own work as part of the renewable identification number verification process.  Such ties may create a perverse incentive for auditors to cover up any problems rather than report them to the EPA.

JENNIFER: Thank you for that comprehensive rundown, Rich. What recommendations did the audit team make to EPA?

RICH: We issued eight recommendations. In summary, these relate to resolving the late reporting issue, enhanced quality assurance checks, better internal verification, reducing conflicts of interest in the Quality Assurance Program, and improving information system technologies and integration.

JENNIFER: What was the Agency’s response to those recommendations?

RICH: EPA ultimately agreed with all of our recommendations and provided acceptable corrective actions and dates by which to put those in place.

JENNFER: Rich, thank you so much for providing this overview of the renewable identification numbers report for our listeners.

RICH: It’s been my pleasure, Jennifer.

JENNIFER: Thanks, also, to our listeners for tuning in to learn more about this topic. To read the full report and other reports published by the EPA Office of Inspector General, please visit our website at www-DOT-epaoig-DOT-gov.