
[Federal Register Volume 78, Number 35 (Thursday, February 21, 2013)]
[Proposed Rules]
[Pages 12157-12217]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03206]



[[Page 12157]]

Vol. 78

Thursday,

No. 35

February 21, 2013

Part II





Environmental Protection Agency





-----------------------------------------------------------------------





40 CFR Part 80





RFS Renewable Identification Number (RIN) Quality Assurance Program; 
Proposed Rule

  Federal Register / Vol. 78 , No. 35 / Thursday, February 21, 2013 / 
Proposed Rules  

[[Page 12158]]


-----------------------------------------------------------------------

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2012-0621; FRL-9758-7]
RIN 2060-AR72


RFS Renewable Identification Number (RIN) Quality Assurance 
Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: Under the Renewable Fuel Standard (RFS) program, producers and 
importers of renewable fuel generate Renewable Identification Numbers 
(RINs) that are used by petroleum refiners and importers to demonstrate 
compliance with their renewable fuel volume obligations. Several cases 
of fraudulently generated RINs, however, have led to inefficiencies and 
a significant reduction in the overall liquidity in the RIN market. The 
result has been greater difficulty for smaller renewable fuel producers 
to sell their RINs. Today's action proposes additional regulatory 
provisions that would promote greater liquidity in the RIN market in a 
way that assures reasonable oversight of RIN generation and assures use 
of the required renewable fuel volumes. The proposal includes a 
voluntary quality assurance program and related provisions intended to 
meet these goals. The proposed program also includes elements designed 
to make it possible to verify the validity of RINs for all of 2013. 
Additionally, we are proposing a number of new regulatory provisions to 
ensure that RINs are retired for all renewable fuel that is exported 
and to address RINs that become invalid downstream of a renewable fuel 
producer.

DATES: Comments must be received on or before April 18, 2013.
    Hearing: We will hold a hearing on March 19, 2013, Room 1153 EPA 
East, Washington, DC 20004, beginning at 10:00 a.m. local time.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-
OAR-2012-0621, by one of the following methods:
     www.regulations.gov: Follow the on-line instructions for 
submitting comments.
     Email: a-and-r-docket@epa.gov.
     Mail: Air and Radiation Docket and Information Center, 
Environmental Protection Agency, Mailcode: 2822T, 1200 Pennsylvania 
Ave. NW., Washington, DC 20460.
     Hand Delivery: EPA Docket Center, EPA West Building, Room 
3334, 1301 Constitution Ave. NW., Washington, DC 20460. Such deliveries 
are only accepted during the Docket's normal hours of operation, and 
special arrangements should be made for deliveries of boxed 
information.
    Instructions: Direct your comments to Docket ID No. EPA-HQ-OAR-
2012-0621. EPA's policy is that all comments received will be included 
in the public docket without change and may be made available online at 
www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be Confidential 
Business Information (CBI) or other information whose disclosure is 
restricted by statute. Do not submit information that you consider to 
be CBI or otherwise protected through www.regulations.gov or email. The 
www.regulations.gov Web site is an ``anonymous access'' system, which 
means EPA will not know your identity or contact information unless you 
provide it in the body of your comment. If you send an email comment 
directly to EPA without going through www.regulations.gov your email 
address will be automatically captured and included as part of the 
comment that is placed in the public docket and made available on the 
Internet. If you submit an electronic comment, EPA recommends that you 
include your name and other contact information in the body of your 
comment and with any disk or CD-ROM you submit. If EPA cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, EPA may not be able to consider your comment. Electronic 
files should avoid the use of special characters, any form of 
encryption, and be free of any defects or viruses. For additional 
information about EPA's public docket visit the EPA Docket Center 
homepage at http://www.epa.gov/epahome/dockets.htm. For additional 
instructions on submitting comments, go to Section I.B of the 
SUPPLEMENTARY INFORMATION section of this document.
    Docket: All documents in the docket are listed in the 
www.regulations.gov index. Although listed in the index, some 
information is not publicly available, e.g., CBI or other information 
whose disclosure is restricted by statute. Certain other material, such 
as copyrighted material, will be publicly available only in hard copy. 
Publicly available docket materials are available either electronically 
in www.regulations.gov or in hard copy at the Air and Radiation Docket 
and Information Center, EPA/DC, EPA West, Room 3334, 1301 Constitution 
Ave. NW., Washington, DC. The Public Reading Room is open from 8:30 
a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The 
telephone number for the Public Reading Room is (202) 566-1744, and the 
telephone number for the Air Docket is (202) 566-1742.

FOR FURTHER INFORMATION CONTACT: Mary Manners, Office of Transportation 
and Air Quality, Compliance Division, Environmental Protection Agency, 
2000 Traverwood Drive, Ann Arbor, MI 48105; Telephone number: 734-214-
4873; Fax number: 734-214-4051; Email address: manners.mary@epa.gov, or 
the information line for the Office of Transportation and Air Quality 
Compliance Division; telephone number (734) 214-4343; Email address 
complianceinfo@epa.gov.

SUPPLEMENTARY INFORMATION:

I. General Information

A. Does this action apply to me?

    Entities potentially affected by this proposed rule are those 
involved with the production, distribution, and sale of transportation 
fuels, including gasoline and diesel fuel or renewable fuels such as 
ethanol and biodiesel. Potentially regulated categories include:

 
----------------------------------------------------------------------------------------------------------------
                                                   NAICS \1\                         Examples of potentially
                   Category                          codes       SIC \2\ codes         regulated entities
----------------------------------------------------------------------------------------------------------------
Industry......................................          324110            2911  Petroleum Refineries.
Industry......................................          325193            2869  Ethyl alcohol manufacturing.
Industry......................................          325199            2869  Other basic organic chemical
                                                                                 manufacturing.
Industry......................................          424690            5169  Chemical and allied products
                                                                                 merchant wholesalers.
Industry......................................          424710            5171  Petroleum bulk stations and
                                                                                 terminals.

[[Page 12159]]

 
Industry......................................          424720            5172  Petroleum and petroleum products
                                                                                 merchant wholesalers.
Industry......................................          454319            5989  Other fuel dealers.
----------------------------------------------------------------------------------------------------------------
\1\ North American Industry Classification System (NAICS)
\2\ Standard Industrial Classification (SIC) system code.

    This table is not intended to be exhaustive, but rather provides a 
guide for readers regarding entities likely to be regulated by this 
proposed action. This table lists the types of entities that EPA is now 
aware could potentially be regulated by this proposed action. Other 
types of entities not listed in the table could also be regulated. To 
determine whether your activities would be regulated by this proposed 
action, you should carefully examine the applicability criteria in 40 
CFR part 80. If you have any questions regarding the applicability of 
this proposed action to a particular entity, consult the person listed 
in the preceding section.

B. What should I consider as I prepare my comments for EPA?

1. Submitting CBI
    Do not submit confidential business information (CBI) to EPA 
through www.regulations.gov or email. Clearly mark the part or all of 
the information that you claim to be CBI. For CBI information in a disk 
or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM 
as CBI and then identify electronically within the disk or CD ROM the 
specific information that is claimed as CBI. In addition to one 
complete version of the comment that includes information claimed as 
CBI, a copy of the comment that does not contain the information 
claimed as CBI must be submitted for inclusion in the public docket. 
Information so marked will not be disclosed except in accordance with 
procedures set forth in 40 CFR part 2.
2. Tips for Preparing Your Comments
    When submitting comments, remember to:
     Identify the rulemaking by docket number and other 
identifying information (subject heading, Federal Register date and 
page number).
     Follow directions--The agency may ask you to respond to 
specific questions or organize comments by referencing a Code of 
Federal Regulations (CFR) part or section number.
     Explain why you agree or disagree, suggest alternatives, 
and substitute language for your requested changes.
     Describe any assumptions and provide any technical 
information and/or data that you used.
     If you estimate potential costs or burdens, explain how 
you arrived at your estimate in sufficient detail to allow for it to be 
reproduced.
     Provide specific examples to illustrate your concerns, and 
suggest alternatives.
     Explain your views as clearly as possible, avoiding the 
use of profanity or personal threats.
     Make sure to submit your comments by the comment period 
deadline identified.

Outline of This Preamble

I. Executive Summary
    A. Purpose of This Action
    B. Summary of Major Provisions
    C. Impacts
II. Background and Purpose
    A. Treatment of Invalid RINs Under the Current Regulations
    B. Recent Issues Regarding Liability for Invalidly Generated 
RINs
    C. Industry Systems That Conduct Oversight of RIN Generation
    1. Existing Systems
    2. Sufficiency of Existing Systems
    D. EPA Goals in Proposing New Regulatory Provisions
III. Overview of the Proposed Program
    A. Requirements for a Quality Assurance Plan and QAP Audits
    B. Requirements for an Affirmative Defense
    C. Replacement of Invalid RINs
    D. Voluntary Participation
    E. Treatment of RINs Prior to Final Rule Promulgation
    F. Request for Comment on Prohibiting Producers From Separating 
RINs
    G. Summary of the Two QAP Options
IV. Provisions for RIN Verification Under Option A
    A. Requirements for Option A Quality Assurance Plans
    1. Elements of an Option A QAP
    a. Feedstock-Related Components
    b. Production Process-Related Components
    c. RIN Generation-Related Components
    d. RIN Separation-Related Components
    2. Approval and Use of Option A QAPs
    a. Approval of Quality Assurance Plan
    b. Frequency of Updates or Revisions to QAPs
    B. RIN Replacement Mechanisms Under Option A
    1. Required Replacement Capability for RIN Replacement 
Mechanisms
    2. Financial Assurance Instruments
    3. RIN Banks
    4. A-RIN Escrow Accounts
    C. Affirmative Defenses
    D. Treatment of Invalid A-RINs
    1. Responsibilities for Replacement of Invalid Verified A-RINs
    2. Invalid A-RIN Replacement
    3. Process for Replacing Invalid Verified RINs
    a. Types of RINs That Can Replace Invalid Verified RINs
    b. Impacts of RIN Replacement on Renewable Fuel Demand
    4. Cap on RIN Replacement
V. Provisions for RIN Verification Under Option B
    A. Requirements for Option B Quality Assurance Plans
    1. Elements of an Option B QAP
    a. Feedstock-Related Components
    b. Production Process-Related Components
    c. RIN Generation-Related Components
    d. RIN Separation-Related Components
    2. Approval and Use of QAPs
    a. Approval of Quality Assurance Plan
    b. Frequency of Updates/Revisions to QAPs
    B. RIN Replacement Mechanisms
    C. Affirmative Defenses
    D. Treatment of Invalid B-RINs
    1. Responsibilities for Replacement of Invalid Verified B-RINs
    2. Invalid B-RIN Replacement
    3. Process for Replacing Invalid Verified RINs
    4. Temporary Limited Exemption for Invalid RIN Replacement
    a. Determination of the Appropriate Exemption Level
    b. How would the limited exemption be applied?
VI. Proposed Requirements for Auditors
    A. Who can be an auditor?
    1. Independence
    2. Professionally Qualified To Implement a QAP
    3. Errors and Omissions Insurance
    B. Registration Requirements
    C. Other Responsibilities of Auditors
    1. Notifying the Agency When There Are Problems
    2. Indentifying Verified RINs in EMTS
    3. Recordkeeping, Reporting, and Attest Engagements
    a. Recordkeeping Requirements
    b. Reporting Requirements
    c. Attest Engagements
    d. Prohibited Activities for Third-Party Auditors
VII. Proposed Requirements for Audits
    A. Document Review and Monitoring
    B. Buyer/Seller Contacts
VIII. Additional Changes Related to the Definition and Treatment of 
Invalid RINs

[[Page 12160]]

    A. Export and Exporter Provisions
    1. Exporter RVO
    2. Require Identification of Renewable Fuel Content
    3. RIN Retirement Requirements
    B. ``Downstream'' Invalidation and Product Transfer Documents
    1. Designation of Intended Renewable Fuel Use
    2. Required Actions Regarding Fuel for Which RINs Have Been 
Generated That Is Used for a Non-Qualifying Fuel Use
    3. RIN Generation for Fuel Made With Renewable Fuel Feedstock
    4. Use of Renewable Fuel in Ocean-Going Vessels
    5. Treatment of Improperly Separated RINs
    C. Treatment of Confidential Business Information
    1. Overview
    2. Proposal To Disclose Aggregated RFS Registration Information
    a. Approach
    b. Rationale for Proposal
    3. Proposal To Disclose Aggregated RFS Report Information
    a. Approach
    b. Rationale for Proposal
    4. QAP Plans and Independent Engineering Reviews
    5. Request for Comments
    D. Proposed Changes to Section 80.1452--EPA Moderated 
Transaction System (EMTS) Requirements--Alternative Reporting Method 
for Sell and Buy Transactions for Assigned RINs
IX. Impacts
    A. Direct Costs for Implementing QAPs
    1. Time and Cost Assumptions
    2. Labor Cost Assumptions
    3. Cost Estimate Results
    B. Costs for RIN Replacement Mechanisms
X. Public Participation
    A. How do I submit comments?
    B. Will there be a public hearing?
XI. Statutory and Executive Order Review
    A. Executive Order 12866: Regulatory Planning and Review and 
Executive Order 13563: Improving Regulation and Regulatory Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132 (Federalism)
    F. Executive Order 13175 (Consultation and Coordination With 
Indian Tribal Governments)
    G. Executive Order 13045: Protection of Children From 
Environmental Health Risks and Safety Risks
    H. Executive Order 13211 (Energy Effects)
    I. National Technology Transfer Advancement Act
    J. Executive Order 12898: Federal Actions To Address 
Environmental Justice in Minority Populations and Low-Income 
Populations
XII. Statutory Authority

I. Executive Summary

    The Renewable Fuel Standard (RFS) program began in 2006 pursuant to 
the requirements in Clean Air Act (CAA) section 211(o) which were added 
through the Energy Policy Act of 2005 (EPAct). The statutory 
requirements for the RFS program were subsequently modified through the 
Energy Independence and Security Act of 2007 (EISA), resulting in the 
publication of major revisions to the regulatory requirements on March 
26, 2010.\1\
---------------------------------------------------------------------------

    \1\ 75 FR 14670.
---------------------------------------------------------------------------

    The RFS program requires that specified volumes of renewable fuel 
be used as transportation fuel, home heating oil, and/or jet fuel each 
year. To accomplish this, EPA publishes applicable percentage standards 
annually that apply to the sum of all gasoline and diesel produced or 
imported. The percentage standards are set so that if every obligated 
party (refiners and importers of gasoline or diesel transportation 
fuel) meets the percentages, then the amount of renewable fuel, 
cellulosic biofuel, biomass-based diesel, and advanced biofuel used are 
projected to meet the volumes required on a nationwide basis.
    Obligated parties demonstrate compliance with the renewable fuel 
volume standards in one of two ways. Obligated parties can demonstrate 
compliance either by acquiring the required volumes of renewable fuels 
together with the associated Renewable Identification Numbers (RINs), 
which are assigned by the renewable fuel producer or importer to every 
batch of renewable fuel produced or imported, or by acquiring just the 
RINs without the associated fuel. Validly generated RINs show that a 
certain volume of qualifying renewable fuel was produced or imported. 
The RFS program also includes provisions stipulating the conditions 
under which RINs are invalid, the liability carried by a party that 
transfers or uses an invalid RIN, and how invalid RINs must be treated. 
The fundamental basis of the Agency's treatment of invalid RINs is the 
concept of buyer beware, in which all regulated parties must take steps 
to verify that the RINs they acquire are valid, and all parties are 
liable for transferring or using invalid RINs.

A. Purpose of This Action

    Several cases of fraudulently generated RINs have led some 
obligated parties to limit their RIN-related business relationships to 
those parties that they are confident are generating valid RINs. In 
order to ensure that RINs are validly generated, individual obligated 
parties are now conducting their own audits of renewable fuel 
production facilities. Given the time and effort to conduct such 
activities, as well as the large overall number of renewable fuel 
producers and importers, the result has been greater difficulty for 
some of the smallest renewable fuel producers to sell their RINs. 
Recently, the overall liquidity of the RIN market has been 
significantly reduced. These circumstances have also created 
inefficiencies in the RIN market, as some RINs have been treated as 
having more value and less risk than others. The purpose of today's 
action is to address these issues by proposing changes to the 
regulations that would promote greater liquidity in the RIN market in a 
way that assures reasonable oversight of the validity of RIN generation 
and assures use of the required renewable fuel volumes.
    In today's action we are proposing a voluntary quality assurance 
program intended to provide regulated parties a structured way to 
assure that RINs entering commerce are valid. The proposed program 
would also provide an affirmative defense against liability for civil 
violations under certain conditions for the transfer or use of 
invalidly generated RINs, and would specify both the conditions under 
which invalid RINs must be replaced with valid RINs, and by whom. The 
voluntary program would enable smaller renewable fuel producers to 
demonstrate that their RINs are valid, reducing the risk that obligated 
parties believe is associated with such RINs. The proposed program 
includes elements to allow verification of RINs to occur at the 
beginning of 2013.
    In today's action we are also addressing export issues and 
circumstances in which RINs may become invalid subsequent to the 
renewable fuel producer's introduction of the RINs into commerce. For 
instance, exporters of renewable fuel may not be retiring an 
appropriate number and type of RINs as required under the current 
regulations. In some cases parties may have exported diesel fuel 
containing amounts of biodiesel below levels that are currently 
required to be reported in other contexts, and are merely labeled as 
diesel fuel. Such exports would not be reported as containing renewable 
fuel, and thus no RINs would be retired. In other cases, exporters may 
report that renewable fuel has been exported, but might sell any RINs 
received and then go out of business before RINs are retired. The 
result of these circumstances could be a disparity between the RINs 
generated and the renewable fuel volume consumed in the U.S. We are 
proposing modifications to the regulations pertaining to exporters of 
renewable fuel to address these issues. We are also proposing a number 
of other modifications intended to address cases in which parties 
transfer or use RINs

[[Page 12161]]

that have become invalid after the producer has introduced them into 
commerce.

B. Summary of Major Provisions

    Today's action proposes two voluntary third party quality assurance 
program options for RINs that regulated parties may exercise as an 
alternative to the ``buyer beware'' liability as prescribed under 
existing regulations. The proposed program would provide a means for 
assuring that RINs are properly generated through audits of renewable 
fuel production conducted by independent third parties using quality 
assurance plans (QAPs), would provide an affirmative defense for the 
transfer or use of invalid RINs that had been verified under an 
approved QAP, and would provide for the replacement of such RINs. To 
this end, we are proposing the following:
     Minimum requirements for QAPs, including such things as 
verification of type of feedstocks, verification that volumes produced 
are consistent with amount of feedstocks processed, and verification 
that RINs generated are appropriately categorized and match the volumes 
produced.
     Qualifications for independent third-party auditors.
     Replacement instruments or other mechanisms that would 
provide assurance that invalid RINs are replaced with valid RINs.
     Requirements for audits of renewable fuel production 
facilities, including minimum frequency, site visits, review of 
records, and reporting.
     Conditions under which a regulated party could assert an 
affirmative defense to civil liability for transferring or using an 
invalid RIN.
     Identification of the party or parties who are responsible 
for replacing invalid RINs with valid RINs and the timing of such 
replacement.
     Changes to the EPA-Moderated Transaction System (EMTS) 
that would accommodate the quality assurance program.
    The two options we are proposing to verify RINs through a QAP would 
provide flexibility in how parties choose to manage the risk of 
transferring or using invalid RINs and costs. We are proposing that the 
quality assurance program would be applicable at the beginning of 2013.
    We are also proposing modifications to the exporter provisions of 
the RFS program. These modifications would ensure that an appropriate 
number and type of RINs are retired whenever renewable fuel is 
exported. Finally, we are proposing a number of changes to other 
aspects of the RFS regulations governing the transfer and use of RINs 
that become invalid downstream of the producer. We are interested in 
comments on all aspects of today's proposal.

C. Impacts

    The quality assurance program would help to reduce the number of 
invalidly generated RINs in distribution, and thus ensure that valid 
RINs are traded and used for compliance. As a result, it would help to 
ensure that the renewable fuel volumes mandated by Congress are 
actually used. In this respect, then, there would be no change to the 
expected impacts of the RFS program as projected in the RFS2 final 
rulemaking \2\ in terms of volumes of renewable fuel consumed or the 
associated GHG or energy security benefits. The primary impacts of the 
quality assurance program would be improved liquidity and efficiency in 
today's RIN market and improved opportunities for smaller renewable 
fuel producers to sell their RINs.
---------------------------------------------------------------------------

    \2\ 75 FR 14670, March 26, 2010.
---------------------------------------------------------------------------

    Likewise, the proposed changes to the regulations governing export 
of renewable fuel would ensure that the appropriate number and type of 
RINs are retired for every gallon of renewable fuel exported, 
consistent with the intent of the program.
    The quality assurance program that we are proposing in today's 
action would be voluntary. As a result, there would be no required 
costs. There would likely be costs associated with an individual 
party's participation in the quality assurance program, and in Section 
IX we have provided estimates of some elements of the costs of 
participation. We have also provided cost estimates as provided by 
several potential third-party auditors. However, the fact that the 
quality assurance program would be voluntary means that a decision to 
participate will be made independently by each regulated party, and 
thus we cannot accurately project the costs that might be incurred for 
the nation as a whole. Furthermore, any costs incurred would only be 
borne if the industry believed that those costs were less than current 
costs in the marketplace resulting from efforts to verify, acquire, and 
trade, and use RINs and the risks associated with such activities.

II. Background and Purpose

    The structure of the RFS program, and in particular the regulatory 
provisions governing the generation and use of RINs, originated during 
the development of the initial RFS program required by the Energy 
Policy Act of 2005. Under the statute, refiners, blenders, and 
importers of non-renewable fuels were responsible for ensuring that 
specified volumes of renewable fuel were used in the transportation 
sector. During the process of developing the regulatory program, 
stakeholders made it clear that requiring each separate obligated party 
to physically blend renewable fuels into its own gasoline and diesel 
fuel would require significant and costly changes to the distribution 
system, fuels markets, and the activities of all involved in the fuel 
supply chain. At the request of stakeholders, EPA developed the RIN 
system as an alternative to a direct blending requirement. Finalized on 
May 1, 2007, the RIN system provides obligated parties with flexibility 
in satisfying their responsibility to ensure that a specified volume of 
renewable fuels is used as transportation fuel in the U.S. each year. 
It also permits renewable fuel producers to sell their fuels in a 
manner that best meets market demands without forcing sales of volumes 
directly to obligated parties.
    Under the RFS program, each RIN is generated by the producer or 
importer of renewable fuel, and represents a volume of renewable fuel 
measured in terms of ethanol-equivalent gallons. RINs are used by 
obligated parties to demonstrate compliance with their Renewable Volume 
Obligations (RVO). This reflects EPA's judgment that production and 
sale of renewable fuel generally leads to its consumption as 
transportation fuel.\3\ When a specified number of RINs are acquired 
and retired by an obligated party, EPA is confident that a certain 
volume of renewable fuel has been produced and blended for use as 
transportation fuel. This RIN-based approach to the development and 
implementation of the RFS program was developed in cooperation with 
stakeholders in the fuel production and distribution industries as part 
of a notice-and-comment rulemaking process.
---------------------------------------------------------------------------

    \3\ See 72 FR 23929.
---------------------------------------------------------------------------

    The intended result of the RIN system is that every RIN used for 
compliance by an obligated party represents physical renewable fuel 
that meets the regulatory criteria and which is used in the United 
States for transportation fuel, heating oil or jet fuel. To ensure that 
this result is achieved, EPA specified the conditions under which RINs 
are invalid, how invalid RINs must be treated, and which parties are 
liable for transferring or using invalid RINs. These provisions were 
included in the RFS1 program and were carried into the revised RFS

[[Page 12162]]

program required by the Energy Independence and Security Act of 2007.
    The provisions concerning invalid RINs and the associated liability 
have recently come under scrutiny due to several cases of fraudulently 
generated RINs. The RFS regulations prohibit any person from 
transferring invalid RINs or using invalid RINs to demonstrate 
compliance with his/her RVOs. Thus, parties holding invalid RINs are 
prohibited from transferring or using these RINs to demonstrate 
compliance with their RVOs. Moreover, all parties holding invalid RINs 
are required to retire them. These circumstances prompted the market 
response described above that has led to the current reductions in the 
liquidity of the market for RINs, and the increased difficulty of small 
producers of renewable fuel, particularly smaller producers, to sell 
the RINs they generate. Concerns regarding the impact of fraudulently 
generated RINs also prompted requests from a broad spectrum of 
stakeholders for an additional, alternative regulatory mechanism that 
could more efficiently verify the validity of RINs. Some obligated 
parties also requested that the EPA place the burden for replacing 
invalid RINs solely on the parties that generate invalid RINs, and 
allow RINs that have been evaluated by independent third parties to be 
used for compliance, even if they are invalid. We address these 
requests more fully in Section III.

A. Treatment of Invalid RINs Under the Current Regulations

    The RFS regulations identify the conditions under which RINs are 
invalid at Sec.  80.1431(a). These include:
     A duplicate of a valid RIN.
     A RIN that was based on incorrect volumes or volumes that 
have not been standardized to 60 [deg]F.
     A RIN that has expired (has not been used for compliance 
in the year it was generated or the following year).
     A RIN that was based on an incorrect equivalence value.
     A RIN that is deemed invalid under the regulations 
applicable to foreign renewable fuel producers.
     A RIN that does not meet the definition of renewable fuel.
     A RIN that was assigned an incorrect ``D'' code value.
     A RIN that was improperly separated.
     A RIN that was otherwise improperly generated.
    While the underlying actions that cause RINs to be invalid vary, in 
all cases of invalid RINs the outcome is the same: Invalid RINs cannot 
be transferred to any person, and cannot be used to achieve compliance 
with the RVO of an obligated party or exporter. These restrictions on 
invalid RINs apply regardless of the party's good faith belief that the 
RINs were valid at the time they were acquired, transferred, or used 
for compliance. Parties that take ownership of RINs are responsible for 
the validity of the RINs they transfer and use, and are expected to 
take whatever measures they deem appropriate to reduce the risk that 
they have acquired invalid RINs.
    The statute requires that EPA promulgate regulations so that the 
national volume mandates required by the statute are met through 
consumption of renewable fuel as transportation fuel, heating oil, or 
jet fuel, and specifies several provisions aimed at achieving this 
result. Based on this, the current regulations prohibit invalid RINs 
from being used for compliance with the applicable standards. This 
prohibition forces obligated parties to replace invalid RINs that they 
had intended to use for compliance with valid RINs.
    The ``buyer beware'' approach to RINs in the RFS program is 
consistent with the approach EPA has taken in all previous mobile 
source fuel programs. Indeed, the regulatory language used to implement 
the buyer beware approach in the RFS program is essentially identical 
to that used in these other programs:
     Benzene credits generated under the reformulated gasoline 
(RFG) program--Sec.  80.67(h)(3).
     Gasoline sulfur allotment trading program--Sec.  
80.275(d)(5)(i).
     Gasoline sulfur credits--Sec.  80.315.
     Sulfur credits generated under the MVNRLM diesel fuel 
program--Sec.  80.531-Sec.  80.536.
    In these other fuels programs, the buyer beware approach to credits 
has proven to be an effective mechanism for ensuring that program goals 
are met. It encourages the industry to self-police the validity of the 
credits they use for compliance and allows the credit market to 
properly allocate any risk associated with the generation and transfer 
of invalid credits. Most importantly, the buyer beware approach 
maintains the environmental benefits of a program if the party that 
generates the invalid credits is not financially viable and able to 
replace the invalid credits, since other regulated parties would then 
be responsible for replacing invalid credits. In the recent cases of 
fraudulently generated RINs, it was this very process that ensured that 
society was getting the benefits promised by the RFS program, albeit at 
a cost to the regulated parties.\4\
---------------------------------------------------------------------------

    \4\ California takes a similar approach for addressing invalid 
carbon offset credits under the state's Global Warming Solutions 
Act.
---------------------------------------------------------------------------

    We continue to believe that the buyer beware approach gives 
industry the greatest flexibility in determining how best to manage 
credit trading practices while providing society the assurance that the 
benefits of a program will materialize. However, we also recognize that 
there are some aspects of the RFS program that make it more difficult 
to implement a buyer beware approach. For instance, once RINs are 
generated and leave the producer, they can be fungibly assigned to any 
volume of renewable fuel, making it difficult to know what volume the 
RIN was intended to represent. As a result, it can be difficult to 
verify that the RIN was validly generated once it has left the 
producer. The use of RINs in the RFS program is also unique in ways 
that may make the buyer beware approach more challenging for regulated 
parties to implement in an efficient manner, while retaining market 
liquidity. Unlike other credit programs, RINs are not generated by the 
same group of parties that use them for compliance purposes. Instead, 
renewable fuel producers generate the RINs, and obligated parties 
acquire them. These circumstances make it more difficult for obligated 
parties to monitor RIN generation. The RFS program also allows an 
unlimited number of parties to own and trade RINs, whereas in other 
programs credit ownership and trading is limited to the parties that 
must demonstrate compliance with applicable standards. In recent 
months, obligated parties have taken actions to avoid the purchase of 
invalid RINs, including limiting their business relationships to those 
parties that they are able to confidently and efficiently project are 
generating valid RINs. This behavior has resulted in certain, often 
smaller, producers being excluded from opportunities to transact with 
obligated parties, creating inefficiencies in the RIN market, in 
particular the inclination of obligated parties to treat some RINs as 
having higher value and lower risk than others.
    Our proposal for an additional, alternative mechanism for ensuring 
that RINs are appropriately generated is an attempt to address the 
inefficiencies that have arisen in the RIN market. We continue to 
believe that the integrity of the program depends on the scrutiny 
applied to it by regulated parties. However, in the specific case of 
the RFS program we also believe that it would be appropriate to provide 
additional

[[Page 12163]]

options for organizing and managing the private oversight of RIN 
generation in addition to the buyer beware approach.

B. Recent Issues Regarding Liability for Invalidly Generated RINs

    While the RFS regulations governing liability for the transfer or 
use of invalid RINs were put in place on May 1, 2007, they have come 
under new scrutiny in 2011 and 2012 as the result of several cases of 
fraudulently generated RINs. To date, the EPA has alleged that three 
biodiesel production companies (Clean Green, Absolute Fuels, and Green 
Diesel) have generated a total of over 140 million biomass-based diesel 
RINs that did not represent qualifying renewable fuel.
    On November 7, 2011, the EPA issued Notices of Violations (NOVs) 
alleging that Clean Green Fuels, LLC (Clean Green) generated invalid 
biomass-based diesel RINs. Clean Green's owner was found guilty of wire 
fraud, money laundering, and violating the Clean Air Act on June 25, 
2012 in the United States District Court for the District of Maryland. 
The jury found that he ran a scheme in which he and his company 
generated and sold over 32 million RINs, but neither produced nor 
imported any renewable fuel.
    The EPA issued Absolute Fuels, LLC an NOV on February 2, 2012. The 
NOV alleges the company generated over 48 million invalid biomass-based 
diesel RINs without producing any qualifying renewable fuel and 
transferred the majority of these invalid RINs to others. On December 
14, 2012, the owner of Absolute Fuels, LLC, and other corporate 
entities associated with Absolute Fuels pleaded guilty to an Indictment 
charging the owner of wire fraud, money laundering, and Clean Air Act 
false statements. The indictment alleges that this individual and his 
companies were involved in defrauding non-renewable fuels companies, 
brokers, and the EPA by falsely representing to EPA, through the RFS 
program electronic data base, that he was producing biodiesel when in 
fact he was not producing any fuel.
    The EPA issued Green Diesel, LLC an NOV on April 30, 2012. The NOV 
alleges the company generated more than 60 million invalid biomass-
based diesel RINs without producing any qualifying renewable fuel and 
transferred the majority of these invalid RINs to others.
    The 140 million invalid RINs from these three companies represented 
about 13% of the nationwide biodiesel volume in 2010 and 4% in 2011.\5\ 
The EPA's Criminal Investigation Division and Office of Civil 
Enforcement have additional ongoing investigations concerning the 
potential generation of fraudulently or invalidly generated RINs.
---------------------------------------------------------------------------

    \5\ The statutory volume requirements for biomass-based diesel 
were 650 mill gal in 2010 and 800 mill gal in 2011.
---------------------------------------------------------------------------

    Under the buyer beware approach, all regulated parties are 
responsible for determining the validity of RINs before they transfer 
those RINs to another party or use them for compliance. With respect to 
the RINs generated by the three companies listed above, many parties 
did in fact transfer and/or use these RINs. In subsequent discussions 
with these parties, most of them indicated that notwithstanding the 
buyer beware aspect of the regulations, they took little or no action 
to evaluate the validity of these RINs before they purchased or used 
them for compliance. In light of the widespread failure of obligated 
parties to conduct adequate oversight, the EPA implemented a 
streamlined approach for parties who used invalid RINs to correct civil 
violations and resolve their liability for those civil violations. The 
Interim Enforcement Response Policy \6\ (IERP) for 2010 and 2011 
biomass-based diesel RINs provided obligated parties who unknowingly 
used invalid RINs with the opportunity to resolve their civil 
violations by replacing invalid RINs with valid RINs and paying modest 
civil penalties. Almost all obligated parties that used RINs generated 
by Clean Green and Absolute Fuels have entered into settlement 
agreements consistent with the IERP to resolve their civil violations.
---------------------------------------------------------------------------

    \6\ The Environmental Protection Agency's Interim Enforcement 
Response Policy to Resolve Violations Arising from the Use of 
Invalid 2010 and 2011 Biomass-Based Diesel Renewable Identification 
Numbers, March 2012, http://www.epa.gov/compliance/resources/policies/civil/erp/erp-invalidrins.pdf.
---------------------------------------------------------------------------

    Obligated parties are required to replace invalid RINs that were 
used for compliance with valid RINs to ensure that they have sufficient 
valid RINs to comply with their Renewable Volume Obligations (RVOs). 
Many obligated parties who used invalid RINs for compliance purposes 
purchased replacement RINs for a substantial additional cost. Under the 
current buyer beware approach, many obligated parties have included 
indemnification clauses in their contracts with RIN suppliers to 
address situations in which invalid RINs must be replaced.
    In light of the recent experience with invalid RINs, obligated 
parties have been taking steps to minimize their exposure to risk. In 
general, they have been treating RINs generated by smaller biodiesel 
producers as higher risk, and have been opting instead to purchase RINs 
primarily from the largest biodiesel producers who are better known, 
have been under production for a longer period of time, and/or have the 
resources to replace invalid RINs should their RINs be determined to be 
invalid. While the concerns directed at any particular biodiesel 
producer may or may not be legitimate, the net result of these actions 
is a general reduction in the liquidity of the biodiesel RIN market. 
While some biodiesel producers have been able to establish business 
relationships with obligated parties, many smaller biodiesel producers 
have not. These smaller producers have been forced to offer their RINs 
at a significant discount relative to RINs from larger producers, 
assuming they can find obligated parties or distributors willing to 
purchase them at all.
    The buyer beware approach has succeeded in compelling regulated 
parties to conduct some oversight of RIN generation to ensure that the 
RINs they transfer and/or use are valid. However, in reaction to the 
fraudulent RIN cases, many regulated parties have reported that 
obligated parties have shifted their purchasing away from smaller 
producers. We believe it is appropriate to consider new regulatory 
provisions that could provide additional confidence in the validity of 
RINs without restricting access to the market by small producers.

C. Industry Systems That Conduct Oversight of RIN Generation

1. Existing Systems
    While regulated parties are individually making efforts to ensure 
that the RINs they transfer and/or use are valid, a number of parties 
have developed more comprehensive systems that are intended to more 
efficiently meet the need for such oversight. Any party can opt to use 
one of these systems for a fee charged by the provider of the service. 
To varying degrees, these systems offer examples of the types of 
activities that EPA has evaluated in developing the proposed provisions 
for a quality assurance program. The systems of which we are currently 
aware include the following:

     Ecoengineers.
     GoldRIN, LLC.
     RIN Integrity Network by Genscape.
     RINPlus by EM Biofuels, LLC.
     RIN-tegrity Survey by Weaver.
     RINTrust, LLC.

[[Page 12164]]

    This is not meant to be a complete list, as the market response is 
still developing, nor is it intended to be an EPA endorsement of any 
particular auditing system or tool.
    The systems currently being offered vary in the means, frequency, 
and degree of oversight of renewable fuel production and RIN 
generation. Most conduct some form of on-site audit including a review 
of production inputs such as feedstocks and process energy, and outputs 
including byproducts and renewable fuel production volumes. Some also 
provide services such as regulatory guidance, assessment of product 
quality, monitoring of sales transactions, and RIN tracking. In 
addition to validation of production processes and RIN generation, some 
also offer financial backing to the producer in the event that RINs are 
subsequently discovered to be invalid.
2. Sufficiency of Existing Systems
    While each of these systems has elements designed to help ensure 
RIN validity, we believe it is important that all systems used to 
verify RINs contain a certain minimum number of elements. For instance, 
ideally each system would include an array of components to verify 
feedstocks, production processes and volumes, qualifying uses of 
renewable fuel, and generation of the appropriate number and type of 
RINs. However, not all systems address all these aspects of production 
and RIN generation, or address them in the same way. Because these 
systems are generally designed to benefit only the obligated party that 
contracts with it, the existence of multiple industry-run verification 
systems has also resulted in duplicative efforts wherein multiple 
auditors visit the same production facility and take the same actions 
to verify the same volume. Finally, the existence of these private 
systems has not completely resolved the reduction in liquidity in the 
market for RINs since they provide no assurances of an affirmative 
defense against a civil violation. Thus there is still a significant 
reluctance to purchase RINs from some smaller producers.
    While these verification systems constitute a reasonable and 
encouraging response to the need to have effective and efficient 
oversight of RIN generation, we recognize that these initiatives on 
their own have not cultivated a market that facilitates reasonable 
oversight of RIN generation, adequate assurance that invalid RINs will 
be replaced, and a market for RINs where the opportunity to produce and 
sell RINs is spread broadly across producers, including small 
producers. Therefore, in today's Notice of Proposed Rulemaking (NPRM) 
we are proposing a set of voluntary regulatory provisions that leverage 
these private market products to achieve these goals. The new 
provisions would provide regulatory options for establishing quality 
assurance programs, provide an affirmative defense against civil 
violations for transferring or using invalidly generated RINs for 
compliance where the RINs were verified under an approved QAP, and 
would specify the conditions under which specific parties would be 
required to replace invalidly generated RINs with valid RINs. Moreover, 
we are proposing several options that would be available to regulated 
parties that would provide a range of approaches to replacement of 
invalidly generated RINs, and allow the market to select the level of 
oversight to match the perceived risk. We believe that the efficiency 
and certainty created by these proposed regulatory options would 
complement the private verification systems already offered in a way 
that would facilitate the broadening of the market for producers and 
increasing market liquidity that EPA and stakeholders are seeking.

D. EPA Goals in Proposing New Regulatory Provisions

    As stated in Section II.B above, we continue to believe that the 
buyer beware approach is both appropriate and effective in ensuring the 
validity of RINs and the use of valid RINs representing real renewable 
fuel to meet compliance obligations. We are not proposing to change the 
buyer beware approach under the existing regulations. Nevertheless, the 
issues we highlighted in the previous section have led us to believe 
that it would be helpful to create an additional, voluntary set of 
regulatory provisions that could provide reasonable oversight to verify 
the validity of RINs. These provisions are intended to reduce the 
incidence of invalidly generated RINs entering the market, provide 
reasonable assurance of replacement of invalidly generated RINs, and 
increase liquidity in the RIN market. The proposed QAP provisions would 
serve as the major component for an affirmative defense against 
liability in the event that a party transferred or used invalidly 
generated RINs. With greater confidence in both the validity of RINs 
and the protection against civil liability that an affirmative defense 
affords, there may be less of a disparity in value between RINs 
generated by large and small renewable fuel producers. As a result, 
there may be renewed market liquidity and certainty.
    To accomplish this, we believe that the new regulatory provisions 
should establish the minimum requirements for Quality Assurance Plans 
(QAPs) that would address all elements of the production of renewable 
fuel and the generation of RINs. These QAPs would in turn form the 
basis for audits of renewable fuel production at particular facilities 
to verify that RINs were being validly generated. Our intent in 
establishing a voluntary QAP audit process would be twofold:
    (1) Any party taking ownership of RINs that had been verified as 
validly generated by an EPA-registered auditor using an EPA-approved 
QAP would have an affirmative defense against liability for a civil 
violation arising from the transfer or use of an invalid RIN as long as 
certain other criteria are also met.
    (2) The burden for the replacement of invalidly generated RINs that 
had been verified by a registered auditor using an EPA-approved QAP and 
which were not replaced by the original RIN generator could be replaced 
by the auditor or obligated party depending on the type of RIN 
verification system and associated RIN replacement mechanism.
    In short, the voluntary QAP audit process would help to ensure that 
the volume consumption goals of the statute are met while addressing 
the unique features of the RFS program that have resulted in 
inefficiencies and poor liquidity in the current RIN market.

III. Overview of the Proposed Program

    EPA is proposing to add two compliance options to the RFS program 
to achieve the goals described above. Each option contains provisions 
for quality assurance plans (``QAP'') that would be created by 
independent third-parties and used to verify the validity of RIN 
generation; provisions for an affirmative defense to civil liability 
for transfer or use of a verified RIN that is invalidly generated; and 
provisions addressing replacement of verified RINs that were invalidly 
generated. One of these options would also ensure that RIN owners could 
avoid liability for a civil violation for transferring or using 
invalidly generated RINs. These new options would be in addition to the 
current regulatory provisions, and EPA is proposing to adopt both 
options and to allow regulated parties to choose either one of the new 
options or instead to use the buyer beware approach in the existing 
regulations. The combination of the two new options, the elements in 
each option, and the ability to choose between options, is intended to 
achieve the program goals described above.
    The civil liability protections afforded by these provisions would 
only apply to RINs that are invalidly generated. RINs

[[Page 12165]]

that become invalid after generation, for example by use for a 
nonconforming purpose or improper separation, would not be covered by 
the affirmative defense mechanism we are proposing today. However, we 
realize that RINs that become invalid ``downstream'' of the RIN 
generator may be problematic for obligated parties and the RIN system 
as a whole. Therefore, we have proposed regulatory changes to account 
for the problem of RINs that become invalid after generation. These 
changes are discussed in Section VIII of this preamble.
    This proposal sets minimum requirements for QAPs that could be used 
to verify the validity of RINs. Verification by an independent third-
party auditor using an EPA-approved QAP would provide the basis for a 
RIN-holder's affirmative defense if those RINs were found to have been 
invalidly generated. The affirmative defense is a defense only to the 
civil liability for the prohibited acts of transferring or using an 
invalidly generated RIN for compliance purposes.
    At the same time, the Agency is responsible for ensuring that the 
statutory annual minimum volume requirements are met, so invalid RINs 
that are retired to fulfill a RVO must be replaced by valid RINs in 
order to make the system whole, even when a party has an affirmative 
defense to liability for a prohibited act. With the exception of some 
limited provisions that would reduce RIN replacement responsibilities 
under certain circumstances, the proposed rules provide a mechanism for 
the replacement of invalidly generated RINs to help ensure that the 
annual RFS volume mandates are met. However, the party responsible for 
replacement of invalid RINs varies between the two new options 
(``Option A'' and ``Option B'') that market participants may choose for 
any given RIN transaction.
    The primary difference between these two options is that under 
Option A, when verified RINs are found to be invalidly generated, the 
third-party auditor that verified the RINs would be responsible for 
retiring valid RINs to replace the invalid RINs if the RIN generator 
does not do so. Under Option B, an obligated party would remain liable 
for replacing any invalidly generated RINs that it owns if the RIN 
generator fails to do so, even if the obligated party successfully 
asserted an affirmative defense. The current system would also remain 
in place after the proposed quality assurance program goes into effect, 
providing a third option for RIN buyers to purchase unverified RINs. In 
other words, the proposed regulations do not require that RINs used for 
fulfillment of an RVO must be verified. In summary, we are proposing 
new regulatory provisions that would create a total of three types of 
RINs in the RFS program:
    (1) RINs verified by a third-party auditor, who would be 
responsible for replacing the RINs in the event that they were 
invalidity generated (``Option A''),
    (2) RINs verified by a third-party auditor, where the obligated 
party would remain liable for RIN replacement (``Option B''), and
    (3) Unverified RINs, where the obligated party remains liable for 
replacement (i.e. the current regulatory approach).
    For both of the two new options we are proposing today (Option A 
and Option B), there are three main regulatory elements:
    (A) Minimum requirements for a QAP to evaluate renewable fuel 
production and verify RINs,
    (B) The required elements for an affirmative defense, and
    (C) Identification of the party responsible for replacing invalid 
RINs and limitations on RIN replacement.
    In this section we also discuss how and why the program amendments 
are proposed as voluntary, how the provisions would apply to any RINs 
transferred and sold prior to the effective date of the final rule, and 
an alternative structure for protecting against invalidity by 
prohibiting RIN generators from separating RINs from renewable fuel 
that they produce.

A. Requirements for a Quality Assurance Plan and QAP Audits

    The regulations would set minimum requirements for the audit 
process used to validate the production of renewable fuel and verify 
the RINs generated at the production facility, even, for imported fuel, 
if the production facility is not in the United States. The proposed 
requirements would potentially apply to producers of renewable fuel and 
parties downstream of the producer that handle renewable fuel or RINs. 
Other parties that work with and support renewable fuel producers, such 
as feedstock suppliers, would not be subject to new requirements 
through the proposed quality assurance program. The proposed 
requirements for Option A and Option B QAPs are fully discussed in 
Sections IV.A and V.A, respectively. The proposed requirements for QAP 
auditors and audit procedures are fully discussed in Sections VI and 
VII of this preamble.
    We would expect that different third-party auditors would develop 
different audit procedures and business models based on market demand, 
the type of fuel being audited, and many other factors. Therefore, the 
new provisions would require the third-party auditor to submit its QAP 
to the Agency for review and approval before using that QAP to audit 
renewable fuel production facilities. The regulations would also set 
both minimum requirements for third-party auditors at the time of 
registration and ongoing requirements that must be met as the third-
party auditor continues to operate.
    The requirements for Option A QAPs would be more detailed and 
involved than those required for Option B QAPs. The differing sets of 
requirements would correspond with the differing RIN replacement 
responsibility under the two QAPs.
    The quality assurance program that we are proposing would also 
apply to RINs generated for foreign-produced renewable fuel. Foreign 
producers of renewable fuel must be approved by EPA and must meet all 
requirements applicable to non-foreign producers, i.e., the provisions 
of Subpart M. Such producers could engage a registered third-party 
auditor to audit their facility in accordance with the proposed quality 
assurance program. However, RINs generated from imported fuel would 
only be considered verified under the proposed quality assurance 
program if the associated foreign renewable fuel production facility is 
audited under an EPA-approved QAP. We request comment on the likelihood 
of such producers participating in the quality assurance program, any 
difficulties to participating they might encounter, and any issues that 
could affect the integrity of the proposed program.

B. Requirements for an Affirmative Defense

    The affirmative defense mechanism would allow any party, other than 
the generator of an invalid RIN, who holds invalidly generated RINs 
verified through a QAP to avoid civil liability for a prohibited act 
involving the transfer or use of invalid RINs for purposes of 
fulfilling an RVO. This mechanism applies only to civil liability, and 
has no effect on any party's potential criminal liability. It is 
similar but not identical to the defense mechanisms used in other fuels 
regulation programs, such as the Diesel Fuel Sulfur Control 
regulations, 40 CFR 80.613(a) and the Reformulated Gasoline 
regulations, 40 CFR 80.79(b)(1). It is fully discussed in Sections IV.C 
and V.C for Options A and B, respectively. Under Option A, in order to 
establish this affirmative defense, a party would be required to prove 
five elements by a preponderance of evidence. Under Option B, in order

[[Page 12166]]

to establish an affirmative defense, a party would be required to prove 
one additional element.
    First, a party would be required to show that the invalidly 
generated RINs in question were verified by an independent third-party 
auditor with an EPA-approved QAP that meets the applicable regulatory 
requirements.
    Second, a party taking ownership of an invalidly generated RIN 
would be required to demonstrate it did not know or have reason to know 
of the invalidity. For Option A RINs, the RIN owner must not have had 
knowledge of the invalidity prior to the RIN being verified. For Option 
B RINs, the RIN owner must not have had knowledge of the invalidity at 
any time up to and including the time the RIN was transferred or used 
for compliance with its RVO, unless the RIN generator had implemented a 
remedial action per the regulations. See 40 CFR 80.1474. The difference 
between the two options reflects the difference in the party 
responsible for replacing invalidly generated RINs in the two new 
options. When the obligated party has the replacement obligation under 
Option B, it would not be appropriate for it to knowingly commit a 
prohibited act and be required to replace the invalid RINs, but still 
have an affirmative defense to civil liability. On the other hand, when 
the auditor has the RIN replacement responsibility under Option A, the 
obligated party's RVO would be backstopped by the auditor's replacement 
of the invalid RINs and therefore the obligated party should be able to 
submit the invalid verified RINs with the understanding that the RINs 
will be replaced and the RVO made whole by the auditor. Providing an 
affirmative defense to obligated parties under Option A even if the 
obligated party in question knows of the invalidity could help to 
address some of the market liquidity concerns described above, by 
limiting the risk to refiners who purchase these RINs. At the same 
time, if the obligated party knew of the invalidity prior to the RINs 
in question being audited and verified, it would have no defense to 
civil liability because it would have knowingly allowed invalid RINs to 
enter the marketplace, potentially placing other obligated parties at 
risk and diminishing the value of other RIN generators' valid RINs.
    Third, we are proposing that any party attempting to establish an 
affirmative defense would be required to inform the Agency within the 
next business day of identifying RINs that were invalidly generated. 
This requirement would assure that invalidity is promptly reported when 
discovered and would eliminate any incentives or financial advantages 
that might be gained from intentionally hiding invalidity or waiting to 
report. The Agency's primary goal to maintain and meet the annual RFS 
volume mandates would be frustrated by delayed reporting of invalidly 
generated RINs. The reporting requirement would therefore be both an 
element of good faith and a practical safeguard to meet the annual RFS 
volume mandates. We seek comment on whether this time frame for 
informing the Agency is appropriate.
    Fourth, a party attempting to establish an affirmative defense 
would be required to demonstrate that it did not cause the invalidity 
of the RIN in question.
    Fifth, a party attempting to establish an affirmative defense would 
be required to demonstrate that it did not have any financial interest 
in the company that generated the invalid RIN. Requiring that the RIN 
owner did not have any financial interest in the RIN generator's 
company ensures that the RIN owner did not receive and had no intention 
of receiving a financial benefit from the generation of invalid RINs.
    For Option B, a sixth element for establishing an affirmative 
defense would be to demonstrate that if the invalid B-RIN was used for 
compliance purposes, the party adjusted its records, reports, and 
compliance calculations as required per the regulations, unless a 
remedial action by the RIN generator was implemented.

C. Replacement of Invalid RINs

    In order to ensure that the annual national RFS volume mandates are 
met, the current RFS program requires that only valid RINs may be used 
by obligated parties to demonstrate fulfillment of their RVO. To use an 
invalid RIN toward fulfilling the RVO is a prohibited act. An obligated 
party that knowingly or unknowingly uses an invalid RIN to comply with 
its RVO is required to revise its compliance report to subtract out the 
invalid RINs and instead use only valid RINs. The obligated party must 
then either carry forward a deficit or replace the invalid RIN with 
valid RINs to meet its RVO.
    Under the two new proposed options, the party responsible for 
replacing the invalid RIN would depend on the type of QAP that verified 
the RIN, Option A or Option B. As noted above, both Option A and Option 
B would be available for market participants under the proposed rule. 
RIN replacement is fully discussed in Sections IV.D and V.D of this 
preamble for Options A and B, respectively.
    We propose in this rule to create a self-implementing 
administrative mechanism to replace invalid RINs. In all cases, and 
regardless of whether the RINs in question are unverified or verified 
through Option A or Option B, the proposed administrative process for 
replacement of invalid RINs places initial responsibility to replace 
invalidly generated RINs on the RIN generator responsible for causing 
the invalidity. See Sec.  80.1474 of the proposed regulations for 
details of the administrative process for replacement of invalid RINs. 
In the event the generator of the invalid RINs does not replace the 
invalidly generated RINs within the time frame set forth in the 
administrative process, either the third-party auditor or the obligated 
party that owns the invalid RINs would also be required to replace the 
invalid RINs, depending on whether the RINs were verified through an 
Option A or Option B audit, or whether the RINs were unverified. The 
RIN generator would always remain liable for replacing all invalid RINs 
that they generated. The third-party auditor or the obligated party 
would be required to replace the RINs in a specified time period after 
notification from EPA that the RIN generator failed to replace the 
invalid RINs. For invalidly generated RINs verified by an Option A QAP, 
the auditor would have the responsibility to replace the RINs, and the 
obligated party would have no responsibility for RIN replacement if it 
successfully established an affirmative defense. For invalidly 
generated RINs verified by an Option B QAP and for unverified RINs, the 
obligated party who owns the RINs would bear the replacement 
responsibility. In the event that regulated parties fail to implement 
the administrative process for replacement of any RINs, the EPA could 
bring an enforcement action against any or all of the parties that were 
required to replace the invalid RINs.
    Additionally, the auditor's RIN replacement responsibility under 
Option A would be capped at a level equal to 2% of up to the last five 
years' of A-RINs verified by the auditor. This cap on RIN replacement 
is proposed for RINs generated in 2013-2015, and the cap may change 
from 2016 onward. Under Option B we are proposing that the obligated 
party would be given a temporary limited exemption for their 
replacement obligation, under which they would not be required to 
replace up to 2% of their RVOs for 2013 and 2014. These measures are 
intended to limit the auditors' and obligated parties' financial 
exposure, as further discussed

[[Page 12167]]

in Section IV of this preamble. We request comment on both the RIN 
replacement cap of 2% and the limited exemption of 2%. The generators 
of invalid RINs, on the other hand, would have neither a cap nor a 
limited exemption for their RIN replacement responsibility under the 
proposed program.
    Furthermore, because third-party auditors are unlikely to have the 
same resources as renewable fuel producers, importers, or obligated 
parties to enable them to replace invalid RINs, we are proposing a 
requirement that auditors using Option A to verify RINs must maintain a 
RIN replacement mechanism capable of replacing a minimum percentage of 
the A-RINs they verify. There are a variety of replacement mechanisms 
possible as discussed in more detail in Section IV.B.

D. Voluntary Participation

    We are proposing that the two new compliance options under the 
proposed quality assurance program would be voluntary. If an auditor 
chooses to participate in the proposed program, it would be required to 
register with EPA and apply to EPA for approval of its QAP, which would 
provide the framework for the auditor's verification process. Since the 
auditor would be responsible to implement the QAP as approved, 
verifying RINs without meeting the requirements of the EPA-approved QAP 
would be a prohibited act. At the same time, an auditor's failure to 
properly implement the QAP would not, by itself, render the RINs 
invalid or constitute a civil violation by the owner of the RIN. While 
auditors could voluntarily decide to obtain EPA approval to verify 
RINs, once they do so they would be responsible to implement the plan 
as approved, and under Option A to replace RINs as required.
    Likewise, RIN generators would be under no obligation to have their 
RINs verified under an EPA approved QAP. RIN generators that do choose 
to have their RINs verified through the proposed quality assurance 
program would need to ensure that other parties with which they work 
closely, such as feedstock suppliers and fuel distributors, are 
providing the information needed by the auditor. Likewise, obligated 
parties would be under no obligation to purchase verified RINs. 
However, if verified RINs are purchased, the regulations would provide 
what requirements must be met to demonstrate an affirmative defense, 
and would specify who would be responsible for replacement of invalid 
RINs.
    It has been suggested that if these provisions were mandatory for 
all obligated parties and only verified RINs could be used for 
compliance purposes, the overall stability of the RIN market might be 
improved because all RINs available in the market would be pre-approved 
by a QAP. This approach would benefit obligated parties by reducing 
their risk of purchasing an invalid RIN and decrease the likelihood of 
violations and need for enforcement actions. However, we believe that 
it is up to the obligated parties to determine how they wish to verify 
the RINs they purchase, balancing their risk tolerance against their 
ability and desire to pay for verified RINs. Also, we expect that most 
RINs purchased and used for compliance purposes will be QAP-verified 
even though the program is voluntary because most obligated parties in 
most situations will prefer not to take on the risk of using an 
unverified RIN. Therefore, making the program mandatory would provide 
only marginal gains in market stability when compared to a voluntary 
program. A mandatory program would also potentially drive up the 
overall cost of RINs by forcing all RIN generators to go through the 
QAP process, even in situations where there is little risk in the 
product being invalidly produced. Overall, we believe the proposed 
program would be adequate to achieve the goals described above, and 
additional requirements would bring increased costs that are not 
appropriate or necessary. However, we seek comment on whether the 
proposed compliance options should be voluntary or mandatory for RIN 
generators and obligated parties.
    These proposed QAP options offer alternative ways for regulated 
entities to operate within and comply with the existing obligations of 
the RFS program. If regulated parties wish to conduct ``business as 
usual'' and not utilize the additional mechanisms proposed in these 
regulations, they would be free to do so and would be subject to the 
same obligations and penalty structure as currently exists. Whether or 
not to purchase and retire RINs verified by an EPA-approved QAP is a 
choice each obligated party would make on its own, depending on the 
level of risk it perceives in the market and in a given producer, and 
its own risk tolerance.

E. Treatment of RINs Prior to Final Rule Promulgation

    The regulatory provisions proposed today would become effective 
only after we review comments submitted in response to this proposal, 
determine what if any changes may be appropriate, and subsequently 
publish a final rule. Following the effective date of the final rule, 
auditors could apply to EPA for registration and for approval of their 
QAPs under one or both of the two Options (A and B). Once EPA 
registered the auditor and approved the QAP plan, then the auditor 
would implement the plan. RIN verification would start once the 
elements of the plan were in place, including the execution of an 
initial site inspection and record review, and under Option A, the 
initiation of ongoing monitoring. At that point, RINs could be verified 
by the auditor. RIN auditors could, of course, operate without EPA 
approval, though the RINs they verified would not be eligible for the 
special treatment afforded to RINs verified by an EPA-approved QAP 
under the proposed rules.
    However, in order to encourage the development and use of RIN 
verification processes, and to promote greater liquidity in the RIN 
market as soon as possible, the proposed provisions relating to the 
affirmative defense apply not only to RINs generated after promulgation 
of the final rule, but also to RINs generated from January 1, 2013 
onward. This raises two separate issues on how the final regulatory 
provisions would apply to RINs generated prior to the effective date of 
the final rule. First, what would be the effect of an audit being 
performed in the interim period? Second, what QAP requirements would 
need to be met for a RIN audited prior to the final rule's effective 
date to be considered verified after the final rule's effective date?
    Regarding the first question, for RINs generated prior to the final 
rule's effective date, EPA's approval process regarding verifications 
would be different than the process effective after the final rule, 
first because EPA cannot formally register an auditor or approve a QAP 
until the rule is in effect and second because there may be 
insufficient lead-time to implement the QAP requirements set out in the 
proposed rule and begin verifying RINs immediately upon publication of 
this NPRM. We recognize that RIN generators and buyers likely will want 
to know whether 2013 RINs generated and audited prior to the effective 
date of the final rule would receive the proposed benefits and 
treatment given to RINs verified after the rule is in effect.
    EPA is ready to facilitate the verification of RINs generated in 
2013 prior to the final rule's effective date through an informal 
``pre-registration'' process. EPA will review auditors' registration 
information and proposed QAPs, and provide guidance on whether

[[Page 12168]]

the plans appear to satisfy the proposed requirements. The names of 
those auditors and QAPs whose submissions are consistent with the 
applicable requirements in the proposed regulations will be published 
on EPA's Web site. This will not signify a final agency decision or 
approval of any auditor or QAP and EPA will not be legally bound by 
this initial evaluation. It would instead be guidance to an auditor as 
to whether EPA has any concerns about its registration and QAP plan and 
whether they appear to be consistent with the requirements in the 
proposed regulations. Publication of the auditors' names and available 
QAPs would provide useful information for outside parties who are 
evaluating the risk associated with RINs audited prior to the effective 
date of the final rule. Auditors would not be required to submit their 
QAPs to EPA for such guidance, and EPA's guidance or feedback to the 
auditors would confer no legal rights or privileges to the auditors, or 
to the production facilities and RINs they review.
    RINs audited through a QAP on which EPA had offered guidance prior 
to the effective date of the final rule would not necessarily be deemed 
``verified'' under the terms of the final rule. RINs could only be 
deemed ``verified'' after the final rule goes into effect, and after 
EPA approved the QAP that was used in the audit process. It is 
important to note that the final rule's provisions for interim RINs may 
not be the same as those in the proposed regulations. Therefore, any 
EPA decisions made after the rule is in effect regarding the 
sufficiency of QAPs and auditors operating prior to that time will be 
based on the content of the final rule, not the proposed rule. EPA's 
intention, however, is that the provisions and requirements proposed in 
this NPRM would apply to RINs verified prior to the final rule, and any 
changes to the proposed provisions would apply only to RINs verified 
after the final rule is effective. EPA invites comment on this 
approach, and will resolve this issue in the final rule after reviewing 
the comments. Similarly, it is important to note that the current 
regulatory provisions, including those regarding RIN replacement and 
civil liability, will remain in full effect until the final rule goes 
into effect.
    Regarding the second question of what QAP requirements would need 
to be met for a RIN audited prior to the final rule's effective date to 
be considered verified after the final rule's effective date, the 
substantive requirements for the QAPs used prior to the final rule may 
be slightly different from QAPs used after the final rule. As discussed 
above, after the final rule is effective, a RIN could be verified only 
after the auditor conducted a site inspection and document review of 
RINs already generated, and (for QAP A) initiated ongoing monitoring of 
feedstock qualifications and production processes. All RIN verification 
after the effective date of the final rule would thus be 
``prospective,'' covering RINs that are not yet generated at the time 
the audit is conducted. For RIN verification prior to the final rule's 
effective date, however, the requisite audit activities, including the 
site visit and setup of ongoing monitoring, might not occur until some 
point well after January 1, 2013. Given the short time period of RIN 
generation at issue before the normal oversight actions could be 
implemented, in many cases a matter of a few months, and the desire to 
have QAP plans start up as quickly as possible, EPA is proposing that 
prior to the final rule's effective date, auditors could verify RINs 
generated before the date the audit is completed. This 
``retrospective'' RIN verification would only be available prior to the 
effective date of the final rule. Auditors would only be able to 
perform a retrospective audit if all the elements of the QAP were 
already in place and could only perform one retrospective audit of a 
given producer. This would ensure that auditors are not inappropriately 
taking advantage of this flexibility by doing retrospective audits only 
(which require less monitoring and work, especially for Option A QAPs) 
until the final rule is effective. Instead, they would be encouraged to 
get QAP-based audits up and running in their intended prospective form 
as soon as possible, while allowing reasonable flexibility to account 
for a start-up lag.
    We recognize that the retrospective audit process for RINs 
generated prior to the actual audit being conducted may offer less 
certainty than the process that applies to RINs generated after the 
audit is conducted. This is because the verification is based on 
document review and a post-hoc site visit, leaving open the possibility 
that RINs generated prior to the site visit may not be representative 
of actual fuel production and the documents on which the audit is based 
were fraudulent. However, as there is a relatively low number of RINs 
at issue, we believe the risk of invalidity in this short term 
transition period is reasonable in light of the benefits of giving a 
reasonable expectation of validity to RINs generated as of January 1, 
2013.
    While these measures may give regulated parties and RIN purchasers 
flexibility and security in developing and using QAPs prior to issuance 
of the final rule, the EMTS system will not be available to display 
information such as whether a given RIN has been reviewed by an auditor 
and who conducted the audit, until after the effective date of the 
final rule. It will therefore be the responsibility of the market 
participants to keep records of verification of RINs until EMTS begins 
tracking and displaying RIN verification status. However, as noted 
above, EPA intends to post the names of those auditors whose QAPs and 
registration materials appear consistent with the proposed regulations 
on EPA's Web site. This public posting will confer no legal rights, 
privileges, or license, but will indicate that, at the time of EPA's 
review, the QAP of the auditor in question appears to meet the proposed 
requirements for a QAP.
    Once the final rule is in effect, EPA will proceed to register 
auditors and approve QAPs that meet the requirements of the final rule. 
Upon receiving such registration and approval, auditors will be able to 
issue verifications for RINs generated prior to issuance of the final 
rule that were reviewed according to the QAP approved under the terms 
of the final rule. Once these RINs generated prior to the effective 
date of the final rule have been verified, they will be treated like 
all other verified RINs for purposes of the affirmative defenses and 
replacement obligation provisions for verified RINs that are determined 
to be invalidly generated.

F. Request for Comment on Prohibiting Producers From Separating RINs

    We request comment on a regulatory change in which renewable fuel 
producers would be prohibited from separating RINs. Under the current 
regulations, RINs generally cannot be separated from the wet gallons 
they represent until the point of blending or purchase by an obligated 
party. However, a renewable fuel producer can separate RINs from their 
associated volumes of renewable fuel under the conditions specified in 
Sec.  80.1429(b)(4), including the situation where the fuel in question 
has been designated for a conforming use (i.e., for transportation 
fuel, heating oil or jet fuel) and is in fact used for such a 
conforming use, without further blending. In this circumstance, any 
owner of the RIN and associated gallon (including the producer) may 
separate the RIN from the fuel, including the producer of the fuel. The 
intent of this provision was to avoid situations in which RINs were 
never separated from renewable fuel due to its use in neat form or some 
atypical blend.

[[Page 12169]]

    In the fraud cases that disturbed the RIN market in 2011-2012, some 
registered biodiesel producers exploited this provision and generated 
and sold invalid RINs without volume. Some have argued that removing 
this option and prohibiting producers in all cases from separating RINs 
from the volumes they produce would greatly reduce the ability of 
producers to generate fraudulent RINs without the knowledge of other 
parties in the RIN market.
    While this mechanism might reduce the problem of producer fraud (of 
the type already seen), it would not eliminate the number of other ways 
invalid RINs could be generated at the point of production. Moreover, 
it could potentially create new concerns, as legitimate cases of 
producers separating RINs from volume would be prohibited. This would 
only be a partial solution to the problem of fraud and invalid RIN 
production. However, we solicit comment on the benefits of producers' 
ability to separate RINs from wet gallons in the limited circumstances 
that are currently permitted, and whether these benefits outweigh the 
potential added risk of fraudulent RINs in the market.

G. Summary of the Two QAP Options

    A summary table of the two QAP options is provided below as a broad 
background for the outcomes associated with each option. The QAP 
options and associated consequences are discussed in each of the 
subsequent sections of this preamble.

             Table III.G-1--Summary of Proposed QAP Options
------------------------------------------------------------------------
         Key element              QAP Option A          QAP Option B
------------------------------------------------------------------------
Parties responsible for       Third-party auditor.  Obligated party.
 replacement of invalidly
 generated RINs \7\.
Requirement for a RIN         Yes.................  No.
 replacement mechanism as
 condition of registration.
Affirmative Defense to civil  Yes.................  Yes.
 liability for transfer or
 use of invalidly generated
 RINs.
Treatment of a knowing        Affirmative defense   Affirmative defense
 transfer or use of            requires the party    requires the party
 invalidly generated RINs.     did not know or       did not know or
                               have reason to know   have reason to know
                               the RIN had been      the RIN had been
                               invalidly generated   invalidly generated
                               before the RIN was    at the time it was
                               verified.             transferred or used
                                                     for compliance.
Limited exemption for         None................  For 2013-14, up to
 invalidly generated RIN                             2% of the obligated
 replacement.                                        party's RVOs.
Cap on RIN replacement......  For 2013-15, 2% of    None.
                               the most recent
                               five year's worth
                               of verified RINs.
Requirements for QAPs.......  Detailed              Less detailed
                               requirements          requirements.
                               including ongoing
                               monitoring.
------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \7\ The generator of the invalid RIN is always responsible for 
replacement.
---------------------------------------------------------------------------

IV. Provisions for RIN Verification Under Option A

    The quality assurance program that we are proposing today would 
include two different options that would be available to regulated 
parties. Both options are intended to provide an efficient mechanism 
for ensuring that RINs are validly generated, and both options would 
provide the basis for an affirmative defense to liability for 
transferring or using invalid RINs. However, the two options would 
differ in whether invalidly generated RINs could be used for 
compliance, and in which party would be responsible for replacing 
invalidly generated RINs.
    In this section we describe our proposed requirements for Option A. 
Under this option, obligated parties would not be responsible for 
replacing RINs that were invalidly generated if they successfully 
established an affirmative defense, and could use invalidly generated 
RINs for compliance under certain conditions. The third-party auditors 
responsible for verifying RINs under this Option would also be 
responsible for replacing those RINs if they are invalidly generated. 
In order to implement this approach, we are proposing detailed 
requirements for QAPs used to verify RINs that would include ongoing 
monitoring of operations at a renewable fuel production facility. We 
are also proposing that third-party auditors who verify RINs under 
Option A would be required to demonstrate the existence of a mechanism 
capable of replacing RINs that are invalidly generated and verified by 
the auditor. For clarity, we refer to RINs that have been verified 
through Option A as A-RINs.
    In this section we first cover the proposed elements of QAPs for 
Option A and the proposed requirements for the replacement mechanism. 
We then describe how regulated parties could assert an affirmative 
defense for transferring invalidly generated A-RINs or using them for 
compliance. Finally, we discuss the treatment of invalidly generated A-
RINs, from the responsibilities of owners of such RINs to the parties 
that would be required to replace them.
    Since we are proposing two options for verifying RINs under a 
quality assurance program, both of which would be available to 
renewable fuel producers, we are also proposing two different sets of 
QAP requirements. Under Option A, the QAP requirements would be more 
comprehensive since obligated parties would be expected to exercise 
little or no oversight over the auditor process under this Option. 
Thus, for instance, we are proposing that any QAP used under Option A 
would have requirements for ongoing monitoring, i.e., for those 
production aspects that have sufficient variability such that less 
frequent monitoring could more easily result in the generation of 
invalid RINs. We would consider these aspects to require ``batch'' 
level monitoring, or as frequent as information becomes available or 
can be collected. We propose that all other components of QAPs under 
Option A would be evaluated on a more limited basis but on a specified 
schedule. We consider these aspects to require ``facility'' level 
monitoring, and are proposing that components subject to this periodic 
or limited schedule be monitored on a quarterly basis. Note that the 
components proposed for monitoring, whether on an ongoing or periodic 
basis, are components that are already regulated under the RFS program.
    We request comment on the components we propose for ongoing or

[[Page 12170]]

periodic monitoring, as well as any components not mentioned here. We 
also request comment on whether we have or whether we could better 
strike the necessary balance between the costs of implementing the 
quality assurance program versus the benefits for the RFS program. We 
also request comment on whether quarterly monitoring is appropriate for 
those components proposed to be subject to the less frequent schedule, 
or whether different components could or should be subject to different 
schedules (e.g., annual, once), and what those schedules should be, and 
why.

A. Requirements for Option A Quality Assurance Plans

    As described in Section III above, QAPs would be used to verify 
that renewable fuel produced at a given facility qualifies under the 
RFS program and that corresponding RINs are validly generated. A QAP 
would form the basis for a facility audit, and would be created by an 
independent third-party based on criteria specified by EPA. This 
proposed rule would not impose any requirement on producers to engage a 
third-party auditor for the purpose of RIN verification, but instead 
would provide a voluntary means by which a production facility that 
engages an approved auditor, and upon a satisfactory facility audit 
using an EPA-approved QAP, would be verified by the auditor as validly 
generating RINs. RINs that had been verified through this process would 
provide the basis for an affirmative defense against civil violations 
for transferring or using invalid RINs for compliance, as discussed 
more fully in Section IV.C. As a result, verified RINs would be more 
valuable than RINs from a facility that had not been verified through a 
third-party auditor. We also expect that RIN replacement costs should 
significantly decrease as a result of this program.
    This section discusses the minimum requirements of Option A QAPs 
under the RFS program, the elements of review that an Option A QAP must 
contain, and timing considerations affecting the use of a QAP.
1. Elements of an Option A QAP
    QAPs would be used by registered third-party auditors to audit 
renewable fuel production at and RIN generation by a particular 
facility. The QAP must include a list of elements that the auditor will 
check in order to verify that the RINs generated by a renewable fuel 
producer or importer are appropriate given the feedstock, production 
process, and fuel for which RINs were generated. Therefore, each QAP 
must identify the specific RIN-generating pathway from Table 1 to Sec.  
80.1426 or a petition granted pursuant to Sec.  80.1416 that it is 
designed to audit. Effectively, the auditor will be presenting a plan 
to EPA that the auditor believes is sufficient in scope and depth to 
ensure that RINs generated under such a plan are valid. The proposed 
required elements of an Option A QAP are discussed below. In the QAP, 
the auditor would specify how the inclusion of the required elements 
would be accomplished. We request comment on these proposed elements, 
including detailed descriptions of any elements not mentioned below.
a. Feedstock-Related Components
    We propose 12 required elements in Option A QAPs designed to ensure 
that the feedstocks used in the production of renewable fuel qualify to 
generate RINs.\8\ As shown in Table IV.A.1.a-1, some elements would be 
required to be monitored on an ongoing basis, and some on a quarterly 
basis. To begin with, for each batch of renewable fuel, we propose that 
the QAP should verify that feedstocks meet the definition of 
``renewable biomass,'' and identify which renewable biomass from the 
listing in Sec.  80.1401. As with all components proposed for 
monitoring and verification under a QAP, except for provisions related 
to the quality assurance program, there are no additional requirements 
added to the RFS program, e.g., that feedstocks are required to meet 
the definition of renewable biomass in Sec.  80.1401 is a current RFS 
requirement.
---------------------------------------------------------------------------

    \8\ The treatment of biomass that is or is derived from invasive 
species will be addressed in a separate rule-making.
---------------------------------------------------------------------------

    We are also proposing specific elements depending on the type of 
feedstock. For instance, if the feedstock is separated yard waste, 
separated food waste, or separated Municipal Solid Waste (MSW), the QAP 
would be required to verify that a separation plan has been submitted 
and accepted or approved, as applicable, as part of the registration 
requirements under Sec.  80.1450, and meets the requirements of Sec.  
80.1426(f)(5) and that all feedstocks being processed meet the 
requirements of the separation plan. If the feedstocks are planted 
crops or crop residue, the QAP would be required to include review of 
records maintained pursuant to Sec.  80.1454 to verify that the land 
use restrictions of Sec.  80.1401 are met and properly reported 
pursuant to Sec.  80.1451(d). If the renewable fuel producer claims 
that the feedstocks qualify under the aggregate compliance approach, 
the QAP would be required to verify that the feedstocks are planted 
crops or crop residue that meet the requirements of Sec.  80.1454(g). 
The auditor would also be required to ensure that other feedstocks with 
additional recordkeeping requirements in Sec.  80.1454 are adequately 
covered (i.e. planted trees and tree residue and slash from non federal 
forest land).
    The QAP would be required to verify that contracts exist for 
ongoing delivery of the type and amount of feedstocks used to produce 
renewable fuel, and that information in the contracts is consistent 
with production numbers. The QAP would also be required to verify that 
feedstock processing and storage equipment is appropriate, sufficient, 
and in working order to handle and process the feedstocks being used.
    The QAP would be required to verify the accuracy of all feedstock-
related factors used in calculation of the feedstock energy (FE) used 
under Sec.  80.1426(f)(3)(vi) or (f)(4), as applicable, including the 
average moisture content of the feedstock, in mass percent, and the 
energy content of the components of the feedstock that are converted to 
renewable fuel, in Btu/lb. Note that requirements for these factors and 
calculations are specified in the RFS regulations. Under the QAP, the 
auditor reviews and verifies that the requirements of the regulations 
were followed.
    The QAP would be required to verify that feedstocks that can be 
processed at a facility match information in the RFS registration and 
engineering review. (Note that we are proposing that a separate 
engineering review would no longer be required if a facility is covered 
by an Option A QAP). In addition, the feedstocks used to produce 
renewable fuel must be valid for the D code being claimed under Sec.  
80.1426 (or have an approved petition under Sec.  80.1416) and must be 
consistent with the information reported in EMTS. Finally, the QAP 
would be required to verify that the feedstock used to produce 
renewable fuel is not a renewable fuel from which RINs were already 
generated in accordance with the requirements at Sec.  80.1426(c)(6).
    The feedstock-related elements that we are proposing to require for 
QAPs under Option A are shown in the table below, along with whether 
each item

[[Page 12171]]

would be required to be monitored on an ongoing basis.

                     Table IV.A.1.a-1--Option A: QAP Monitoring Frequency--Feedstock-Related
----------------------------------------------------------------------------------------------------------------
                                                                                                  Quarterly
                                                    Component            Ongoing monitoring       monitoring
----------------------------------------------------------------------------------------------------------------
1-1......................................  Feedstocks are renewable                      X   ...................
                                            biomass.
1-2......................................  Separation plan for food or  ...................                   X
                                            yard waste submitted and
                                            accepted.
1-3......................................  Separation plan for          ...................                   X
                                            municipal solid waste
                                            submitted and approved.
1-4......................................  Feedstocks meet separation                    X   ...................
                                            plan.
1-5......................................  Crop, crop residue                            X   ...................
                                            feedstocks meet land use
                                            restrictions.
1-6......................................  Feedstocks with additional                    X   ...................
                                            recordkeeping.
1-7......................................  Contracts for feedstocks     ...................                   X
                                            compare to production.
1-8......................................  Feedstock processing,        ...................                   X
                                            storage equipment match
                                            engineering review.
1-9......................................  Accuracy of feedstock        ...................                   X
                                            energy calculation.
1-10.....................................  Feedstock valid for D code,                   X   ...................
                                            consistent with EMTS.
1-11.....................................  Feedstock consistent with                     X   ...................
                                            production process.
1-12.....................................  Feedstock is not renewable                    X   ...................
                                            fuel where RINs generated.
----------------------------------------------------------------------------------------------------------------

b. Production Process-Related Components
    We propose t 10 required elements in Option A QAPs designed to 
ensure that the renewable fuel production process is appropriate for 
the RINs being generated. Auditors submitting QAPs for EPA approval 
would be required to provide a list of specific steps they will take to 
audit each of the elements.
    For each batch of renewable fuel, the QAP would require mass and 
energy balances of the production process, and verify that the results 
match expectations for the type of facility being audited (e.g., 
biodiesel from soybean oil may have different expectations than 
biodiesel from non-food grade corn oil) based on typical values from 
prior input/output values, or similar facilities if prior values are 
not available. Energy inputs from on-site energy creation (e.g., 
propane, natural gas, coal, heating oil, diesel, gasoline, etc) and/or 
energy bills, and mass inputs/outputs such as feedstocks, additional 
chemicals, water, etc. would be required as part of the mass and energy 
balances. In addition, the QAP would be required to verify that yields, 
production of co-products, and production of wastes match expectations 
for the type of facility being audited.
    In addition to mass and energy balances, QAPs under Option A would 
be required to verify that the production process is capable of 
producing, and is producing, renewable fuel of the type being claimed. 
The QAP would be required to verify the accuracy of all process-related 
factors used in calculation of the feedstock energy under Sec.  
80.1426(f)(3)(vi) or (f)(4), as applicable.
    The QAP would be required to verify workforce size and conduct 
random employee interviews to confirm the production process. We 
believe this element is useful as verification that the plant is 
running as stated. Staffing levels, or a reasonable metric such as 
whether the workforce is appropriate per shift for throughput, would 
confirm that the plant is operating as expected. We understand that 
automation, plant complexity and staff skill levels and experience, 
among other factors, can result in some variation here, but believe 
this is easily accessible and useful data.
    The QAP would be required to also verify that production process 
technology and capacity used matches information reported in EMTS and 
in the facility's RFS registration. The QAP also would be required to 
verify that the production process is consistent with D code being used 
as permitted under Table 1 to Sec.  80.1426 or a petition approved 
through Sec.  80.1416.
    The QAP would be required to verify a number of things related to 
the fuel type. For instance, the QAP would include verification of the 
existence of certificates of analysis demonstrating that the renewable 
fuel being produced meets the applicable specifications and/or 
definitions in Sec.  80.1401, and would be required to verify contracts 
with lab(s) for certificates of analysis, unless a facility has an on-
site laboratory. If on-site, the QAP would be required to verify lab 
procedures and test methods. The QAP would be required to verify that 
renewable fuel being produced at the facility and that can be produced, 
matches information in RFS registration in terms of chemical 
composition. The QAP would also be required to verify the existence of 
quality process controls regarding test equipment (e.g., accuracy of 
flow meters, temperature gauges), and would be required to monitor 
equipment integrity to ensure proper procedures for equipment 
replacement, maintenance, and cleaning are in place.
    Finally, the QAP would be required to verify that production volume 
being claimed is consistent with storage and/or distribution capacity 
and other applicable reports generated by the producer.
    The production process-related elements that we are proposing to 
require for QAPs under Option A are shown in the table below, along 
with whether each item would be required to be monitored on an ongoing 
basis.

[[Page 12172]]



                Table IV.A.1.b-1--Option A: QAP Monitoring Frequency--Production Process-Related
----------------------------------------------------------------------------------------------------------------
                                                                                                  Quarterly
                                                    Component            Ongoing monitoring       monitoring
----------------------------------------------------------------------------------------------------------------
2-1......................................  Mass and energy balances...  ...................                   X
2-2......................................  Workforce size.............  ...................                   X
2-3......................................  Process-related factors      ...................                   X
                                            used in feedstock energy
                                            calculation.
2-4......................................  Production process                            X   ...................
                                            consistent with EMTS.
2-5......................................  Production process                            X   ...................
                                            consistent with D code.
2-6......................................  Certificates of analysis                      X   ...................
                                            verify fuel.
2-7......................................  Verify existence of quality  ...................                   X
                                            process controls.
2-8......................................  Volume production            ...................                   X
                                            consistent with other
                                            reports required by EPA or
                                            other government entities.
2-9......................................  Volume production            ...................                   X
                                            consistent with storage
                                            and distribution capacity.
2-10.....................................  Volume production capacity   ...................                   X
                                            is consistent with RFS
                                            registration.
----------------------------------------------------------------------------------------------------------------

c. RIN Generation-Related Components
    We propose nine required elements in Option A QAPs designed to 
ensure that the renewable fuel being produced qualifies to generate 
RINs, and that the number of RINs generated is accurate.
    For each batch of renewable fuel, the QAP would be required to 
verify that volumes of renewable fuel for which RINs are being 
generated meet, are designated for, and are sold for as transportation 
fuel, heating oil, and/or jet fuel as defined in Sec.  80.1401.
    The QAP would be required to verify that renewable fuel being 
produced matches the D code being claimed under Sec.  80.1426, or 
approved petition under Sec.  80.1416.
    The QAP would be required to verify a number of things related to 
the volume of renewable fuel produced, including a check to ensure that 
volume temperature correction procedures are followed correctly. The 
QAP would be required to verify that volume of renewable fuel produced 
is consistent with expectations for the amount of feedstock being 
processed. The QAP also would be required to verify the accuracy of all 
fuel-related factors used in calculation of the feedstock energy, as 
applicable, including equivalence value for the batch of renewable fuel 
and the renewable fraction of the fuel as measured by a carbon-14 
dating test method (see Sec.  80.1426(f)(9)).
    The QAP would be required to verify that fuel shipments are 
consistent with production, and would be required to review, if 
applicable, purchases and storage of petroleum-based fuel, and 
contracts with any company that removes wastes, co-products, off-spec 
products or any other material other than renewable fuel from the 
facility. The QAP would be required to review bills of lading (BOL), 
invoices, product transfer documents (PTDs), EMTS inputs, EPA quarterly 
reports and Energy Information Administration data.
    Finally, the QAP must verify that appropriate RIN generation 
calculations are being followed under Sec.  80.1426(f)(3), (4), or (5) 
as applicable, and that RIN generation was consistent with wet gallons 
produced.
    The RIN generation-related elements that we are proposing to 
require for QAPs under Option A are shown in the table below, along 
with whether each item would be required to be monitored on an ongoing 
basis.

                  Table IV.A.1.c-1--Option A: QAP Monitoring Frequency--RIN Generation-Related
----------------------------------------------------------------------------------------------------------------
                                                    Component            Ongoing monitoring  Periodic monitoring
----------------------------------------------------------------------------------------------------------------
3-1......................................  Renewable fuel sold for                       X   ...................
                                            qualifying uses.
3-2......................................  Standardization of volumes.                   X   ...................
3-3......................................  Renewable fuel matches D                      X   ...................
                                            code or petition.
3-4......................................  RIN generation consistent                     X   ...................
                                            with wet gallons.
3-5......................................  Fuel shipments consistent                     X   ...................
                                            with production.
3-6......................................  Renewable content R is                        X   ...................
                                            accurate.
3-7......................................  Registration, reporting,     ...................                   X
                                            recordkeeping.
3-8......................................  Equivalence value EV is                       X   ...................
                                            accurate, appropriate.
3-9......................................  RIN generation calculations                   X   ...................
----------------------------------------------------------------------------------------------------------------

d. RIN Separation-Related Components
    We propose three required elements in Option A QAPs designed to 
verify RIN separation. First, under the limited circumstances where a 
renewable fuel producer or importer separates RINs, the QAP would be 
required to verify that any RIN separation being done by the producer 
is done according to the requirements of Sec.  80.1429, was reported to 
EMTS accurately and in a timely manner, and is supported by records. 
The QAP would be required to ensure that fuel that is exported was not 
used to generate RINs, or alternatively that RINs were generated but 
retired. Finally, the QAP must verify the accuracy of the annual 
attestation.
    The RIN separation-related elements that we are proposing to 
require for QAPs under Option A are shown in the table below, along 
with whether each item would be required to be monitored on an ongoing 
basis.

[[Page 12173]]



                  Table IV.A.1.D-1--Option A: QAP Monitoring Frequency--RIN Separation-Related
----------------------------------------------------------------------------------------------------------------
                                                                                                  Quarterly
                                                    Component            Ongoing monitoring       monitoring
----------------------------------------------------------------------------------------------------------------
4-1......................................  Verify RIN separation......                   X   ...................
4-2......................................  Exported fuel not used to                     X   ...................
                                            generate RINs.
4-3......................................  Verify accuracy of annual    ...................                   X
                                            attestation.
----------------------------------------------------------------------------------------------------------------

2. Approval and Use of Option A QAPs
a. Approval of Quality Assurance Plan
    We are proposing that a third-party auditor choosing to verify RINs 
under the quality assurance program must submit a QAP to EPA for 
approval. A separate QAP is required for each different feedstock/
production process/fuel type combination (i.e., pathway). A QAP for a 
given pathway may be used for multiple facilities for which that 
pathway applies. We are also proposing that a QAP must be submitted for 
approval every year. A QAP would be deemed valid on the date EPA 
notifies the party that submitted the QAP that it has been approved. 
Only an EPA-approved QAP could be used by a third-party auditor to 
provide audit services to renewable fuel producers.
b. Frequency of Updates or Revisions to QAPs
    We are proposing that a QAP approval by EPA only applies to the 
plan that was submitted to EPA, and there are specific cases in which 
we believe a QAP should be modified and resubmitted for approval. We 
are proposing that a QAP would need to be revised if the renewable fuel 
producer makes a change in feedstock, production process, or fuel that 
is not covered by the QAP. Under even one of these conditions, the plan 
submitted to EPA would no longer be applicable, and thus a new QAP 
would be required to be submitted and approved. We request comment on 
what changes would require a new QAP to be submitted for approval. 
Specifically, we request comment on whether a new QAP should be 
required to be submitted to EPA if the audited facility changes 
operations, feedstock, fuel type, etc.

B. RIN Replacement Mechanisms Under Option A

    Auditors operating under Option A would be responsible for 
replacing invalid verified RINs if the RIN generator does not first 
replace them. Upon registration with EPA, auditors would be required to 
demonstrate that they have access to a RIN replacement mechanism that 
can replace a minimum percentage of any invalidly generated RINs they 
verify as A-RINs. See Section VI.B of this preamble for full 
registration requirements. If the party who generated the invalid A-
RINs did not replace them, the RIN replacement mechanism would ensure 
the auditor's ability to fulfill its replacement requirement. We are 
proposing that there would be no requirement for a RIN replacement 
mechanism under Option B, where only producers and obligated parties, 
not auditors, would be responsible for replacing invalid verified RINs.
    The reason we are proposing to require a RIN replacement mechanism 
under Option A (for auditors), but not under Option B (for obligated 
parties), is that the business models, size, and assets of the parties 
expressing interest in operating as auditors suggests that they would 
not be capable of self-financing a RIN replacement obligation. The 
obligated parties, on the other hand, are generally owners of major 
capital assets and are capable of self-financing a potential RIN 
replacement responsibility. While this may change in the future, it is 
appropriate at this point to ensure that there would be a reliable 
mechanism available to fulfill the auditor's replacement obligation. We 
intend that the requirement of a RIN replacement mechanism would 
provide stability in the marketplace and ensure that the RIN 
replacement obligation would in fact be fulfilled.
    Whatever mechanism is used must be capable of fulfilling the 
auditor's potential replacement requirement for invalid RINs audited 
under an Option A QAP in a given calendar year and the previous four 
years. The calculation of this potential replacement requirement is 
further discussed in Section IV.B.1, below, in the context of the 
proposed cap on RIN replacement under Option A.
    There are a number of RIN replacement mechanisms that may exist or 
become available to auditors. We are proposing to leave the choice of 
the type of mechanism to the auditors, who are in the best position to 
know what arrangement will work best for their businesses. The proposed 
rules do not therefore limit or specify the types of mechanisms we 
would accept. Rather, we propose only general minimum requirements for 
an acceptable replacement mechanism, and we solicit comments on these 
and potential additional requirements for these mechanisms. We have 
considered three possible types of mechanisms that could provide this 
function: traditional financial assurance instruments, RIN banks, and 
RIN escrow accounts. However, these mechanisms, outlined below, are not 
intended to be inclusive of all possible ways a RIN replacement 
mechanism could work, and are merely suggestions of potential pathways 
Option A auditors might follow.
    We request comment on the various factors that will impact the 
effectiveness and cost of establishing and maintaining the minimum 
required balance in a RIN replacement mechanism, such as how many 
year's worth of RINs the mechanism should be required to be capable of 
replacing, whether a minimum percentage of the potential replacement 
obligation should be used as a baseline for the mechanism, and 
alternative methods to determining the appropriate minimum funding of 
the mechanism. We also seek comment on the perceived feasibility and 
necessity of the replacement mechanism requirement for auditors under 
Option A. Finally, we seek comment on whether any of the replacement 
mechanisms described below or any other form of replacement mechanism 
might provide the required type and amount of coverage, whether any 
should be prohibited, and any other relevant comments on this issue.
1. Required Replacement Capability for RIN Replacement Mechanisms
    We do not believe it would be reasonable to require replacement 
mechanisms under Option A to provide coverage for all of the RINs an 
auditor verifies because we believe that properly functioning QAP 
audits will significantly reduce the chance of invalid A-RINs entering 
the market. We also recognize that the market will need time to 
evaluate the risk associated with bonds or other traditional financial 
assurance mechanisms and properly price these financial assurance 
instruments. Accordingly, we are proposing to phase in the RIN 
replacement mechanism over time to balance the benefits of encouraging 
early implementation of the more robust QAP A program with the cost of 
early

[[Page 12174]]

implementation. Under this approach, the minimum ``replacement cap'' 
will be set relatively low through 2015, and may change on January 1, 
2016.
    We propose that an auditor using an Option A QAP must be capable of 
replacing 2% of the total A-RINs that it verifies during the first 
phase of the program, i.e. through 2015, and we will finalize a 
replacement cap for subsequent years in the final rulemaking. We 
believe incidences of invalid RINs will be significantly below historic 
levels. Invalid RINs in 2010 and 2011 were generated when there was 
little due diligence being performed by downstream parties to ensure 
that RINs were valid, and we believe that incidences of invalidity 
would be significantly fewer in number once the QAP verification 
processes are in use. The auditor's replacement responsibility is 
therefore equal to the ``replacement cap'' for this first phase of the 
program. For further information on the replacement cap, see Section 
IV.D.4, below.
    Nevertheless, historically, invalid RINs have not been generated 
with equal probability by all biodiesel producers. Instead, it has been 
a few producers that were responsible, with essentially all RINs 
generated by those producers being invalid. If such circumstances were 
repeated in the future, the potential impacts on auditors would be 
twofold. First, some auditors would not have to replace any of the RINs 
they verify, since many producers would have generated no invalid RINs. 
Second, in the event that an auditor was required to replace invalidly 
generated RINs, those invalid RINs would likely represent more than 2% 
of the RINs that the auditor verified. As a result, it is possible that 
the number of invalid RINs could be higher than 2% of a single 
auditor's throughput even if the total number of invalid RINs 
represented only 2% of all RINs generated for the nation as a whole. We 
therefore seek comment on the level of coverage required for RIN 
replacement mechanisms. We believe that the appropriate level of 
coverage for RIN replacement mechanisms should strike a balance between 
the benefits of ensuring that invalid RINs are replaced and reducing 
the risk of invalid RINs entering the market, and the costs associated 
with implementing RIN replacement mechanisms. We also seek comment on 
whether it would be appropriate to require a minimum dollar value as a 
floor for coverage. The minimum dollar value might help ensure that the 
auditors who participate in this program have the capital to function 
appropriately, but might also cause some qualified auditors to refrain 
from participating in the program because of the additional costs. We 
seek comment on whether to require an additional floor for the RIN 
replacement mechanism and the correct amount of the floor.
    Beginning January 1, 2016, the Option A RIN replacement mechanism 
cap may change from the initial 2%. Our goals for the cap in 2016 and 
later years, as they are for the cap in 2013, 2014, and 2015, would be 
for it to ensure that most if not all of invalidly generated A-RINs 
would be replaced and at the same time provide assurance that the costs 
of a RIN replacement mechanism would not be excessive. We invite 
comment on what level would meet these goals, i.e., whether a lower 
cap, the same 2% cap, or a higher cap, for example 25%, would be 
appropriate. As noted above, we will finalize the replacement cap for 
2016 and later years in the final rulemaking. As described in greater 
detail in Section IV.D.4, below, we also propose that the auditor's 
replacement responsibility extend back to cover no more than five 
years.\9\ Therefore, the auditor must maintain the ability to replace 
the cap percentage of A-RINs verified in the current year to date plus 
the cap percentage of A-RINs verified in the previous four calendar 
years. If the replacement cap changes in 2016, we expect that the 
auditor's replacement responsibility for the years in the initial phase 
would not change.
---------------------------------------------------------------------------

    \9\ While there is no statute of limitations on EPA taking 
enforcement actions with respect to invalid RINs, there is a five 
year limit on records retention.
---------------------------------------------------------------------------

    Maintenance of a RIN replacement mechanism is a condition of an 
auditor's registration, which would be renewed annually. A failure to 
maintain the ability to replace up to the given cap percentage would 
therefore be a sufficient condition for denying a registration renewal 
or revoking an Option A auditor's registration. However, we recognize 
that if an auditor's replacement capacity has been significantly 
depleted by a replacement action, it might be difficult or even 
impossible for it to re-fund the replacement mechanism and maintain its 
registration in the short term. We therefore propose that the 
replacement mechanism be re-funded on an ongoing basis, i.e. by the 
given cap percentage of A-RINs verified, until the maximum required 
amount is again achieved. The formula for this calculation is in Sec.  
80.1470(c) of the proposed regulations, and this re-funding mechanism 
is mirrored in the calculation of the replacement cap, see Section 
IV.D.4 below. We request comment on all aspects of the calculation of 
the replacement mechanism and re-funding of a depleted replacement 
mechanism.
2. Financial Assurance Instruments
    As noted above, we would not prescribe that auditors under Option A 
must use any particular RIN replacement mechanism, but would only 
require that the mechanism used be capable of covering an auditor's 
potential replacement responsibility described above. Since obligated 
parties would not be responsible for replacing invalid RINs under 
Option A, any replacement mechanism held by the auditor would need to 
make disbursements directly to the auditor or to a third-party 
contractually obligated to perform the auditor's replacement 
responsibility and retire the correct number and type of A-RINs, up to 
the replacement cap discussed above.
    We have considered a number of traditional financial instruments 
that we believe are not suitable to provide the coverage required under 
Option A. For instance, a liability policy obtained by an auditor would 
typically only cover losses incurred by another party contracting with 
the auditor, in this case, most likely the RIN purchaser. This would 
not be an acceptable replacement mechanism under Option A because the 
RIN purchaser is not responsible for replacement of A-RINs and 
therefore would have no compensable harm. If an insurance policy could 
be written to cover the replacement obligation of the auditor instead 
of a third-party, regardless of the fault of the auditor or the source 
of the invalidity (i.e., covering potentially fraudulent acts by the 
producer), then such an instrument may be acceptable as a replacement 
mechanism under Option A. Similarly, a replacement mechanism that would 
pay out directly to EPA instead of the auditor would not be acceptable 
because EPA cannot purchase or retire RINs. Surety bonds and letters of 
credit payable to EPA would therefore not be suitable replacement 
mechanisms for Option A.
    On the other hand, a surety bond or other financial instrument, 
such as a letter of credit, could be used as a RIN replacement 
mechanism if capable of providing direct replacement of invalid RINs, 
either by itself or by contracting with a third party. A performance 
bond, for example, might directly guarantee the performance of the 
auditor's RIN replacement responsibility. The bond agreement could 
allow the surety the option of purchasing and retiring replacement RINs 
itself, hiring a third-party agent to complete the purchase and 
retirement, or paying into a standby

[[Page 12175]]

trust that could, in turn, fulfill the replacement responsibility on 
its own or by hiring a third-party agent to do so. A payment bond, 
similarly, could be established to pay out to a standby trust 
authorized to purchase and retire RINs on demand by the EPA 
administrator, or to contract with a third-party to perform the 
replacement.
    In an effort to provide regulated parties with an option where the 
auditor could use a traditional liability policy as a RIN replacement 
mechanism while relieving the obligated party of RIN replacement 
responsibility, we considered a modified Option A approach. In this 
modified approach, the obligated party would be responsible for 
replacing invalid A-RINs that it had retired for compliance purposes, 
but the auditor would carry a third-party liability policy to cover the 
cost of that RIN replacement. In the event that the insurance policy 
failed for whatever reason to pay out the replacement costs, or paid 
out only part of the replacement costs, the obligated party would not 
be liable for fulfilling the remaining portion of its RIN replacement 
responsibility. Essentially, the obligated party would be responsible 
for RIN replacement, but would be assured that their replacement costs 
would be covered entirely by a third party. However, we found 
significant problems with this approach. The primary problem is that if 
an obligated party incurred a replacement obligation and sought 
compensation through the insurance policy, it would have little reason 
to press its claim with any vigor, knowing that any lack of payment 
from the insurer would effectively be forgiven by EPA. The obligated 
party, in short, would be rendered whole regardless of how little the 
policy paid, or even if the policy paid at all. As a result, we 
consider it very likely that under this modified Option A system, the 
invalid RINs would not be replaced. This approach would also affect the 
behavior of the insurer, who would define the limits of its liability 
on the basis of the potential harm that the obligated party might 
suffer. Since the obligated party would not be responsible for 
replacing any RINs not covered by the insurance policy, its ``harm'' 
would be limited to whatever amount the insurer chose or intended to 
pay out. The insurer would not be penalized or pursued for failing to 
pay out to the limits of the policy because such a decision would cause 
no harm or loss to the obligated party or the policy holder. It is 
arguable that this situation would effectively create a fictitious 
insurance contract, because the insurer would control most if not all 
of the total amount of the loss it was insuring against. We seek 
comment, however, on whether this or some other modification to Option 
A would be considered acceptable and feasible.
    The inapplicability of a third-party liability policy as a 
replacement mechanism under Option A would not, of course, diminish its 
availability and use under Option B. While liability insurance is not a 
required feature of the Option B program, auditors and obligated 
parties could nonetheless choose to contract for it voluntarily. Third-
party liability insurance, therefore, would still provide a way for 
obligated parties to cover their potential replacement responsibility 
under Option B. Obligated parties and auditors would remain free to set 
up whatever kinds of contracts and/or third-party agreements to cover 
potential losses due to invalid RINs.
    We also considered a ``hybrid'' approach, combining certain 
features of Option A with certain features of Option B. Under this 
approach, the obligated party would retain the replacement 
responsibility, but the auditor would be required to carry a third-
party liability policy to cover the obligated party's potential losses 
due to the use of invalid A-RINs. In this scenario, the obligated party 
would remain liable for replacement of invalidly generated RINs even if 
the insurance instrument provided only partial coverage, or if it 
failed to provide coverage at all. This option would give obligated 
parties the extra assurances of an Option A QAP and a dedicated 
liability insurance policy held by the third-party auditor to cover 
their potential losses. However, as noted above, this approach is 
essentially already available under Option B. An independent third-
party auditor could offer a QAP that met the requirements of Option A 
and could also provide the assurance of a third-party liability policy 
to cover the RIN purchaser's potential replacement responsibility. 
Moreover, by leaving this as an independent and voluntarily chosen 
option, auditors and obligated parties have more flexibility to decide 
what level of coverage and risk they are willing to bear, instead of 
being required to maintain a set minimum amount of coverage. We 
therefore decided not to propose this as an independent option, but we 
request comment on whether this hybrid approach or some variation of it 
would be a valuable addition to the proposed program.
3. RIN Banks
    Another potential replacement mechanism is a RIN bank. A RIN bank 
would be a repository for valid RINs to which multiple Option A 
auditors (the ``members'' of the bank) contribute, and which could be 
used as a source of replacement RINs in the event that any one of the 
members was required to replace invalid RINs. As with any other 
replacement mechanism, the bank would have to be capable of fulfilling 
any member's replacement requirement, meaning that it would have to 
contain RINs sufficient to meet the replacement responsibility of the 
member with the largest potential replacement requirement at any given 
point in time.
    The primary advantage of a RIN bank is that it would give each 
member access to a large quantity of A-RINs in exchange for 
contributing a relatively small quantity of A-RINs. However, if RINs 
from the RIN bank were used to replace RINs for which one of the bank's 
members was responsible, the withdrawn RINs would have to be replaced 
in the bank. While the bank managers might require the responsible 
party to reimburse the bank for any RINs withdrawn as a result of its 
actions, if the responsible party declared bankruptcy or was otherwise 
unable to reimburse the bank, the remaining members would be 
responsible for re-populating the bank to the required level.
    A RIN bank could be established, funded and managed by members of 
the bank. Members would each purchase and contribute verified A-RINs to 
the bank. While such contributions could be proportional to each 
party's RIN replacement liability, it would be up to the bank managers 
to stipulate how the bank would be populated, how withdrawals from the 
bank are administered and managed, how to re-populate the bank in the 
event that RINs are withdrawn to replace invalid RINs, and how to grant 
or revoke membership in the bank.
    A RIN bank would establish an EMTS account to identify the RINs 
contributed by the bank's members. RINs would be held by the bank and 
be available to replace invalid RINs that were verified under Option A 
by a member of the bank. Each member of the bank would be required to 
have access to all of the RINs in the bank to replace A-RINs they had 
audited that were found to be invalid. If at any point the number of 
RINs held by the bank no longer met the EPA's requirements, either due 
to the addition of a new member(s) to the bank, an increase in the 
liability of one of the members of the bank, or a withdrawal to replace 
invalid RINs, the members of the bank would again be required to 
contribute RINs to the bank

[[Page 12176]]

until the minimum required level of RINs was reached.
    RINs deposited in RIN banks would expire just like other RINs. We 
contemplated creating a special category of RINs that do not expire if 
deposited in a RIN bank which would allow the bank to provide perpetual 
backing for its members' replacement responsibilities, as long as the 
RINs were not withdrawn to replace invalid RINs. However, RINs that do 
not expire could acquire a higher market value compared to RINs from 
the same facility without this new status. If EPA adopted this system, 
we would also have to stipulate that RINs placed in a RIN bank could 
not be withdrawn for any reason other than to replace invalid RINs to 
prevent auditors from depositing RINs into the bank, achieving this new 
status, and then withdrawing them to be sold with a new higher market 
value. This stipulation would place restrictions on the use of RINs 
owned by the auditors participating in this system and could be 
problematic in cases where an auditor wanted to disassociate from a 
bank.
    The alternative to this system, and the one we are proposing today, 
would not change the status of RINs deposited in a RIN bank and would 
allow them to expire just like any other RINs. Auditors would be free 
to regularly withdraw older RINs from the bank and replace them with 
newer RINs (in addition to their new contributions) to prevent RINs in 
the bank from expiring and losing their value. While we recognize that 
this would add some administrative burden to auditors and potentially 
impact the value of RINs that are deposited in the bank (since RINs 
from a previous year are limited to being used to cover 20% of an 
obligated party's RVO) we nevertheless believe this is a better option 
than creating a new class of RINs. This approach would allow auditors 
to have the most control over their own RINs, depositing and 
withdrawing them at any time, provided they maintain their required 
minimum balance in the bank. Further, since the rollover cap limitation 
on the previous year's RINs that may be used to meet the current year's 
RVO (see Sec.  80.1427(a)(5)) is significantly higher than the 
percentage of RINs that would be required to be held by a bank, we 
believe the depreciation in the value of RINs deposited in a bank is 
likely to be minimal.
4. A-RIN Escrow Accounts
    An A-RIN escrow account would work very much like a RIN bank, but 
would be funded by a single auditor instead of a group of auditors, and 
would be supervised and managed by a third-party escrow agent. The 
advantage of this option is that an auditor would have total control 
over the funding of the escrow account and, in contrast to the RIN 
bank, an auditor using an escrow account would never be adversely 
affected by the actions of another contributor to the account, such as 
failure to contribute its required share or a large withdrawal from the 
RIN bank that might leave the bank underfunded. On the other hand, an 
auditor using an escrow account would be solely responsible for the 
funding of the account, and so would be required to maintain a balance 
equal to a much larger percentage of its potential replacement 
responsibility than it might be if using a RIN bank.
    To qualify as an acceptably funded account, we propose that the 
escrow account would be required to maintain a balance of A-RINs equal 
to the auditor's replacement responsibility at any given point in time. 
As with the RIN bank, the RINs held in escrow would expire just like 
any other RIN and would have to be retired and replaced on a rolling 
basis to maintain the auditor's ability to replace invalid RINs at any 
given point in time. Thus, the RIN auditor would eventually be able to 
use the proceeds from the sale of RINs in the escrow account to fund 
the purchase of new RINs, reducing the total long-term costs of this 
RIN replacement instrument. Likewise, if the account's balance fell 
below the minimum required amount for any reason, the auditor would be 
precluded from verifying RINs unless and until the account's balance 
was brought back to the minimum level until the cumulative five year 
cap is reached (as further described in Section IV.D.4)
    The escrow account would contain verified A-RINs and would be used 
as a source of RINs to retire upon a finding that RINs verified by the 
auditor were in fact invalid. An originally signed copy of the escrow 
account agreement would be submitted by the auditor to EPA as part of 
its registration. The agreement would stipulate, for example, that the 
escrow agent would release RINs from the account upon demand by or with 
the concurrence of the EPA Administrator. RINs would be released 
directly to the auditor (for roll-over purposes or for meeting a 
replacement requirement) or to a designated third party such as a 
standby trust (solely for meeting the auditor's replacement 
requirement). Maintenance of the account's minimum balance requirements 
would be part of the auditor's regular compliance reporting. The 
auditor would set up a separate account in EMTS to identify RINs placed 
in the escrow account.

C. Affirmative Defenses

    After meeting with industry stakeholders over the course of several 
months, we recognize that providing an affirmative defense to civil 
liability arising from the transfer or use of invalid RINs would 
promote greater liquidity in the RIN market, especially the market for 
RINs generated by smaller producers. EPA believes that in the 
circumstances present in the RFS program, an affirmative defense 
combined with a reasonable QAP and adequate mechanisms to replace RINs 
that are invalidly generated, is an appropriate way to promote greater 
liquidity in the RIN market. It is our intent to design a system that 
would provide RIN owners with such an affirmative defense to civil 
liability provided appropriate measures are in place with respect to a 
QAP and a mechanism for replacement of invalidly generated RINs.
    To this end, under the proposed regulations renewable fuel 
producers and obligated parties would have the option of participating 
in a quality assurance program that would provide significant assurance 
(Option A) or reasonable assurance (Option B) that RINs are validly 
generated at production facilities. EPA would approve Quality Assurance 
Plans (QAPs) that meet the basic criteria prescribed in the 
regulations, and these QAPs would be the template for production 
oversight by an independent third-party auditor. Performance of an EPA-
approved QAP audit would be the foundation of an affirmative defense 
for parties that transfer or use QAP-verified RINs for compliance 
purposes. The affirmative defense would only be available to RIN owners 
for RINs that were verified by an independent third-party auditor using 
an EPA-approved QAP, whether Option A or Option B. Additionally, it is 
our intent that affirmative defenses would not be available to the 
generator of an invalid RIN. Since the quality assurance program would 
be voluntary, parties could still purchase RINs not verified by an EPA-
approved QAP and transfer or use these unverified RINs, but they could 
not assert an affirmative defense if the RINs were found to be invalid, 
regardless of their level of good faith or any independent due 
diligence they perform prior to purchase.
    Once a RIN has been verified by the auditor, any person, other than 
the generator of the RIN, who transfers or uses that verified RIN would 
be eligible for an affirmative defense if the RIN was in fact invalidly 
generated and the

[[Page 12177]]

person then transferred it to another party or used it for compliance 
purposes. Once a RIN was verified through an audit based on an Option A 
QAP, it would remain verified for the purpose of asserting an 
affirmative defense.\10\ The QAPs would be designed to verify valid 
generation of RINs, and the assertion of an affirmative defense would 
be limited to the prohibited acts of transferring and using invalidly 
generated RINs. The proposed affirmative defense addresses violations 
of 40 CFR 80.1460(b)(2) and the use violation of 40 CFR 80.1460(c)(1). 
40 CFR 80.1460(b)(2) prohibits any person from transferring to any 
other person a RIN that is invalid. 40CFR 80.1460(c)(1) provides that 
no person shall use invalid RINs to meet the person's RVO, or fail to 
acquire sufficient RINs to meet the person's RVO. The proposed 
affirmative defense would apply to violations arising from a person's 
use of invalid RINs whether or not his/her use of the invalid RINs 
caused them to fail to acquire sufficient RINs to meet their RVOs.
---------------------------------------------------------------------------

    \10\ If a RIN was improperly verified, the QAP auditor could be 
liable for committing the prohibited act of verifying a RIN without 
following the requirements of the EPA-approved QAP plan. However, 
the RIN would remain verified for purposes of asserting an 
affirmative defense by parties who transferred or used that RIN 
after it was verified.
---------------------------------------------------------------------------

    We are proposing new regulations in Section VIII to address RINs 
that become invalid downstream of the RIN generator, but an affirmative 
defense would not apply in this situation. It should again be noted 
that an affirmative defense is not available for a RIN that was not 
verified under an EPA-approved QAP. In other words, the system as it 
exists under the current regulations would continue to be an option for 
obligated parties who do not wish to purchase RINs verified by a QAP.
    As noted above in Section III of this preamble, there are two types 
of verified RINs: those verified by a third-party auditor who is 
required to have a replacement mechanism to guarantee replacement of 
invalidly generated RINs (``Option A'' or ``A-RINs'') and those 
verified by a third-party auditor who is not required to replace 
invalidly generated RINs (``Option B'' or ``B-RINs''). The requirements 
for establishing an affirmative defense under Option A are described 
below, while Option B is described in Section V.C. In order to 
establish an affirmative defense under Option A or Option B, we are 
proposing that the elements would be required to be proven by a 
preponderance of the evidence. This means that each element was more 
likely than not to have been met. Additionally, we are proposing that 
when a person seeks to establish an affirmative defense, he/she would 
submit a written report to EPA, along with any necessary supporting 
documentation, that would demonstrate how the elements were met. The 
written report would need to be submitted within 30 days of the person 
discovering the invalidity of the RIN. We welcome comment on the 
elements of the affirmative defense and the effects of establishing an 
affirmative defense.
    In the event that invalidly generated A-RINs are transferred or 
used, the person could establish an affirmative defense to liability 
arising from transferring or using the invalid A-RINs for compliance 
with an RVO if the following elements were proven by a preponderance of 
evidence:
    (1) The RINs in question were verified in accordance with an EPA-
approved Option A QAP as defined in EPA regulations;
    (2) The RIN owner did not know or have reason to know that the RINs 
were invalidly generated prior to being verified by the third-party 
auditor;
    (3) The QAP auditor or RIN owner informs the Agency within the next 
business day of discovering that the RINs in question were invalidly 
generated;
    (4) The RIN owner did not cause the invalidity; and
    (5) The RIN owner did not have a financial interest in the company 
that generated the invalid RIN.
    Allowing invalid RINs to circulate in the market without EPA's 
knowledge would subvert the intent of the quality assurance program and 
the RFS program. In that context, the knowledge and notification 
requirements, (2) and (3) of the above list, ensure that the RIN owner 
did not knowingly allow invalid RINs to enter the market, and did not 
benefit from the use or retirement of the invalid RINs without 
informing EPA that the RIN was invalid.
    An affirmative defense is a defense that precludes liability even 
if all of the elements of a claim are proven, and generally is asserted 
in an administrative or judicial enforcement proceeding. In this 
proposed rule, we are including an explicit notification requirement to 
allow EPA to evaluate affirmative defense claims before deciding 
whether or not to commence an enforcement action.
    We request comment on all the elements we are proposing as 
prerequisites to asserting an affirmative defense, and in particular 
the requirement to report invalid RINs to the EPA within the next 
business day of discovery.

D. Treatment of Invalid A-RINs

    Under both the current and proposed regulations, RIN purchasers 
must assess the level of risk associated with purchasing a particular 
RIN to comply with their RVOs. For instance, a purchaser unfamiliar 
with the renewable fuel producer generating the RIN risks the 
possibility that the RIN is invalid, while a well-known producer might 
seem less risky. The use of the QAPs as described in this NPRM would 
reduce the risk of purchasing invalid RINs, especially in situations 
where the producer of the RIN is unknown or new to the market. Where a 
producer is considered less risky in a given situation by a given 
purchaser, the RIN buyer may not need as extensive a QAP to reduce its 
risk to an acceptable level, and would be willing to risk the 
obligation to replace the RIN if it were found invalid. On the other 
hand, a RIN deemed more risky might require a more stringent QAP and 
additional assurances against the responsibility to replace it if the 
RIN turns out to be invalid. The obligation to replace invalid RINs 
that have been retired for compliance purposes will differ depending on 
whether the RIN was unverified, or verified through an Option A or 
Option B QAP.
    Additionally, as discussed in Section III.C, we are proposing an 
administrative process for replacement of invalid RINs that places 
initial responsibility to replace invalidly generated RINs on the RIN 
generator responsible for causing the invalidity. In the event the RIN 
generator does not replace the invalidly generated RINs according to 
the administrative process, the third-party auditor under Option A 
would also be required to replace the invalid RINs. Thus, for invalidly 
generated RINs verified by an Option A QAP, the auditor would have the 
responsibility to replace the invalidly generated RINs, and the 
obligated party would have no responsibility for RIN replacement, if 
they met the requirements of the affirmative defense. However, in the 
event that regulated parties fail to implement the administrative 
process for replacement of any invalid RINs, the EPA could bring an 
enforcement action against any or all of the parties that were required 
to replace the invalid RINs, which under QAP Option A includes the RIN 
generator or auditor, but not the obligated party. See Sec.  80.1474 of 
the proposed regulations for details of the administrative process for 
replacement of invalid RINs.

[[Page 12178]]

    This section describes the responsibilities of regulated parties 
that generate RINs or take ownership of RINs verified under Option A 
but which are ultimately found to have been invalidly generated. We 
also describe the conditions under which invalid RINs must be replaced, 
by whom, and the mechanisms for doing so.
1. Responsibilities for Replacement of Invalid Verified A-RINs
    For Option A we are proposing a system wherein RINs would be 
verified by a third-party auditor using an EPA-approved QAP, and the 
third-party auditor would be liable for replacing invalidly generated 
RINs. Obligated parties would not be liable for replacing invalid RINs 
under Option A, and could use invalid A-RINs for compliance.
    Obligated parties that purchase A-RINs would not be subject to 
civil liability if an A-RIN transferred or used for compliance purposes 
was later found to have been invalidly generated, if all the elements 
of an affirmative defense were successfully asserted, as described in 
Section IV.C. Moreover, obligated parties would be under no obligation 
to replace A-RINs used for compliance that were subsequently found to 
be invalid and could transfer and use invalidly generated A-RINs (if 
they did not know or have reason to know the A-RINs were invalidly 
generated prior to being verified) without violating the Prohibited 
Acts section, Sec.  80.1460.
    Under Option A, the third-party auditor would be required to have a 
replacement mechanism capable of replacing invalidly generated A-RINs 
that were verified by that auditor.\11\ We chose to have the third-
party auditor replace invalidly generated A-RINs to provide obligated 
parties the greatest amount of incentive to buy RINs from smaller 
producers, who might be perceived to be higher risk producers, which 
would increase the liquidity of the market. The third-party auditors 
would have the greatest oversight of A-RIN generation because of the 
robustness of the verification product they are providing to the market 
under Option A. Thus, charging them with the corresponding replacement 
obligation is a reasonable approach to achieving the goals of the 
proposal. Additionally, as discussed above, after meeting with several 
third-party auditors, we discovered that they, in most cases, do not 
have the same level of financial resources that many obligated parties 
possess. Therefore, requiring a replacement mechanism provides a level 
of security for the Agency in making sure the statutory volume mandate 
is met. As described more fully in Section IV.B, the form of this 
replacement mechanism would determine how this replacement occurs.
---------------------------------------------------------------------------

    \11\ It should be noted that the replacement mechanism could not 
be funded by RINs that were both generated and verified by the same 
auditor. Auditor requirements are discussed in further detail in 
Section VI.
---------------------------------------------------------------------------

    QAP Option A would provide the greatest risk mitigation for 
obligated parties in the event that their RINs were invalidly generated 
and later used for compliance purposes. Not only could they assert a 
defense to civil liability for using an invalid A-RIN for compliance 
purposes, but they would not be responsible for later replacing that 
RIN. QAP Option A would provide a means for all producers to 
participate in the market because obligated parties would bear no risk 
of a replacement obligation for any A-RINs, regardless of who produced 
them. Smaller producers would thus have access to a larger number of 
obligated parties as potential customers than they might have under the 
existing regulations, where obligated parties are always subject to a 
replacement obligation if the RINs they have retired are deemed 
invalid. We seek comment on this approach. In particular, we seek 
comment on what types of entities would seek to serve as auditors, what 
the potential risk burden might be, and how this burden could be 
quantified. We further seek comment on the impact of the RIN 
replacement cap on the cost of the program.
2. Invalid A-RIN Replacement
    The current regulations do not specify that an obligated party must 
replace invalid RINs. Rather, obligated parties choose to replace 
invalid RINs in order to meet their RVOs. If the party holding an 
invalid RIN is an obligated party, and he does not have a sufficient 
number of valid RINs to meet his RVO, he must acquire additional valid 
RINs.
    Under the quality assurance program the requirement to replace an 
invalid RIN may be placed on a party other than the owner of the 
invalid RIN. As a result, the regulations governing the replacement of 
invalid verified RINs must specify which party is responsible. Under 
Option A only the renewable fuel producer or importer who generated the 
invalid RINs and the auditor who verified those RINs would be 
responsible for replacing them.
    In general, as discussed above, the administrative process for 
replacement of invalid RINs places initial responsibility of 
replacement of invalid RINs on the RIN generator, regardless of who 
actually owns the invalid RINs at the time that the invalidity is 
discovered. Even though we are proposing that invalid verified A-RINs 
could continue to be transferred and used for compliance, the generator 
of an invalid A-RIN would never be permitted to transfer verified A-
RINs that are invalid.
    If the RIN generator failed to replace invalidly generated A-RINs 
in the time frame established in the administrative process specified 
in the proposed regulations, the third-party auditor would be required 
to replace the invalid A-RINs. A QAP A auditor would be responsible for 
replacing invalidly generated A-RINs up to the levels discussed in 
Sections IV.B and IV.D.5. All regulated parties that are potentially 
liable for replacing invalid RINs would be free to obtain more coverage 
for RIN replacement than the regulations require. In the event that 
regulated parties fail to implement the administrative process for 
replacement of any RINs, the EPA could bring an enforcement action 
against any or all of the parties that were required to replace the 
invalid RINs, i.e., the RIN generator or auditor, but not the obligated 
party.
    The methods for replacing invalidly generated RINs under QAP Option 
A are outlined below. See Sec.  80.1474 of the proposed regulations for 
details of the administrative process for replacement of invalid RINs. 
In general, RINs verified under Option A could always be transferred or 
used even if they are discovered to have been invalidly generated, 
since RIN replacement would be carried out by the RIN generator or the 
auditor.
    In the event that EPA or the independent third-party auditor 
alleged that an A-RIN was invalidly generated, that RIN would be a 
``potentially invalid RIN'' or ``PIR''. The RIN generator would be 
required to take one of three possible corrective actions within 30 
days of being notified of the PIR:
     Retire a valid A-RIN of the same D-type as the PIR, either 
by purchasing it or generating a new valid RIN and separating it from 
the physical volume that it represents;
     Retire the invalidly generated RIN (if still in the RIN 
generator's possession); or
     If the RIN generator believed the PIR was in fact valid, 
it would submit a written demonstration providing a basis for its claim 
of validity to either the third-party auditor or EPA, whoever 
identified the PIR. If the third-party auditor determined that the 
demonstration was sufficient, the RIN would not need to be replaced; 
however, EPA would reserve the right to make a determination regarding 
the validity of the RIN. If EPA determined

[[Page 12179]]

that the demonstration was sufficient, the RIN would not need to be 
replaced. However, if the third-party auditor determined it was not 
sufficient and if the EPA confirmed that determination, or if EPA 
determined it was not sufficient, it would notify the RIN generator of 
that finding and again require the RIN generator to replace the PIR 
within 30 days.
    In order to allow a producer to replace a PIR with a new valid RIN 
from renewable fuel that it has generated, we are proposing a new 
provision in Sec.  80.1429 that would permit producers to separate RINs 
from volume they produced for the specific purpose of retiring RINs to 
replace a PIR. If the RIN generator retired a valid RIN to replace the 
PIR, the invalid RIN that it replaced could continue to be transferred 
or used for compliance by any party.
    If the RIN generator did not replace an invalidly generated A-RIN 
for any reason, the regulations would require the third-party auditor 
to replace the invalid A-RIN. The auditor would have 60 days from the 
day it received notification of the PIR to retire a valid RIN to 
replace the PIR. Regardless of whether the RIN generator or auditor 
replaced the invalid A-RIN or not, any other party that owned the 
potentially invalid A-RIN could transfer or use that A-RIN for 
compliance purposes. Additionally, if an obligated party or other 
third-party owner of an A-RIN successfully established an affirmative 
defense, they would not be responsible for replacing the A-RIN if it 
was deemed invalidly generated.
3. Process for Replacing Invalid Verified RINs
    When an auditor or EPA determines that a RIN is a PIR, the RIN 
generator would be notified directly. At this point, the process of 
retiring an appropriate valid RIN would begin.
    There would be two forms of invalid RIN replacement under the 
proposed quality assurance program:
    1. If a party that is required to replace an invalid verified RIN 
owns the RIN in question, it may be retired through EMTS in the same 
way that invalid RINs under the current regulations are retired.
    2. If a party that is required to replace an invalid verified RIN 
does not own the RIN in question, or the RIN has already been used for 
compliance, the party would be required to acquire a valid RIN and 
retire it in place of the invalid RIN. In this case, since it would be 
a valid RIN that is being retired, a new retirement code reason would 
be created in EMTS for this purpose.
a. Types of RINs That Can Replace Invalid Verified RINs
    Parties that retire valid RINs to replace invalid RINs would be 
required to match the renewable fuel category and the QAP category of 
both the valid and invalid RINs. For instance, an invalid verified RIN 
with a D code of 4, representing biomass-based diesel, could only be 
replaced with a valid verified RIN with a D code of 4. Moreover, we 
propose that invalid RINs verified through Option A could only be 
replaced with valid RINs verified through Option A, not Option B (and 
vice-versa). Since the balance of cost and risk could be different 
under Options A and B of the quality assurance program, RINs verified 
under the two options could have different prices even though they have 
the same D code. Thus there could be a financial incentive for valid 
RINs verified under one option to be used to replace invalid RINs 
verified under the other option, and this could lead to unforeseen 
market imbalances. Nevertheless, we request comment on whether valid 
RINs verified under one option should be permitted to replace invalid 
RINs verified under the other option.
    We do not believe that valid RINs generated under the existing 
regulations (i.e. not under the proposed quality assurance program) 
should be permitted to replace an invalid verified RIN. The replacement 
of invalid RINs with valid RINs is an approach that we have designed in 
the context of the quality assurance program to allow verified RINs 
that are found to be invalid to continue to be transferred and used for 
compliance. We do not believe it would be appropriate to replace a RIN 
that had been verified through the quality assurance program with one 
that has not been verified. We request comment on this approach.
b. Impacts of RIN Replacement on Renewable Fuel Demand
    The purpose of requiring invalid RINs to be replaced is to ensure 
that the annual renewable fuel volume mandates provided in CAA 
211(o)(2) are fulfilled. However, the process of identifying invalid 
RINs and replacing them could potentially unfold over months or even 
years. This process could result in some portion of a given year's 
applicable volume requirement being fulfilled in a subsequent year, as 
replacement RINs may not be generated in the same year that the invalid 
RINs were generated. Thus there is a possibility that RIN replacement 
could cause greater demand for renewable fuel in a given year than the 
applicable standards are intended to require for that year. While we 
expect the number of invalidly generated RINs to be considerably less 
under our proposed quality assurance program than they were in 2010 and 
2011, nevertheless we believe that this issue should be addressed.
    While the RFS program is designed to result in the use of specified 
volumes of renewable fuel within each calendar year, the current 
regulations include provisions that allow the volumes used in a given 
year to be more or less than the specified volume. For instance, the 
RIN rollover cap at Sec.  80.1427(a)(5) allows up to 20% of a given 
year's volume requirement to be met with previous-year RINs. 
Effectively, this means that the demand for renewable fuel in a given 
year can be up to 20% below the volumes required. In addition, the 
deficit carryover provision at Sec.  80.1427(b) allows an obligated 
party to delay compliance with any portion of his RVOs by one year. 
Although an obligated party cannot carry over a deficit for two years 
in a row, the fact that there is no limit to the size of deficit 
carryovers means that in theory there could be substantial differences 
between the volumes required in a given year and the actual demand for 
renewable fuel in that year. In addition, the applicable percentage 
standard set by EPA is based on projections of gasoline and diesel 
production, and to the extent the actual production varies from these 
projections, the actual volume of renewable fuel may be more or less 
than the national volume called for in section 211(o)(2). Finally, 
under the current regulations, the future replacement of RINs may occur 
in the context of an enforcement action related to the transfer or use 
of invalid RINs. This replacement obligation under the proposed 
regulations has a similar effect as far as timing of RIN replacement, 
recognizing that under the proposal there should be many fewer invalid 
RINs generated, and therefore much less need for future RIN 
replacement.
    Consistent with the effect of these various provisions, we believe 
it would also be appropriate to permit an invalid verified RIN to be 
replaced outside of the year in which it was generated. In the case of 
RIN replacement using valid RINs from a RIN escrow account or RIN bank, 
valid RINs are set aside before invalid RINs are generated and 
discovered. The small increase in demand for renewable fuel caused by 
setting aside these valid RINs would occur before RIN replacement, not 
after, and they would accrue at the same rate that RINs are being 
generated and verified. We believe that these features of RIN escrow 
accounts and RIN banks

[[Page 12180]]

would mitigate the impacts of RIN replacement on the renewable fuel 
market, and thus the use of future year RINs to replace invalid RINs 
generated in the past would be very unlikely to create a difficulty in 
meeting the volume mandates in a given year.
4. Cap on RIN Replacement
    Another mechanism we are proposing to reduce the costs associated 
with the Option A quality assurance program is a cap on RIN 
replacement. Such a cap would help to ensure that QAP Option A could be 
implemented at a reasonable cost, and thus help to achieve the overall 
goals of this proposal. We are proposing that the cap would not apply 
to invalid RIN replacement for the nation as a whole, but rather to 
individual auditors that would be required to replace invalid RINs. 
However, since its primary benefit would be to reduce the costs of a 
RIN replacement mechanism that an auditor would be required to hold, we 
are proposing that the cap would apply only to auditors under QAP 
Option A, since auditors under QAP Option B would not be required to 
hold a RIN replacement mechanism. The cap would apply to all RINs that 
the auditor validates through an Option A QAP within a calendar year, 
and would apply separately to RINs of each D code.
    The level of the cap reflects a balance between the need to ensure 
that the volume mandates of the RFS program are met and providing 
auditors with reasonable assurance that the costs of replacing invalid 
RINs will not be excessive. We believe that the incidences of invalidly 
generated RINs would be significantly lower for RINs verified under an 
Option A QAP than they were over the previous few years. Since we are 
proposing that the required RIN replacement mechanism should provide 
coverage for 2% of each D code of A-RINs verified by an auditor in the 
current year and (up to) the previous four years (see Section IV.B 
above), we likewise believe it would be appropriate to cap the number 
of A-RINs that each auditor must replace at 2% of the A-RINs it has 
verified in the same period. In other words, the RIN replacement cap 
should be equal to the minimum replacement coverage required for Option 
A auditors. As stated above, we believe that this cap would ensure that 
most if not all of invalidly generated A-RINs would be replaced and 
would provide assurance that the costs of a RIN replacement mechanism 
would not be excessive.
    We are proposing that the cap apply to all A-RINs that have been 
verified by an auditor to date, up to a maximum of the most recent five 
year's worth of verified RINs. The table below provides an example for 
how the cap would be applied. (This table assumes the 2% cap continues 
into the second phase of the program, i.e. in 2016 and beyond, though 
as discussed above, we are proposing that the cap may change in 2016.)

                  Table IV.D.5-1--Example of Application of RIN Replacement Cap Under Option A
----------------------------------------------------------------------------------------------------------------
                                                                                               Maximum number of
                                                                                                A-RINs that the
                                                          A-RINs verified         2% cap        auditor would be
                                                           by the auditor                       responsible for
                                                                                                   replacing
----------------------------------------------------------------------------------------------------------------
2013...................................................         50,000,000          1,000,000          1,000,000
2014...................................................         30,000,000            600,000          1,600,000
2015...................................................         35,000,000            700,000          2,300,000
2016...................................................         40,000,000            800,000          3,100,000
2017...................................................         60,000,000          1,200,000          4,300,000
----------------------------------------------------------------------------------------------------------------

    In 2018, the auditor's responsibility for replacing any 2013 RINs 
would expire and be replaced by its responsibility for 2018 RINs. 
Therefore, assuming a relatively static number of A-RINs verified each 
year and a static replacement cap, the auditor's replacement 
responsibility would plateau in year six of its auditing activities.
    Finally, we are proposing that the 2% cap on A-RIN replacement 
would not apply to invalid RINs that were erroneously verified based on 
negligence, error, or omission of the auditor, including any failure by 
the auditor to properly implement its QAP. This issue is discussed 
further in Section VI.A.3.

V. Provisions for RIN Verification Under Option B

    As described in Section IV, the voluntary quality assurance program 
we are proposing today would include two compliance options that would 
be available to regulated parties. Both options would be intended to 
provide a more efficient mechanism for ensuring that RINs are validly 
generated, and both options would provide an affirmative defense 
against civil violations for certain actions involving invalid RINs. 
However, the two options would differ in whether invalidly generated 
RINs could be used for compliance, and in which party would be 
responsible for replacing invalidly generated RINs.
    In this section we describe our proposed requirements for Option B. 
Under this option, obligated parties would be responsible for replacing 
RINs that were invalidly generated, as under the current regulations. 
Also, obligated parties would not be permitted to use an invalidly 
generated RIN for compliance unless the generator of the invalid RIN 
replaced it. However, since obligated parties are more likely to 
conduct their own oversight to verify that the RINs they acquire are 
valid, we are proposing that the requirements for QAPs used to verify 
RINs would be less rigorous than those under Option A. Moreover, we 
would not require third-party auditors who verify RINs as having been 
validly generated to replace RINs that are invalidly generated. For 
clarity, we refer to RINs that have been verified through Option B as 
B-RINs.
    In this section we first cover the proposed elements of QAPs for 
Option B. We then describe how regulated parties could assert an 
affirmative defense for transferring invalidly generated RINs or using 
them for compliance. Finally, we discuss the treatment of invalidly 
generated RINs, from the responsibilities of owners of such RINs to the 
parties that would be required to replace them.

A. Requirements for Option B Quality Assurance Plans

    As described more fully in Section IV.A, QAPs would be used to 
verify that the production of renewable fuel at a given facility meets 
all EPA requirements and that corresponding RINs are validly generated. 
In general,

[[Page 12181]]

QAPs under Option B would operate in the same way that QAPs under 
Option A would operate. The primary difference would be the frequency 
of monitoring of the required QAP elements. Specifically, we propose 
that there would be no requirement for ongoing monitoring under Option 
B, rather, all elements of an Option B QAP would be evaluated on a 
quarterly basis. In addition, there are fewer required elements under 
an Option B QAP compared to an Option A QAP.
1. Elements of an Option B QAP
    Option B QAPs would be used by EPA-approved independent third-party 
auditors to audit renewable fuel production. The QAP would have to 
include a list of elements that the auditor would check to verify that 
the RINs generated by a renewable fuel producer or importer are 
appropriate given the feedstock, production process and fuel for which 
RINs were generated. Therefore, each QAP must identify the specific 
RIN-generating pathway from Table 1 to Sec.  80.1426 or a petition 
granted pursuant to Sec.  80.1416 that it is designed to audit. The 
proposed required elements of an Option B QAP are discussed below. We 
request comment on these proposed elements, including detailed 
descriptions of any elements not mentioned below.
    We also request comment on whether quarterly monitoring is 
appropriate under Option B, or whether different components could or 
should be subject to different schedules (e.g., monthly, biannually, 
etc), and what those schedules should be, and why.
a. Feedstock-Related Components
    We propose eight required elements in Option B QAPs designed to 
ensure that the feedstocks used in the production of renewable fuel 
qualify to generate RINs. First, for each batch of renewable fuel, we 
propose that the QAP should verify that feedstocks meet the definition 
of ``renewable biomass,'' and identify which renewable biomass per 
Sec.  80.1401.
    We are also proposing specific elements depending on the type of 
feedstock. For instance, if the feedstock is separated yard waste, 
separated food waste, or separated MSW, the QAP would be required to 
verify that a separation plan has been submitted and accepted or 
approved, as applicable, as part of the registration requirements under 
Sec.  80.1450, and meets the requirements of Sec.  80.1426(f)(5), and 
that all feedstocks being processed meet the requirements of the 
separation plan. If the renewable fuel producer claims that the 
feedstocks qualify under the aggregate compliance approach, the QAP 
would be required to verify that the feedstocks are planted crops or 
crop residue that meet the requirements of Sec.  80.1454(g).
    The QAP would be required to verify that the feedstocks used to 
produce renewable fuel are valid for the D code being claimed under 
Sec.  80.1426 (or have an approved petition under Sec.  80.1416) and 
must be consistent with the information reported in EMTS. The QAP would 
be required to verify that the feedstock used to produce renewable fuel 
is not a renewable fuel from which RINs were already generated.
    Finally, the QAP would be required to verify the accuracy of all 
feedstock-related factors used in calculation of the feedstock energy 
used under Sec.  80.1426(f)(3)(vi) or (f)(4), as applicable, including 
the average moisture content of the feedstock, in mass percent, and the 
energy content of the components of the feedstock that are converted to 
renewable fuel, in Btu/lb. The feedstock-related elements that we are 
proposing to require for QAPs under Option B are shown in the table 
below. All items would be required to be monitored on a quarterly 
basis.

 Table V.A.1.a-1--Option B: QAP Monitoring Frequency--Feedstock-Related
------------------------------------------------------------------------
                                                 Component
------------------------------------------------------------------------
1-1..............................  Feedstocks are renewable biomass.
1-2..............................  Separation plan for food or yard
                                    waste submitted and accepted.
1-3..............................  Separation plan for municipal solid
                                    waste submitted and approved.
1-4..............................  Feedstocks meet separation plan.
1-5..............................  Crop, crop residue feedstocks meet
                                    land use restrictions.
1-6..............................  Feedstock valid for D code,
                                    consistent with EMTS.
1-7..............................  Feedstock is not renewable fuel where
                                    RINs generated.
1-8..............................  Accuracy of feedstock energy
                                    calculation.
------------------------------------------------------------------------

b. Production Process-Related Components
    We are proposing four required elements in Option B QAPs designed 
to ensure that the renewable fuel production process is appropriate for 
the RINs being generated. Auditors submitting QAPs for EPA approval 
would be required to provide a list of specific steps they will take to 
audit all four elements.
    First, the QAP would be required to verify that production process 
technology and capacity used matches information reported in EMTS and 
in the facility's RFS2 registration. The QAP also would be required to 
verify that the production process is capable of producing, and is 
producing, renewable fuel of the type being claimed, i.e., is 
consistent with the D code being used as permitted under Table 1 to 
Sec.  80.1426 or a petition approved through Sec.  80.1416.
    For each batch of renewable fuel, the QAP would require mass and 
energy balances of the production process, and verify that the results 
match expectations for the type of facility being audited (e.g., 
biodiesel from soybean oil may have different expectations than 
biodiesel from non-food grade corn oil) based on typical values from 
prior input/output values, or similar facilities if prior values are 
not available. Energy inputs from on-site energy creation (e.g., 
propane, natural gas, coal, biodiesel, heating oil, diesel, gasoline, 
etc) and/or energy bills, and mass inputs/outputs such as feedstocks, 
additional chemicals, water, etc., would be required as part of the 
mass and energy balances.
    Finally, the QAP would be required to verify the accuracy of all 
process-related factors used in calculation of the feedstock energy 
(FE) under Sec.  80.1426(f)(3)(vi) or (f)(4), as applicable. The 
production process-related elements that we are proposing to require 
for QAPs under Option B are shown in the table below. All items would 
be required to be monitored on a quarterly basis.

Table V.A.1.b-1--Option B: QAP Monitoring Frequency--Production Process-
                                 Related
------------------------------------------------------------------------
                                                 Component
------------------------------------------------------------------------
2-1..............................  Production process consistent with
                                    EMTS.
2-2..............................  Production process consistent with D
                                    code.
2-3..............................  Mass and energy balances appropriate.
2-4..............................  Accuracy of process-related factors
                                    used in feedstock energy (FE)
                                    calculation.
------------------------------------------------------------------------

c. RIN Generation-Related Components
    We propose seven required elements in Option B QAPs designed to 
ensure that the renewable fuel being produced qualifies to generate 
RINs, and that the number of RINs generated is accurate.
    For each batch of renewable fuel, the QAP would be required to 
verify that volumes of renewable fuel for which RINs are being 
generated meet, are designated for, and are sold as transportation 
fuel, heating oil, and/or jet fuel as defined in Sec.  80.1401.

[[Page 12182]]

    The QAP would be required to verify a number of things related to 
the fuel type. For instance, the QAP would include verification of the 
existence of certificates of analysis demonstrating that the renewable 
fuel being produced meets the applicable specifications and/or 
definitions in Sec.  80.1401, and would be required to verify contracts 
with lab(s) for certificates of analysis, unless a facility has an on-
site laboratory. If on-site, the QAP would be required to verify lab 
procedures and test methods. The QAP would be required to verify that 
renewable fuel being produced at the facility and that can be produced, 
matches information in RFS2 registration in terms of chemical 
composition, and would be required to sample and test the final fuel 
and compare to specifications. The QAP would be required to verify that 
renewable fuel being produced matches the D code being claimed under 
Sec.  80.1426, or approved petition under Sec.  80.1416.
    The QAP would be required to verify a number of things related to 
the volume of renewable fuel produced, including a check to ensure that 
volume temperature correction procedures are followed correctly. The 
QAP would be required to verify that volume of renewable fuel produced 
matches expectations for the amount of feedstock being processed. The 
QAP also would be required to verify the accuracy of all fuel-related 
factors used in calculation of the feedstock energy, as applicable, 
including equivalence value for the batch of renewable fuel and the 
renewable fraction of the fuel as measured by a carbon-14 dating test 
method.
    The QAP would be required to verify that production volume being 
claimed matches storage and/or distribution capacity and that actual 
volume production capacity matches the value specified in the 
facility's RFS2 registration. Finally, the QAP must verify that 
appropriate RIN generation calculations are being followed under Sec.  
80.1426(f)(3), (4), or (5) as applicable, and that RIN generation was 
consistent with wet gallons produced. The RIN generation-related 
elements that we are proposing to require for QAPs under Option B are 
shown in the table below. All items would be required to be monitored 
on a quarterly basis.

  Table V.A.1.c-1--Option B: QAP Monitoring Frequency--RIN Generation-
                                 Related
------------------------------------------------------------------------
                                                 Component
------------------------------------------------------------------------
3-1..............................  Renewable fuel sold for qualifying
                                    uses.
3-2..............................  Certificates of analysis.
3-3..............................  Renewable fuel matches D code or
                                    petition.
3-4..............................  Renewable content R is accurate.
3-5..............................  Equivalence value EV is accurate,
                                    appropriate.
3-6..............................  Volume production capacity is
                                    consistent with registration.
3-7..............................  RIN generation calculations.
------------------------------------------------------------------------

d. RIN Separation-Related Components
    We propose three required elements in Option B QAPs to verify RIN 
separation. First, under the limited circumstances where a renewable 
fuel producer or importer separates RINs, the QAP would be required to 
verify that any RIN separation being done by the producer is done 
according to the requirements of Sec.  80.1429, was reported to EMTS 
accurately and in a timely manner, and is supported by records. The QAP 
would be required to ensure that fuel that is exported was not used to 
generate RINs, or alternatively that RINs were generated but retired. 
Finally, the QAP must verify the accuracy of the annual attestation.
    The RIN separation-related elements that we are proposing to 
require for QAPs under Option B are shown in the table below. All items 
would be required to be monitored on a quarterly basis.

  Table V.A.1.d-1--Option B: QAP Monitoring Frequency--RIN Separation-
                                 Related
------------------------------------------------------------------------
                                                 Component
------------------------------------------------------------------------
4-1..............................  Verify RIN separation.
4-2..............................  Exported fuel not used to generate
                                    RINs.
4-3..............................  Verify accuracy of annual
                                    attestation.
------------------------------------------------------------------------

2. Approval and Use of QAPs
a. Approval of Quality Assurance Plan
    We propose that approval of QAPs under Option B would operate in 
essentially the same way as under Option A, i.e., a third-party auditor 
choosing to verify RINs under the quality assurance program must submit 
a QAP to EPA for approval. A separate QAP is required for each 
different feedstock/production process/fuel type combination (i.e., 
pathway). A QAP for a given pathway may be used for multiple facilities 
for which that pathway applies. We are also proposing that a QAP must 
be submitted for approval every year. A QAP would be deemed valid on 
the date EPA notifies the party that submitted the QAP that it has been 
approved. Only an EPA-approved QAP could be used by a third-party 
auditor to provide audit services to renewable fuel producers.
b. Frequency of Updates/Revisions to QAPs
    We are proposing that a QAP approval by EPA only applies to the 
plan that was submitted to EPA, and there are specific cases in which 
we believe a QAP should be modified and resubmitted for approval. We 
are proposing that a QAP would need to be revised if the renewable fuel 
producer makes a change in feedstock, production process, or fuel that 
is not covered by the QAP. Under even one of these conditions, the 
original plan submitted to EPA would no longer be applicable, and thus 
a new QAP would be required to be submitted and approved. We request 
comment on what changes would require a new QAP to be submitted for 
approval. Specifically, we request comment on whether a new QAP should 
be required to be submitted to EPA if the audited facility changes 
operations, feedstock, fuel type, etc.

B. RIN Replacement Mechanisms

    As outlined in Section IV, auditors operating under Option A must 
have a replacement mechanism sufficient to cover a minimum percentage 
of invalid RINs they verify. We are proposing that there would be no 
requirement for a replacement mechanism under Option B, though this 
does not preclude any regulated party from setting up such a mechanism 
voluntarily or contracting amongst themselves to ensure that the 
obligated party's potential replacement responsibility is accounted 
for.

C. Affirmative Defenses

    As discussed in Section IV.C, we believe that making an affirmative 
defense available against otherwise applicable civil liability arising 
from the transfer or use of invalid RINs would promote greater 
liquidity in the RIN market, especially the market for RINs generated 
by smaller producers.
    Under the proposed quality assurance program, there would be two 
types of verified RINs: Those verified through an Option A QAP by a 
third-party auditor who is required to replace invalidly generated 
RINs, and those verified through an Option B QAP by a third-party 
auditor who is not required to replace such RINs. The requirements for 
establishing an affirmative defense

[[Page 12183]]

under Option B are described below. As discussed under Option A, we are 
proposing that when a person seeks to establish an affirmative defense, 
they would submit a written report to EPA, along with any necessary 
supporting documentation, that would demonstrate how the elements were 
met. The written report would need to be submitted within 30 days of 
the person discovering the invalidity of the RIN. We welcome comment on 
the elements of the affirmative defense and the effects of establishing 
an affirmative defense.
    In the event that invalidly generated B-RINs are transferred or 
used, the person could establish an affirmative defense to the 
prohibited act of transferring or using the invalid B-RINs for 
compliance with an RVO if the following elements were proven by a 
preponderance of evidence:
    (1) The RINs in question were verified in accordance with an EPA-
approved Option B QAP as defined in EPA regulations;
    (2) The RIN owner did not know or have reason to know that the RINs 
were invalidly generated at the time of transfer or use for compliance, 
unless a remedial action had been implemented by the RIN generator;
    (3) The QAP provider or RIN owner informs the Agency within the 
next business day of discovering that the RINs in question were 
invalidly generated;
    (4) The RIN owner did not cause the invalidity;
    (5) The RIN owner did not have a financial interest in the company 
that generated the invalid RIN; and
    (6) If the RIN owner used the invalid RINs for compliance, the RIN 
owner adjusted its records, reports, and compliance calculations in 
which the invalid RIN was used as required by regulations, unless a 
remedial action by the RIN generator had been implemented.
    The affirmative defense requirements pertaining to B-RINs are the 
same as those for A-RINs, except for the element of knowledge, item 
(2), and for the element dealing with adjusting RVO calculations, item 
(6). Owners of verified B-RINs must not have known or had reason to 
know of the invalidity of the RIN at the time they either transferred a 
RIN or used a RIN for compliance purposes. This restrains the use of B-
RINs more than A-RINs. This is because under Option B, obligated 
parties are responsible for replacing any invalid RINs used for 
compliance purposes, notwithstanding an affirmative defense to 
liability for the civil violation arising from the transfer or use of 
invalid RINs. We do not believe it would be appropriate to allow an 
obligated party to use an invalid RIN for compliance with its RVO if it 
already knew of the invalidity and therefore knew that, even if it 
successfully avoided liability for a civil violation, it would still be 
liable for retiring valid RINs in the future to replace the invalid 
RINs. Similarly, we do not believe it would be appropriate to allow a 
RIN owner to transfer an invalid RIN to a third party if it knew that 
the third party could not retire the RIN for compliance with an RVO (or 
even that it would be possible to sell an invalid B-RIN, given that it 
had lost its value for compliance purposes). For these reasons, we 
propose that the owner of an invalid but verified B-RIN cannot assert 
an affirmative defense if it knows or has reason to know of its 
invalidity at the time it transfers or uses the RIN for compliance 
purposes. Such knowledge would subvert the purpose of the quality 
assurance program. In regard to item (6), we have chosen to have the 
affirmative defense for B-RINs contingent upon obligated parties taking 
the invalid B-RINs out of the system or demonstrating that the producer 
implemented a remedial action by retiring a replacement B-RIN. This 
would help the Agency efficiently ensure that the environmental goals 
of the RFS program are achieved by incentivizing obligated parties to 
make the system whole.

D. Treatment of Invalid B-RINs

    The treatment of invalid RINs would differ depending on the type of 
verified RIN that is chosen by the RIN owner. The treatment of invalid 
RINs verified under Option A is discussed in Section IV.D. This section 
describes the responsibilities of regulated parties that generate RINs 
or take ownership of RINs verified under Option B, but which are 
ultimately found to have been invalidly generated. We also describe the 
conditions under which invalid B-RINs must be replaced, by whom, and 
the mechanisms for doing so.
    Additionally, we reiterate that we are proposing an administrative 
process for replacement of invalid B- RINs that places initial 
responsibility to replace invalidly generated RINs on the RIN generator 
responsible for causing the invalidity. In the event the RIN generator 
does not replace the invalidly generated B-RINs according to the 
administrative process, the obligated party would be required to 
replace the invalid RINs if the RINs were verified under Option B or 
were unverified. Thus, for invalidly generated RINs verified by an 
Option B QAP and for unverified RINs, the obligated party who owns the 
RINs would bear the replacement responsibility. However, in the event 
that regulated parties fail to implement the administrative process for 
replacement of any RINs, the EPA could bring an enforcement action 
against any or all of the parties that were required to replace the 
invalid RINs. See Sec.  80.1474 of the proposed regulations for details 
of the administrative process for replacement of invalid RINs.
1. Responsibilities for Replacement of Invalid Verified B-RINs
    Under Option B, RINs would be verified by a third-party auditor 
using an EPA-approved QAP just as under Option A. However, under Option 
B the obligated parties would be responsible for replacing invalidly 
generated RINs if the RIN generator failed to do so under the 
administrative process for replacement of invalid RINs.
    Obligated parties that purchase B-RINs would not be subject to a 
civil violation if a B-RIN transferred or used for compliance purposes 
was later found to have been invalidly generated, if the elements of an 
affirmative defense were successfully asserted. See Section V.C. 
However, obligated parties would be responsible for replacing any 
invalidly generated B-RINs used for compliance purposes. Obligated 
parties would be free to contract with producers, independent third-
party auditors, or other parties, such as brokers, to limit their 
exposure for replacement of invalidly generated B-RINs. Obligated 
parties would not be permitted to transfer or use B-RINs they know or 
have reason to know have been invalidly generated. Any such transfer or 
use would be deemed a prohibited act, pursuant to Sec.  80.1460.
    Option B would provide flexibility for obligated parties, 
producers, and third-party auditors to minimize the cost of 
verification services for RINs they deem to be less risky. Obligated 
parties that want the protection of an affirmative defense but would 
rather contract on their own terms regarding replacement of invalidly 
generated RINs could find this option appealing, as it would be easier 
for them to find coverage for less risky RINs and/or to demand 
replacement assurance as a term of their purchase contract or audit 
service contract. Additionally, smaller producers could be drawn to 
this option because the cost to participate in the quality assurance 
program could be less under Option B due to the absence of a 
requirement for a RIN replacement mechanism and the less stringent 
audit requirements for an Option B QAP.
    However, as with Option A, Option B might not work for all parties 
in all

[[Page 12184]]

situations. Obligated parties could still view the potential risk of 
replacing invalidly generated B-RINs, even though they could be 
protected by contracts, as too high to purchase from smaller producers. 
Producers deemed more risky could therefore choose to use Option A QAP 
auditors. We seek and welcome comments on potential risk containment 
measures to alleviate obligated parties' potential concerns of 
purchasing from smaller producers
2. Invalid B-RIN Replacement
    As mentioned above and in Section IV.D, the proposed administrative 
process for replacement of invalid RINs places initial responsibility 
of replacement of invalid RINs on the RIN generator, regardless of who 
actually owns the invalid RINs at the time that the invalidity is 
discovered.
    If the RIN generator fails to replace invalidly generated B-RINs in 
the time frame established in the administrative process specified in 
the proposed regulation, the obligated party would be responsible for 
replacing the invalid B-RINs. In the event that regulated parties fail 
to implement the administrative process for replacement of any RINs, 
the EPA could bring an enforcement action against any or all of the 
parties that were required to replace the invalid RINs.
    The methods (fully detailed in the proposed regulations in Sec.  
80.1474) for replacing invalidly generated RINs under QAP Option B are 
outlined below. In general, and in contrast to Option A, potentially 
invalid RINs verified under Option B could not be transferred or used 
for compliance purposes.
    In the event that EPA or the independent third-party auditor 
alleges that a B-RIN was invalidly generated, the RIN would be a 
potentially invalid RIN or ``PIR''. The RIN generator would be required 
to take one of three possible corrective actions within 30 days of 
being notified of the PIR:
     Retire a valid B-RIN of the same D-type as the PIR, either 
by purchasing it or by generating a new valid RIN and separating it 
from the physical volume it represents;
     Retire the invalidly generated RIN (if still in the RIN 
generator's possession); or
     If the RIN generator believed the PIR was in fact valid, 
it would submit a written demonstration providing a basis for its claim 
of validity to either the third-party auditor or EPA, whoever 
identified the PIR. If the third-party auditor determined that the 
demonstration was sufficient, the RIN would not need to be replaced; 
however, EPA would reserve the right to make a determination regarding 
the validity of the RIN. If EPA determined that the demonstration was 
sufficient, the RIN would not need to be replaced. However, if the 
third-party auditor determined it was not sufficient and if the EPA 
confirmed that determination, or if EPA determined it was not 
sufficient, it would notify the RIN generator of that finding and again 
require the RIN generator to replace the PIR within 30 days.
    As discussed in section IV.D.2, producers would be permitted to 
separate RINs from volume they produced for the specific purpose of 
retiring a RIN to replace a PIR. Similarly, if the RIN generator 
retired a valid RIN to replace the PIR, the invalid RIN that it 
replaced could continue to be transferred or used for compliance by any 
party. However, if the RIN generator for any reason failed to replace 
the PIR, the obligated party would be notified of the failure and would 
be required to retire the invalid RIN within 60 days. If the PIR had 
already been used for compliance with its RVO, the obligated party 
would be required instead to correct its RVO by subtracting the number 
of PIRs from it. Unless and until the PIR was replaced, either by the 
RIN generator or the obligated party, it would remain a PIR and could 
not be transferred or used for compliance purposes.
3. Process for Replacing Invalid Verified RINs
    The process for replacing invalid RINs under Option B would in 
general be the same as under Option A. This includes the use of 
particular codes in EMTS for retiring replacement RINs, and a 
requirement that replacement RINs match the invalid RINs in terms of 
their D codes and type of verification under the quality assurance 
program (i.e. Option A or Option B). See the broader discussion under 
Section IV.D.3 regarding the general process for replacing invalid 
verified RINs.
    In Section IV.D.3.b we discussed the possibility under Option A 
that replacement RINs may not be generated in the same year that the 
invalid RINs were generated, and that such circumstances could result 
in a portion of a given year's applicable volume requirement being 
fulfilled in a subsequent year. Thus there is a possibility that RIN 
replacement could cause greater demand for renewable fuel in a given 
year than the applicable standards are intended to require for that 
year. This same situation could occur under Option B. However, we do 
not believe that this circumstance would create a problem for the 
renewable fuels market under our proposed program for the reasons 
discussed in Section IV. In addition, we are proposing a limited 
exemption to B-RIN replacement that would absolve obligated parties 
from replacing a small percentage of invalidly generated B-RINs. See 
Section V.D.4 below. The level of this limited exemption may be above 
the number of invalid B-RINs generated, given that our proposed quality 
assurance program is expected to reduce incidences of invalidly 
generated RINs. As such, the occasions in which invalid B-RINs must be 
replaced would be correspondingly smaller, or even non-existent.
4. Temporary Limited Exemption for Invalid RIN Replacement
    During the development of the proposed QAP process for today's 
NPRM, some regulated parties raised the possibility of a regulatory 
provision that would permit a small fraction of invalid RINs to not be 
replaced by parties downstream from the generator/producer. Given the 
perceived concerns about RINs generated by the smallest producers, such 
a limited exemption for invalid RIN replacement could help provide a 
means for those small producers to sell their RINs, particularly during 
the first two years while auditors are learning to implement QAPs. We 
believe that a provision for a temporary limited exemption for invalid 
RIN replacement may be appropriate, and we request comment on it. It is 
important to note that this would only apply to replacement by parties 
other than the producer. The issue is not whether some percentage of 
RINs should never have to be replaced, but instead what is the 
appropriate approach for replacement by parties other than the 
producer.
a. Determination of the Appropriate Exemption Level
    The number of invalid RINs that could be exempt from replacement 
should be a small fraction of the overall volume obligation. We believe 
that this fraction should be consistent with some measure of real-world 
uncertainty in whether the renewable fuel volume requirements will be 
precisely met. Since there are several potential sources of 
uncertainty, there are several different ways that an appropriate 
exemption level for invalid RIN replacement could be calculated.
    One source of uncertainty is the roundoff in the applicable 
percentage standards for cellulosic biofuel, biomass-based diesel, 
advanced biofuel, and total renewable fuel. In the RFS1 program that 
was finalized on May 1,

[[Page 12185]]

2007, we determined that the applicable percentage standards would be 
specified to two decimal places.\12\ As a result, the total number of 
RINs that are actually used to comply with the applicable standards may 
differ by up to 0.005% from the precise number of RINs that would be 
needed to exactly match the volume mandates. For example, the 
applicable 2012 standard for biomass-based diesel was set at 0.91% on 
January 9, 2012, corresponding to a volume requirement of 1.0 bill gal. 
Since this percentage standard was the result of rounding to two 
decimal places, the actual calculated value could have been as high as 
0.91499% and still round to 0.91%. Obligated party compliance with a 
standard of 0.91% instead of 0.91499% would mean that the actual volume 
of biodiesel consumed could be 0.9945 bill gal instead of 1.0 bill gal, 
a difference of 0.0055%. This same result can be obtained by dividing 
the maximum potential rounding error of 0.005% by the applicable 
percentage standard of 0.91%.
---------------------------------------------------------------------------

    \12\ Since the required volumes of cellulosic biofuel have been 
significantly less than the volumes specified in the statute, we 
have used three decimal places for the percentage standard for 
cellulosic biofuel.
---------------------------------------------------------------------------

    If we were to base the exemption for invalid RIN replacement on the 
roundoff error in the applicable percentage standards, the calculation 
would be carried out as follows:
[GRAPHIC] [TIFF OMITTED] TP21FE13.000

    Table V.D.4.a-1 provides the results if this formula were applied 
to the applicable 2012 standards.

Table V.D.4.a-1--Exemption for Invalid RIN Replacement Based on Roundoff
                      Error in Applicable Standards
------------------------------------------------------------------------
                                                             Exemption
                                              Applicable      for RIN
                                               standard     replacement
                                              (percent)      (percent)
------------------------------------------------------------------------
Cellulosic biofuel........................          0.006       \a\ 8.3
Biomass-based diesel......................          0.91            0.55
Advanced biofuel..........................          1.21            0.41
Total renewable fuel......................          9.23            0.05
------------------------------------------------------------------------
\a\ Based on a maximum potential roundoff error of 0.0005% instead of
  0.005%

    Another source of uncertainty in whether the required volumes of 
renewable fuel will actually be consumed is the difference between the 
projected volumes of gasoline and diesel that are used to calculate the 
applicable percentage standards, and the volumes of gasoline and diesel 
that are actually consumed. Using EIA's Short-Term Energy Outlook 
(STEO), we determined that projections of the sum of gasoline and 
diesel have typically exceeded the actual volumes by an average of 
1.7%.

Table V.D.4.a-2--Comparison of Projected Versus Actual Obligated Volumes
------------------------------------------------------------------------
                                    Projected      Actual     Difference
                                    (bill gal)   (bill gal)   (percent)
------------------------------------------------------------------------
2011.............................        196.9        193.1         -1.9
2010.............................        196.6        196.2         -0.2
2009.............................        200.1        193.7         -3.2
2008.............................        210.0        198.4         -5.5
2007.............................        208.4        206.8         -0.7
2006.............................        206.5        205.9         -0.3
2005 \a\.........................        204.0        203.7         -0.2
    Average......................  ...........  ...........         -1.7
------------------------------------------------------------------------
Source: EIA's Short Term Energy Outlook, Table 4a. Values represent the
  sum of motor gasoline and distillate fuel oil consumption. All
  projected volumes for a given year are from the October release in the
  previous year.
\a\ STEO for years prior to 2005 do not include projections.

Based on the formula used to calculate the applicable percentage 
standards, a shortfall of 1.7% in actual gasoline + diesel consumption 
volumes will produce a 1.7% shortfall in the volume of renewable fuel 
consumed. Since Congress established the mechanism for calculating the 
applicable standards, including the use of projected volumes, this 
shortfall represents an acceptable source of uncertainty in the RFS 
program. As such, it may also represent an acceptable level of 
uncertainty in the context of establishing a limited exemption for 
invalid RIN replacement by parties other than the renewable fuel 
producer.

    Based on our review of potential sources of uncertainty, it appears 
that differences between projected and actual gasoline and diesel 
volumes is the largest source of uncertainty. Using the historical 
differences shown in Table V.D.4.a-2, we propose that the limited 
exemption for invalid RIN replacement be set at 2%, approximating the 
1.7% value to account for the variability shown in Table V.D.4.a-2. 
However, we request comment on a different value based on one of the 
alternative methods described above.
b. How would the limited exemption be applied?
    A primary purpose of the overall proposal would be to address the 
market liquidity concerns discussed above,

[[Page 12186]]

largely focused on the ability of small producers to sell RINs. As 
described in Section IV, QAP Option A addresses this by providing a 
significant degree of oversight on RIN generation, and placing the 
replacement obligation on the QAP auditor, not the obligated party. As 
a result, we do not believe that it would be necessary for the limited 
exemption to apply under Option A, and we propose that the limited 
exemption would only apply under Option B. In addition, we propose that 
the limited exemption would be available only to obligated parties that 
are required to replace invalid RINs, not renewable fuel producers that 
are required to replace invalid RINs.
    Nevertheless, under Option A an auditor would be responsible for 
replacing invalidly generated RINs. If the limited exemption for RIN 
replacement was also available to the auditor, it might help reduce the 
costs associated with any RIN replacement mechanisms that auditors 
carry. We request comment on whether the limited exemption should also 
apply under Option A.
    While a limited exemption for RIN replacement could also apply 
under the existing regulations, where RINs are not verified by an EPA-
approved independent auditor, we do not believe that this would be 
appropriate. The voluntary QAP process that we are proposing in today's 
NPRM is an alternative to the existing regulatory provisions governing 
liability for the transfer or use of invalid RINs and their 
replacement. We are considering a limited exemption for RIN replacement 
only in this context, as a component of the voluntary QAP process and 
other measures aimed at achieving a regulatory structure that 
facilitates reasonable oversight of RIN generation, adequate assurance 
that invalid RINs will be replaced, and a market for RINs where the 
opportunity to produce and sell RINs is spread broadly across 
producers, including small producers.
    We propose that the limited exemption would apply separately to 
each of the four standards under the RFS program: cellulosic biofuel, 
biomass-based diesel, advanced biofuel, and total renewable fuel. We do 
not believe it would be appropriate to apply the limited exemption only 
to the total renewable fuel standard, since doing so would permit much 
more than 2% of invalid advanced biofuel RINs to not be replaced. For 
instance, in 2012 the required volume of advanced biofuel is 2.0 bill 
gal, while the total renewable fuel requirement is 15.2 bill gal. If 
the 2% limited exemption was applied only to the total renewable fuel 
requirement, allowing up to 258 mill invalid RINs to not be replaced, 
this would represent 13% of the advanced biofuel requirement if all the 
invalid RINs were advanced biofuel RINs. It would represent an even 
larger fraction of biomass-based diesel.
    We also propose that the limited exemption would apply separately 
to each obligated party that is responsible for replacing invalid RINs 
rather than to the industry as a whole. For instance, an obligated 
party would apply the 2% limited exemption to each of its four 
Renewable Volume Obligations (RVOs) to determine the number of RINs of 
each of the four types that would not need to be replaced should they 
be found to be invalidly generated. This approach would ensure that 
each obligated party can estimate at the beginning of each year how 
many RINs would not need to be replaced should they be determined to be 
invalid, and moreover would allow him to adjust his RIN acquisition 
activities in real-time to address risk based on the number of invalid 
RINs he had already acquired. If instead we applied the limited 
exemption to the nationwide volumes, we do not believe it would have 
the intended effect of reducing perceived risk for obligated parties 
considering acquiring RINs from smaller renewable fuel producers. So 
long as the total nationwide number of invalid RINs fell below 2%, no 
obligated party would be required to replace invalid RINs. However, 
each individual obligated party would never know if any RINs he 
acquires would be protected from replacement should they be determined 
to be invalid. Moreover, this approach would create an inherent 
imbalance among obligated parties holding invalid RINs since it could 
potentially allow one party to avoid replacing a large number of 
invalid RINs while effectively forcing another party to replace all of 
its invalid RINs.
    We propose that the limited exemption would represent the threshold 
below which invalid RINs would not be required to be replaced rather 
than a trigger that determines when all invalid RINs must be replaced. 
Under our proposed threshold approach, an obligated party would know at 
the beginning of each year that 2% of the RINs needed to meet each of 
his RVOs would not need to be replaced if those RINs were B-RINs and 
were determined to be invalidly generated. The limited exemptions would 
be calculated as follows:

LECB,i = 0.02 x RVOCB,i
LEBBD,i = 0.02 x RVOBBD,i
LEAB,i = 0.02 x RVOAB,i
LERF,i = 0.02 x RVORF,i

Where:

LECB,i = Limited exemption for cellulosic biofuel for 
year i
LEBBD,i = Limited exemption for biomass-based diesel for 
year i
LEAB,i = Limited exemption for advanced biofuel for year 
i
LERF,i = Limited exemption for renewable for year i
RVOCB,i = The Renewable Volume Obligation for cellulosic 
biofuel for the obligated party for calendar year i, in gallons, 
pursuant to Sec.  80.1407.
RVOBBD,i = The Renewable Volume Obligation for biomass-
based diesel for the obligated party for calendar year i after 2010, 
in gallons, pursuant to Sec.  80.1407.
RVOAB,i = The Renewable Volume Obligation for advanced 
biofuel for the obligated party for calendar year i, in gallons, 
pursuant to Sec.  80.1407.
RVORF,i = The Renewable Volume Obligation for renewable 
fuel for the obligated party for calendar year i, in gallons, 
pursuant to Sec.  80.1407.

Under this threshold approach, the number of B-RINs than an obligated 
party would be required to replace would be those in excess of the 
applicable limited exemption LE as calculated above. Under an 
alternative trigger approach, an obligated party would not be required 
to replace any invalid RINs so long as the number of invalid RINs it 
owns falls below 2% of his RVOs. However, if at any time within a 
calendar year the number of invalid RINs it owns exceeded 2% of his 
RVOs, it would be required to replace all of them. We do not believe 
that this alternative would have the intended effect of reducing 
perceived risk for obligated parties considering acquiring RINs from 
smaller renewable fuel producers.

    Finally, we propose that the limited exemption would be applicable 
only during the first two years of the quality assurance program, for 
RINs verified under Option B in calendar years 2013 and 2014. During 
this timeframe, we expect regulated parties to be working to optimize 
implementation of the quality assurance program, and it may not be 
possible for all of the smallest renewable fuel producers to 
participate under QAP Option A. The limited exemption can help to 
ensure that the RIN market is more liquid as the program starts up, as 
obligated parties would be less concerned about potential invalidity 
for B-RINs. But as the program matures, we believe that there will be 
much less need for a limited exemption since small renewable fuel 
producers will have greater opportunities to have their RINs verified 
under Option A. Moreover, obligated parties will gain experience in the 
first

[[Page 12187]]

two years of the program with Option B, and we would expect their 
confidence in the validity of B-RINs to grow over this timeframe as 
well. We request comment on this approach and whether it should apply 
for a period longer than two years.

VI. Proposed Requirements for Auditors

    Today, we are proposing a number of requirements for the 
independent third-party auditors that would use approved quality 
assurance plans (QAPs) to audit renewable fuel production to verify 
that RINs were validly generated by the producer. Qualified, 
independent third-party auditors would be integral to the successful 
implementation of the combination of provisions EPA is proposing. Under 
both options, third-party auditors would need to meet minimum 
qualifications (e.g. independence and professional competency 
requirements). All third-party auditors would be required to register 
with EPA, similar to how other parties (e.g. gasoline refiners, 
renewable fuel producers, etc.) register for other EPA fuels programs. 
We are also proposing to require that third-party auditors under both 
options have professional liability errors and omissions insurance (E&O 
Insurance). However, under Option A, third-party auditors would also be 
required to have an approved RIN replacement mechanism since, as 
discussed in Section IV.B, they would be responsible to replace RINs 
that become invalid for any reason after being verified by the auditor. 
During registration, third-party auditors would submit QAPs to EPA for 
approval, demonstrate that they meet minimum qualifications, and 
provide the Agency with other information as discussed below. After EPA 
has approved a QAP and registered the third-party auditor, we propose 
that the auditor could flag RINs in EMTS as verified. This would 
provide parties throughout the renewable fuel distribution chain the 
confidence that a RIN has been validly generated and that an 
affirmative defense may be established. Finally, in order to ensure 
that QAPs are appropriately implemented, we are also proposing 
recordkeeping, reporting, and attest engagement requirements on third-
party auditors consistent with similar requirements on other parties in 
RFS.

A. Who can be an auditor?

    One key element of the QAP process is the minimum qualifications 
that the auditors conducting facility visits must have. Today we are 
proposing minimum qualifications for an auditor in order to implement a 
QAP and verify RINs. First, as is required of independent third-parties 
that conduct engineering reviews for renewable fuel producers under 
RFS, auditors would be required to be independent of the renewable fuel 
producers that they are auditing. Second, auditors would be required to 
have the professional expertise to effectively implement QAPs. Third, 
under Option A, third-party auditors would be required to also have an 
approved RIN replacement mechanism, as discussed in Section IV above to 
assure replacement of invalid RINs generated from facilities that an 
auditor has audited, as well as E&O insurance. EPA believes that these 
key qualifications would provide assurances that auditors could 
successfully implement QAPs and would help avoid the generation of 
invalid RINs at the fuel producer level. We seek comment on whether any 
additional minimum qualifications would be necessary for auditors to 
successfully implement QAPs or aid in the generation of invalid RINs at 
facilities.
1. Independence
    The first, and perhaps the most important, requirement for auditors 
is that they remain independent of renewable fuel producers. 
Independence of the auditor from upstream parties is necessary to 
ensure that RINs are not inappropriately validated due to a conflict of 
interest between the third-party auditor and the renewable fuel 
producer. For example, if auditors were employed by the renewable fuel 
producers to validate RINs produced from a facility owned by the 
producer, the auditor would have an incentive to ensure that RINs 
produced from that facility appeared valid, while the RINs may in fact 
be invalid. In the RFS2 final rule, we defined an independent third-
party as a party that was not operated by the renewable fuel producer 
(or any subsidiary or employee of the producer) and free from any 
interest in the renewable fuel producer's business. Similar provisions 
have also appeared in RFS1 and other fuels programs when a third-party 
is required to independently test fuel samples, audit reporting and 
recordkeeping requirements, and/or conduct in-use compliance surveys. 
Thus, we are proposing the same independent third-party definition for 
third-party auditors that we used in RFS2 for an independent third-
party to conduct engineering reviews. Additionally, we are proposing 
that independent third-party auditors submit an affidavit attesting to 
their independence as part of registration (discussed below).
    Although the proposed requirement for independence is limited to 
renewable fuel producers, it could be extended to include independence 
from other parties as well. However, we believe this is unnecessary. 
This proposed rulemaking is not intended to discourage any current 
efforts that an obligated party or other intermediary may take to 
ensure compliance with RFS requirements, and requiring that third-party 
auditors be independent of all parties may hamper existing efforts by 
industry to mitigate invalid RIN generation. However, some parties may 
have a conflict of interest with third-party auditors that might 
promote the improper validation of RINs. For example, a third-party 
auditor could also be acting on behalf of a RIN-owner, which may be an 
incentive to validate RINs fraudulently to sell to other parties. 
Therefore, we specifically seek comment over whether we should expand 
the proposed definition of independence to include other parties.
    We also recognize that a conflict of interest may exist if the 
independent third-party implementing a QAP for a renewable fuel 
production facility was the same party that conducted the facility's 
engineering review required under Sec.  80.1450(b)(2), since the 
auditor would essentially be verifying its own assessment of a 
facility. Similar reasoning could apply to the independent third-
parties that do attest engagements. However, we recognize that, 
especially in the beginning, there may be a limited number of qualified 
independent-third party auditors capable of implementing QAPs for a 
facility if we do not allow independent third-parties that conducted 
engineering reviews or attest engagements to also implement QAPs for a 
given facility. Therefore, we specifically seek comment on whether we 
should exclude a third-party that has conducted an engineering review 
or attest engagement for a facility from implementing a QAP for that 
same facility. We also seek comment on whether any other situations 
present a conflict of interest for independent third-party auditors 
that may disqualify a third-party from being able to implement a QAP 
for a facility.
2. Professionally Qualified To Implement a QAP
    Another key element to ensure the effective implementation of QAPs 
at renewable fuel production facilities would be that auditors have the 
necessary professional expertise and credentials. In RFS2, we require 
that each renewable fuel production facility undergo an engineering 
review by a

[[Page 12188]]

licensed professional engineer as part of registration. In this NPRM, 
we are proposing a similar requirement for auditors since the 
verification of production capabilities of a quality assurance program 
should be similar to the type of review conducted in the engineering 
review process for RFS registration. Independent third-party auditors 
would demonstrate that they possess the required professional expertise 
during registration. We are not proposing that companies that register 
as a third-party auditor be solely constituted of professional 
engineers to implement an EPA-approved QAP and conduct facility audits; 
however, a licensed professional engineer would need to supervise and 
or work in a team with other employees of the third-party auditing 
company.
    However, since the complexity of QAP implementation may vary 
substantially based on size and scope of the QAP and whether RINs are 
verified under Option A or Option B, independent third-parties that 
conduct audits may need to demonstrate additional professional 
qualifications to EPA before they can be registered to implement QAPs. 
For example, periodic (e.g. quarterly) audits may include careful 
review of several months' worth of invoices and other bookkeeping 
records for a facility, and this type of audit may be more suitable to 
a certified public accountant (CPA) than a professional engineer. 
Additionally, we require that all responsible parties in RFS undergo 
annual attest engagements conducted by a licensed certified public 
accountant (CPA) or certified internal auditor (CIA) to verify similar 
information. Although we are not proposing that independent third-
parties that implement QAPs demonstrate that CPAs conduct audits, we 
are seeking comments over whether third-parties must have any 
additional qualifications (e.g. minimum years of experience, 
professional licensing in states where audited facilities are located, 
etc.) before we register them as auditors under the proposed quality 
assurance program.
    Another potential qualification, suggested by a party that may 
conduct third-party facility audits, could be that an independent 
third-party auditor has sufficient knowledge of the RFS program in 
order to conduct audits and potentially validate RINs. Although we 
believe that third-party auditors should have thorough knowledge of RFS 
requirements to implement QAPs, it would be difficult to construct a 
standard to measure a third-party auditors ``competency.'' It was 
suggested by a party that may conduct third-party facility audits that 
we require elements of various ISO validation standards such as, for 
example, ISO standards used for validation of international greenhouse 
gas programs. We believe that these standards could serve as a useful 
template in the development of similar voluntary consensus standard 
board (e.g. ISO and ASTM International) specifications for third-party 
auditors. However, we also believe that standards such as these are 
best developed through the existing collaborative processes that draw 
upon the expertise of affected stakeholders. It is also important to 
note that several independent third-parties have developed sufficient 
expertise with RFS to provide useful validation services to obligated 
parties, and we believe that there exist adequate incentives for 
parties to ensure that third-party auditors understand the RFS program 
sufficiently to prepare and implement QAPs. Therefore, we are not 
proposing to create such a requirement for auditors, but we do seek 
comment on whether the Agency should be responsible for the development 
of a similarly detailed professional competency standard to validate 
RINs.
3. Errors and Omissions Insurance
    An additional element to ensure the effective implementation of 
QAPs at renewable fuel production facilities would be to require 
independent third-party auditors to maintain professional liability 
insurance, commonly known as Errors and Omissions or E&O insurance. We 
are proposing this as a registration requirement for both QAP Option A 
and Option B. The amount of insurance should be, at a minimum, equal to 
2% of the RINs the auditor verifies in a year to cover the replacement 
of any RINs verified by an auditor that turn out to be invalid as a 
result of auditor error, omission, or negligence. Additionally, we are 
proposing that independent third-party auditors would be required to 
use insurance providers that possess a financial strength rating in the 
top four categories from either Standard & Poor's or Moody's (i.e., 
AAA, AA, A or BBB for Standard & Poor's and Aaa, Aa, A, or Baa for 
Moody's). We feel that requiring E&O insurance would help to achieve 
the level of professionalism necessary for the quality assurance 
program to work as intended. Possession of E&O insurance would lend 
business and financial credibility to a potential QAP auditor in the 
eyes of their customers, as well as provide a level of comfort for the 
Agency that the statutory volume mandate would be met in the event of 
error, omission, or negligence on the part of a QAP auditor.
    Since E&O insurance policies are intended to provide coverage for 
any failings on the part of the auditor, we do not believe that the 2% 
cap on RIN replacement proposed for Option A should apply to RIN 
replacement that is covered by an E&O insurance policy. Thus we are 
proposing that the 2% cap on RIN replacement would only apply to 
invalidly generated RINs that the auditor is responsible for replacing, 
but which are not the result of errors, omissions, or negligence on the 
part of the auditor as defined in the E&O policy.
    We seek comment on (1) Whether the requirement of E&O insurance 
would fulfill the goals discussed above, (2) whether the requirement 
would prevent some third-party auditors from being able to participate 
in the quality assurance program, and (3) what, if any, minimum amount 
of coverage should be required and what that minimum amount should be 
based on.

B. Registration Requirements

    In order to implement and enforce the new quality assurance program 
that we are proposing today, we believe that third-party auditors must 
become regulated parties under the RFS program. We believe that it 
would be necessary to impose registration, recordkeeping, and reporting 
requirements on third-party auditors to ensure that appropriate QAPs 
are executed according to the requirements specified in the proposed 
regulations. This would allow EPA and affected parties to monitor and 
have confidence that third-party auditors are implementing QAPs 
appropriately.
    One necessary requirement for third-party auditors would be that 
they have to register with EPA as a regulated party through the 
Agency's Central Data Exchange (CDX). We already require that obligated 
parties, renewable fuel producers, and RIN owners register with EPA, 
and that those parties provide us with production information, basic 
company information, and in the case of renewable fuel producers, 
third-party engineering reviews. Requiring third-party auditors to 
register would allow EPA to determine that the basic minimum 
requirements discussed in Section VI.A. are met. Registering auditors 
would also facilitate the process of allowing third-party auditors to 
indentify RINs as having been verified in EMTS so other parties may 
recognize RINs as having been verified under an EPA-approved QAP.
    During registration, we propose that third-party auditors would 
need to

[[Page 12189]]

provide basic contact information as well as their basic corporate 
structure. This information is useful both as contact information and 
to help the Agency determine whether a third-party auditor is a 
legitimate legal entity. Third-party auditors would be required to 
indicate which facilities they intend to audit. EPA recognizes that a 
third-party auditor may contract with additional renewable fuel 
producers and facilities to implement QAPs after initial registration, 
and therefore, we are also requiring that a third-party auditor be 
required to update their registration each time they wish to verify 
RINs for additional renewable fuel producers or new facilities. This 
information would help the Agency ensure that QAPs submitted to the EPA 
as part of the registration process are consistent with the type of 
renewable fuel facilities being audited.
    Since we are proposing a requirement that third-party auditors 
implementing QAPs under both Options A and B have E&O insurance (see 
Section VI.A.3), third-party auditors would be required to provide 
copies of any applicable E&O insurance policies during the registration 
process. If a third-party auditor is implementing a QAP under Option A, 
they would need to also provide EPA with copies of pertinent documents 
and other evidence that demonstrate they have an adequate replacement 
mechanism in place. This information is necessary to ensure that third-
party auditors have the ability to cover their RIN replacement 
responsibilities. Third-party auditors would also be expected to 
provide EPA with copies of professional certifications (see Section 
VI.A.2) and a signed affidavit that states that the third-party auditor 
is independent of and free from any conflicts of interest with any 
renewable fuel producer that for which they intend on verifying RINs.
    Third-party auditors would also be required to provide QAPs for 
Agency approval during registration, and EPA would be required to 
approve a QAP before a third-party auditor could be registered and use 
a QAP for a facility audit. EPA believes that it would be inappropriate 
to register a third-party auditor without an appropriate QAP. QAP 
details are discussed in more detail in Sections IV.A and V.A for 
Options A and B, respectively.
    Recognizing that foreign third-party auditors may have unique 
challenges compared with domestic third-party auditors, EPA is 
proposing additional registration requirements for foreign third-party 
auditors. In the final RFS2 rulemaking, we outlined a number of 
requirements that applied to foreign RIN owners (see 40 CFR 80.1467). 
These additional requirements are designed to ensure enforcement of RFS 
regulations at the foreign RIN owner's place of business and are 
similar to requirements for foreign parties under other fuels 
regulations. For example, under RFS, foreign RIN owners must submit 
reports in English and provide translated documents in English upon 
demand from EPA inspectors or auditors, must submit themselves to 
administrative and judicial enforcement powers and provisions of the 
United States without limitation based on sovereign immunity, and post 
a bond covering a portion of the gallon-RINs that a foreign RIN owner 
owns. EPA is proposing the same requirements be extended to foreign 
third-party auditors and seeks comment over whether fewer or additional 
requirements would be necessary.
    The effectiveness of this proposed rule is contingent on the 
integrity of the third-party auditors and their ability to competently 
implement approved QAPs. The registration process is designed to help 
ensure that QAPs are implemented by competent, qualified and 
independent third-party auditors. A third-party auditor may only verify 
RINs under a voluntary quality assurance program if the auditor is 
registered with EPA. In order to ensure that auditors fulfill their 
regulatory obligations, we propose that each auditor would renew its 
registration on an annual basis. The renewed registration submissions 
would include updates to information required for initial registration 
and an affidavit by the auditor that it is in full compliance with 
applicable QAP regulations. The affidavit would include a specific 
certified statement that the third-party auditor (1) Has only verified 
RINs that it reviewed under an EPA-approved QAP, (2) has informed EPA 
and RIN generators about all potentially invalid RINs that it 
discovered, and (3) has fulfilled its RIN replacement obligation if 
applicable. Third-party auditors that fail to accurately and completely 
renew their registrations will no longer be registered and therefore 
can no longer implement QAPs and verify RINs. We also propose that we 
may revoke a third-party auditor's registration at any time if it 
determines that the third-party auditor has failed to meet its 
regulatory requirements. Furthermore, we are proposing that we can deny 
a registration application from any third-party auditor that employs 
any person that was involved in the verification of RINs for a third-
party auditor whose registration was revoked. We seek comment on 
whether this approach is appropriate.
    We also seek comment on whether we should require that third-party 
auditors' registration information, including QAPs, be made publicly 
available. We believe that there is a positive correlation between the 
effectiveness of a quality assurance program and the amount of 
transparency in the third-party auditor's registration and QAP 
implementation processes. By making registration information publicly 
available, it would allow other parties to evaluate whether they have 
confidence in a QAP conducted by a third-party auditor. This would also 
allow affected stakeholders to notify EPA of concerns or deficiencies 
in a third-party auditor's registration or QAP. Some third-party 
auditors may argue that such information is confidential business 
information. To address this concern, EPA could allow third-party 
auditors to submit both confidential and public versions of 
registration documents to ensure that sensitive information is 
protected.

C. Other Responsibilities of Auditors

1. Notifying the Agency When There Are Problems
    We believe that an important element of today's proposed quality 
assurance program is the timely notification and correction of problems 
that are identified during the facility audit process, and a 
requirement to communicate potential problems that are uncovered 
through this process. Historically, in other EPA fuels programs, such 
as the RFG, ULSD, and E15 Survey Programs, we require that the 
independent party that implements the program report potential 
violations of standards within 24 hours of identifying the potentially 
non-compliant fuel sample. This has allowed the Agency to work with 
responsible parties to correct potential issues in a timely manner, 
thereby reducing the potential environmental impact of the non-
compliant fuel. We believe that the utility of this third-party 
notification would enhance the effectiveness of today's proposed 
quality assurance program. Therefore, we are proposing requirements 
that third-party auditors would be required to notify EPA and the 
renewable fuel producer of potential problems, including but not 
necessarily limited to fraud, errors, and/or omissions, within 24 hours 
after a problem has been identified. We seek comment on whether EPA 
should allow third-party auditors more or less time to report potential 
issues that arise during

[[Page 12190]]

audits of renewable fuel production facilities.
2. Indentifying Verified RINs in EMTS
    The primary goal of today's proposed quality assurance program is 
to allow downstream parties to feel confident that RINs are being 
appropriately generated at renewable fuel production facilities. Third-
party auditors have an integral role in providing this assurance by 
verifying that facilities are in fact producing the type and quantity 
of renewable fuels from the appropriate feedstocks using specified 
pathways, and that the associated RINs have been validly generated. The 
next step would be for third-party auditors to identify RINs as having 
been verified so that downstream parties would know which RINs had been 
subjected to review by an auditor and thus can be the basis for an 
affirmative defense. To attain this goal, we are proposing requirements 
that third-party auditors would be responsible for tagging RINs as 
having been ``verified'' in a way that would be clearly visible in EMTS 
after they have been generated.
    We propose that verifying a RIN in EMTS be prospective, meaning 
that a RIN could only be verified after an auditor has audited a 
facility in accordance with an approved QAP and met other conditions 
discussed below. Apart from the verification of RINs during the interim 
period between release of the NPRM and the final rule, we do not 
believe that there are any benefits from allowing verification of RINs 
retroactively in EMTS that warrant the complication, confusion, and 
risks associated with it.
    We also believe that before a QAP can be implemented by a third-
party auditor, a relationship must be established in CDX between the 
third-party auditor and the renewable fuel producer or importer. This 
process would occur during the initial registration of a third-party 
auditor and after any updates to a third-party auditor's registration. 
This procedure would be necessary to ensure that both the third-party 
auditor and the renewable fuel producer or importer have agreed to 
establish a quality assurance program under a proposed affirmative 
defense option. Also as discussed in Section IV.B, EPA may not 
recognize this relationship unless the third-party auditor satisfies 
applicable replacement mechanism requirements. Hence, we propose that 
renewable fuel producers would have to acknowledge through an update of 
their registration that a third-party auditor will implement a QAP and 
verify RINs at the renewable fuel producer's facility.
    Third-party auditors should also have the ability to stop 
verification of newly generated RINs should a problem arise during the 
QAP implementation process. Since third-party auditors would be in the 
best position to identify potentially invalid RINs before EPA and other 
parties, allowing third-party auditors this flexibility is necessary to 
ensure that problems with invalid RINs are quickly identified and 
corrected. Additionally, since under Option A and potentially as a 
contractual matter Option B, a third-party auditor may have some 
liability to replace RINs, they should have the ability to limit their 
liability should they notice through the implementation of a QAP that 
RINs may be invalid. However, if a third-party auditor removes the 
``flag'' for a facility that is generating RINs, this will not affect a 
previously verified RIN's ability to be used for compliance if it has 
been generated prior to the third-party auditor choosing to no longer 
validate a facility's RINs. Since one of the goals of today's proposed 
quality assurance program would be to mitigate the transaction and use 
of invalid RINs for compliance purposes, we are proposing that third-
party auditors under both options be required to remove the validation 
flag for RINs generated at a facility until problems are rectified and 
confidence is restored to both the third-party and EPA that newly 
generated RINs are valid.
    As mentioned above, one key requirement for the effective 
implementation of a QAP by a third-party party auditor would be that 
the third-party auditor must be free from conflicts of interest with 
renewable fuel producers that are being audited. However, some existing 
third-party auditors currently act as agents for renewable fuel 
producers by not only verifying that RINs are appropriately generated 
at renewable fuel producer's facilities, but by also handling a 
renewable fuel producer's reporting activities in EMTS (e.g. they 
submit reports to generate RINs in EMTS for renewable fuel volumes 
produced at a facility owned/operated by the renewable fuel producer). 
This may present a conflict of interest since those third-party 
auditors have a contractual relationship to act on behalf of the 
renewable fuel producer. On the other hand, since third-party auditors 
are going to be responsible for verifying all RINs generated at a 
facility in EMTS, they may be able to serve as an agent for a renewable 
fuel producer in this capacity without an apparent conflict of 
interest. We seek comment on whether we should allow third-party 
auditors to act as agents in the generation of RINs for renewable fuel 
producers. We also seek comment on any element of today's proposal to 
require third-party auditors to validate RINs in EMTS.
    Finally, as pointed out elsewhere, Option A RINs may have more 
value in the marketplace than Option B RINs. We seek comment on 
mechanisms that the market will employ to differentiate such RINs 
across the supply chain and how EPA may facilitate such transfers in 
the context of EMTS.
3. Recordkeeping, Reporting, and Attest Engagements
a. Recordkeeping Requirements
    Under both options, we propose third-party auditors would be 
required to implement EPA-approved QAPs and maintain records of all 
verification and validation activities related to the implementation of 
a quality assurance program. These records would serve to demonstrate 
that a QAP was appropriately implemented if invalid RINs are reported 
at a later date.
b. Reporting Requirements
    Under the existing RFS program, obligated parties, exporters of 
renewable fuel, producers and importers of renewable fuels, and any 
party who owns RINs must report appropriate information to EPA on a 
regular (e.g. quarterly and/or annual) basis. Similarly, we are 
proposing that the third-party auditors would be required to submit 
quarterly reports, in line with existing RFS quarterly reporting 
deadlines, identifying how many RINs the auditor has verified the 
previous quarter. We are also proposing that independent third-party 
auditors would have to include the facilities audited and the dates of 
those audits. This information would allow EPA to compare a third-party 
auditor's reported activity to information gleaned from EMTS to ensure 
that third-party auditors are appropriately implementing QAPs.
    If a third-party auditor were to implement a QAP under Option A, 
then he would be required to also report the size of the replacement 
mechanism he has obtained to cover their potential RIN replacement 
liability. We believe that these reports would help the Agency ensure 
that third-party auditors are maintaining an appropriate replacement 
mechanism to replace invalid RINs relative to the number of RINs 
verified by the third-party auditor. For example, renewable production 
facilities sometimes increase production levels, which may increase the 
size of the RIN

[[Page 12191]]

replacement mechanism a third-party auditor would need to have.
    We recognize that some may see this as providing the same 
information twice since we are proposing to require that independent 
third-party auditors identify facilities they intend to audit and 
provide proof of an appropriate replacement mechanism during 
registration. However, we believe that quarterly reports indicating 
where and when audits occurred and the size of the appropriate RIN 
replacement mechanism relative to the number of RINs validated by 
third-party auditors would provide a useful compliance tool to better 
ensure that third-party auditors are effectively implementing QAPs 
since failure to fulfill reporting requirements may constitute a 
violation to the Clean Air Act and may subject the responsible party to 
the penalties discussed below. We seek comment on whether we should 
require quarterly reports from third-party auditors, or more/less 
frequent reporting, and whether we should require third-party auditors 
to report additional information on a regular basis.
c. Attest Engagements
    We seek comment on whether to require that third-party auditors 
have an annual attest engagement similar to those required of other 
parties currently required under Sec.  80.1464. Attest engagements are 
used in many of the Agency's fuels programs and are similar to 
financial audits. Attest engagements consist of an independent, 
professional review of compliance records and reports. During 
discussions with stakeholders, some suggested that we establish an 
``audit the auditor'' program. We believe that attest engagements may 
be an appropriate means of verifying the accuracy of the information 
reported to us by the third-party auditors. Similar to current RFS 
requirements, the attest engagement could consist of an outside 
certified CPA or certified independent auditor following agreed upon 
procedures to determine whether underlying records, reported items, and 
transactions agree, and issuing a report as to their findings and that 
attest engagements occur annually. These requirements would be similar 
to those we require of other parties in RFS.
d. Prohibited Activities for Third-Party Auditors
    We are proposing new prohibition and liability provisions 
applicable to third-party auditors. Since we are creating a new 
regulated party that will be integral to the successful implementation 
of voluntary quality assurance programs, we believe it is appropriate 
to hold these parties liable if they fail to comply with the proposed 
requirements. The prohibition and liability provisions would be similar 
to those of other fuels programs. We propose to identify certain 
prohibited acts, such as failing to properly implement an EPA-approved 
QAP; failing to timely notify RIN generators and EPA of potentially 
invalid RINs; failing to replace invalid RINs, if applicable; and 
verifying RINs that are invalid.
    In addition, a third party auditor who is subject to an affirmative 
requirement under this proposal will be liable for a failure to comply 
with the requirement. For example, third-party auditors will be liable 
for separate violations for failing to comply with the registration, 
reporting and recordkeeping requirements. Like other fuels programs, we 
propose that if the third party auditor causes another person to 
violate a prohibition or fail to comply with a requirement, the third 
party auditor may be found liable for the violation.
    The penalty and injunction provisions in section 211(d) of the 
Clean Air Act apply to violations of the renewable fuels regulations 
implemented pursuant to section 211(o). Accordingly, under the proposed 
rule, any person who violates any proposed prohibition or requirement 
may be subject to civil penalties of $37,500 for every day of each such 
violation and for the amount of economic benefit or savings resulting 
from the violation.
    We request comment on the need for any additional prohibition and 
liability provisions specific for third-party auditors.

VII. Proposed Requirements for Audits

    Under the proposed quality assurance program, an auditor would use 
an approved QAP as the basis for the verification of renewable fuel 
produced and RINs generated at a facility. In order to verify 
production, the auditor must review documents, monitor facility 
activity, contact entities that do business with the facility, and 
conduct onsite visits. All of these components constitute an audit of 
the facility. The elements of a QAP are discussed in some detail in 
sections IV and V. The following provides some additional detail on the 
proposed elements of an audit. As with other provisions of the RFS 
program, the proposed use of a QAP and the associated audit would also 
be available to foreign producers of renewable fuel. We request comment 
on specific aspects of the proposed program with respect to foreign 
producers, and specifically request comment on possible additional 
program elements that may only be applicable to foreign producers.

A. Document Review and Monitoring

    The auditor should ensure that the producer has and is fulfilling 
the EPA record-keeping requirements at Sec.  80.1454(c)(1)(i)(A)-(B) 
and (ii). We expect the auditor to evaluate reports submitted to EPA, 
and propose that these be reports year-to-date, as applicable, and from 
the previous year, for comparison. These include Activity Reports, RIN 
transaction reports, RIN generation reports, and Renewable Fuel 
producer Co-product reports. The third-party engineering review and 
annual attestation report should also be reviewed.
    Reports submitted to EPA should be cross-checked with other 
records. For instance, the auditor should have access to certificates 
of analysis. The auditor must check recent feedstock receipts (if the 
producer uses a variety of feedstocks, then the auditor should be 
provided with receipts for each feedstock). Integrated facilities may 
not have internal sales receipts for feedstock usage, so an alternative 
paper trail will likely be required. Similar to the feedstock document 
review and crosscheck, renewable fuel and co-product delivery 
documentation should be part of any audit.
    For all documentation reviews, we would expect the auditor to 
analyze reports to determine whether a producer is reporting volumes 
consistently, and to require (from the producer) explanation for 
missing or inaccurate reports. The auditor should investigate 
discrepancies between volumes reported and processed. Other reports the 
auditor should consider as part of its review include the EIA M22 
Survey, any state reports, federal and state tax returns, and 
association dues reports. The auditor should also determine if there is 
any import or foreign biofuel producer documentation.
    Of prime concern to the proposed quality assurance program is the 
verification of RINs, and there are many aspects to this part of the 
audit. The auditor should evaluate monthly RIN generation reports 
submitted through the EMTS, verify that RINs generated match wet 
gallons sold, determine if the facility purchases or separates RINs, 
and review product transfer documents for all RIN activity. We propose 
that this review encompass random samples of documentation; however, 
based on the documentation provided by the producer, the auditor could 
decide to review all documentation. Furthermore, and in order to ensure 
that renewable

[[Page 12192]]

fuel producers will maintain their records in a manner that will allow 
third party auditors and the EPA to efficiently evaluate whether RINs 
were properly generated, we are also proposing to change Sec.  80.1426 
to state that RINs may only be generated for fuel that is demonstrated 
pursuant to the reporting requirements of Sec.  80.1451, the 
recordkeeping requirements of Sec.  80.1454, or in other records 
maintained by the producer, to be produced in accordance with the 
applicable pathway listed in Table 1 to Sec.  80.1426(f) or a petition 
approved by EPA pursuant to Sec.  80.1416.
    Finally, for those components of the audit that we propose to 
require ongoing, or batch-level monitoring, the QAP would be required 
to provide details of the means for collection and evaluation of the 
data collected on an ongoing basis.
    We request comment on whether and how the document review and 
monitoring discussed here should be more detailed (and/or include 
different details) for facilities subject to an Option A QAP than for 
those subject to an Option B QAP.

B. Buyer/Seller Contacts

    At the end of an audit, the auditor should know all customers of 
and suppliers to the facility, and all parties that distribute 
feedstock to and fuel from the facility. We expect the auditor to 
contact the customers and suppliers in order to verify sales and 
purchases, in accordance with the requirements under the applicable QAP 
(i.e., Option A or Option B). We envision this proposed requirement as 
a ``spot check''; the auditor should be able to provide a reason for 
such calls regarding the entity called, questions asked, etc. We 
request comment on whether and how the audit requirements for Buyer and 
Seller contacts should differ between facilities subject to an Option A 
QAP than for those subject to an Option B QAP.

C. Onsite Visits

    The goal of the onsite visit is to verify that plant has the 
technology to produce, store, and blend biofuels at registered levels, 
is operating in accordance with the facility's registration, and that 
the RINs generated since the last visit are valid. The auditor will 
likely use plant maps and photos as part of this analysis, and should 
compare and contrast the plant's infrastructure with the third-party 
engineering review reports on file with EPA. The auditor should note 
the size and number of storage and blending tanks, and observe the 
measurement of volume in the tanks. The auditor should determine 
whether the process rate is consistent with annual and quarterly 
production of the facility, and whether the facility has quality 
process controls in place (e.g., are ASTM International specifications 
being followed where appropriate).
    We believe that mass and energy balances on the facility are 
critical components of any audit. Because integrated facilities will 
likely have energy usage that is not directly related to biofuel 
production, the auditor should have alternate means of assessing and 
correlating energy usage to production.
    The proposed requirements for onsite visits are the same for Option 
A QAP and Option B QAPs. We are proposing that an auditor conduct at 
least four (4) onsite visits per year, or every three (3) months. We 
request comment on this proposed onsite visit frequency. In addition, 
we request comment on whether, over time, less frequent audits would be 
reasonable under an Option B QAP. We are proposing that new production 
facilities should be audited before verification of RINs.
    We expect that each visit could take from one to several days, 
depending on the size and complexity of the facility, the availability 
of records, changes since the last audit, etc. The proposed required 
visits are the minimum. There may be value in visiting more often. It 
is possible that there may be some value to requiring unannounced 
visits as well, and we request comment on the value and impact that 
such unannounced site visits would have on the effectiveness of the 
program and its associated costs.

D. RIN Verification

    We are proposing that RINs would be verified only for a specified 
period following an audit. Although an audit of any entity usually 
certifies what was done, the audits we are proposing are prospective in 
that the audits are verifying that past practices and procedures have 
been followed, and are currently in place for future RINs that will be 
generated. RINs generated after the completion of the audit could then 
be verified until the next audit is completed, but for no longer than 
100 days after completion of the audit. We believe this prospective 
approach is appropriate for the proposed quality assurance program 
because the audit would be verifying the starting point from which 
future RINs would be generated. In that sense, the upcoming period of 
RIN generation is starting with a verified set of conditions. In 
addition, it could place a serious impediment in the market for RINs if 
their verification followed RIN generation by any significant period of 
time.
    To allow for some flexibility around the proposed standard audit 
schedule (i.e., quarterly, or roughly every 90 days), we are proposing 
that RINs generated for up to 100 days after the last audit could be 
verified, unless the real time monitoring data or other information 
obtained by the QAP auditor prior to the onsite audit indicates that 
RINs are invalid. If another audit was not conducted within 100 days, 
RINs could no longer be verified for that facility until a new audit 
was conducted. We request comment on this coverage period.
    If a verified RIN was invalidly generated, it would indicate that 
the QAP that had been used to verify that RIN was deficient in some 
aspect. We request comment on whether, in the event of discovery of 
invalid RINs, a more frequent onsite visit schedule should be required. 
We are not inclined to require such an outcome at this point because 
one of the purposes of the quality assurance programs is to proactively 
identify invalidly-generated RINs. In addition, it is highly 
anticipated that there will also be situations where no invalid RINs 
have been generated for an extended period of time for a given 
facility. Under this scenario, less frequent onsite visits may be 
warranted. We request comment on whether lower audit frequency levels 
should be allowed after a significant period of time with no invalidly 
generated RINS, and suggestions as to appropriate reduced onsite visit 
frequencies.

VIII. Additional Changes Related to the Definition and Treatment of 
Invalid RINs

A. Export and Exporter Provisions

    In this action, we propose to address the following issues 
regarding the export of renewable fuels: Exporter RVO requirements, 
identification of renewable fuel content for all fuel transfers, and 
retirement of RINs at the time of export. The Agency is proposing to 
address these issues primarily because the export of renewable fuel, 
particularly ethanol and biodiesel, has become more prevalent in the 
transportation fuel market. These proposed changes address how RINs 
should be handled when renewable fuel is exported. In addition, it will 
provide EPA with the data needed to track renewable fuel exports. The 
intent is to ensure that exported renewable fuel is not included in 
meeting the mandated domestic annual renewable fuel volume requirement.

[[Page 12193]]

1. Exporter RVO
    Any volume of renewable fuel which is exported, either neat or 
blended, requires calculation of an export RVO. In this rule, we are 
making minor changes to the regulations to address concerns that some 
regulated parties may be misinterpreting the regulations and only 
establishing an RVO for exported renewable fuel that is ``in its neat 
form or blended with gasoline or diesel.'' The opening clause of 40 CFR 
80.1430(a) clearly provides that an RVO must be satisfied by any party 
that ``owns any amount of renewable fuel'' that is exported, and 40 CFR 
80.1430(f) also states that ``each exporter of renewable fuel'' must 
satisfy an RVO. The portion of 80.1430(a) that provides that the 
regulation applies ``whether [the exported renewable fuel] is in its 
neat form or blended with gasoline or diesel'' was intended to make the 
point, through specific examples, that the regulation applies to both 
neat renewable fuels and renewable fuel blends that are exported. Thus, 
the reference to ``gasoline or diesel'' blends is illustrative, and 
does not exclude other exported renewable fuel blends, such as 
biodiesel blended into fuel oils, from the scope of the regulation. We 
are proposing changes to 40 CFR 80.1430(a) to remove the references to 
examples of fuel blended with ``gasoline and diesel,'' and state in 
this section of the regulations that the requirement to establish an 
RVO applies whether the exported renewable fuel is in its neat form or 
blended.
    We seek comment on what additional amendments, if any, should be 
made to the export provisions at 80.1430, the recordkeeping 
requirements at 80.1454, and the reporting requirements at 80.1451, to 
ensure that exporter RVOs adequately make the RIN market whole for any 
exported biofuel for which RINs may have been generated. In particular 
EPA seeks comment on whether EPA should limit exporter RVO requirements 
in situations where exporters can document that either no RINs were 
ever generated for the exported fuel, or that any such RINs were 
previously retired.
2. Require Identification of Renewable Fuel Content
    As background, the Federal Trade Commission, as directed by EISA 
established labeling requirements for biofuel blends.\13\ EISA 
specifically addressed three categories of biodiesel fuel blends, 
requiring labels with precise wording for two. First, fuel blends 
containing no more than five percent biodiesel and no more than five 
percent biomass-based diesel, and that meet ASTM D975 (``Standard 
Specification for Diesel Fuel Oils''), need not be labeled. Second, 
fuel blends containing more than five but no more than twenty percent 
biomass-based diesel or biodiesel ``shall be labeled `contains biomass-
based diesel or biodiesel in quantities between five percent and 20 
percent.' '' EISA Sec. 205(b)(2) (emphasis added). Finally, blends 
containing more than 20 percent biodiesel or biomass-based diesel 
``shall be labeled `contains more than 20 percent biomass-based diesel 
or biodiesel.' '' EISA Sec. 205(b)(3) (emphasis added). As fuel blends 
containing no more than five percent biomass-based diesel are not 
required to be labeled, it is possible that some exporters may believe 
that the fuel they are exporting has a lower biofuel content than it 
actually does or they may be claiming that it's straight diesel fuel.
---------------------------------------------------------------------------

    \13\ Automotive Fuel Ratings, Certification and Posting Final 
Rule, 73 FR 40154, July 11, 2008.
---------------------------------------------------------------------------

    To better document and communicate the biodiesel content of any 
biofuel blend throughout the fuel supply chain (not just biofuel blends 
containing more than five percent biomass-based diesel), we propose to 
extend the existing product transfer document requirements at 40 CFR 
80.1453 to fuel blends such that any person that sells or otherwise 
transfers title to any biomass-based diesel blend or biodiesel blend to 
any other person for resale of the product shall prepare a product 
transfer document evidencing such transfer. Such product transfer 
documents may be in the form of an invoice, bill of lading, bill of 
sale or other written instrument meeting the requirements of this 
subsection. All such transfer documents shall include the name of the 
transferor, the name of the transferee, the date of transfer, the 
volume in gallons of the product transferred, and either the volume in 
gallons or percentage of biomass-based diesel or biodiesel that is 
contained in the blended product. Each person making such transfer 
shall maintain each transfer document required by this subsection for a 
period of four years from the transfer date.
3. RIN Retirement Requirements
    The current RFS regulations require exporters to demonstrate 
compliance with their exporter RVOs on an annual basis, by February 28 
of the year following the compliance year in question. 40 CFR 
80.1451(a). EPA is seeking comment on the period of time that should be 
allowed for retirement of RINs as a result of renewable fuel export, 
and whether the current deficit carry-over provision in 
80.1451(a)(1)(xii) should be eliminated for exporters. Given the 
volatility in the renewable fuel export market, a shorter time period 
may ease concerns for related uncertainty in the RIN market. This 
problem was anticipated, as stated in the final RFS2 Rule: ``However, 
we are aware of some exporters who sell RINs that they separate as a 
source of revenue, with the intention to purchase replacement RINs on 
the open RIN market later in the year to comply with their RVOs.'' This 
provision was included to allow flexibility for exporters. However, EPA 
is considering whether a change is required at this time to prevent 
instability and abuse.
    One approach under consideration would require exporters to clearly 
demonstrate on a quarterly basis that they have acquired RINs 
sufficient to cover volumes exported in the quarter. This shorter time 
frame would significantly reduce the window of opportunity for large 
exports of renewable fuel without exporters having obtained the RINs 
that must ultimately be retired. Alternatively, EPA could require the 
immediate retirement of RINs, at the time of export or within a limited 
window such as 30 days after export. This would prevent rolling 
deficits carried by exporters, and guard against unanticipated market 
changes, or even ``shell companies'' closing up shop in order to avoid 
the cost of meeting their export RVO. Eliminating the deficit carry-
forward provision as it applies to exporters would also further the 
same objectives. EPA solicits comment on these options.

B. ``Downstream'' Invalidation and Product Transfer Documents

    The definition of ``renewable fuel'' requires that the fuel be used 
to replace or reduce the quantity of fossil fuel present in 
transportation fuel, heating oil, or jet fuel. Several stakeholders 
have requested that the EPA amend the regulations to address concerns 
that properly generated RINs may become invalid as a result of the fuel 
not being used in or as transportation fuel, heating oil, or jet fuel 
``downstream'' of the renewable fuel producer or importer, that is 
after it has left the custody of the producer or importer. In response 
to these concerns, EPA is proposing amendments to clarify and expand on 
existing requirements regarding the designation of qualifying renewable 
fuel, and is also proposing new limitations on RIN generation for those 
types of renewable fuel that can be expected to be used in or as non-
qualifying fuel.

[[Page 12194]]

1. Designation of Intended Renewable Fuel Use
    The existing regulations at Sec.  80.1426(a) and (c) require 
renewable fuel producers and importers to generate RINs for fuel that: 
(1) Qualifies for a D code pursuant to Sec.  80.1426(f) or has been 
approved by a petition pursuant to Sec.  80.1416, and (2) is 
demonstrated to be produced from renewable biomass pursuant to the 
recordkeeping and reporting requirements in the regulations. However, 
Sec.  80.1426(c) also specifies that RINs may not be generated for fuel 
that is not designated or intended for use as transportation fuel, 
heating oil or jet fuel, i.e., for a ``non-qualifying fuel use''.
    We are proposing amendments to Sec.  80.1426(a) and (c), and 
conforming amendments to the product transfer document (PTD) 
regulations in Sec.  80.1453, to require all renewable fuel producers 
and importers to designate all RIN-generating renewable fuel as 
transportation fuel, heating oil or jet fuel on the PTDs that a 
renewable fuel producer or importer prepares to accompany a fuel 
shipment. These changes would standardize the existing ``designation'' 
requirement for RIN generators by specifying the location and content 
of the designations. The requirement to designate intended fuel uses in 
PTDs would operate as a constant reminder to renewable fuel producers 
and importers that RINs may only be generated for fuel intended for use 
as transportation fuel, heating oil or jet fuel, i.e., qualifying fuel 
uses, and would facilitate EPA enforcement of the designation 
requirement. The regulations would require that designations be made in 
good faith. Parties designating fuel for a qualifying fuel use who in 
fact knew that the fuel would likely be used in a fuel other than 
transportation or jet fuel or heating oil (a ``non-qualifying fuel 
use'') would be in violation of this proposed regulation, and subject 
to civil penalties.
    We are also proposing to include special conditions, in addition to 
the PTD requirements, related to the distribution and sale of any 
renewable fuel that is not typically sold for use in or as 
transportation fuel, jet fuel, or heating oil. We propose that these 
conditions would apply to all RIN-generating renewable fuels other than 
ethanol, biodiesel, and ``drop in'' renewable diesel. Biogas and 
renewable electricity would also be excluded from these conditions 
since sections 80.1426(f)(10) and (11) include specific conditions 
designed to ensure that these fuels are used in transportation fuel. 
These special conditions must be satisfied in order for RINs to be 
generated for those fuels. We are proposing to include these new 
requirements together with other conditions for RIN generation in 
Sec. Sec.  80.1426(a) and (c), and conforming amendments to the 
registration, reporting and recordkeeping sections.
    EPA believes that denatured ethanol, biodiesel that meets the ASTM 
6751 specifications and renewable diesel that meets the ASTM D 975 
Grade No. 1-D or No. 2-D specifications are highly likely to be used as 
transportation fuel, heating oil or jet fuel. Accordingly, to relieve 
burdens associated with identifying what we expect to be de minimis 
volumes of these fuels used for non-qualifying purposes, and to avoid 
the potential for downstream invalidation of RINs for such fuels and 
associated detrimental impacts that such potential may have on RIN 
markets, we are proposing that validly generated RINs for these fuels 
will remain valid regardless of the downstream use of the fuel. 
However, parties upstream from the ultimate consumer who re-designate 
any renewable fuel for which RINs were generated for a non-qualifying 
use would be subject to the proposed RIN retirement provisions in 
80.1433 that are discussed below. We seek comment on whether these 
fuels are highly likely to be used only as transportation fuel, heating 
oil or jet fuel, and on whether other biofuel types should be similarly 
recognized. We also seek comment on whether biodiesel and renewable 
fuel diesel producers who generate RINs should be required to sample 
and test their fuels to ensure that the fuel is appropriate for use as 
transportation fuel, and what specific sampling and testing 
requirements would be appropriate. For all other fuels, we think that 
it is appropriate to limit the opportunity for RIN generation to 
circumstances where the producer or importer has taken actions to 
ensure that the fuel is used for transportation fuel, heating oil or 
jet fuel. Where such actions are taken, we are proposing that RINs 
generated for qualifying renewable fuel will remain valid regardless of 
the final downstream use.
    While we are proposing that the special conditions related to 
renewable fuel that is not typically sold for use in or as 
transportation fuel, jet fuel, or heating oil would not apply to ``drop 
in'' renewable diesel, we also recognize that there is at least one 
circumstance in which renewable diesel may benefit from being subject 
to the same special conditions. Renewable diesel is a product that was 
originally introduced by companies attempting to create a ``drop-in'' 
transportation fuel made from renewable sources that met the same 
specifications as petroleum based transportation diesel. Some renewable 
fuel producers are currently generating RINs for fuel that they claim 
meets the exiting definition of renewable diesel, but which is not 
chemically equivalent to a petroleum diesel fuel under the renewable 
diesel definition. This product is primarily composed of triglycerides 
that have not been chemically converted to a hydrocarbon, and can be 
produced through simple filtration of vegetable oils with little 
processing equipment or effort. Further, this product cannot be used as 
a ``drop-in'' transportation fuel but instead can only be used at blend 
levels with diesel fuel that are approved under 40 CFR part 79, and 
moreover it is commonly used for non-qualifying fuel uses. To address 
these issues, we are proposing to clarify in the definition of ``non-
ester renewable diesel'' that qualifying products must be approved 
under 40 CFR part 79 at specific blend levels with diesel fuel. 
However, it may also be necessary to differentiate between the two 
types of renewable diesel (``drop in'' and triglycerides) so industry 
may easily determine which product and which RINs they are purchasing, 
and to allow EPA enforcement to differentiate between the two products 
upon inspection of a renewable fuel facility. We request comment on 
limiting the definition of non-ester renewable diesel, or renewable 
diesel, to fuel that meets the ASTM D 975 Grade No. 1-D or No. 2-D, and 
that are homogenous hydrocarbons. We could then refer to all other 
fuels that meet the current definition of renewable diesel as viscous 
non-ester renewable diesel, and they would be subject to the special 
conditions related to the distribution and sale of renewable fuel that 
is not typically sold for use in or as transportation fuel, heating oil 
or jet fuel. This approach would not remove anyone from the program and 
could give greater certainty to the industry.
    The new regulatory requirements are designed to ensure that these 
fuels are in fact used in or as transportation fuel, heating oil or jet 
fuel, and therefore that RINs are appropriately generated for these 
fuels. These requirements are necessary because these other renewable 
fuels are commonly used in non-qualifying fuels. For instance, butanol 
is a common chemical feedstock but can also be used in transportation 
fuel. The EPA believes that the only current allowable use for these 
other fuels (insofar as RINs are associated with them) would be as a 
blending

[[Page 12195]]

component or additive for gasoline or diesel fuels. We are proposing 
two options for generating valid RINs for these fuels. First, the 
renewable fuel producer or importer of these fuels may generate RINs if 
they maintain contemporaneous records demonstrating that they used the 
fuel as a blendstock or additive and that the final product is a 
transportation fuel, heating oil or jet fuel that met all applicable 
standards. Second, if the renewable fuel producer or importer does not 
use the fuel itself as a blendstock or additive for gasoline or diesel 
fuel, they may still generate RINs if they enter into a contract that 
requires the party who purchases the fuel to use it as a blendstock or 
additive for gasoline or diesel fuel, and that meets certain 
requirements designed to assure that the buyer does, in fact, use the 
fuel as a blendstock or additive in a transportation fuel, heating oil 
or jet fuel that meets all applicable standards.
    In order to verify that these fuels are produced for use as a 
transportation fuel, heating or jet fuel, EPA is proposing conforming 
registration, recordkeeping and reporting requirements. We are 
proposing that parties who generate RINs for the production of these 
renewable fuels will have to include information in their registration 
stating if they will be using the fuel as a blendstock or additive at 
their facility or if they will be selling the fuel to another party who 
will be using the fuel as a blendstock or additive. If the renewable 
fuel producer or importer will be using the fuel as a blendstock or 
additive, they will be required to describe their blending activities 
in their registration application. If the renewable fuel producer or 
importer will be selling the fuel to another party who will be using 
the fuel as a blendstock or the fuel was blended into a qualifying fuel 
downstream of the renewable fuel producer or importer, these parties 
will need to provide additional information to verify that the fuel 
was, in fact, blended for a qualifying fuel use. We solicit comment on 
how these new registration requirements should apply to currently-
registered entities. Options include requiring an immediate (within 30-
60 days) registration update, or allowing the new submissions to occur 
at the facilities' next 3-year registration update. We propose that 
renewable fuel producers or importers who contract with a downstream 
party to blend their product to make a qualifying renewable fuel be 
required to include affidavits in their reports from the downstream 
parties to verify that the fuel was used in or as a qualifying fuel. 
This concept is modeled after the existing regulations relating to RIN 
generation for biogas and renewable electricity, which require the use 
of downstream affidavits to verify proper use of the fuel. We also 
propose that any party who produces or blends these fuels will need to 
keep records relating to the blending activities to allow the QAP 
providers and the EPA to verify that RINs were properly generated. We 
seek comment on whether these requirements are appropriate for 
renewable fuels that are not highly likely to be used for qualifying 
RFS fuels or whether there are other mechanisms that could provide 
adequate assurance that these fuels are used for transportation fuel, 
heating oil or jet fuel.
2. Required Actions Regarding Fuel for Which RINs Have Been Generated 
That Is Used for a Non-Qualifying Fuel Use
    Section 80.1429(f) of the existing regulations provides that any 
person who uses or designates a renewable fuel for an application other 
than transportation fuel, heating oil or jet fuel (i.e., a non-
qualifying fuel use) must retire any RINs received with that renewable 
fuel. Section 80.1429(f) was intended to require the person using or 
designating RIN-generating fuel in or for a non-qualifying fuel use to 
retire the RINs received with the fuel so that they cannot be used for 
RFS compliance. This approach, however, places the burden of using fuel 
for a qualifying fuel use on the end user when the fuel has already 
been designated upstream as either a qualifying or non-qualifying fuel. 
In other words, once the fuel reaches the end user, it has already been 
designated as transportation fuel, heating oil or jet fuel, or has been 
redesignated for a non-qualifying fuel use. The end user has no part in 
the designation or redesignation of the fuel.
    In order to ensure that RINs generated with renewable fuels are 
retired if the fuel is redesignated for a non-qualifying fuel use, we 
propose to tighten the requirements for RIN retirement for any party 
that redesignates a renewable RIN-generating fuel for a non-qualifying 
fuel use, and to relieve end users of such an obligation. To accomplish 
this, we propose to remove and reserve paragraph 80.1429(f) of the 
regulations and to add a new section 80.1433 to require parties that 
designate fuel for which RINs were generated for a non-qualifying fuel 
use, i.e. for something other than transportation fuel, heating oil, or 
jet fuel, to retire an appropriate number and type of RINs. We believe 
that any person designating fuel for which RINs have been generated for 
a non-qualifying use should make the RIN system whole by retiring an 
equivalent number and type of RINs. This approach places the burden of 
ensuring an appropriate number of RINs are retired on a party in the 
fuel distribution business, rather than an end user. Such parties tend 
to have greater expertise in complying with regulatory requirements, 
and the potential number of parties potentially subject to these 
requirements is far reduced by placing the burden for RIN retirement 
upstream of end users. We further propose new subsection 80.1460(g) 
which would prohibit a person from designating a qualifying renewable 
fuel for which RINs were generated for a non-qualifying fuel use, 
unless the requirements of section 80.1433 have been met. The proposed 
amendments would require retirement of applicable RINs within a 10 day 
period.
3. RIN Generation for Fuel Made With Renewable Fuel Feedstock
    The existing regulations do not provide a pathway for any party to 
generate RINs for a fuel produced using another renewable fuel as a 
feedstock. Parties seeking to do so, however, may submit a petition 
requesting approval pursuant to Sec.  80.1416. 40 CFR 80.1426(c)(6)(ii) 
sets forth certain prohibitions that would apply if, in the future, EPA 
approved a pathway that allowed a party to generate RINs for a fuel 
that was produced using another renewable fuel as a feedstock. These 
prohibitions are designed to prevent parties from generating more than 
one RIN for the same volume of renewable fuel. For example, the 
production of ETBE uses ethanol as a feedstock, and RINs may have been 
previously generated if the ethanol used to make the ETBE was 
denatured. The ETBE producer in this example should not be allowed to 
generate RINs representing the full energy equivalence of the finished 
ETBE, if RINs were previously generated for the ethanol feedstock. In 
order to address this type of scenario, we are proposing to modify 
Sec.  80.1426(c)(6) to prohibit a party from generating new RINs for a 
fuel that is made from a feedstock that is a renewable fuel, where the 
feedstock that is a renewable fuel was produced by another party, 
unless EPA approves a petition under Sec.  80.1416 to allow for the 
generation of RINs for a fuel that was produced using another renewable 
fuel as a feedstock and the petition and approval include an 
enforceable mechanism to prevent double counting of RINs.
    We also propose to amend Sec.  80.1426(f)(4) to address the 
potential

[[Page 12196]]

for ``double discounting'' for non-renewable feedstocks when renewable 
fuel is produced by co-processing renewable biomass and non-renewable 
feedstocks to produce a fuel that is partially renewable. Specifically, 
we have discovered that the existing regulations may inadvertently 
cause the number of RINs generated to be discounted twice for the 
presence of non-renewable feedstocks. The first would be in the 
calculation of the equivalence value under Sec.  80.1415(c)(1), and the 
second would be in the calculation of the number of RINs generated 
under Sec.  80.1426(f)(4)(i). To correct this problem, we are proposing 
to add a new paragraph (f)(4)(iii) so that for purposes of Sec.  
80.1426(f)(4) only, the equivalence value does not include a discount 
for non-renewable feedstocks.
4. Use of Renewable Fuel in Ocean-Going Vessels
    Another issue the Agency is aware of concerns the use of renewable 
fuel-containing MVNRLM in ocean-going vessels. The definition of 
``transportation fuel'' specifically excludes ``fuel for use in ocean-
going vessels.'' 40 CFR 80.1401. In the preamble to the March 26, 2010 
RFS rule, the Agency stated that `` `for use in ocean-going vessels' 
means residual or distillate fuels other than Motor Vehicle Nonroad 
Locomotive and Marine (MVNRLM) intended to be used to power large 
ocean-going vessels.'' 75 FR 14670, 14721 (March 26, 2010). The rule 
also defines ``fuel for use in ocean going vessels'' as including ECA 
marine fuel. 40 CFR 80.1401. Some parties have questioned whether 
MVNRLM that is blended into ECA marine fuel is ``fuel for ocean going 
vessels'' such that RINs generated for the renewable fuel component of 
MVNRLM become invalid upon that use. It is the Agency's interpretation 
that the definition of ``fuel for use in an ocean-going vessel'' in 
Sec.  80.1401 does not include MVNRLM that is blended into ECA marine 
fuel. This is based on the definitions of fuel for use in an ocean-
going vessel and of ECA marine fuel, as explained in the March 2010 
rulemaking.\14\ Therefore, RINs that have been or are properly 
generated for any renewable fuel component of MVNRLM that is blended to 
produce ECA fuel remain valid. EPA notes that the vast majority of 
MVNRLM is used for qualifying RFS purposes, and that only a trivial 
quantity of such fuels is used to produce ECA fuel for ocean-going 
vessels. Given the complexity and regulatory burden that would be 
involved in tracking trivial quantities of MVNRLM that may be used in 
ECA fuel, the RFS regulations appropriately treat all properly 
generated RINS for renewable fuel blended into MVNRLM as valid, 
regardless of the possible downstream blending of MVNRLM with ECA fuel. 
In addition, under today's proposal, additional regulatory requirements 
designed to ensure that renewable fuel is put to a qualifying use would 
be imposed on certain types of renewable fuel, as discussed above. 
These new requirements would further limit the quantity of renewable 
fuel that could ultimately be blended with ECA fuel used in ocean going 
vessels.
---------------------------------------------------------------------------

    \14\ This does not change the fact that the blend of fuel that 
results from blending MVNRLM or NRLM with ECA marine fuel would 
still be ECA marine fuel and subject to the sulfur limits that apply 
to such fuel.
---------------------------------------------------------------------------

    We seek comment on whether our interpretation of ``fuel for use in 
an ocean-going vessel'' creates any potential problems.
5. Treatment of Improperly Separated RINs
    Section 80.1431(a)(1)(viii) currently provides that a RIN that was 
improperly separated pursuant to 80.1429 is invalid. Under section 
80.1460(c)(1), obligated parties may not use invalid RINs for 
compliance purposes. EPA proposes to remove 80.1431(a)(1)(viii) of the 
regulations, and to add section 80.1460(h), identifying the improper 
separation of RINs as a prohibited act. The net effect of these changes 
would be to allow obligated parties to use RINs that were improperly 
separated for compliance purposes, since the RINs would no longer be 
considered invalid. However, improper RIN separation would continue to 
be a prohibited act under the regulations.
    EPA seeks comment on whether the RFS regulations should instead 
maintain section 80.1431(a)(1)(viii), but also require a more 
comprehensive and robust mechanism to allow parties that acquire 
separated RINs and EPA to evaluate whether the RINs were properly 
separated and used in or for a qualifying fuel. The goal would be to 
make it easier for EPA and obligated parties to determine whether RINs 
are valid. These mechanisms could require a designate and track 
approach, with corresponding recordkeeping and reporting requirements, 
similar to the program set forth in the diesel sulfur regulations at 40 
CFR part 80, subpart I. In general, under Subpart I, each time custody 
of fuel is transferred from one facility to another, the transferor 
must designate the fuel and record its volume. The party who receives 
custody of the fuel must record the same information, to ensure that 
each party relies on the same designation and volume for its own 
compliance purposes. Maintaining proper PTDs, with proper designations, 
is also part of the diesel sulfur program's recordkeeping requirements. 
EPA seeks comment on whether the RFS regulations should establish 
similar designation and track requirements addressed at tracking and 
recording RIN separation events and end use of renewable fuels.
    Additionally, EPA requests comment on whether we should require RIN 
separators to include with their quarterly reports additional records 
related to qualifying separation events that are already required as 
part of the recordkeeping regulations. See Sec.  80.1454 for a 
description of the records that must be retained by parties. EPA 
believes requiring this information to be reported quarterly will allow 
EPA to review the information in a more timely way than in the existing 
structure, where EPA must request it from RIN separators on an ad hoc 
basis. Additionally, all parties who separate RINs must sign and 
certify that the information reported to EPA under the RFS program is 
true and accurate.
    Inaccurate, misleading, and/or false reports submitted to EPA may 
be used in a criminal prosecution against the submitter and other 
culpable persons. Enhanced reporting requirements for RIN separators 
would facilitate EPA's ability to investigate and prosecute persons who 
engage in RIN separation violations. EPA seeks comment on the type and 
scope of reporting that would most likely assist EPA in identifying RIN 
separation violators.

C. Treatment of Confidential Business Information

1. Overview
    In the March 26, 2010 RFS2 final rule, the EPA addressed a number 
of confidentiality concerns raised by comments to the rule proposed on 
May 26, 2009 (74 FR 24904). At the time, the Agency explained that 
renewable fuel producers would need to submit information to support 
their registration and report information to the Agency for 
implementation of the RFS program. The EPA also confirmed that we would 
treat any information submitted with a claim that it was confidential 
business information (``CBI'') as CBI in accordance with existing 
Agency regulations at 40 CFR part 2, subpart B. Information submitted 
to the Agency in compliance with the RFS2 regulations has been handled 
in that fashion. The EPA typically makes confidentiality determinations 
on a case-by-case basis. However, subsequent to the

[[Page 12197]]

implementation of the RFS program, we have received hundreds of 
requests for information; the need for case-by-case determinations has 
prevented timely release of non-CBI information.
    Due to the high level of interest in RFS compliance information, 
the EPA is considering approaches to increasing public access to 
information collected by the RFS program. At the same time, we want to 
ensure that we continue to properly process CBI claims and protect 
company's confidential information. The EPA is now proposing to make 
certain RFS registration and reporting information publicly available 
because we believe that greater transparency will work hand-in-hand 
with our QAP process to improve the integrity of information submitted 
for RFS compliance and deters fraudulent behavior. As discussed in more 
detail below, today's action provides affected businesses subject to 
Part 80, other stakeholders, and the general public an opportunity to 
comment on the proposal to publish RFS registration and reporting 
information that would be aggregated into monthly, quarterly, and 
annual reports. This action is part of a broader effort to increase 
transparency and provide information to the public that would promote 
greater liquidity in the RIN market in a way that assures reasonable 
oversight of RIN generation.
    Notably also, many interested parties--including renewable fuel 
producers--have asked the EPA to publish this information. Since 
implementation of the RFS program, the Agency has received numerous 
requests for this information. Not only are members of the public and 
interested stakeholders interested in reviewing this information, many 
parties to the RFS program are requesting that the Agency release this 
information in order to make the RFS program more transparent. The EPA 
is soliciting comments on whether, for any information in the format 
proposed for release, there are unique circumstances where disclosing 
this information would cause substantial harm to a company's 
competitive position.
2. Proposal To Disclose Aggregated RFS Registration Information
a. Approach
    The EPA is proposing to summarize and publish aggregated 
registration and QAP information required under 40 CFR 80.1450(b), (c), 
and (g) from independent third-party auditors and renewable fuel 
producers and importers that are registered with the RFS program. We 
propose to publish this information by facility and on a monthly basis. 
Each monthly report of registration information will disclose certain 
registration information for each producer, importer, and QAP. The 
monthly reports would be cumulative reports of all registrations 
accepted by the EPA; they would include existing registrations, new 
registrations, and registration updates. For each facility, we would 
publish the company name, facility name, facility type/fuel product, 
total permitted capacity, production volume, production process type, 
feedstocks, D-Code, and any co-products. This information would not 
reveal proprietary production processes. For example, the production 
process would be identified by the production process description used 
in Table 1 to 40 CFR part 1426, or for a production process approved 
through the Agency's pathway petition process, it would be identified 
by the name associated with that process in OTAQReg. An example of what 
information we intend to publish appears below:

                                                     Table VIII.C.2.a-1--Example Registration Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Total
        Company name           Facility name    Facility type    permitted    Production     Feedstock       Process type      D code      Co-products
                                                                  capacity      volume
--------------------------------------------------------------------------------------------------------------------------------------------------------
Example Ethanol Company.....  Example Ethanol  Ethanol........      125,000           20  Corn Starch....  Wet mill                   6  Distillers
                               Facility.                                                                    process using                 grains, corn
                                                                                                            biomass or                    oil.
                                                                                                            biogas for
                                                                                                            process energy.
Example Biodiesel Company...  Example          Biodiesel......      125,000          500  Canola Oil.....  Trans-                     4  None.
                               Biodiesel                                                                    esterification
                               Facility.                                                                    using natural
                                                                                                            gas or biomass
                                                                                                            for process
                                                                                                            energy.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    After publishing these monthly registration reports, we intend to 
summarize and update the information so that we can publish quarterly 
and annual registration reports of the same type of information. At 
this time, the EPA is not proposing to publish registration information 
at the broader company-level or more specific batch-level. We also are 
not proposing, at this time, to publish registration submissions or 
information from supplemental registration documents (e.g., heat plans, 
separated food waste plans). The EPA is interested in stakeholder views 
on this approach.
b. Rationale for Proposal
    The EPA believes that the information elements as described above 
are not entitled to confidential treatment for a number of reasons. 
First, this type of registration information is already available 
through other public outlets. For example, for publicly-traded 
companies, this information is filed with the U.S. Security Exchange 
Commission in their annual 10-K and quarterly 10-Q reports in the 
company's overview. In those reports, companies identify their fuel 
products, production facilities, co-products, production processes, 
production capacities, actual production volumes, and feedstocks. 
Additionally, many producers currently post this type of information on 
their public Web sites and issue press releases broadcasting this 
information. Regardless of whether a company is publicly traded or 
posts this information on its Web site, all renewable fuel producers 
report this information to the U.S. Department of Energy's National 
Renewable Energy Laboratory, which publishes the information on their 
Web site. Since this information is already publicly available, it 
would not be eligible for confidential treatment under the Agency's 
existing CBI regulations

[[Page 12198]]

under 40 CFR part 2, subpart B, and therefore, it could be released.
    Second, the EPA believes that release of this information would not 
cause substantial harm to the competitive position of a Part 80 
business submitter. The information elements, submitted under Part 80, 
and proposed to be made publicly available consist of information on 
renewable fuel producers' facility fuel product, total permitted 
capacity, production volume, production process type, feedstocks, D-
Code, and co-products. These information elements do not reveal any 
proprietary information, or any other information that would likely 
provide insight for competitors to gain an advantage. For example, 
consider the Example Ethanol Facility:
     Example Ethanol Facility is a renewable fuel producer that 
produces ethanol from corn starch using a wet mill process and 
generates D-Code 6 RINs for its ethanol. The production of ethanol from 
cornstarch using a wet mill process is typical of an ethanol production 
facility, widely-known, and demonstrates that the facility meets RFS 
regulatory requirements for RIN generation. The feedstock, process, and 
fuel product must comply with an approved RFS pathway, which are 
specific to these three information elements and identified in Table 1 
to section 1426 or a publicly-available EPA petition approval. These 
information elements are necessary for a producer to determine if it 
meets RFS requirements. These information elements describe commonly 
used renewable fuel production information and do not describe any 
particular specifications about an individual facility's unique 
processing. Because these information elements are widely known and do 
not reveal details about the precise production processes used, they 
are not the type of information that a competitor could use to develop 
marketing strategies to undermine the producer's competitive position. 
Thus, disclosing information elements containing feedstock, process 
type, D-Code, and fuel type would not reveal--and could not be used to 
determine--an individual facility's production efficiency, production 
costs, or pricing structure.
     That the Example Ethanol Facility is permitted to produce 
125,000 gallons of ethanol but only produces 20 gallons of ethanol does 
not disclose proprietary information. Releasing total permitted 
capacity and production volumes do not disclose actual production 
rates; nor could it be used to determine facility-level production 
rates or the quantity of feedstock used to produce that volume. This 
information would not provide a competitor with business insights and/
or any competitive advantage over the Example Ethanol Facility. 
Accordingly, the EPA believes that disclosing permitted capacity and 
production volumes would not cause substantial harm to a business 
submitter's competitive position.
     That the Example Ethanol Facility produced distillers 
grains and corn oil as co-products from wet mill process does not 
disclose proprietary information. Wet mill processing is widely known 
to result in the co-production of distillers grains and corn oil, and 
these co-products must be disclosed to the EPA with the producer's 
registration for compliance with 40 CFR 80.1426. This is not the type 
of information that could be used by a competitor to gain business 
insights or advantage over the Example Ethanol Producer. Co-product 
information is widely known among the renewable fuel industry and would 
not contain details regarding co-product characteristics, production 
volume, quality, quantity, production efficiency, costs, or pricing 
structure. Therefore, the EPA believes that disclosing a facility's co-
product would not cause substantial harm to business submitter's 
competitive position.
3. Proposal To Disclose Aggregated RFS Report Information
a. Approach
    In addition to publishing monthly, quarterly, and annual 
registration reports, we are also proposing to publish monthly, 
quarterly and/or annual report of information that is required to be 
reported to the EPA under 40 CFR 80.1452(b) for renewable fuel 
producers and importers. We are proposing to publish this information 
in the same manner as registration information--on a corporate and/or 
facility-by-facility basis, as described in the chart below. The EPA 
intends to publish:
     The name of the renewable fuel producer or importer and 
associated registration information (i.e., name, address, feedstock, 
process, fuel type, D-Code). The EPA also intends to depict this 
information in a variety of formats, including geographically (i.e., 
maps) or tables to identify where renewable fuel production facilities 
are located (40 CFR 80.1450(b) and 80.1452(b)(1)).
     The EPA company and facility registration numbers and the 
associated registration information of the renewable fuel producers, 
foreign ethanol producers and importers that generated RINs in EMTS 
during the applicable time period(s) (40 CFR 80.1450(b), 80.1452(b)(2), 
80.1452(b)(3), 80.1452(b)(4), and 80.1452(b)(5)). This information will 
be provided for each facility where renewable fuel was produced.
     The D-code of RINs generated by the facility during the 
time period (40 CFR 80.1452(b)(6)). For each D-code generated at a 
facility, the EPA will publish the number of RINs generated (40 CFR 
80.1452(b)(12)), volume of fuel produced (40 CFR 80.1452(b)(10)), fuel 
type (40 CFR 80.1452(b)(9)), production process (40 CFR 80.1452(b)(7)), 
feedstocks (40 CFR 80.1452(b)(13)), and co-products (40 CFR 
80.1452(b)(15)).
     The EPA also intends to release the volume of denaturant 
(for ethanol), applicable equivalence value, and whether all the 
feedstocks used during the time period were claimed to have met the 
definition of renewable biomass (40 CFR 80.1452(b)(11), and 
80.1452(b)(14)).
An example of the ``reporting'' information the EPA proposes to publish 
appears in the chart below:

[[Page 12199]]



                                                                                            Table VIII.C.3.a-1--Example ``Reporting'' Report
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Renewable fuel                       Location in   Renewable fuel                                                                                       Amount of fuel
   RIN  generating  company      Company name        original        Facility name      latitude/       production   D code/fuel type  Feedstocks used     Production      Co-products       Volume of     produced (in        RINs
                                                     producer         and address       longitude      year/month                                           process                         denaturant       gallons?)       generated
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Example Ethanol Company......  Example Ethanol   Example Ethanol   111 Ethanol       Lat/Long......  2010/July.....  5--Renewable      888--Feedstock   888--Grandfathe  Distillers               549.52          27,476          27,476
                                Company.          Company.          Street, City,                                     Fuel/10--Non-     not listed       red (Other).     grains, corn
                                                                    State, ZIP.                                       cellulosic        (used at a                        oil.
                                                                                                                      ethanol (EV       grandfathered
                                                                                                                      1.0).             facility 100%).
Example Biodiesel Company....  Example           Example           222 Biodiesel     Lat/Long......  2010/July.....  4--Biomass-Based  160--Biogenic    180--Transester                   ..............          21,934          32,902
                                Biodiesel         Biodiesel         Way, City,                                        Diesel/20--       Waste Oils/      ification,
                                Company.          Company.          State, ZIP.                                       Biodiesel (EV     Fats/Greases     Dedicated
                                                                                                                      1.5).             100%.            Renewable
                                                                                                                                                         Biomass
                                                                                                                                                         Facility.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 12200]]

    As with registration information, the EPA proposes to publish 
``reporting'' information in only an aggregated form (at the facility 
level, not the batch level), and only on a monthly, quarterly, and/or 
annual basis. The EPA will continue to consider the confidential nature 
of the batch-level information and may take further action to provide 
additional programmatic transparency. The EPA is interested in 
stakeholders' views on this approach, including whether facility-level 
information is the appropriate level of aggregation or whether it might 
be more appropriate to publish batch-level information.
b. Rationale for Proposal
    The EPA believes that the disclosure of certain aggregated RFS 
report information is not entitled to confidential treatment for a 
number of reasons. First, the information elements in this category 
consist of publicly available and widely known information on renewable 
fuel producer's company name, facility name, RIN-generating name, 
location, production year, fuel product type, RIN D-Code, production 
volume, production process type, feedstocks, equivalence value, and 
number of RINs generated. Furthermore, disclosing this information is 
not likely to cause substantial harm to the competitive position of the 
business required to report these information elements under Part 80 
because these elements of information do not reveal any proprietary 
information, or any other information that would likely provide insight 
for competitors to gain an advantage. Furthermore, because these 
information elements would be aggregated to the facility level and 
further aggregated for the time period of the EPA-published report, the 
information would not be presented in a form that any company's 
competitors could use to gain a competitive advantage. Aggregating this 
information at the facility level and for the monthly, quarterly, and/
or annual time period would prevent competitors from reverse 
engineering the information to determine information that could be 
considered confidential (e.g., exact amounts of feedstocks used, which 
could potentially be used to reveal production efficiencies). 
Accordingly, disclosing aggregate information would not cause 
substantial harm to the submitter's competitive position. For example:
     The name of the renewable fuel producer or importer and 
associated registration information, including facility name, 
registration identification numbers, RIN-generating name, location, 
production year, fuel type, RIN D-Code, production process type, and 
feedstock is non-specific information that is submitted for RFS program 
registration. These information elements are necessary for a producer 
to determine if it meets RFS requirements. These information elements 
describe commonly used renewable fuel production information and do not 
describe any particular specifications about an individual facility's 
unique processing. Because this information does not reveal details 
about the precise production processes used, they are not the type of 
information that a competitor could use to develop marketing strategies 
to undermine the producer's competitive position. These information 
elements do not reveal--and could not be used to determine--an 
individual facility's production efficiency, production costs, or 
pricing structure. Accordingly, the EPA believes that disclosing the 
name of the renewable fuel producer or importer, the facility name, 
registration identification numbers, RIN-generating name, location, 
production year, fuel type, RIN D-Code, production process type, and 
feedstock would not cause substantial harm to business submitter's 
competitive position.
     The volume of denaturant, applicable equivalence value, 
and whether all the feedstocks used during the time period were claimed 
to have met the definition of renewable biomass (40 CFR 80.1452(b)(11), 
and 80.1452(b)(14)) is widely-known information that is submitted to 
demonstrate RFS program compliance. The volume of denaturant used must 
be less than 2% to meet RFS requirements for RIN generation. The 
equivalence value is a number that is used to determine how many 
gallon-RINs can be generated for a gallon of renewable fuel according 
to 40 CFR 80.1426. An affirmation that that the feedstocks a producer 
used meets the definition of renewable biomass is required to 
demonstrate that the feedstocks a facility registered to use, pursuant 
to 40 CFR 80.1450, were actually used. Revealing the volume of 
denaturant, equivalence value, and confirming that a producer affirmed 
use of renewable biomass would not reveal anything proprietary or 
otherwise about the precise production process a given producer is 
using, and would not provide any insight that competitors might use to 
gain competitive advantage. Rather, this information is commonly-known 
information about the renewable fuel produced that demonstrates RFS 
regulatory compliance for RIN generation.
4. QAP Plans and Independent Engineering Reviews
    At this time, the EPA is not proposing to publish QAP plans or 
independent engineering reviews that are submitted for RFS 
registration. For QAP plans and independent engineering reviews that 
are claimed as CBI, the EPA proposes to require submission of two 
versions of those documents: One clearly marked ``CBI version,'' with 
appropriate areas denoted as CBI, and a second ``public version,'' with 
CBI information redacted. We would require the submission of both 
versions of QAP plans and engineering reviews begin with the effective 
date of this rule. For engineering reviews filed pursuant to 40 CFR 
80.1450(b)(2), we would require submission for new registrations, and 
as necessary for updates pursuant to 40 CFR 80.1450(d)(3). Based on the 
Agency's experience with the RFS program, the EPA notes that certain 
information should not fall under a claim of CBI because this 
information is generally available to the public or widely-known within 
the industry, and disclosure of this information would not likely cause 
harm to the competitive position of any submitting renewable producer, 
importer, or any other party to a RIN transaction.
    If the EPA receives a Freedom of Information Act (FOIA) request for 
the CBI version of an engineering review or QAP plan, the EPA would 
process the FOIA request pursuant to its CBI regulations under 40 CFR 
part 2, subpart B. Submission of the two versions of QAP plans and 
engineering reviews (CBI and public versions) would allow the Agency to 
clearly understand what information is claimed as CBI, and would also 
allow the Agency to make public versions available to the public 
without unnecessary delay. The EPA is interested in stakeholder views 
on this approach.
5. Request for Comments
    The added transparency of making certain registration and reporting 
information available to the public in the form of EPA-published 
reports, along with the implementation of the QAP process, will 
strengthen the RFS program and act as a deterrent to fraudulently 
generated RINs. The EPA solicits comment on all aspects of these 
proposals.

[[Page 12201]]

D. Proposed Changes to Section 80.1452--EPA Moderated Transaction 
System (EMTS) Requirements--Alternative Reporting Method for Sell and 
Buy Transactions for Assigned RINs

    Reporting and product transfer document (PTD) requirements, found 
in sections 80.1452 and 80.1453, respectively, currently state that the 
reportable event for a RIN purchase or sale occurs on the date of 
transfer. Sellers must report the sale of RINs within five (5) business 
days of the reportable event via the EPA Moderated Transaction System 
(EMTS). Buyers must report the purchase of RINs within ten (10) 
business days of the reportable event via EMTS. The date of transfer is 
the date on which title of RINs is transferred from the seller to the 
buyer. Some buyers and sellers of assigned RINs have expressed concerns 
with these requirements stating they have difficulty determining the 
date of transfer since title of the renewable fuel is not transferred 
until the fuel physically reaches the buyer. Some transactions, for 
example those by rail or barge, may take several weeks, and their 
current accounting systems do not include a means for capturing the 
buyer's receipt date.
    EPA understands this concern, but also recognizes that some 
regulated parties have modified their accounting systems to address the 
current reporting and PTD requirements in RFS2. We also believe that 
for parties separating, retiring, and selling or buying separated RINs, 
the current reporting and PTD requirements are effective and should 
remain unchanged. Therefore, at this time EPA is not proposing to 
replace existing requirements, but is instead proposing an additional, 
alternative method for reporting sell and buy transactions involving 
assigned RINs only.
    The proposed alternative method for sell and buy transactions of 
assigned RINs would redefine the reportable event for both the seller 
and the buyer, introduce a unique identifier that the seller must 
provide to the buyer, and require the buyer to report the date of 
transfer. Buyers and sellers would need to agree on which method they 
would be using to report transfers of assigned RINs; either the current 
method or the alternative method. EPA believes that this alternative 
would provide the regulated community with the flexibility to address 
their reporting concerns and also provide EPA with the data necessary 
to effectively administer and enforce transactions of assigned RINs. 
EPA welcomes comment on this proposed alternative method for reporting 
assigned RIN buy and sell transactions.
    We propose that sellers of assigned RINs under the alternative 
method be required to do the following:
     Within five (5) business days of shipping renewable fuel 
with assigned RINs, report a sell transaction, using the alternative 
method, via EMTS;
     Include in the EMTS sell transaction report other required 
information per section 80.1452; and
     Provide a PTD to the assigned RIN buyer with a unique 
identifier, also reported via EMTS, in addition to the information in 
section 80.1453. The date of transfer is not required for the 
alternative method.
    We propose that buyers of assigned RINs under the alternative 
method be required to do the following:
     Within five (5) business days of receiving a shipment of 
renewable fuel with assigned RINs, report a buy transaction, indicating 
use of the alternative method, via EMTS;
     Include in the EMTS buy transaction report other required 
information per section 80.1452;
     Include in the EMTS buy transaction report the unique 
identifier provided by the seller; and
     Include in the EMTS buy transaction report the date the 
renewable fuel was received, i.e. the date of transfer.
    If this proposed alternative method is finalized, the EMTS would be 
modified to accept such transactions. EPA would provide additional 
instruction and guidance at the time of the new EMTS version release. 
EPA invites comment on all aspects of this proposal.

IX. Impacts

    The quality assurance program that we are proposing in today's NPRM 
would provide a voluntary mechanism for regulated parties to verify 
that RINs are validly generated, provide an affirmative defense against 
violations if a regulated party transfers an invalidly generated RIN or 
uses it for compliance, and provide clarity regarding the 
responsibility of regulated parties to replace invalidly generated 
RINs. The proposed program would not change the volume requirements of 
the RFS program, but instead would help to ensure that those volume 
requirements are met. Likewise, the proposed changes to the regulations 
governing export of renewable fuel, separation of RINs from wet 
gallons, and qualifying uses of renewable fuel would also be intended 
to ensure that the RFS volume requirements are met with qualifying 
renewable fuel. As a result, there would be no change to the expected 
impacts of the RFS program in terms of volumes of renewable fuel 
consumed or the associated GHG or energy security benefits. Instead, 
the primary impacts of the quality assurance program would be improved 
liquidity in the RIN market and improved opportunities for smaller 
renewable fuel producers to sell their RINs.
    The quality assurance program that we are proposing in today's 
action would be voluntary. As a result, there would be no obligatory 
costs. There would likely be costs associated with an individual 
party's participation in the quality assurance program. However, the 
fact that the quality assurance program would be voluntary means that a 
decision to participate will be made independently by each regulated 
party, and thus we cannot estimate the costs that might be incurred for 
the nation as a whole. Furthermore, any costs incurred would only be 
borne if the industry believed that those costs were less than current 
costs in the marketplace resulting from efforts to verify, acquire, and 
trade RINs.
    In the discussion below, Section IX.A addresses direct costs 
associated with implementing Quality Assurance Plans (QAPs), such as 
the time required to develop a QAP and the associated recordkeeping and 
reporting, site visits to renewable fuel production facilities, costs 
for accounting services, etc. Section IX.B addresses potential costs 
associated with RIN replacement mechanisms that would be required under 
Option A.

A. Direct Costs for Implementing QAPs

    Currently, there are approximately 485 biofuel producers operating 
more than 600 biofuel production facilities. These numbers are expected 
to increase as the biofuel market expands. While it is unlikely that 
all biofuel producers would opt to participate in the quality assurance 
program, that was the assumption for these cost estimates in order to 
reflect the maximum potential cost of the program.
    EPA staff met with seven parties who are already developing RIN 
validation programs for the biofuels industry. We also met with several 
industry groups and obligated parties which have been affected by RIN 
fraud. These parties all provided informal estimates of the costs 
associated with this type of quality assurance program which was used 
to inform our cost calculations.
    For those biofuel producers who opt into the quality assurance 
program, each biofuel production facility must be visited and assessed 
as part of any audit conducted under the proposed quality assurance 
program. An auditor would

[[Page 12202]]

use an approved QAP as the basis for the verification of biofuel 
produced and RINs generated at a facility. In order to verify 
production, the auditor must conduct site visits, review documents, and 
contact entities that do business with the facility. The proposed 
components of audits are described in Section VII.
    We are proposing that production facilities should be visited on a 
quarterly basis. New production facilities would be visited prior to 
verification of any RINs and, subsequently, according to the standard 
quarterly schedule. We expect that each visit could take from one to 
several days, depending on the size and complexity of the facility, the 
availability of records, changes since the last audit, etc. For some 
components of the audit, we propose to require ongoing, or batch-level, 
monitoring. The QAP would be required to provide details of the means 
for collection and evaluation of the data collected on an ongoing 
basis.
    Tables IX.A-1, IX.A-2, and IX.A-3 below itemize the activities 
anticipated for each biofuel production facility audit. The estimates 
include costs incurred by the biofuel producer (Table IX.A-1), the 
auditor (Table IX.A-2), and the EPA (Table IX.A-3). This table does not 
include costs associated with the RIN replacement mechanism that some 
QAP providers may acquire to cover loss in the event of RIN fraud. 
These costs are discussed separately below.

                                           Table IX.A-1--Costs to the Biofuel Producer for Implementing a QAP
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Prof./tech.
                Category                   Manager time        time        Clerical time   Number per yr     Capital $      Total hours       Total $
--------------------------------------------------------------------------------------------------------------------------------------------------------
Site Visit..............................               1              16               4               2  ..............              42           3,588
Reporting...............................               2              12               4               3  ..............              54           4,560
Recordkeeping...........................               0               0               2               3  ..............               6             222
                                         ---------------------------------------------------------------------------------------------------------------
    Total...............................  ..............  ..............  ..............  ..............  ..............             102           8,370
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                              Table IX.A-2--Costs to the QAP Auditor for Implementing a QAP
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Prof./tech.
                Category                   Manager time        time        Clerical time  Number per yr.     Capital $      Total hours       Total $
--------------------------------------------------------------------------------------------------------------------------------------------------------
Auditor:
Contract Init...........................               4               4               2               1             530              10           1,428
Site Visit..............................               4              16               0               1           1,060              20           3,036
Follow-up...............................               2              28               5               3           1,060             105          12,459
Monitoring..............................               2              50               0  ..............  ..............              52           5,020
Consultants.............................  ..............  ..............  ..............               4           1,000  ..............           4,000
Reporting...............................               0               4              12  ..............  ..............              16           1,656
QAP Prep................................               2              16               4  ..............  ..............              22           3,808
EMTS....................................               0              25               0  ..............  ..............              25           2,400
Recordkeeping...........................               0              12              25  ..............  ..............              37           2,077
                                         ---------------------------------------------------------------------------------------------------------------
    Total...............................  ..............  ..............  ..............  ..............  ..............             250          38,839
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                  Table IX.A-3--Costs to the EPA for Implementing a QAP
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Prof./tech.
                        Category                           Manager time        time        Clerical time     Capital $      Total hours       Total $
--------------------------------------------------------------------------------------------------------------------------------------------------------
Implementation..........................................  ..............               3  ..............  ..............               3             267
EMTS Data Management....................................  ..............               1  ..............  ..............               1              89
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................  ..............  ..............  ..............  ..............               4             356
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. Time and Cost Assumptions
    The specific times estimated for each task are shown in Tables 
IX.A-1, IX.A-2, and IX.A-3. These estimates are based on a number of 
basic assumptions. An initial site visit of the facility to be audited 
is assumed to require two days, and include estimated travel and per 
diem costs. For simplicity, we have estimated an average $600 for 
airfare, $150 for lodging, and $80 for the per diem expenses. It is 
assumed that a plant manager would meet briefly with the auditor, and 
that a plant chemist or other professional would escort the auditor 
throughout the visit. Some clerical support would be required to locate 
files for the related document reviews.
    It was assumed that an auditor would travel and spend half a day on 
contract initiation. Any follow up site visits were assumed to be 
shorter in duration, as the auditor would now be familiar with the 
facility and its normal operation. A substantial amount of the 
auditor's time would be spent in follow up documentation of the 
facility, such as checking feedstock suppliers, process fuel suppliers, 
doing volume and mass balances, and monitoring the ongoing operation of 
the facility. It was assumed that an auditor would employ specialized 
consultants and/or local agents to perform some portion of the audit 
support.
    In addition to tracking facility operation, an auditor would also 
be responsible for preparing the QAP, maintaining recordkeeping, 
monitoring and/or brokering activities on EMTS, and assisting with RFS 
reporting requirements.

[[Page 12203]]

2. Labor Cost Assumptions
    The labor costs used in this cost estimation are average mean wages 
for each labor category, as provided in the Bureau of Labor and 
Statistics Report dated May 2011. Based on this data, we used the 
following hourly wages for each employee type:

Managerial--$55.04 per hour
Technical/Professional--$47.81 per hour
Clerical--$18.35 per hour

    Doubling to account for company overhead and benefits, and for 
convenience, rounding up to the dollar, gives the following hourly 
rates:

    Managerial--$110 per hour.
    Technical/Professional--$96 per hour.
    Clerical--$37 per hour.
    For the Agency costs, the work was assumed to be performed by a GS-
13 technical employee, doubled and rounded up, for an hourly rate of 
$89.
3. Cost Estimate Results
    We made our total cost estimate based on the number of registered 
biofuel producers in the CDX as of July 2011, assuming that all parties 
choose to participate in the voluntary quality assurance program. This 
assumes 485 RIN generators with 600 biofuel production facilities. This 
results in a total cost for the program of $27,576,450. If all parties 
are participating in the program and all RINs are verified, this 
results in a per RIN cost of less that $0.01. However, these costs are 
assumed to be linear and we do not expect that there would be any 
economies of scale in terms of the number of RINs verified by an 
auditor. However, we do expect that the per-RIN cost would vary 
depending on the number of RINs generated by each fuel producer since 
the effort involved in validating many aspects of renewable fuel 
production are the same regardless of the size of the facility.
    We do not expect that the costs of participation in the proposed 
quality assurance program would vary significantly by the D code of 
RINs. While RINs with different D codes may command different prices in 
the market, the verification process for each RIN is expected to be 
similar regardless of D code, with the biggest cost differences in 
feedstock verification.

B. Costs for RIN Replacement Mechanisms

    For reasons described previously, some QAP providers may choose a 
replacement mechanism to insure against invalid RINs. Such mechanisms 
would be required under Option A, but would not be required under 
Option B. There is large uncertainty in estimating the costs of these 
mechanisms because it is an entirely new market. Informal discussions 
with potential QAP auditors, as well as other parties involved in 
similar markets or financial surety mechanisms in general, have 
suggested a broad range of potential costs. For these reasons the costs 
for such a mechanism were not included in the analysis above, and EPA 
welcomes comments on the cost impacts of any potential financial surety 
mechanisms.
    In order to fully inform cost impacts of the various QAP options, 
we discuss the relevant cost factors of the three possible types of 
mechanisms discussed in Section IV above. The discussion includes RIN 
banks, RIN escrow accounts, and other traditional financial 
instruments. As noted previously, these mechanisms are not intended to 
be inclusive of all possible ways a RIN replacement mechanism could 
work, and are merely suggestions of potential pathways Option A 
auditors might follow.
    A RIN bank is a managed repository of valid audited RINs which are 
available to all members of the bank for replacement purposes. The 
costs associated with a RIN bank are directly proportional to the value 
of the RINs banked, and the number of banked RINs required to meet the 
obligations of the bank members. There would also be bank management 
costs, which would be impacted by the number of bank members, and how 
the bank is managed in terms of RIN deposit, withdrawal, update, and 
replacement. In addition, bank managers would need to come up with a 
system to maintain current year RINs in the bank, which may involve 
additional costs for the sale of expiring RINs and any differential in 
the value of the RIN at the time of deposit and the time of sale or 
release. These costs would be born by the members of the bank, but 
would likely be passed on to RIN purchasers to the maximum extent 
possible. These parameters will vary so much from bank to bank that it 
is impossible to estimate an average per RIN cost across the entire 
program. However, it is reasonable to assume that the cost would be 
effectively the per-RIN value of banked RINs plus some fractional 
percentage to cover management costs.
    A RIN escrow account would work very much like a RIN bank, but 
would be funded by a single auditor instead of a group of auditors, and 
would be supervised and managed by a third-party escrow agent. The 
advantage of this option is that an auditor would have total control 
over the funding of the escrow. However, an auditor using an escrow 
account would be solely responsible for the funding of the account, and 
so would be required to maintain a balance equal to a much larger 
percentage of its potential replacement responsibility than it might be 
if using a RIN bank. The cost of a RIN escrow account is entirely 
dependent upon the number and value of the RINs covered by the escrow.
    Traditional financial instruments, such as surety bonds, letters of 
credit, or expanded insurance coverage, are also options under Option 
A. The cost for this type of coverage is dependent on the level of risk 
determined by the surety provider, as well as the value of the RINs to 
be covered. This type of financial instrument would most likely provide 
a maximum dollar amount of coverage, which would translate into a per 
RIN cost depending on the number of RINs covered, relative to the 
number of RINs audited by the QAP provider purchasing the financial 
protection. EPA has learned that the cost of these policies vary 
greatly among the parties looking into these options. For this reason, 
this type of financial protection was not included in the cost analysis 
outlined above.

X. Public Participation

    We request comment by April 18, 2013 on all aspects of this 
proposal, including but not limited to the following:
     The RIN replacement cap of 2% and the limited exemption of 
2%.
     A potential regulatory change in which renewable fuel 
producers would be prohibited from separating RINs.
     The proposed components of QAPs.
     The proposed elements of RIN replacement mechanisms, 
including the inclusion of E&O insurance.
     The costs associated with indemnifying auditor 
verification of RINs.
     Mechanisms to ensure that auditors are not complicit in 
fraud.
    This section describes how you can participate in this process.

A. How do I submit comments?

    We are opening a formal comment period by publishing this document. 
We will accept comments through April 18, 2013. If you have an interest 
in the program described in this document, we encourage you to comment 
on any aspect of this rulemaking. We request comment on various topics 
throughout this proposal.
    Your comments will be most useful if you include appropriate and 
detailed supporting rationale, data, and analysis. If you disagree with 
parts of the

[[Page 12204]]

proposed program, we encourage you to suggest and analyze alternate 
approaches to meeting the goals described in this proposal. You should 
send all comments, except those containing proprietary information, to 
our Air Docket (see ADDRESSES) before the end of the comment period. If 
you submit proprietary information for our consideration, you should 
clearly separate it from other comments by labeling it ``Confidential 
Business Information (CBI).'' You should send CBI directly to the 
contact person listed under FOR FURTHER INFORMATION CONTACT instead of 
the public docket. This will help ensure that no one inadvertently 
places proprietary information in the docket. If you want us to use 
your confidential information as part of the basis for the final rule, 
you should send a non-confidential version of the document summarizing 
the key data or information. We will disclose information covered by a 
claim of confidentiality only through the application of procedures 
described in 40 CFR part 2. If you do not identify information as 
confidential when we receive it, we may make it available to the public 
without notifying you.

B. Will there be a public hearing?

    We will hold a hearing on March 19, 2013, Room 1153 EPA East, 
Washington, DC 20004, beginning at 10:00 a.m. local time. If you would 
like to present testimony at the public hearing, we ask that you notify 
the contact person listed above under FOR FURTHER INFORMATION CONTACT 
at least ten days before the hearing. You should estimate the time you 
will need for your presentation and identify any needed audio/visual 
equipment. We suggest that you bring copies of your statement or other 
material for the EPA panel and the audience. It would also be helpful 
if you send us a copy of your statement or other materials before the 
hearing. We will make a tentative schedule for the order of testimony 
based on the notifications we receive. This schedule will be available 
on the morning of the hearing. In addition, we will reserve a block of 
time for anyone else in the audience who wants to give testimony. We 
will conduct the hearing informally, and technical rules of evidence 
won't apply. We will arrange for a written transcript of the hearing 
and keep the official record of the hearing open for 30 days to allow 
you to submit supplementary information. You may make arrangements for 
copies of the transcript directly with the court reporter.

XI. Statutory and Executive Order Review

A. Executive Order 12866: Regulatory Planning and Review and Executive 
Order 13563: Improving Regulation and Regulatory Review

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), this 
action is a ``significant regulatory action'' because it raises novel 
legal and policy issues. Accordingly EPA submitted this action to the 
Office of Management and Budget (OMB) for review under Executive Orders 
12866 and 13563 and any changes made in response to OMB recommendations 
have been documented in the docket for this action.
    This action is being proposed today as a result of several cases of 
fraudulently generated RINs. As discussed above, several biodiesel 
production companies have been identified as having generated RINs that 
did not represent qualifying renewable fuel. While these invalid RINs 
represented a very small amount (about 5%) of the nationwide biodiesel 
volume in the 2009--2011 timeframe, the net result is that this fraud 
has impacted the liquidity of the biodiesel RIN market as some 
biodiesel RINs are perceived as having less value than others. In 
addition, as a result of fraudulent activities, obligated parties have 
been subject to monetary penalties and the additional cost of 
purchasing new RINs to cover the invalid RINs, even though they 
purchased the original RINs in good faith believing that they were 
valid. These issues have raised novel legal and policy issues for the 
RFS program and EPA believes it is necessary put in place an additional 
regulatory mechanism that could provide an alternative way to assure 
that RINs used for compliance are valid to restore confidence in the 
RIN market and level the playing field for large and small producers.

B. Paperwork Reduction Act

    The information collection requirements in this proposed rule have 
been submitted for approval to the Office of Management and Budget 
(OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. The 
Information Collection Request (ICR) document prepared by EPA has been 
assigned EPA ICR number 2473.01.
    The RFS program requires that specified volumes of renewable fuel 
be used as transportation fuel, heating oil, and/or jet fuel each year. 
Obligated parties demonstrate compliance with the RFS standards through 
the acquisition of unique Renewable Identification Numbers (RINs) 
assigned by the producer or importer to every batch of renewable fuel 
produced or imported. Validly generated RINs show that a certain volume 
of qualifying renewable fuel was produced or imported. The RFS program 
also includes provisions stipulating the conditions under which RINs 
are invalid, the liability carried by a party that transfers or uses an 
invalid RIN, and how invalid RINs must be treated.
    In this action we are proposing a voluntary quality assurance 
program intended to provide a more structured way to assure that the 
RINs entering commerce are valid. The voluntary quality assurance 
program for RINs would provide a means for regulated parties to ensure 
that RINs are properly generated, through audits of production 
facilities conducted by independent third parties using quality 
assurance plans (QAPs).
    The annual public reporting and recordkeeping burden for this 
collection is estimated to be 320 hours per response. A document 
entitled ``Supporting Statement for Renewable Fuels Standard (RFS2) 
Voluntary RIN Quality Assurance Program (Proposed Rule)'' has been 
placed in the public docket. The supporting statement provides a 
detailed explanation of the Agency's estimates by collection activity. 
The estimates contained the supported statement are briefly summarized 
here:
    Total No. of Respondents: 485.
    Total Burden Hours: 192,270.
    Total Cost to Respondents: $ 4,062,000.

Burden is defined at 5 CFR 1320.3(b).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. The OMB control numbers for EPA's 
regulations in 40 CFR are listed in 40 CFR part 9.
    To comment on the Agency's need for this information, the accuracy 
of the provided burden estimates, and any suggested methods for 
minimizing respondent burden, EPA has established a public docket for 
this rule, which includes this ICR, under Docket ID number EPA-HQ-OAR-
2012-0621. Submit any comments related to the ICR to EPA and OMB. See 
ADDRESSES section at the beginning of this notice for where to submit 
comments to EPA. Send comments to OMB at the Office of Information and 
Regulatory Affairs, Office of Management and Budget, 725 17th Street 
NW., Washington, DC 20503, Attention: Desk Office for EPA. Since OMB is 
required to make a decision concerning the ICR between 30 and 60

[[Page 12205]]

days after February 21, 2013, a comment to OMB is best assured of 
having its full effect if OMB receives it by March 25, 2013. The final 
rule will respond to any OMB or public comments on the information 
collection requirements contained in this proposal.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act generally requires an agency to 
prepare a regulatory flexibility analysis of any rule subject to notice 
and comment rulemaking requirements under the Administrative Procedure 
Act or any other statute unless the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities. Small entities include small businesses, small organizations, 
and small governmental jurisdictions. For purposes of assessing the 
impacts of this rule on small entities, small entity is defined as: (1) 
A small business as defined by the Small Business Administration's 
(SBA) regulations at 13 CFR 121.201 (see table below); (2) a small 
governmental jurisdiction that is a government of a city, county, town, 
school district or special district with a population of less than 
50,000; and (3) a small organization that is any not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field. The following table provides an overview of the 
primary SBA small business categories potentially affected by this 
regulation:

------------------------------------------------------------------------
                                     Defined as small
             Industry               entity by SBA if:    NAICS \a\ codes
------------------------------------------------------------------------
Petroleum refineries.............  <=1,500 employees..            324110
------------------------------------------------------------------------
\a\ North American Industrial Classification System.

    The program proposed in today's action is a voluntary quality 
assurance program intended to provide a more structured way to assure 
that RINs entering commerce are valid. As a result of the recent fraud 
issue, obligated parties are reluctant to purchase RINs from smaller 
refiners because of the uncertainty of their validity. While this 
voluntary program could be beneficial for both larger and smaller 
refineries it could be particularly beneficial for smaller petroleum 
refineries if they choose to participate. In the current climate, these 
smaller producers have been forced to offer their RINs at a significant 
discount relative to RINs from larger producers, assuming they can find 
obligated parties or distributors willing to purchase them at all. 
While there will be some cost to opt into the program, we believe these 
costs will be offset by leveling the playing field between larger 
producers and small producers, allowing small producers to effectively 
compete in the market.
    After considering the economic impacts of this action on small 
entities, I certify that this action will not have a significant 
economic impact on a substantial number of small entities. This action 
will not impose any requirements on small entities. We continue to be 
interested in the potential impacts of the proposed rule on small 
entities and welcome comments on issues related to such impacts.

D. Unfunded Mandates Reform Act

    This rule does not contain a Federal mandate that may result in 
expenditures of $100 million or more for State, local, and tribal 
governments, in the aggregate, or the private sector in any one year. 
The agency has determined that this action does not contain a Federal 
mandate that may result in expenditures of $100 million or more for the 
private sector in any one year. Because the program outlined in this 
proposal is optional, entities subject to this rule will have the 
flexibility to participate or not. Thus, this action is not subject to 
the requirements of sections 202 or 205 of the UMRA. This action is 
also not subject to the requirements of section 203 of the UMRA because 
it contains no regulatory requirements that might significantly or 
uniquely affect small governments.

E. Executive Order 13132 (Federalism)

    Executive Order 13132, entitled ``Federalism'' (64 FR 43255, August 
10, 1999), requires EPA to develop an accountable process to ensure 
``meaningful and timely input by State and local officials in the 
development of regulatory policies that have federalism implications.'' 
``Policies that have federalism implications'' is defined in the 
Executive Order to include regulations that have ``substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.''
    This action does not have federalism implications. It will not have 
substantial direct effects on the States, on the relationship between 
the national government and the States, or on the distribution of power 
and responsibilities among the various levels of government, as 
specified in Executive Order 13132. These rules will apply to 
manufacturers of on-highway engines and not to state or local 
governments. Thus, Executive Order 13132 does not apply to this action.
    In the spirit of Executive Order 13132, and consistent with EPA 
policy to promote communications between EPA and State and local 
governments, EPA specifically solicits comments on this proposed rule 
from State and local officials.

F. Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments)

    This action does not have tribal implications, as specified in 
Executive Order 13175 (65 FR 67249, November 9, 2000). This rule will 
be implemented at the Federal level and impose compliance costs only on 
engine manufacturers who elect to participate in the program. Thus, 
Executive Order 13175 does not apply to this rule.
    EPA specifically solicits additional comment on this proposed 
action from tribal officials.

G. Executive Order 13045: Protection of Children From Environmental 
Health Risks and Safety Risks

    EPA interprets Executive Order 13045 as applying only to those 
regulatory actions that are based on health or safety risks, such that 
the analysis required under section 5-501 of the Order has the 
potential to influence the regulation. This rule is not subject to 
Executive Order 13045 because it does not establish an environmental 
standard intended to mitigate health or safety risks.

H. Executive Order 13211 (Energy Effects)

    This action is not a ``significant energy action'' as defined in 
Executive Order 13211 (66 FR 28355 (May 22, 2001)), because it is not 
likely to have a significant adverse effect on the supply, 
distribution, or use of energy. We have concluded that any energy 
impacts of this rule will be negligible because the voluntary QAP audit 
process would ensure that the volume consumption goals of the statute 
are met while addressing the unique features of the RFS program that 
have resulted in

[[Page 12206]]

inefficiencies and poor liquidity in the RIN market.

I. National Technology Transfer Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (``NTTAA''), Public Law 104-113, 12(d) (15 U.S.C. 272 note) 
directs the agencies to use voluntary consensus standards in its 
regulatory activities unless to do so would be inconsistent with 
applicable law or otherwise impractical. Voluntary consensus standards 
are technical standards (e.g., materials, specifications, test methods, 
sampling procedures, and business practices) that are developed or 
adopted by voluntary consensus standards bodies. NTTAA directs EPA to 
provide Congress, through OMB, explanations when the EPA decides not to 
use available and applicable voluntary consensus standards.
    This proposed rulemaking does not involve technical standards. 
Therefore, EPA is not considering the use of any voluntary consensus 
standards.

J. Executive Order 12898: Federal Actions To Address Environmental 
Justice in Minority Populations and Low-Income Populations

    Executive Order 12898 (59 FR 7629, February 16, 1994) establishes 
federal executive policy on environmental justice. Its main provision 
directs federal agencies, to the greatest extent practicable and 
permitted by law, to make environmental justice part of their mission 
by identifying and addressing, as appropriate, disproportionately high 
and adverse human health or environmental effects of their programs, 
policies, and activities on minority populations and low-income 
populations in the United States.
    Today's action proposes a voluntary set of regulatory provisions 
that could provide regulated parties with a specific mechanism for 
demonstrating that they have conducted due diligence to verify the 
validity of RINs. Therefore, EPA has determined that this action will 
not have disproportionately high and adverse human health or 
environmental effects on minority or low-income populations.

RFS Renewable Identification Number (RIN) Quality Assurance Program

XII. Statutory Authority

    Statutory authority for the rule finalized today can be found in 
section 211 of the Clean Air Act, 42 U.S.C. 7545. Additional support 
for the procedural and compliance related aspects of today's rule, 
including the recordkeeping requirements, come from Sections 114, 208, 
and 301(a) of the Clean Air Act, 42 U.S.C. 7414, 7542, and 7601(a).

List of Subjects in 40 CFR Part 80

    Administrative practice and procedure, Air pollution control, 
Diesel fuel, Environmental protection, Fuel additives, Gasoline, 
Imports, Oil imports, Petroleum.

    Dated: January 31, 2013.
Lisa P. Jackson,
Administrator.

    For the reasons set forth in the preamble, 40 CFR part 80 is 
proposed as follows:

PART 80--REGULATION OF FUELS AND FUEL ADDITIVES

0
1. The authority citation for part 80 continues to read as follows:

    Authority:  42 U.S.C. 7414, 7521(1), 7545 and 7601(a).

Subpart M--[ Renewable Fuel Standard]

0
2. Section 80.1401 is amended by adding in alphabetical order the 
definitions of ``A-RIN'', ``B-RIN'', ``Independent Third-Party 
Auditor'', ``Non-qualifying fuel'', ``Quality assurance audit'', 
``Quality assurance plan'', and ``Verified RIN'' and revising the 
definition of ``Non-ester renewable diesel''.
    The added and revised text read as follows:


Sec.  80.1401  Definitions.

* * * * *
    A-RIN means a RIN verified by a registered independent third-party 
auditor using a QAP that has been approved under Sec.  80.1469(a) 
following the audit process described in Sec.  80.1472.
* * * * *
    B-RIN means a RIN verified by a registered independent third-party 
auditor using a QAP that has been approved under Sec.  80.1469(b) 
following the audit process described in Sec.  80.1472.
* * * * *
    Independent Third-Party Auditor means a party meeting the 
requirements of Sec.  80.1471(b) that conducts QAP audits and verifies 
RINs.
* * * * *
    Non-ester renewable diesel, also known as renewable diesel, means 
renewable fuel which is all of the following:
    (1) A fuel which can be used at a blend level approved under 40 CFR 
Part 79 in an engine designed to operate on conventional diesel fuel, 
or be heating oil or jet fuel.
    (2) Not a mono-alkyl ester.
    Non-qualifying fuel use means a use of renewable fuel in an 
application other than transportation fuel, heating oil, or jet fuel.
    Quality Assurance Audit means an audit of a renewable fuel 
production facility conducted by an independent third-party auditor in 
accordance with a QAP that meets the requirements of Sec.  80.1469.
    Quality Assurance Plan, or QAP, means the list of elements that an 
independent third-party auditor will check to verify that the RINs 
generated by a renewable fuel producer or importer are valid.
* * * * *
    Verified RIN means a RIN generated by a renewable fuel producer 
that was subject to a QAP audit executed by an independent third-party 
auditor, and determined by the independent third-party auditor to be 
valid. Verified RINs include both A-RINs and B-RINs.
0
3. Section 1402 is added to read as follows.


Sec.  80.1402  Information Submitted under 40 CFR part 80 Subpart M.

    Sections 2.201 through 2.215 of 40 CFR part 2, subpart B, do not 
apply to the following information:
    (a) Registration information submitted pursuant to Sec. Sec.  
80.1450(b), (c), and (g) that is not entitled to confidential treatment 
includes company name, facility name, facility type, fuel type, 
permitted capacity, production volume, feedstocks, production process, 
D-Code, and co-products.
    (b) Reporting information submitted pursuant to reporting 
requirements in 40 CFR 1452(b) that is not entitled to confidential 
treatment includes company name, RIN-generating company name, renewable 
fuel producer, facility name and address, facility location, renewable 
fuel production month and year, fuel type, D-Code, feedstocks, 
production process, volume of fuel produced, and number of RINs 
generated.
0
4. Section 80.1426 is amended as follows:
0
a. By revising paragraph (a)(1)(i) and (a)(1)(ii);
0
b. Adding paragraphs (a)(1)(iii);
0
c. By revising paragraphs (c)(1) and (c)(6);
0
d. By revising paragraphs (f)(4)(i)(A)(1) and (f)(4)(i)(B);
0
e. By adding paragraph (f)(4)(iii);
0
f. By revising paragraph (f)(12); and
0
g. By adding paragraph (f)(14).
    The additions and revisions reads as follows:

[[Page 12207]]

Sec.  80.1426  How are RINs generated and assigned to batches of 
renewable fuel by renewable fuel producers or importers?

    (a) * * *
    (1) * * *
    (i) Qualifies for a D code pursuant to Sec.  80.1426(f), or as 
otherwise approved by EPA, and is demonstrated pursuant to the 
reporting requirements of Sec.  80.1451 and the recordkeeping 
requirements of Sec.  80.1454, or other records maintained by the 
producer, to be produced in accordance with the applicable pathway.
    (ii) Is designated on a product transfer document (PTD) for use as 
transportation fuel, heating oil, or jet fuel in accordance with Sec.  
80.1453(a)(12); and
    (iii) For renewable electricity, biogas, and any renewable fuel 
other than ethanol, biodiesel, or renewable diesel, is distributed and 
sold in accordance with Sec.  80.1426(f)(10), Sec.  80.1426(f)(11), or 
Sec.  80.1426(f)(12), as appropriate.
* * * * *
    (c) * * *
    (1) Fuel producers and importers may not generate RINs for fuel 
that does not satisfy the requirements of subsection (a)(1) of this 
section.
* * * * *
    (6) A party is prohibited from generating RINs for a volume of fuel 
that it produces if the fuel has been produced by a process that uses a 
renewable fuel as a feedstock, and the renewable fuel that is used as a 
feedstock was produced by another party, except that RINs may be 
generated for such fuel if allowed by EPA in response to a petition 
submitted pursuant to Sec.  80.1416 and the petition approval specifies 
a mechanism to prevent double counting of RINs.
* * * * *
    (f) * * *
    (4) * * *
    (i) * * *
    (A) * * *
    (1) VRIN shall be calculated according to the following 
formula:

VRIN = EV * Vs * FER/(FER + 
FENR)

Where:

VRIN = RIN volume, in gallons, for use in determining the 
number of gallon-RINs that shall be generated for the batch.
EV = Equivalence value for the batch of renewable fuel per Sec.  
80.1415, subject to qualification in paragraph (f)(4)(iii) of this 
section.
Vs = Standardized volume of the batch of renewable fuel 
at 60 [deg]F, in gallons, calculated in accordance with paragraph 
(f)(8) of this section.
FER = Feedstock energy from renewable biomass used to 
make the transportation fuel, in Btu.
FENR = Feedstock energy from non-renewable feedstocks 
used to make the transportation fuel, heating oil, or jet fuel, in 
Btu.
* * * * *
    (B) Method B. VRIN shall be calculated according to the 
following formula:

VRIN = EV * Vs * R

Where:

VRIN = RIN volume, in gallons, for use in determining the 
number of gallon-RINs that shall be generated for the batch.
EV = Equivalence value for the batch of renewable fuel per Sec.  
80.1415, subject to qualification in paragraph (f)(4)(iii) of this 
section.
Vs = Standardized volume of the batch of renewable fuel 
at 60 [deg]F, in gallons, calculated in accordance with paragraph 
(f)(8) of this section.
R = The renewable fraction of the fuel as measured by a carbon-14 
dating test method as provided in paragraph (f)(9) of this section.
* * * * *
    (iii) In determining the RIN volume VRIN according to 
paragraph (f)(4)(i)(A) or (f)(4)(i)(B) of this section, the equivalence 
value used to determine VRIN which is calculated according 
to Sec.  80.1415 shall use a value of 1.0 to represent R, the renewable 
content of the renewable fuel.
* * * * *
    (12)(i) For purposes of this section, any renewable fuel other than 
ethanol, biodiesel, or renewable diesel is considered renewable fuel 
and the producer or importer may generate RINs for such fuel only if 
all of the following apply:
    (A) The fuel is produced from renewable biomass and qualifies for a 
D code in Table 1 to this section or has been otherwise approved by the 
Administrator;
    (B) The fuel producer or importer maintains records demonstrating 
that the fuel was produced for use as a transportation fuel, heating 
oil or jet fuel by:
    (1) Blending the renewable fuel into gasoline or diesel fuel to 
produce a transportation fuel, heating oil or jet fuel that meets all 
applicable standards;
    (2) Entering into a written contract for the sale of a the 
renewable fuel, which specifies the purchasing party shall blend the 
fuel into gasoline or diesel fuel to produce a transportation fuel, 
heating oil or jet fuel that meets all applicable standards; or
    (3) Entering into a written contract for the sale of the renewable 
fuel, which specifies that the fuel shall be used in its neat form as a 
transportation fuel, heating oil or jet fuel that meets all applicable 
standards.
    (C) The fuel was sold for use in or as a transportation fuel, and 
for no other purpose; and
    (ii) Reserved.
    (iii) Reserved.
* * * * *
    (14) For purposes of Table 1 to this section, process heat produced 
from combustion of gas at a renewable fuel facility is considered 
derived from biomass if the gas is biogas.
    (i) For biogas directly transported to the facility without being 
placed in a commercial distribution system, all of the following 
conditions must be met:
    (A) The producer has entered into a written contract for the 
procurement of a specific volume of biogas with a specific heat 
content.
    (B) The volume of biogas was sold to the renewable fuel production 
facility, and to no other facility.
    (C) The volume and heat content of biogas injected into the 
pipeline and the volume of gas used as process heat are measured by 
continuous metering.
    (ii) For biogas that has been gathered, processed and injected into 
a common carrier pipeline, all of the following conditions must be met:
    (A) The producer has entered into a written contract for the 
procurement of a specific volume of biogas with a specific heat 
content.
    (B) The volume of biogas was sold to the renewable fuel production 
facility, and to no other facility.
    (C) The volume of biogas that is withdrawn from the pipeline is 
withdrawn in a manner and at a time consistent with the transport of 
fuel between the injection and withdrawal points.
    (D) The volume and heat content of biogas injected into the 
pipeline and the volume of gas used as process heat are measured by 
continuous metering.
    (E) The common carrier pipeline into which the biogas is placed 
ultimately serves the producer's renewable fuel facility.
    (iii) The process heat produced from combustion of gas at a 
renewable fuel facility described in paragraph (f)(12)(i) of this 
section shall not be considered derived from biomass if any other party 
relied upon the contracted volume of biogas for the creation of RINs.
0
5. Section 80.1429 is amended by adding paragraph (b)(10) and removing 
and reserving paragraph (f) to read as follows:


Sec.  80.1429  Requirements for separating RINs from volumes of 
renewable fuel.

* * * * *
    (b) * * *
    (10) Any party that produces a volume of renewable fuel may 
separate any RINs that have been generated to represent that volume of 
renewable fuel or that blend if that party retires the

[[Page 12208]]

separated RINs to replace invalid RINs according to Sec.  80.1474.
* * * * *
0
6. In Sec.  80.1430 revise paragraph (a), (b), and (e) to read as 
follows:


Sec.  80.1430  Requirements for exporters of renewable fuel.

    (a) Any party that owns any amount of renewable fuel, whether in 
its neat form or blended, that is exported from any of the regions 
described in Sec.  80.1426(b) shall acquire sufficient RINs to comply 
with all applicable Renewable Volume Obligations under paragraphs (b) 
through (e) of this section representing the exported renewable fuel.
    (b) Exporter Renewable Volume Obligations. An exporter of renewable 
fuel shall determine its Exporter Renewable Volume Obligations from the 
volumes of the renewable fuel exported.
    (1) Cellulosic biofuel.

    ERVOCB,k = VOLk* EVk

Where:

ERVOCB,k = The Exporter Renewable Volume Obligation for 
cellulosic biofuel for discrete volume k in gallons.
k = A discrete volume of renewable fuel that the exporter knows or 
has reason to know is cellulosic biofuel that is exported in a 
single shipment.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (2) Biomass-based diesel.


ERVOBBD,k = VOLk* EVk

Where:

ERVOBBDI,k = The Exporter Renewable Volume Obligation for 
biomass-based diesel for discrete volume k, in gallons.
k = A discrete volume of renewable fuel that is biodiesel or 
renewable diesel and is exported in a single shipment.
VOLk = The standardized volume of discrete volume k 
calculated in accordance with Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (3) Advanced biofuel.

ERVOAB,k = VOLk* EVk

Where:

ERVOAB,k = The Exporter Renewable Volume Obligation for 
advanced biofuel for discrete volume k, in gallons.
k = A discrete volume of renewable fuel that is advanced biofuel 
(including biomass-based diesel, renewable diesel, cellulosic 
biofuel and other advanced biofuel) and is exported in a single 
shipment.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (4) Renewable fuel.

ERVORF,i = VOLk* EVk

Where:

ERVORF,i = The Renewable Volume Obligation for renewable 
fuel for discrete volume k, in gallons.
k = A discrete volume of exported renewable fuel that is exported in 
a single shipment.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.
* * * * *
    (e) For renewable fuels that are in the form of a blend at the time 
of export, the exporter shall determine the volume of exported 
renewable fuel based on one of the following:
* * * * *
0
7. Section 80.1431 is amended by removing and reserving paragraph 
(a)(1)(viii) and revising paragraph (b) introductory text to read as 
follows:


Sec.  80.1431  Treatment of invalid RINs.

    (a) * * *
    (1) * * *
    (viii) [Reserved]
* * * * *
    (b) Except as provided in Sec.  80.1473, the following provisions 
apply in the case of RINs that are invalid:
* * * * *
0
8. Section 80.1433 is added to read as follows:


Sec.  80.1433  Requirements for parties that designate fuel for which 
RINs were generated for an application that is not transportation fuel, 
heating oil, or jet fuel.

    (a) Any party that designates any amount of fuel originally 
produced as renewable fuel, whether in its neat form or blended, for an 
application that is not transportation fuel, heating oil, or jet fuel 
shall retire an appropriate number and type of RINs according to one of 
the following equations and as specified in paragraph (b).
    (1) Except as provided in (a)(5), Cellulosic biofuel.

RINRETCB,i = [Sigma](VOLk* 
EVk)i

Where:

RINRETCB,i = The quantity of cellulosic biofuel RINs that 
must be retired for day i, in gallons.
k = A discrete volume of fuel which the party designated for use in 
an application other than as transportation fuel, heating oil or jet 
fuel and which the party knows or has reason to know would have 
qualified as cellulosic biofuel if not put to a non-qualifying fuel 
use.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with paragraph (c) of this section 
and Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (2) Except as provided in (a)(5), Biomass-based diesel.

RINRETBBD,i = [Sigma](VOLk* 
EVk)i

Where:

RINRETBBD,i = The quantity of biomass-based diesel RINs 
that must be retired for day i, in gallons.
k = A discrete volume of fuel which the party designated for use in 
an application other than as transportation fuel, heating oil or jet 
fuel and which the party knows or has reason to know would have 
qualified as biomass-based diesel if not put to a non-qualifying 
fuel use.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (3) Advanced biofuel.

RINRETAB,i = [Sigma](VOLk* 
EVk)i

Where:

RINRETAB,i = The quantity of advanced biofuel RINs that 
must be retired for day i, in gallons.
k = A discrete volume of fuel which the party designated for use in 
an application other than as transportation fuel, heating oil or jet 
fuel and which the party knows or has reason to know would have 
qualified as advanced biofuel if not put to a non-qualifying fuel 
use.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with paragraph (c) of this section 
and Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (4) Renewable fuel.

RINRETRF,i = [Sigma](VOLk* 
EVk)i

Where:

RINRETRF,i = The quantity of renewable fuel RINs that 
must be retired for day i, in gallons.
k = A discrete volume of fuel which the party designated for use in 
an application other than as transportation fuel, heating oil or jet 
fuel and which the party knows or has reason to know would have 
qualified as renewable fuel if not put to a non-qualifying fuel use.
VOLk = The standardized volume of discrete volume k, in 
gallons, calculated in accordance with Sec.  80.1426(f)(8).
EVk = The equivalence value associated with discrete 
volume k.

    (5) If the party has reason to know that the fuel would have 
qualified as cellulosic diesel if not put to a non-qualifying fuel use, 
it must choose either the formula specified in paragraph (a)(1) or that 
in paragraph (a)(2) to calculate the number and type of RINs that must 
be retired.
    (b) For the purposes of calculating the number of RINs that must be 
retired under paragraphs (a) of this section:
    (1) If the equivalence value for the discrete volume k can be 
determined pursuant to Sec.  80.1415 based on its

[[Page 12209]]

composition, then the appropriate equivalence value shall be used in 
the calculation pursuant to paragraph (a).
    (2) If the discrete volume k is known to be biomass-based diesel 
but the composition is unknown, the EVk shall be 1.5.
    (3) If neither the category nor composition of discrete volume k 
can be determined, the EVk shall be 1.0.
    (c) VOLk shall be based on one of the following:
    (1) Information from the supplier of the blend of the concentration 
of fuel originally produced as renewable fuel in the blend;
    (2) Determination of the renewable portion of the blend using 
Method B or Method C of ASTM D 6866 (incorporated by reference, see 
Sec.  80.1468), or an alternative test method as approved by the EPA; 
or
    (3) Assuming the maximum concentration of the renewable fuel in the 
blend as allowed by law and/or regulation.
    (d) [Reserved]
    (e) All RINs retired pursuant to this section shall be identified 
in EMTS according the following schedule:
    (1) Within ten (10) business days of the designation of a fuel for 
which RINs were generated for a use other than as transportation fuel, 
heating oil, or jet fuel.
    (f) Any volume of fuel which is designated for a purpose other than 
as transportation fuel, heating oil or jet fuel cannot be redesignated 
as renewable fuel.
0
9. Section 80.1450 is amended as follows:
0
a. By adding paragraph (b)(1)(ix); and
0
b. By revising paragraph (g) and
0
c. By adding paragraph (h).
    The revisions and additions read as follows:


Sec.  80.1450  What are the registration requirements under the RFS 
program?

* * * * *
    (b)* * *
    (1)* * *
    (ix) For a producer or importer or any renewable fuel other than 
ethanol, biodiesel, renewable diesel, biogas or renewable electricity:
    (A) A description of the renewable fuel and how it will be blended 
to into gasoline or diesel fuel to produce a transportation fuel, 
heating oil or jet fuel that meets all applicable standards;
    (B) A statement regarding whether the renewable fuel producer or 
importer will blend the renewable fuel into gasoline or diesel fuel or 
enter into a written contract for the sale and use of a specific 
quantity of the renewable fuel with a party who blends the fuel into 
gasoline or diesel fuel to produce a transportation fuel, heating oil 
or jet fuel that meets all applicable standards;
    (C) If the renewable fuel producer or importer enters into a 
written contract for the sale and use of a specific quantity of the 
renewable fuel with a party who blends the fuel into gasoline or diesel 
fuel to produce a transportation fuel, heating oil or jet fuel, provide
    (1) the name, location and contact information for the party that 
will blend the renewable fuel, and
    (2) a copy of the contract that requires the party to blend the 
renewable fuel into gasoline or diesel fuel to produce a transportation 
fuel, heating oil or jet fuel that meets all applicable standards;
* * * * *
    (g) Any independent third-party auditor described in Sec.  80.1471 
must register with EPA as an independent third-party auditor and 
receive an EPA issued company identification number prior to conducting 
quality assurance audits pursuant to Sec.  80.1472. Registration 
information must be submitted at least 30 days prior to conducting 
audits of renewable fuel production facilities. The independent third-
party auditor must provide to EPA the following:
    (1) The information specified under Sec.  80.76, if such 
information has not already been provided under the provisions of this 
part.
    (2) Documentation of professional qualifications as described in 
Sec.  80.1450(b)(2)(i)(A) and Sec.  80.1450(b)(2)(i)(B).
    (3) Documentation of professional liability insurance as described 
in Sec.  80.1471(c).
    (4) Any quality assurance plans as described in Sec.  80.1469.
    (5) Name, address, and company and facility identification number 
of all renewable fuel production facilities that the independent third-
party auditor intends to audit under Sec.  80.1472.
    (6) An affidavit from each renewable fuel producer or foreign 
renewable fuel producer stating its intent to have the independent 
third-party auditor conduct a quality assurance audit of any of the 
renewable fuel producer's or foreign renewable fuel producer's 
facilities.
    (7) An affidavit stating that an independent third-party auditor is 
independent, as described in paragraphs Sec.  80.1471(b), of any 
renewable fuel producer or foreign renewable fuel producer.
    (8) Proof of a RIN replacement instrument, if applicable, as 
described under Sec.  80.1470.
    (9) The name and contact information for each person employed (or 
under contract) by the independent third-party auditor to conduct 
audits or verify RINs, as well as the name and contact information for 
the Professional Engineer performing the review.
    (10) Registration updates.--
    (i) Any independent third-party auditor who makes changes to its 
quality assurance plan(s) that will allow it to audit new renewable 
fuel production facilities, as defined in Sec.  80.1401 that is not 
reflected in the producer's registration information on file with EPA 
must update its registration information and submit a copy of an 
updated QAP on file with EPA at least 60 days prior to producing the 
new type of renewable fuel.
    (ii) Any independent third-party auditor who makes any other 
changes to a QAP that will affect the third-party auditor's 
registration information but will not affect the renewable fuel 
category for which the producer is registered per paragraph (b) of this 
section must update its registration information 7 days prior to the 
change.
    (iii) Independent third-party auditors must update their QAPs at 
least 60 days prior to verifying RINs generated by a renewable fuel 
facility uses a new pathway.
    (iv) Independent third-party auditors must update their QAPs at 
least 60 days prior to verifying RINs generated by any renewable fuel 
facility not identified in their existing registration.
    (11) Registration renewal. Registrations for independent third-
party auditors expire at the end of the calendar year, December 31, 
after EPA has approved a registration under this paragraph (g) unless:
    (i) The independent third-party auditor resubmits all information, 
updated as necessary, described in Sec.  80.1450(g)(1) thru (g)(7) no 
later than October 31; and
    (ii) The independent third-party auditor submits an affidavit 
affirming that he or she has only verified RINs using a QAP approved 
under Sec.  80.1469, notified all appropriate parties of all 
potentially invalid RINs as described in Sec.  80.1471(d), and 
fulfilled all of his or her RIN replacement obligations under Sec.  
80.1474.
    (12) Revocation of Registration.
    (i) The Administrator may issue a notice of intent to revoke the 
registration of a third-party auditor if the Administrator determines 
that the auditor has failed to fulfill any requirement of this subpart. 
The notice of intent shall include an explanation of the reasons for 
the proposed revocation.

[[Page 12210]]

    (ii) Within 60 days of receipt of the notice of intent to revoke, 
the independent third-party auditor may submit written comments 
concerning the notice, including but not limited to a demonstration of 
compliance with the requirements which provide the basis for the 
proposed revocation. Communications should be sent to the following 
address:

U.S. Mail: U.S. Environmental Protection Agency, Fuels Programs 
Registration (6406J), 1200 Pennsylvania Avenue NW., Washington, DC 
20460.
Commercial Delivery: U.S. Environmental Protection Agency, Fuels 
Programs Registration, Room 647C, 202-343-9038, 1310 L Street NW., 
Washington, DC 20005.

The Administrator shall review and consider any such submission before 
taking final action concerning the proposed revocation.

    (iii) If the auditor fails to respond in writing within 60 days to 
the notice of intent to revoke, the revocation shall become final by 
operation of law and the Administrator shall notify the independent 
third-party auditor of such revocation.
    (iv) EPA may deny the registration of an independent third-party 
auditor if the independent third-party auditor employs any person that 
was previously employed by an independent third-party auditor whose 
registration was revoked.
* * * * *
    (h) Registration shall be on forms, and following policies, 
established by the Administrator.
0
10. Section 80.1451 is amended as follows:
0
a. By revising paragraphs (a)(1)(ix) through (xiii);
0
b. By adding paragraphs (a)(1)(xiv) through (xvi);
0
c. By revising paragraph (b)(1)(ii)(T);
0
d. By revising paragraphs (c)(2)(x) through (xvi);
0
e. By adding paragraphs (c)(2)(xvii) and (c)(2)(xviii);
0
f. By revising paragraph (g); and
0
g. By adding paragraph (h).
    The revisions and additions read as follows:


Sec.  80.1451  What are the reporting requirements under the RFS 
program?

    (a) * * *
    (1) * * *
    (ix) The total current-year RINs by category of renewable fuel, as 
those fuels are defined in Sec.  80.1401 (i.e., cellulosic biofuel, 
biomass-based diesel, advanced biofuel, renewable fuel, and cellulosic 
diesel), retired for compliance that are invalid as defined in Sec.  
80.1431(a).
    (x) The total prior-year RINs by renewable fuel category, as those 
fuels are defined in Sec.  80.1401, retired for compliance.
    (xi) The total prior-year RINs by renewable fuel category, as those 
fuels are defined in Sec.  80.1401, retired for compliance that are 
invalid as defined in Sec.  80.1431(a).
    (xii) The total cellulosic biofuel waiver credits used to meet the 
party's cellulosic biofuel RVO.
    (xiii) A list of all RINs generated prior to July 1, 2010 that were 
retired for compliance in the reporting period.
    (xiv) A list of all RINs that were retired for compliance in the 
reporting period and are invalid as defined in Sec.  80.1431(a).
    (xv) Any deficit RVO(s) carried into the subsequent year.
    (xvi) Any additional information that the Administrator may 
require.
* * * * *
    (b) * * *
    (1)(i) * * *
    (ii) * * *
    (T) Producers or importers of any renewable fuel other than 
ethanol, biodiesel, renewable diesel, biogas or renewable electricity, 
shall report, on a quarterly basis, all the following for each volume 
of fuel:
    (1) Total volume of renewable fuel produced or imported, total 
volume of renewable fuel blended into gasoline and diesel fuel by the 
producer or importer, and the percentage of renewable fuel in each 
batch of finished fuel;
    (2) If the renewable fuel producer or importer enters into a 
written contract for the sale of a specific quantity of the renewable 
fuel to a party who blends the fuel into gasoline or diesel fuel to 
produce a transportation fuel, heating oil or jet fuel, or who uses the 
neat fuel for a qualifying fuel use, the name, location and contact 
information for each puchasing party, and one or more affidavits from 
that party including the following information:
    (i) Quantity of renewable fuel received from the producer or 
importer;
    (ii) Date the renewable fuel was received from producer;
    (iii) A description of the fuel that the renewable fuel was blended 
into and the blend ratios for each batch, if applicable;
    (iv) A description of the finished fuel, and a statement that the 
fuel meets all applicable standards and was sold for use as a 
transportation fuel, heating oil or jet fuel;
    (v) Quantity of assigned RINs received with the renewable fuel, if 
applicable; and
    (vi) Quantity of assigned RINs that the end user separated from the 
renewable fuel, if applicable.
    (c) * * *
    (2) * * *
    (x) The total current-year RINs retired that are invalid as defined 
in Sec.  80.1431(a).
    (xi) The total prior-year RINs retired.
    (xii) The total prior-year RINs retired that are invalid as defined 
in Sec.  80.1431(a).
    (xiii) The number of current-year RINs owned at the end of the 
quarter.
    (xiv) The number of prior-year RINs owned at the end of the 
quarter.
    (xv) The number of RINs generated.
    (xvi) The volume of renewable fuel (in gallons) owned at the end of 
the quarter.
    (xvii) The total 2009 and 2010 retired RINs reinstated.
    (xviii) Any additional information that the Administrator may 
require.
* * * * *
    (g) All independent third-party auditors. Any party that is an 
independent third-party auditor as defined in Sec.  80.1471 that 
verifies RINs must submit to EPA reports according to the schedule, and 
containing all the information, that is set forth in this paragraph 
(g).
    (1)(i) For RINs verified beginning on January 1, 2014, RIN 
generation verification reports for each facility audited by the 
independent third-party auditor shall be submitted according to the 
schedule specified in paragraph (f)(2) of this section.
    (ii) The RIN generation verification reports shall include all the 
following information for each batch of renewable fuel produced or 
imported verified, where ``batch'' means a discrete quantity of 
renewable fuel produced or imported and assigned a unique batch-RIN per 
Sec.  80.1426(d):
    (A) The RIN generator's name.
    (B) The RIN generator's EPA company registration number.
    (C) The renewable fuel producer EPA facility registration number.
    (D) The importer EPA facility registration number and foreign 
renewable producer company registration number, if applicable.
    (E) The applicable reporting period.
    (F) The quantity of RINs generated for each batch according to 
Sec.  80.1426.
    (G) The production date of each batch.
    (H) The fuel type of each batch.
    (I) The volume of denaturant and applicable equivalence value of 
each batch.
    (J) The volume of each batch produced.

[[Page 12211]]

    (K) The volume and type of each feedstock used to produce the 
batch.
    (L) Which batches met the definition of Renewable Biomass.
    (M) The quantity and type of co-products produced.
    (N) Any additional information the Administrator may require.
    (2) RIN verification activity reports shall be submitted to EPA 
according to the schedule specified in paragraph (f)(2) of this 
section. Each report shall summarize RIN verification activities for 
the reporting period. The quarterly RIN verification activity reports 
shall include all of the following information:
    (i) The submitting party's name.
    (ii) The submitting party's EPA company registration number.
    (iii) The number of current-year RINs verified at the start of the 
quarter.
    (iv) The number of prior-year RINs verified at the start of the 
quarter.
    (v) The total current-year RINs verified.
    (vi) The total prior-year RINs verified.
    (vii) The number of current-year RINs verified at the end of the 
quarter.
    (viii) The number of prior-year RINs verified at the end of the 
quarter.
    (ix) A list of all RINs subject to the audit that were not verified 
or that were identified as Potentially Invalid RINs (PIRs) pursuant to 
80.1474, along with a narrative description of why the RINs were not 
verified or were identified as PIRs.
    (x) Any additional information that the Administrator may require.
    (3) All reports required under this paragraph (g) must be signed 
and certified as meeting all the applicable requirements of this 
subpart by the independent third-party auditor or a responsible 
corporate officer of the independent third-party auditor.
    (h) All reports required under this section shall be submitted on 
forms and following procedures prescribed by the Administrator.
0
11. Section 80.1452 is amended by revising paragraph (d) and adding 
paragraph (e), to read as follows.


Sec.  80.1452  What are the requirements related to the EPA-Moderated 
Transaction System (EMTS)?

* * * * *
    (d) Alternative method of reporting buy and sell transactions in 
EMTS. For buyers and sellers of assigned RINs that agree to utilize 
this alternative reporting method, the reporting requirements of 
paragraph(c) of this section are modified as follows:
    (1) The seller of assigned RINs shall do the following:
    (i) Report the sell transaction in EMTS within five (5) business 
days of shipping, and;
    (ii) Indicate that the alternative reporting method is being 
utilized; and
    (iii) Report the date the renewable volume is shipped in place of 
the date of transfer (c)(7) in the EMTS sell transaction report; and
    (iv) Report a unique identifier and provide a product transfer 
document (PTD) that meets all requirement of Sec.  80.1453 and that 
includes the unique identifier agreed upon by the buyer and seller.
    (2) The buyer of assigned RINS shall do the following:
    (i) Report the buy transaction in EMTS within five (5) business 
days of receipt;
    (ii) Indicate that the alternative reporting method is being 
utilized;
    (iii) Include the unique identifier provided by the seller under 
paragraph (g)(1)(iii) in the EMTS buy transaction report; and
    (iv) Report the date the renewable volume is received in place of 
the date of transfer (c)(7) in the EMTS buy transaction report.
    (e) All information required under this section shall be submitted 
on forms and following procedures prescribed by the Administrator.
0
12. Section 80.1453 is amended as follows:
0
a. Revising paragraph (a) introductory text; and
0
b. Adding paragraphs (a)(5), and (a)(12)
    The revisions and additions read as follows:


Sec.  80.1453  What are the product transfer document (PTD) 
requirements for the RFS program?

    (a) On each occasion when any party transfers ownership of neat 
and/or blended renewable fuels or separated RINs subject to this 
subpart, the transferor must provide to the transferee documents that 
include all of the following information, as applicable:
* * * * *
    (5) Name and blend level of all blending components in a product 
containing renewable fuel, if applicable.
* * * * *
    (12) For the transfer of renewable fuel with or without RINs, an 
accurate and clear statement on the product transfer document of the 
fuel type from Table 1 to Sec.  80.1426, and designation of the fuel 
use(s) intended by the transferor, as follows:
    (i) Ethanol. ``This volume of neat or blended ethanol is designated 
and intended for use as transportation fuel or jet fuel in the 48 U.S. 
contiguous states and Hawaii. Any other use in the 48 U.S. contiguous 
states and Hawaii is a violation of 40 CFR 80.1460(g), unless the 
requirements in Sec.  80.1433 are met.''
    (ii) Biodiesel. '' This volume of neat or blended biodiesel is 
designated and intended for use as transportation fuel, heating oil or 
jet fuel in the 48 U.S. contiguous states and Hawaii. Any other use in 
the 48 U.S. contiguous states and Hawaii is a violation of 40 CFR 
80.1460(g), unless the requirements in Sec.  80.1433 are met.''
    (iii) Renewable Heating oil. ``This volume of heating oil is 
designated and intended for use as heating oil in the 48 U.S. 
contiguous states and Hawaii. Any other use in the 48 U.S. contiguous 
states and Hawaii is a violation of 40 CFR 80.1460(g), unless the 
requirements in Sec.  80.1433 are met.''
    (iv) Renewable Diesel. ``This volume of neat or blended renewable 
diesel is designated and intended for use as transportation fuel, 
heating oil or jet fuel in the 48 U.S. contiguous states and Hawaii. 
Any other use in the 48 U.S. contiguous states and Hawaii is a 
violation of 40 CFR 80.1460(g), unless the requirements in Sec.  
80.1433 are met.''
    (v) Naphtha. '' This volume of neat or blended naphtha is 
designated and intended for use as transportation fuel or jet fuel in 
the 48 U.S. contiguous states and Hawaii. This naphtha may only be used 
as a gasoline blendstock or jet fuel. Any other use in the 48 U.S. 
contiguous states and Hawaii is a violation of 40 CFR 80.1460(g), 
unless the requirements in Sec.  80.1433 are met.''
    (vi) Butanol. ``This volume of neat or blended butanol is 
designated and intended for use as transportation fuel or jet fuel in 
the 48 U.S. contiguous states and Hawaii. This butanol may only be used 
as a gasoline blendstock or jet fuel. Any other use in the 48 U.S. 
contiguous states and Hawaii is a violation of 40 CFR 80.1460(g), 
unless the requirements in Sec.  80.1433 are met.''
    (vii) Renewable fuels other than ethanol, biodiesel, heating oil, 
renewable diesel, naptha or butanol. ``This volume of neat or blended 
renewable fuel is designated and intended to be used as transportation 
fuel, heating oil, or jet fuel in the 48 U.S. contiguous states and 
Hawaii. Any other use in the 48 U.S. contiguous states and Hawaii is a 
violation of 40 CFR 80.1460(g), unless the requirements in Sec.  
80.1433 are met.''
0
13. Section 80.1454 is amended as follows:
0
a. By adding paragraph (b)(7);
0
b. By revising paragraphs (l), (m), (n), (o), and (p); and
0
c. By adding paragraphs (q) and (r).
    The revisions and additions read as follows:

[[Page 12212]]

Sec.  80.1454  What are the recordkeeping requirements under the RFS 
program?

* * * * *
    (b) * * *
    (7) Records related to the implementation of a QAP under Sec.  
80.1469.
* * * * *
    (l) Requirements for producers or importers of any renewable fuel 
other than ethanol, biodiesel, renewable diesel, biogas or renewable 
electricity. A renewable fuel producer that generates RINs for any 
renewable fuel other than ethanol, biodiesel, renewable diesel, biogas 
or renewable electricity shall keep all of the following additional 
records:
    (1) Documents demonstrating the total volume of renewable fuel 
produced, total volume of renewable fuel blended into gasoline and 
diesel fuel, and the percentage of renewable fuel in each batch of 
finished fuel;
    (2) Contracts and documents memorializing the sale of renewable 
fuel to parties who blend the fuel into gasoline or diesel fuel to 
produce a transportation fuel, heating oil or jet fuel, or who use the 
renewable fuel in its neat form for a qualifying fuel use; and
    (3) Such other records as may be requested by the Administrator.
    (m) Requirements for independent third-party auditors. Any 
independent third-party auditor (as described at Sec.  80.1471) must 
keep all of the following records for a period of at least five (5) 
years:
    (1) Copies of all reports submitted to EPA under Sec.  80.1451(g), 
as applicable.
    (2) Records related to the implementation of a QAP under Sec.  
80.1469 for each facility including records from facility audits and 
ongoing and quarterly monitoring activities.
    (3) Records related to the verification of RINs under Sec.  
80.1471(e).
    (4) Copies of communications sent to and received from renewable 
fuel producers or foreign renewable fuel producers, feedstock 
suppliers, purchasers of RINs, and obligated parties.
    (5) Copies of all notes relating to the implementation of a QAP 
under Sec.  80.1469.
    (6) List of RINs reported to EPA and renewable fuel producers or 
foreign renewable fuel producers as potentially invalidly generated 
under Sec.  80.1474 compliance.
    (7) Records related to the professional liability insurance 
requirement under Sec.  80.1471(c).
    (8) Copies of all records related to any financial assurance 
instrument as required under Sec.  80.1470 under a quality assurance 
plan implemented under Sec.  80.1469(a).
    (9) Such other records as may be requested by the Administrator.
    (n) The records required under paragraphs (a) through (d) and (f) 
through (l) of this section and under Sec.  80.1453 shall be kept for 
five years from the date they were created, except that records related 
to transactions involving RINs shall be kept for five years from the 
date of the RIN transaction.
    (o) The records required under paragraph (e) of this section shall 
be kept through calendar year 2022.
    (p) On request by EPA, the records required under this section and 
under Sec.  80.1453 must be made available to the Administrator or the 
Administrator's authorized representative. For records that are 
electronically generated or maintained, the equipment or software 
necessary to read the records shall be made available; or, if requested 
by EPA, electronic records shall be converted to paper documents.
    (q) The records required in paragraphs (b)(3) and (c)(1) of this 
section must be transferred with any renewable fuel sent to the 
importer of that renewable fuel by any foreign producer not generating 
RINs for his renewable fuel.
    (r) Copies of all reports required under Sec.  80.1464.
0
14. Section 80.1460 is amended by adding paragraphs (g), (h), and (i) 
to read as follows.


Sec.  80.1460  What acts are prohibited under the RFS program?

* * * * *
    (g) Failing to retire RINs when fuel for which RINs have been 
generated is designated for use in an application other than 
transportation fuel, heating oil or jet fuel. No person shall designate 
fuel for which RINs were generated for a non-qualifying fuel use, 
unless the requirements of 80.1433 have been met.
    (h) RIN Separation Violations. No person shall do any of the 
following:
    (1) Identify separated RINs in EMTS with the wrong separation 
reason code.
    (2) Identify separated RINs in EMTS without having a qualifying 
separation event pursuant to 80.1429.
    (3) Separate more than 2.5 RINs per gallon of renewable fuel that 
has a valid qualifying separation event pursuant to Sec.  80.1429.
    (4) Separate RINs outside of the requirements in Sec.  80.1452(c).
    (5) [Reserved]
    (6) Improperly separate RINs in any other way not listed in 
paragraphs (i)(1)-(5) of this section.
    (i) Independent third-party auditor violations. No person shall do 
any of the following:
    (1) Fail to fully and competently implement a QAP approved under 
Sec.  80.1469.
    (2) Fail to notify appropriate parties of potentially invalid RINs 
under Sec.  80.1474(b).
    (3) Identify a RIN as verified in accordance with Sec.  80.1471(e) 
that is invalid under Sec.  80.1431.
0
15. Section 80.1461 is amended by revising paragraphs (a)(1) and (a)(2) 
to read as follows.


Sec.  80.1461  Who is liable for violations under the RFS program?

* * * * *
    (a) * * *
    (1) Any person who violates a prohibition under Sec.  80.1460(a) 
through (d) or Sec.  80.1460(g) through (h) is liable for the violation 
of that prohibition.
    (2) Any person who causes another person to violate a prohibition 
under Sec.  80.1460(a) through (d) or Sec.  80.1460(g) through (h) is 
liable for a violation of Sec.  80.1460(e).
* * * * *
0
16. Section 80.1469 is added to read as follows:


Sec.  80.1469  Requirements for Quality Assurance Plans.

    This section specifies the requirements for two types of Quality 
Assurance Plan (QAP).
    (a) Option A QAP Requirements.
    (1) Feedstock-related components.
    (i) Components requiring ongoing monitoring:
    (A) Feedstocks are renewable biomass as defined in Sec.  80.1401.
    (B) Feedstocks are being separated according to a separation plan, 
if applicable under Sec.  80.1426(f)(5)(ii).
    (C) Crop and crop residue feedstocks meet land use restrictions, or 
alternatively the aggregate compliance provisions of Sec.  80.1454(g).
    (D) If applicable, verify that feedstocks with additional 
recordkeeping requirements meet requirements of Sec.  80.1454(d).
    (E) Feedstocks are valid for the D code being used, and are 
consistent with information recorded in EMTS.
    (F) Feedstock is consistent with production process and D code 
being used as permitted under Table 1 to Section 80.1426 or a petition 
approved through section 80.1416.
    (G) Feedstock is not renewable fuel for which RINs were previously 
generated.
    (ii) Components requiring quarterly monitoring:
    (A) Separated food waste or separated yard waste plan is accepted 
and up to

[[Page 12213]]

date, if applicable under Sec.  80.1426(f)(5)(ii).
    (B) Separated municipal solid waste plan is approved and up to 
date, if applicable under Sec.  80.1426(f)(5)(ii).
    (C) Contracts or agreements for feedstock acquisition are 
sufficient for facility production.
    (D) Feedstock processing and storage equipment are sufficient and 
are consistent with engineering review under Sec.  80.1450(b)(2).
    (E) If applicable, accuracy of feedstock energy (FE) calculation 
factors related to feedstocks, including average moisture content m and 
feedstock energy content E.
    (2) Production process-related components.
    (i) Components requiring ongoing monitoring:
    (A) Production process is consistent with that reported in EMTS.
    (B) Production process is consistent with D code being used as 
permitted under Table 1 to Sec.  80.1426 or a petition approved through 
Sec.  80.1416.
    (C) Certificates of analysis verifying fuel type and quality, as 
applicable.
    (ii) Components requiring quarterly monitoring:
    (A) Mass and energy balances are appropriate for type and size of 
facility.
    (B) Workforce size is appropriate for type and size of facility, 
and sufficient workers are on site for facility operations.
    (C) If applicable, process-related factors used in feedstock energy 
(FE) calculation are accurate, in particular the converted fraction 
(CF).
    (D) Verify existence of quality process controls designed to ensure 
that fuel continues to meet applicable property and quality 
specifications.
    (E) Volume production is consistent with that reported to EPA and 
EIA, as well as other federal or state reporting.
    (F) Volume production is consistent with storage and distribution 
capacity.
    (G) Volume production capacity is consistent with RFS registration.
    (3) RIN generation-related components.
    (i) Components requiring ongoing monitoring:
    (A) Standardization of volumes pursuant to Sec.  80.1426(f)(8) are 
accurate.
    (B) Renewable fuel type matches the D code being used.
    (C) RIN generation is consistent with wet gallons produced or 
imported.
    (D) Fuel shipments are consistent with production volumes.
    (E) If applicable, renewable content R is accurate pursuant to 
80.1426(f)(9).
    (F) Equivalence value EV is accurate and appropriate.
    (G) Renewable fuel was intended and sold for qualifying uses as 
transportation fuel, heating oil, or jet fuel.
    (H) Verify that appropriate RIN generation calculations are being 
followed under Sec.  80.1426(f)(3), (4), or (5), as applicable.
    (ii) Components requiring quarterly monitoring:
    (A) Registration, reporting and recordkeeping components.
    (4) RIN separation-related components.
    (i) Components requiring ongoing monitoring:
    (A) If applicable, verify that RIN separation is appropriate under 
Sec.  80.1429(b)(4).
    (B) If applicable, verify that RINS were retired for any fuel that 
the producer produced and exported.
    (ii) Components requiring quarterly monitoring:
    (A) Verify that annual attestation report is accurate.
    (b) Option B QAP Requirements.
    All components specified in this paragraph (b) require quarterly 
monitoring.
    (1) Feedstock-related components.
    (i) Feedstocks are renewable biomass as defined in Sec.  80.1401.
    (ii) If applicable, separated food waste or separated yard waste 
plan under Sec.  80.1426(f)(5)(ii) is accepted and up to date.
    (iii) If applicable, separated municipal solid waste plan under 
Sec.  80.1426(f)(5)(ii) is approved and current.
    (iv) Feedstocks are being separated according to a separation plan, 
if applicable under Sec.  80.1426(f)(5)(ii).
    (v) Crop and crop residue feedstocks meet land use restrictions, or 
alternatively the aggregate compliance provisions of Sec.  80.1454(g).
    (vi) Feedstock is consistent with production process and D code 
being used as permitted under Table 1 to Section 80.1426 or a petition 
approved through section 80.1416, and is consistent with information 
recorded in EMTS.
    (vii) Feedstock is not renewable fuel for which RINs were 
previously generated.
    (viii) If applicable, accuracy of feedstock energy (FE) calculation 
factors related to feedstocks, including average moisture content m and 
feedstock energy content E.
    (2) Production process-related components.
    (i) Production process is consistent with that reported in EMTS.
    (ii) Production process is consistent with D code being used as 
permitted under Table 1 to Sec.  80.1426 or a petition approved through 
Sec.  80.1416.
    (iii) Mass and energy balances are appropriate for type and size of 
facility.
    (iv) If applicable, process-related factors used in feedstock 
energy (FE) calculation are accurate, in particular the converted 
fraction CF.
    (3) RIN generation-related components.
    (i) Renewable fuel was intended and sold for qualifying uses as 
transportation fuel, heating oil, or jet fuel.
    (ii) Certificates of analysis verifying fuel type and quality, as 
applicable.
    (iii) Renewable fuel type matches the D code being used.
    (iv) If applicable, renewable content R is accurate pursuant to 
80.1426(f)(9).
    (v) Equivalence value EV is accurate and appropriate.
    (vi) Volume production capacity is consistent with RFS 
registration.
    (vii) Verify that appropriate RIN generation calculations are being 
followed under Sec.  80.1426(f)(3), (4), or (5), as applicable.
    (4) RIN separation-related components.
    (i) If applicable, verify that RIN separation is appropriate under 
Sec.  80.1429(b)(4).
    (ii) Verify that fuel that is exported was not used to generate 
RINs, or alternatively that were generated but retired.
    (iii) Verify that annual attestation report is accurate.
    (c) Each QAP shall represent a specific RIN-generating pathway as 
provided in Table 1 to Sec.  80.1426 or as approved by the 
Administrator pursuant to Sec.  80.1416, and shall contain elements 
specific to particular feedstocks, production processes, and fuel types 
as applicable.
    (d) Submission and approval of a QAP.
    (1) Each independent third-party auditor shall annually submit a 
QAP to the EPA which demonstrates adherence to the requirements of 
paragraphs (a) and (c) or (b) and (c) of this section, as applicable, 
and request approval on forms and using procedures specified by the 
Administrator.
    (2) No third-party independent auditor may present a QAP as 
approved by the EPA without having received written approval from the 
EPA.
    (3) A QAP is approved on the date that EPA notifies the third-party 
independent auditor of such approval.
    (4) EPA may revoke its approval of a QAP for cause, including, but 
not limited to, an EPA determination that the approved QAP has proven 
to be inadequate in practice.
    (5) EPA may void ab initio its approval of a QAP upon EPA's 
determination that the approval was based on false information, 
misleading

[[Page 12214]]

information, or incomplete information, or if there was a failure to 
fulfill, or cause to be fulfilled, any of the requirements of the QAP.
    (e) Conditions for revisions of a QAP.
    (1) A new QAP shall be submitted to EPA according to paragraph (d) 
of this section whenever the following changes occur at a production 
facility audited by a third-party independent auditor using an approved 
QAP:
    (i) Change in feedstock.
    (ii) Change in type of fuel produced.
    (iii) Change in facility operations or equipment that may impact 
the capability of the QAP to verify that RINs are validly generated.
    (2) An original QAP ceases to be valid as the basis for verifying 
RINs until a new QAP, submitted to EPA under this paragraph (e), is 
approved pursuant to paragraph (d).
0
17. Section 80.1470 is added to read as follows:


Sec.  80.1470  RIN Replacement Mechanisms for Option A Independent 
Third Party Auditors.

    (a) Applicability. This section applies to independent third party 
auditors using a QAP approved under Option A pursuant to Sec.  
80.1469(a) and (c).
    (b) Requirements. An independent third party auditor must establish 
or participate in the establishment of a RIN replacement mechanism. The 
RIN replacement mechanism must fulfill, at a minimum, the following 
conditions:
    (1) The RIN replacement mechanism must be capable of fulfilling the 
independent third party auditor's RIN replacement responsibility, as 
described in section 1474(b)(5)(i) of this subpart.
    (2) The independent third party auditor is responsible for 
calculating and maintaining the minimum coverage afforded by the RIN 
replacement mechanism at all times.
    (3) RINs held by the RIN replacement mechanism (if any) must be 
identified in a unique EMTS account designated for the exclusive use of 
the replacement mechanism.
    (4) Distribution and removal of RINs from the replacement mechanism 
may not be under the sole operational control of the third-party 
auditor.
    (5) An originally signed duplicate of the agreement or contract 
establishing the RIN replacement mechanism must be submitted to EPA by 
the independent third party auditor in accordance with 40 CFR 
1450(g)(7).
    (6) Any substantive change to the agreement establishing the RIN 
replacement mechanism must be submitted to EPA within 30 days of the 
change.
    (c) Cap on RIN Replacement for Independent Third Party Auditors of 
A-RINs.
    (1) If required to replace invalid A-RINs pursuant to paragraph (b) 
of this section, the independent third party auditor shall be required 
to replace no more than the percentage specified in paragraph (c)(2) of 
this section of each D code of A-RINs verified by the auditor in the 
current calendar year and four previous calendar years.
    (2)(i) The cap on RIN replacement for auditors of A-RINs shall be 
2% for A-RINs generated in 2013, 2014, and 2015.
    (ii) The cap on RIN replacement for auditors of A-RINs shall be [to 
be determined] for A-RINs generated in 2016 and beyond.
    (3) The auditor's potential replacement responsibility for a given 
RIN will expire at the end of the fourth calendar year after the 
calendar year in which the RIN was verified.
    (4) The minimum RIN replacement coverage (RRC) that must be held by 
the third-party auditor's RIN replacement mechanism is the lesser of:
    (i)
    [GRAPHIC] [TIFF OMITTED] TP21FE13.001
    

Where:

RRCy = RIN replacement coverage in year y in units of A-
RINs that the mechanism is capable of replacing
y = The current year
ARINVERy-i = The sum of all A-RINs of a particular D code 
verified by the third-party auditor in year y-i
or

(ii)

RRCy = 0.02 x ARINVERy + RRCy-1 - 
ARINREPy-1,
Where:
RRCy = RIN replacement coverage in year y in units of A-
RINs that the mechanism is capable of replacing
y = The current year
ARINVERy = The sum of all A-RINs of a particular D code 
verified by the third-party auditor in year y
RRCy-1 = RIN replacement coverage in year y-1 in units of 
A-RINs that the mechanism is capable of replacing
ARINREPy-1 = The sum of all A-RINs of a particular D code 
that were replaced by the third-party auditor in year y-1

    (d) The cap on RIN replacement does not apply when invalid verified 
RINs are a result of auditor error, omission, negligence, fraud, 
collusion with the renewable fuel producer, or a failure to implement 
the QAP properly or fully.
0
18. Section 80.1471 is added to read as follows:


Sec.  80.1471  Requirements for QAP Auditors

    (a) QAP audits conducted pursuant to Sec.  80.1472 must be 
conducted by an independent third-party auditor that is a professional 
engineer, as specified in paragraphs Sec.  80.1450(b)(2)(i)(A) and 
Sec.  80.1450(b)(2)(i)(B).
    (b) To be considered an independent third-party auditor under 
paragraph Sec.  80.1471(a):
    (1) The independent third-party auditor shall not be owned or 
operated by the renewable fuel producer or foreign ethanol producer, or 
any subsidiary or employee of the renewable fuel producer or foreign 
ethanol producer.
    (2) The independent third-party auditor shall be free from any 
interest in the renewable fuel producer or foreign ethanol producer's 
business.
    (3) The renewable fuel producer or foreign renewable fuel producer 
shall be free from any interest in the third-party auditor's business.
    (4) The independent third-party auditor must not be debarred, 
suspended, or proposed for debarment pursuant to the Government-wide 
Debarment and Suspension regulations, 40 CFR part 32, or the Debarment, 
Suspension and Ineligibility provisions of the Federal Acquisition 
Regulations, 48 CFR, part 9, subpart 9.4.
    (c) Independent third-party auditors shall maintain professional 
liability insurance, as defined in 31 CFR 50.5(q), of a minimum amount 
equal to 2% of the RINs the auditor verifies in a year to cover 
replacement of any invalid verified RINs due to auditor error, 
omission, or negligence. Independent third-party auditors shall use 
insurance providers that possess a financial strength rating in the top 
four categories from either Standard & Poor's or Moody's, i.e., AAA, 
AA, A or BBB for Standard & Poor's and Aaa, Aa, A, or Baa for Moody's. 
Replacement of any such invalid verified RINs is not subject to the cap 
on RIN replacement set forth in Sec.  80.1474(e).
    (d)(1) In the event that an independent third-party auditor 
identifies a RIN that may have been invalidly generated, the 
independent third-party auditor shall, within 24 hours, send 
notification of the potentially invalidly generated RIN to EPA and the 
renewable fuel producer that generated the RIN.
    (2) The independent third-party auditor shall provide the 
notification required under paragraph (d)(1) of this section in writing 
(which includes email or facsimile) and, if requested by the party 
being notified of a potentially invalidly generated RIN, by telephone.

[[Page 12215]]

    (e) The independent third-party auditor shall identify RINs 
generated from a renewable fuel producer or foreign renewable fuel 
producer as having been verified under a QAP.
    (1) For RINs verified under QAP Option A pursuant to Sec.  
80.1469(a), RINs shall be designated as A-RINs.
    (2) For RINs verified under QAP Option B pursuant to Sec.  
80.1469(b), RINs shall be designated as B-RINs.
    (3) The independent third-party auditor shall not indentify RINs 
generated from a renewable fuel producer or foreign renewable fuel 
producer as having been verified under a QAP if a revised QAP must be 
submitted to and approved by EPA under Sec.  80.1469(e).
    (f)(1) Except as specified in paragraph (f)(2) of this section, 
auditors may only verify RINs that have been generated after the audit 
required under Sec.  80.1472 has been completed.
    (i) For A-RINs, ongoing monitoring must have been initiated.
    (ii) Verification of RINs may continue for no more than 100 days 
following an audit.
    (2) Auditors may verify RINs that were generated before the audit 
required under Sec.  80.1472 has been completed, under the following 
conditions:
    (i) The RINs in question were generated between January 1, 2013 and 
December 31, 2013 inclusive.
    (ii) The audit is completed between January 1, 2013 and the 
effective date of the final rule.
    (iii) The audit is performed in accordance with the elements 
specified in a QAP that has been approved by the EPA per Sec.  
80.1469(c).
    (iv) The audit requirements of Sec.  80.1472(e)(1) are met for 
every batch of renewable fuel for which RINs were generated and are 
being verified.
    (v) The auditor may not perform more than one (1) audit under this 
subparagraph for any single RIN generator.
    (g) The independent third-party auditor shall permit any 
representative of EPA to monitor at any time the implementation of QAPs 
and renewable fuel production facility audits.
    (h) Any person who fails to meet a requirement under (f)(1) of this 
section shall be subject to a separate violation pursuant to section 
1460(f) of this subpart.
0
19. Section 80.1472 is added to read as follows:


Sec.  80.1472  Requirements for Quality Assurance Audits

    (a) General requirements.
    (1) An audit shall be performed by an auditor who meets the 
requirements of Sec.  80.1471.
    (2) An audit shall be based on either an Option A QAP per Sec.  
80.1469(a) or an Option B QAP per Sec.  80.1469(b).
    (3) Each audit shall verify every element contained in an 
applicable and approved QAP.
    (4) Each audit shall include direct contact with all feedstock 
suppliers to the facility to obtain documents related to the feedstocks 
used in the production of renewable fuel at the facility.
    (5) Each audit shall include a review of documents generated by the 
renewable fuel producer.
    (6) Each audit shall include direct contact with all purchasers of 
renewable fuel produced at the facility to obtain documents related to 
renewable fuel purchased from the facility.
    (b) On-site visits.
    (1) Option A QAP.
    (i) The auditor shall conduct an on-site visit at the renewable 
fuel production facility at least 4 times per calendar year.
    (ii) The on-site visits specified in paragraph (b)(1)(i) of this 
section shall occur at least 60 days apart. The 60-day period shall 
start the day after the previous on-site ends.
    (iii) The on-site visit shall include verification of all QAP 
elements that require inspection or evaluation of the physical 
attributes of the renewable fuel production facility, except for any 
physical attribute that is verified through remote monitoring equipment 
per the applicable QAP.
    (2) Option B QAP.
    (i) The auditor shall conduct an on-site visit at the renewable 
fuel production facility at least 4 times per calendar year.
    (ii) The on-site visit specified in paragraph (b)(2)(i) of this 
section shall occur at least 60 days after the previous on-site visit. 
The 60-day period shall start the day after the previous on-site visit 
ends.
    (iii) An on-site visit shall include verification of all QAP 
elements that require inspection or evaluation of the physical 
attributes of the renewable fuel production facility.
0
20. Section 80.1473 is added to read as follows:


Sec.  80.1473  Affirmative Defenses

    (a) Any person who engages in actions that would be a violation of 
the provisions of either Sec.  80.1460(b)(2) or (c)(1), other than the 
generator of an invalid RIN, will not be deemed in violation if the 
person demonstrates that the criteria under Sec.  80.1473 (c) or (d) 
are met.
    (b) Applicability of affirmative defenses. The following provisions 
apply to affirmative defenses asserted under subsection (a) of this 
section:
    (1) Affirmative defenses only apply to RINs that were invalidly 
generated and verified through a quality assurance audit using an EPA-
approved Option A or Option B QAP.
    (2) Affirmative defenses only apply in situations where an 
invalidly generated verified RIN is either transferred to another 
person (violation of Sec.  80.1460(b)(2)) or used for compliance for an 
obligated party's RVO (use violation of Sec.  80.1460(c)(1)).
    (3) Affirmative defenses do not apply to the generator of an 
invalid RIN.
    (c) Asserting an affirmative defense for invalid A-RINs. To 
establish an affirmative defense to a violation of Sec.  80.1460 (b)(2) 
or (c)(1) involving invalid A-RINs, the person must meet the 
notification requirements of Sec.  80.1473(e) and prove by a 
preponderance of evidence that:
    (1) The RIN in question was verified through a quality assurance 
audit pursuant to Sec.  80.1472 using an approved Option A QAP as 
defined in Sec.  80.1469(a).
    (2) The person did not know or have reason to know that the RINs 
were invalidly generated prior to being verified by the independent 
third-party auditor.
    (3) If the person self-identified the RIN as having been invalidly 
generated, the person notified EPA within the next business day of 
discovering the invalidity.
    (4) The person did not cause the invalidity.
    (5) The person did not have a financial interest in the company 
that generated the invalid RIN.
    (d) Asserting an affirmative defense for invalid B-RINs. To 
establish an affirmative defense to a violation of Sec.  80.1460 (b)(2) 
or (c)(1) involving invalid B-RINs, the person must meet the 
notification requirements of Sec.  80.1473(e) and prove by a 
preponderance of evidence that:
    (1) The RIN in question was verified through a quality assurance 
audit pursuant to Sec.  80.1472 using an approved Option B QAP as 
defined in Sec.  80.1469(b).
    (2) The person did not know or have reason to know that the RINs 
were invalidly generated at the time of transfer or use for compliance, 
unless a remedial action as defined in Sec.  80.1474 was implemented.
    (3) If the person self-identified the RIN as having been invalidly 
generated, the person notified EPA within the next business day of 
discovering the invalidity.
    (4) The person did not cause the invalidity.

[[Page 12216]]

    (5) The person did not have a financial interest in the company 
that generated the invalid RIN.
    (6) If the person used the invalid B-RIN for compliance, the person 
adjusted its records, reports, and compliance calculations in which the 
invalid B-RIN was used as required by Sec.  80.1431, unless a remedial 
action as defined in Sec.  80.1474 was implemented.
    (e) Notification Requirements. A person asserting an affirmative 
defense to a violation of Sec.  80.1460 (b)(2) or Sec.  80.1460(c)(1), 
arising from the transfer or use of an invalid A-RIN or B-RIN, must 
submit a written report to the EPA, including all pertinent supporting 
documentation, demonstrating that the requirements of Sec.  80.1473(c) 
or (d) were met. The written report must be submitted within 30 days of 
the person discovering the invalidity.
0
21. Section 80.1474 is added to read as follows:


Sec.  80.1474  Replacement Requirements for Invalidly Generated RINs.

    (a) Responsibility for replacement of invalid verified RINs.
    (1) The generator of the A-RIN and the independent third-party 
auditor that verified the A-RIN are required to replace invalidly 
generated A-RINs with valid RINs pursuant to the procedures specified 
in paragraph (b) of this section.
    (2) The generator of the B-RIN and the obligated party that owns 
the B-RIN are required to replace invalidly generated B-RINs with valid 
RINs pursuant to the procedures specified in paragraph (b) of this 
section.
    (3) The producer of an unverified RIN and the obligated party that 
owns an unverified RIN are required to replace invalidly generated and 
unverified RINs pursuant to the procedures specified in paragraph (b) 
of this section.
    (b) Identification and treatment of Potentially Invalid RINs (PIRs)
    (1) Any RIN can be identified as a PIR by the RIN generator, an 
independent third-party auditor that verified the RIN, or EPA.
    (2) For PIRs identified by the RIN generator, the generator is 
required to notify EPA within 24 hours of the identification, including 
a detailed explanation of why the RIN is believed to be invalid, and is 
required to take one of the following corrective actions within 30 
days:
    (i) Retire the PIR, or
    (ii) Retire a valid RIN meeting the requirements of paragraph (c) 
of this section.
    (3) For PIRs identified by the independent third-party auditor that 
verified the RIN, the independent third-party auditor is required to 
notify EPA and the RIN generator in writing within 24 hours of the 
identification, including a detailed explanation of why the RIN is 
believed to be invalid.
    (4) Within 30 days of being notified by EPA or the independent 
third-party auditor that verified the RIN that a RIN is a PIR, the RIN 
generator is required to take one of the following actions:
    (i) In the event that EPA identifies a RIN as a PIR:
    (A) Retire the PIR,
    (B) Retire a valid RIN following the requirements of paragraph (c) 
of this section, or
    (C) Submit a demonstration in writing to EPA that the PIR is valid.
    (1) If EPA determines that the demonstration is satisfactory, the 
PIR will be deemed to be a valid RIN.
    (2) If EPA determines that the demonstration is not satisfactory, 
the PIR will be deemed invalid and the PIR generator must retire the 
PIR or a valid RIN following the requirements of paragraph (c) of this 
section within 30 days of notification by EPA.
    (ii) In the event that the independent third-party auditor 
identifies a RIN as a PIR:
    (A) Retire the PIR,
    (B) Retire a valid RIN following the requirements of paragraph (c) 
of this section, or
    (C) Submit a demonstration in writing to the independent third-
party auditor that the PIR is valid.
    (1) If the independent third-party auditor determines that the 
demonstration is satisfactory, the PIR will be deemed to be a valid 
RIN; however, EPA reserves the right to make a determination regarding 
the validity of the RIN.
    (2) If the independent third-party auditor determines that the 
demonstration is not satisfactory, EPA will then make a determination 
whether the demonstration is not satisfactory, and if so, the PIR will 
be deemed invalid and the PIR generator must retire the PIR or a valid 
RIN following the requirements of paragraph (c) of this section within 
30 days of notification by EPA.
    (5) Within 60 days of receiving a notification from EPA that a PIR 
generator has failed to perform a corrective action required pursuant 
to this section,
    (i) For A-RINs, the independent third-party auditor that verified 
the PIR is required to retire valid RINs meeting the requirements of 
paragraph (c) of this section.
    (ii) For B-RINs and unverified RINs, the obligated party that owns 
the PIR is required to either
    (A) Retire the PIR.
    (B) If the PIR has already been used for compliance with the 
obligated party's RVO, correct the RVO to subtract the PIR.
    (c) The following specifications apply when retiring valid RINs to 
replace PIRs or invalid RINs:
    (1) When a RIN is retired to replace a PIR or invalid RIN, it must 
be of the same verification type, either A-RIN, B-RIN, or unverified. 
The D code of the retired RIN must be eligible to be used towards 
meeting all the renewable volume obligations as the PIR or invalid RIN 
it is replacing, as specified in paragraph (a)(2) of Sec.  80. 1427.
    (2) The number of RINs retired must be equal to the number of PIRs 
or invalid RINs being replaced, subject to paragraph (d) of this 
section and paragraph (c) of Sec.  80.1470.
    (d) Limited Exemption for invalid B-RINs.
    (1) In the event that an obligated party is required to retire or 
replace a PIR that is a B-RIN pursuant to paragraph (b) of this 
section, the obligated party will be afforded a ``limited exemption'' 
equal to 2% of its annual Renewable Volume Obligation (RVO) for 
calendar years 2013 and 2014.
    (2) Limited exemptions are calculated as follows:

LECB,i = 0.02 x RVOCB,i
LEBBD,i = 0.02 x RVOBBD,i
LEAB,i = 0.02 x RVOAB,i
LERF,i = 0.02 x RVORF,i

Where:

LECB,i = Limited exemption for cellulosic biofuel for 
year i
LEBBD,i = Limited exemption for biomass-based diesel for 
year i
LEAB,i = Limited exemption for advanced biofuel for year 
i
LERF,i = Limited exemption for renewable for year i
RVOCB,i = The Renewable Volume Obligation for cellulosic 
biofuel for the obligated party for calendar year i, in gallons, 
pursuant to Sec.  80.1407.
RVOBBD,i = The Renewable Volume Obligation for biomass-
based diesel for the obligated party for calendar year i after 2010, 
in gallons, pursuant to Sec.  80.1407.
RVOAB,i = The Renewable Volume Obligation for advanced 
biofuel for the obligated party for calendar year i, in gallons, 
pursuant to Sec.  80.1407.
RVORF,i = The Renewable Volume Obligation for renewable 
fuel for the obligated party for calendar year i, in gallons, 
pursuant to Sec.  80.1407.

    (3) If the number of invalidly generated B-RINs required to be 
retired or replaced in a calendar year is less than or equal to LE as 
calculated in paragraph (d)(2) of this section, the entire RIN 
retirement obligation is excused.

[[Page 12217]]

    (4) If the number of invalidly generated B-RINs required to be 
retired or replaced in a calendar year is greater than LE as calculated 
in paragraph (d)(2) of this section, the retirement of a number of B-
RINs equal to 2% of the obligated party's RVO is excused.
    (5) The limited exemption applies only in calendar years 2013 and 
2014.
    (e) Failure to Take Corrective Action. Any person who fails to meet 
a requirement under paragraph (b)(5) of this section shall be liable 
for full performance of such requirement, and each day of non-
compliance shall be deemed a separate violation pursuant to section 
1460(f) of this subpart.

[FR Doc. 2013-03206 Filed 2-20-13; 8:45 am]
BILLING CODE 6560-50-P


