Nation & World

Speculators and swindlers: Biofuel credits market is loosely regulated

'The scams just keep coming'

Minneapolis Star Tribune/TNS

Prices for credits started soaring when the Renewable Fuel Standard, which mandates escalating volumes of renewables be produced each year, began requiring production of more corn ethanol and other biofuels than America’s increasingly energy-efficient cars need. Above, a Corn Plus ethanol plant on May 22, 2015 in Winnebago, Minn. (Glen Stubbe/)
Minneapolis Star Tribune/TNS Prices for credits started soaring when the Renewable Fuel Standard, which mandates escalating volumes of renewables be produced each year, began requiring production of more corn ethanol and other biofuels than America’s increasingly energy-efficient cars need. Above, a Corn Plus ethanol plant on May 22, 2015 in Winnebago, Minn. (Glen Stubbe/)

WASHINGTON — Andre Bernard made a killing selling a mirage.

As oil refineries struggled to comply with federal mandates for blending renewable fuels into the nation’s gasoline and diesel supply,

Bernard offered a solution: millions of dollars’ worth of biofuel credits they could buy to help meet their obligation.

The credits ostensibly were generated by biofuel companies Bernard and his partners owned.

The only problem is they weren’t making the fuel. They were faking it, generating at least $42 million worth of phony credits.

Bernard was sent to prison last month.

“The scams just keep coming,” said Doug Parker, a former director of the Environmental Protection Agency’s criminal investigation division. “There has already been north of $500 million in fraud prosecuted.

“That to me means there have been billions of dollars in fraud losses out there.”

More than a decade after Congress created it at the behest of the corn lobby, the far-reaching mandate to blend increasing volumes of corn-based ethanol and other biofuels into the gas and diesel sold at the pump faces a reckoning.

Influential early allies of the mandate declare it a flop. The billions of gallons of next-generation, climate-friendly fuels the program was supposed to generate aren’t getting made.

And the loosely regulated market of biofuel credits that the mandates are built around has become prey for speculators and swindlers.

‘We made a mistake’

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The Renewable Fuel Standard is starting to resemble California’s misadventures in electricity deregulation, in which a well-intentioned vision spawned an oblique regulatory scheme that confused the public and invited exploitation by shrewd market players.

“The law hasn’t worked out as we intended,” said Henry A. Waxman, the former Los Angeles congressman who crusaded for its passage a decade ago. “We made a mistake.”

Now, Washington, D.C., can’t figure out how to fix it.

The same system of credit trading that Bernard exploited for a windfall is creating all manner of havoc for fuel businesses operating legally across the country.

Fraud is only one piece of the problem.

The Renewable Identification Number credits, or RINs, that refiners must purchase are swinging wildly in price for reasons lawmakers can’t agree on. Half a dozen governors in states with refineries obligated to buy RINs warn that the price volatility puts the facilities at risk of financial collapse — a prospect alarming the White House.

The credit-trading market is so murky that regulators are finding it impossible to determine whether there is a price-fixing problem.

It all came to a head a few weeks ago when President Donald Trump summoned oil and agriculture industry leaders and their allies in Congress to the White House to try to find some kind of fix. They couldn’t.

The issue got on the White House radar amid the Chapter 11 bankruptcy of Philadelphia Energy Solutions, a Pennsylvania oil refinery that said the crushing credit prices are driving it to financial ruin.

The company says it spent more on credits in 2017 than it did on the salaries of its hundreds of employees.

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“Can you imagine running a business where you spend more than double your payroll to write a check — not to buy anything, not to pay anybody, not to buy any supplies, but simply to purchase a government license, so to speak, that is crushing and it is destroying jobs?” Sen. Ted Cruz, R-Texas, said on the Senate floor in February.

Prices for credits started soaring when the Renewable Fuel Standard, which mandates escalating volumes of renewables be produced each year, began requiring production of more corn ethanol and other biofuels than America’s increasingly energy-efficient cars need or can even handle.

That led to another perversity of this market. Even when there is a glut of ethanol available, the price of biofuel credits can go up.

Because fuel blenders can’t absorb all the renewables the law requires they purchase, they go on the hunt for the type of credit Bernard was purporting to sell.

Demand for these credits increases, and their prices go up.

That has made the credits a lucrative commodity, luring financial gamesmanship into a market that operates in the shadows.

Aside from fraudsters such as Bernard, the refineries complain they are contending with investors who are hoarding credits to manipulate the market.

Commodities regulators are struggling to investigate these complaints because the rules are so lax that trades can be made over apps that leave no paper trail.

“It’s clear that market manipulation in the RIN market is occurring, and it is causing market volatility and price spikes,” Sen. Thomas R. Carper, D-Del., wrote in a March 15 letter to Trump. “It is directly harming my constituents.”

‘You’re fooling yourself’

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Yet the refiners have brought on some of the hardship themselves. The wildly fluctuating cost of the credits has drawn some of them to place risky bets on prices.

Instead of purchasing the credits as the oil is refined, at which point they can most easily pass the cost on to consumers, they might take a chance on waiting, hoping they can fetch a cheaper price later.

One economist who closely monitors the market for the credits, Scott Irwin at the University of Illinois, says it is largely functioning as it should, and it is not being manipulated by the kind of alleged price fixing that recently prompted Carper and several other senators to demand a federal investigation.

But asked whether the arcane system of credit trades was interfering with the program’s high-minded goals of developing climate-friendly fuels and cleaner-burning cars, Irwin seemed surprised by the question.

“You are fooling yourself if you think this law was ever passed in the first place for its environmental benefits,” he said. “The drivers of the Renewable Fuel Standard have always been farm interests that have had decades-and-decades-old goals to expand their markets and the demand for farm commodities. That is the driving political impulse. It always has been.”

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