[Federal Register Volume 79, Number 138 (Friday, July 18, 2014)]
[Rules and Regulations]
[Pages 42077-42125]
[FR Doc No: 2014-16487]

Vol. 79

Friday,

No. 138

July 18, 2014

Part II

Environmental Protection Agency

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40 CFR Part 80

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

Federal Register / Vol. 79, No. 138 / Friday, July 18, 2014 / Rules
and Regulations

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2012-0621; FRL-9906-55-OAR]
RIN 2060-AR72

RFS Renewable Identification Number (RIN) Quality Assurance
Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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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, led to inefficiencies and a
significant reduction in the overall liquidity in the RIN market,
resulting in greater difficulty for smaller renewable fuel producers to
sell their RINs. Today's action finalizes additional regulatory
provisions that are intended to assure reasonable oversight of RIN
generation and promote greater liquidity in the RIN market, which in
turn helps ensure the use of the required renewable fuel volumes. The
rule includes a voluntary quality assurance program and related
provisions intended to meet these goals. The program also includes
elements designed to make it possible to verify the validity of RINs
from the beginning of 2013. Additionally, we are finalizing 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: The provisions of this regulatory action become effective
September 16, 2014. The incorporation by reference of certain
publications listed in the rule is approved by the Director of the
Federal Register as of September 16, 2014.

ADDRESSES: The EPA has established a docket for this action under
Docket ID No. EPA-HQ-OAR-2012-0621. 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: Deborah Adler-Reed, Office of
Transportation and Air Quality, Compliance Division, Environmental
Protection Agency, 2000 Traverwood Drive, Ann Arbor, MI 48105;
Telephone number:<PHONE_NUMBER>; Fax number:<PHONE_NUMBER>; Email
address<EMAIL_ADDRESS>or the information line for the
Office of Transportation and Air Quality Compliance Division; telephone
number<PHONE_NUMBER>; Email address<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Does this action apply to me?

    Entities potentially affected by this final 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:

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                                          NAICS \1\     SIC \2\
                Category                    codes        codes                           Examples of potentially regulated entities
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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.
Industry...............................       424720         5172  Petroleum and petroleum products merchant wholesalers.
Industry...............................       454319         5989  Other fuel dealers.
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\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
action. This table lists the types of entities that the EPA is now
aware could be regulated by this action. Other types of entities not
listed in the table could also be regulated. To determine whether your
activities would be regulated by this action, you should carefully
examine the applicability criteria in 40 CFR part 80. If you have any
questions regarding the applicability of this action to a particular
entity, consult the EPA contact person listed in the preceding section.

Outline of This Preamble

I. Executive Summary
    A. Purpose of This Final Action
    B. Summary of Major Provisions
    C. Impacts
II. Description of the Regulatory Provisions for QAPs and Response
to Comments Received
    A. QAP Framework
    1. Finalization of a Single QAP Option
    2. Description of the Affirmative Defense, Replacement
Obligation, and Limited Exemption for the Single QAP
    a. Affirmative Defense
    b. Replacement Obligation for Invalid Q-RINs
    c. Limited Exemption for Q-RINs
    3. Administrative Process for Replacement of Invalidly Generated
RINs
    4. Producer Separation of RINs
    B. Treatment of Interim Period RINs
    C. Provisions of RIN Verification Under QAP A During the Interim
Period
    D. Provisions of RIN Verification Under QAP B During the Interim
Period
    E. Provisions for RIN Verification Under the QAP
    1. Elements of the 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 QAPs
    b. Frequency of Updates/Revisions to QAPs
    3. Importers and the Use of a QAP
    F. Auditor Requirements
    1. Who can be an auditor?
    a. Independence
    b. Professionally Qualified To Implement a QAP

    c. Errors and Omissions Insurance
    2. Registration Requirements
    3. Other Responsibilities of Auditors
    a. Notifying the Agency When There Are Problems
    b. Indentifying Verified RINs in EMTS
    c. Recordkeeping, Reporting, and Attest Engagements
    i. Recordkeeping Requirements
    ii. Reporting Requirements
    iii. Attest Engagements
    d. Prohibited Activities for Third-Party Auditors
    G. Audit Requirements
    1. Document Review and Monitoring
    2. Buyer/Seller Contacts
    3. On-Site Visits
    4. RIN Verification
III. Additional Changes Related to the Definition and Treatment of
Invalid RINs
    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 Redesignated 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. Proposed Disclosure of Certain Registration and Reported
Information
    2. Treatment of QAPs and Independent Engineering Reviews
    D. Proposed Changes to Section 80.1452--EPA Moderated
Transaction System (EMTS) Requirements--Alternative Reporting Method
for Sell and Buy Transactions for Assigned RINs
IV. Impacts
    A. Time and Cost Assumptions
    B. Labor Cost Assumptions
    C. Cost Estimate Results
V. Public Participation
VI. 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
    K. Congressional Review Act
VII. 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\
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    \1\ 75 FR 14670.
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    The RFS program requires that specified volumes of renewable fuel
be used as transportation fuel, home heating oil, or jet fuel each
year. To accomplish this, the EPA publishes applicable percentage
standards annually that apply to the sum of all gasoline and diesel
produced or imported into the United States. 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.
In general, all regulated parties are liable for transferring or using
invalid RINs. As a result, all regulated parties are responsible to
take the steps they deem appropriate to verify that the RINs they
acquire are valid. This is generally referred to as a ``buyer beware''
approach to RIN validity for the obligated parties.

A. Purpose of This Final Action

    Several cases of fraudulently generated RINs in the last few years
\2\ led some obligated parties to limit their RIN purchases to
renewable fuel produced by those parties that they are confident are
generating valid RINs. In order to ensure that RINs are validly
generated, individual obligated parties began conducting their own
audits of renewable fuel production facilities. The time and effort to
conduct such activities, as well as the large overall number of
renewable fuel producers and importers, resulted in greater difficulty
for some of the smallest renewable fuel producers to sell their RINs.
Initially, the overall liquidity of the RIN market was significantly
reduced. These circumstances 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 final action is to address
these issues by finalizing changes to the regulations that assure
reasonable oversight of the validity of RIN generation, promote greater
liquidity in the RIN market, and assure the use of the required
renewable fuel volumes.
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    \2\ The EPA's Criminal Investigation Division and Office of
Civil Enforcement issued three Notices of Violation in 2011-2012
which helped lead to criminal convictions against the fraudulent
actors. EPA continues to vigilantly investigate cases of potential
generation of fraudulently generated RINs as they arise.
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    In today's final action we are finalizing a voluntary quality
assurance program intended to provide regulated parties a structured
way to ensure that RINs entering commerce are valid. The program
provides an affirmative defense against liability for civil violations
under certain conditions for the transfer or use of invalidly generated
RINs, and specifies both the conditions under which invalid RINs must
be replaced with valid RINs, and by whom. Quality assurance programs
enable smaller renewable fuel producers to demonstrate that their RINs
are valid, reducing the risk that obligated parties believe is
associated with such RINs. We are finalizing, consistent with the
proposal, provisions applicable to RINs generated in 2013 through
December 31, 2014.
    In today's final action, in consideration of comments received on
the notice of proposed rulemaking (NPRM),\3\ 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 have been 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 have been reported as
containing renewable fuel, and thus no RINs would have been retired. In
other cases, exporters may have reported that renewable fuel had 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 finalizing modifications to the regulations
pertaining to exporters of renewable fuel to address these issues. We
are also finalizing a number of other modifications intended to address
cases in which parties transfer or use RINs that have become invalid
after the producer has introduced them into commerce.
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    \3\ 78 FR 12158, February 21, 2013.
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B. Summary of Major Provisions

    Today's final action includes a voluntary third-party quality
assurance program option for RINs that regulated parties may exercise
as a supplement to the ``buyer beware'' liability as prescribed under
existing regulations. The program provides a means for ensuring that
RINs are properly generated through audits of renewable fuel production
conducted by independent third-parties using quality assurance plans
(QAPs), provides an affirmative defense for the transfer or use of
invalid RINs that had been verified under an approved QAP, defines the
conditions when RINs must be replaced, and a process for determining
who will replace the RINs.
    For the interim period only, which runs from February 21, 2013
through December 31, 2014, we are finalizing both of the proposed QAP
programs, QAP A and QAP B.
    Beginning January 1, 2015, after the interim period is over, the
program will consist of a single QAP, with its associated verified RINs
referred to as Q-RINs. To this end, we are finalizing the following for
the single QAP:

 Minimum requirements for a QAP, including such things as
verification 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
 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
 A two percent limited exemption for calendar years 2014, 2015,
and 2016 that exempts a small fraction of a party's Renewable Volume
Obligation (RVO) from the requirement of replacement of invalid RINs
used for compliance if they were RINs verified through a QAP
 Changes to the EPA Moderated Transaction System (EMTS) that
would accommodate the quality assurance program
    We are finalizing certain provisions exclusive to QAP A in the
interim period, such as the RIN replacement mechanism that provides for
invalid A-RINs to be replaced, the RIN replacement cap for auditor
replacement of invalid A-RINs, and the elements of an affirmative
defense specific to A-RINs. Additionally, we are finalizing provisions
exclusive to QAP B in the interim period, such as the elements of an
affirmative defense specific to B-RINs, and a two percent limited
exemption for B-RINs for calendar years 2013 and 2014.
    We are also finalizing modifications to the exporter provisions of
the RFS program. These modifications will help ensure that an
appropriate number and type of RINs are retired whenever renewable fuel
is exported. Finally, we are finalizing 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.

C. Impacts

    We anticipate that the quality assurance program will help to
reduce the number of invalidly generated RINs in distribution, and thus
help ensure that valid RINs are traded and used for compliance. As a
result, it will help to ensure that the renewable fuel volumes mandated
by Congress are actually used. In this respect, then, there will be no
change to the expected impacts of the RFS program as projected in the
March 2010 RFS final rulemaking \4\ in terms of volumes of renewable
fuel consumed or the associated GHG or energy security benefits. The
primary impacts of the quality assurance program will be improved
liquidity and efficiency in today's RIN market and improved
opportunities for smaller renewable fuel producers to sell their RINs.
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    \4\ 75 FR 14670, March 26, 2010.
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    Likewise, the changes to the regulations governing export of
renewable fuel will 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 finalizing in today's
action will be voluntary. Even though the program is voluntary, there
will likely be costs associated with an individual party's
participation in the quality assurance program, and in Section IV we
have provided estimates of some elements of the costs of participation.
However, the fact that the quality assurance program will be voluntary
means that a decision to participate will be made independently by each
regulated party. Making the program voluntary allows the regulated
parties to choose whether any costs incurred by participating will be
less than the current costs in the marketplace resulting from efforts
to verify, acquire, trade, and use RINs and the risk of buying
fraudulent RINs associated with such activities. Although we cannot say
that the voluntary QAP provisions will reduce the cost of the RFS
program, we expect that parties will only choose to use these voluntary
provisions if they believe doing so will reduce their risk of
purchasing fraudulent RINs and possibly save them money when compared
to the oversight actions they are currently implementing.

II. Description of the Regulatory Provisions for QAPs and Response to
Comments Received

A. QAP Framework

1. Finalization of a Single QAP Option
    The NPRM proposed two new compliance options (``Option A'' and
``Option B'') in addition to the existing ``buyer beware'' approach.
Each of the two proposed options contained provisions for: A quality
assurance plan (``QAP'') that would be created and applied by an
independent third-party auditor to verify the validity of RIN
generation; an affirmative defense to civil liability for transfer or
use of a verified but invalidly generated RINs; identification of the
party responsible for replacement of verified but invalidly generated
RINs, and limitations on the extent of that responsibility. Under both
options, verification under an EPA-

approved QAP would provide the basis for the defense to civil liability
for any prohibited acts premised on the RIN's invalidly generated
status. In today's rule, we are finalizing a single QAP closely
resembling the proposed Option B, with its associated verified RINs
referred to as Q-RINs. Option A and Option B are only being finalized
with respect to interim period RINs, which are addressed in section
II.B of this preamble.
    Under the proposal for Option A, the QAP requirements were very
stringent, requiring for example continuous monitoring of renewable
fuel production facilities and documentation of RIN generation. Also
under Option A, the QAP auditor would be responsible for replacing any
invalidly generated RINs it had verified, if the RIN generator itself
failed to replace. The auditor's liability for replacement would be
capped at two percent of the A-RINs it had verified in that compliance
year and the previous four compliance years, and the auditor would be
required to maintain a RIN replacement mechanism capable of immediately
replacing any invalid RINs up to the amount of the auditor's potential
liability at any given point in time. Under Option B, the QAP
requirements were less stringent, requiring quarterly site monitoring
and document review, among other features. Also under Option B, the
obligated party bore the responsibility to retire or (if already
transfered or retired for compliance) to replace any invalidly
generated B-RINs, but only if the number of such invalid RINs exceeded
two percent of the obligated party's RVO for the compliance year in
which the invalid RINs were generated. A major difference between
Option A and Option B, then, was the identification of and parameters
for the replacement of RINs that were invalidly generated but
nonetheless verified under an EPA-approved QAP. Under Option A, the
replacement responsibility rested on the QAP auditor, effectively
eliminating any risk of replacing invalid verified RINs for the
obligated party, while under option B, the obligated party bore the
risk of having to replace invalid verified RINs if the quantity of such
RINs was greater than two percent of its RVO. There were also some
important differences in the requirements of the audit program.
    During the period between publication of the NPRM and this final
rulemaking, the EPA worked with a number of potential QAP auditors as
they developed proposals for their QAPs and began implementation of
their auditing services. To facilitate the verification of RINs
generated in 2013 prior to the final rule's effective date, the EPA
developed an informal pre-registration process. The EPA reviewed
auditors' registration information and proposed QAPs, and provided
guidance on whether the plans appeared to satisfy the proposed
requirements. The EPA identified those auditors whose submissions were
consistent with the requirements in the proposed regulations as part of
this informal pre-registration process. RINs audited prior to the
effective date of the final rule through a QAP which the EPA had
informally pre-registered could be informally verified by the auditor,
but they would only be formally verified after the final rule goes into
effect, and after the EPA approved the QAP that was used in the audit
process. Several auditors made use of this informal process.
    Based on these ongoing interactions, the EPA collected significant
data on the potential utility and feasibility of both Option A and
Option B QAPs. For many auditors, a major barrier to development of an
Option A QAP was the expense and risk associated with establishment and
maintenance of an acceptable RIN replacement mechanism. The NPRM
required, for instance, that the RIN replacement mechanism be outside
of the sole operational control of the QAP auditor, requiring a third
party's involvement and control. As discussed in the NPRM, many
traditional forms of financial assurance would not be suitable for a
RIN replacement mechanism and those that would fulfill the program
requirements would likely be very expensive for auditors to maintain.
These difficulties were clearly borne out in the experience of auditors
attempting to set up Option A QAPs in the interim period. One of the
informally pre-registered Option A QAP providers suggested that if a
producer could not afford to have all its RINs audited as A-RINs, the
same A-RIN protocols minus the RIN replacement mechanism should be
counted as a B-RIN audit.\5\ This comment underscores the significant
expense associated with the RIN replacement mechanism and the auditors'
perspective that many producers will not be able to utilize the Option
A system simply because of this expense. In addition to the expense of
the RIN replacement mechanism, one commenter also asserted that the RIN
replacement mechanism could artificially skew demand for RINs and drive
market prices up, if an auditor were to stockpile RINs (instead of a
cash escrow) to fulfill the replacement mechanism requirement. Looking
beyond the RIN replacement mechanism, the additional oversight and
review required in QAP A also inflates the cost of providing Option A
auditing services, when compared to the less onerous Option B QAP
requirements. The challenge of installing a continuous monitoring
system requires significant capital investment and ongoing time and
financial resources.
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    \5\ See docket document EPA-HQ-OAR-2012-0621-0040 at page 9.
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    Of the four auditors informally pre-registering Option A QAPs, only
one actually used the Option A QAP to informally verify RINs in the
interim period. Further, out of nearly 480 million RINs informally
verified or pending informal verification through February 2014, less
than 20 percent of them were Option A RINs (by the one informally pre-
registered Option A auditor). This demonstrates a lower level of buy-in
and lower utility of the Option A QAP when compared to the Option B
QAP.
    Most obligated party comments on Option A were consistent with
auditors' experiences in attempting to set up the Option A QAPs. They
asserted that given the increased stringency of the Option A auditing
requirements and the replacement mechanism, the cost of these expenses
would be passed through and reflected in the price of A-RINs. While A-
RINs would indeed be seen as less risky than B-RINs or non-audited
RINs, the decreased risk might not be worth the cost. Many commenters
stated that the stringency of QAP B would be sufficient to guarantee
the validity of audited RINs and the increased stringency of A was
``overly rigorous'' and not worth the additional expense.
    Many small biodiesel producers also commented that they feared the
Option A QAP would be too expensive for them to utilize. As discussed
in the NPRM, the EPA hoped that the Option A QAP would improve
liquidity for small producers on the RIN market, because the auditor
replacement feature would eliminate any fear of a replacement
obligation for RIN purchasers. Given the increased costs required to
set up and run an Option A QAP program, however, many small producers
do not expect they would be able to afford the cost of these services,
even considering the speculative potential of increased value that A-
RIN status might give to their RINs.
    Given the difficulty experienced by auditors in setting up Option A
QAPs, the apparent lack of use of the Option A QAP in the interim
period, and the overwhelmingly negative comments regarding Option A by
producers and obligated parties alike, we are not

finalizing Option A as a compliance alternative for use after the
interim period.\6\ Instead, we are finalizing a single QAP for use
after the interim period that closely resembles the proposed Option B.
The full description of the terms and conditions of this compliance
program is found in sections II.A.2 and II.E of this preamble.
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    \6\ As discussed in section II.C, Option A will be available for
RINs generated during the interim period, as discussed at the
proposal. This recognizes that there has been some informal use of
this option during the interim period to date, even if limited.
Finalizing Option A for just the interim period will avoid
penalizing the parties who have informally verified RINs under this
option to date, and the parties who have purchased such RINs.
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    In addition to the issues raised by parties in comment, the EPA
also considered the higher implementation costs for the Agency to
administer both QAP A and QAP B. While this was not the Agency's
primary consideration in reaching this decision we do note that
directionally this decision will also reduce the cost to the government
to implement and provide ongoing maintenance of and support for QAP A.
Lastly, we would note that many of the financial features of QAP A can
be offered through private contracts and financial instruments without
the need for EPA involvement.
2. Description of the Affirmative Defense, Replacement Obligation, and
Limited Exemption for the Single QAP
a. Affirmative Defense
    Based on the reasoning and discussion detailed below, for the
single QAP for use after the interim period (with its associated
verified RINs referred to as Q-RINs), the Agency is finalizing an
affirmative defense to civil liability for RIN owners like was proposed
for QAP B in the NPRM, except for the notification element which we
increased from one to five business days. See Sec.  80.1473(e) of the
regulations for more details.
    The affirmative defense in this final rule will be modeled from the
proposed affirmative defense for QAP B.\7\ Note that there will be an
affirmative defense for A-RINs and B-RINs informally verified during
the interim period. See Sec.  80.1473 (c) and (d) of the regulations
for more details.
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    \7\ For more information regarding the rationale as to why an
affirmative defense is being offered, please see the NPRM (78 FR
12176-12177 (February 21, 2013)).
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    The affirmative defense will only be available to RIN owners for
RINs that were verified by an independent third-party auditor using an
EPA-approved QAP.
    Additionally, it is our intent that the affirmative defenses will
not be available to the generator of an invalid RIN. Since the quality
assurance program will 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.
    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 will
be eligible to assert an affirmative defense if the RIN was invalidly
generated and the person then transferred it to another party or used
it for compliance purposes. The QAPs will be designed to verify valid
generation of RINs, and the assertion of an affirmative defense will be
limited to the prohibited acts of transferring and using invalidly
generated RINs. The 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. 40 CFR 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 affirmative
defense will 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.
    We finalized new regulations in Section III.B to ensure that
properly generated RINs cannot become invalid downstream of the RIN
generator. 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 ``buyer beware'' system as it exists under the current
regulations will continue to be an option for obligated parties who do
not wish to purchase RINs verified through a QAP.
    When we proposed an affirmative defense in the NPRM, the Agency
stated that 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 approach 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). In order to establish this affirmative defense under the
QAP, a party will be required to prove six elements by a preponderance
of evidence. This means that each element was more likely than not to
have been met. A person asserting an affirmative defense also must
submit a written report to the EPA, along with any necessary supporting
documentation, demonstrating that the elements have been met. The
written report will need to be submitted within 30 days of the person
discovering the invalidity of the RIN. 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. We have included an explicit reporting
requirement to allow the EPA to evaluate affirmative defense claims
before deciding whether or not to commence an enforcement action.
    In the event that invalidly generated Q-RINs are transferred or
used, the elements that must be established for an affirmative defense
to the prohibited act of transferring or using the invalid Q-RINs for
compliance with an RVO are as follows and are described in Sec.
80.1473:
    1. The RINs in question were verified in accordance with an EPA-
approved QAP as defined in the EPA regulations in Sec.  80.1469;
    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 the RIN generator replaced the RIN pursuant to Sec.  80.1474;
    3. The QAP provider or RIN owner informs the Agency via the EMTS
technical support line<EMAIL_ADDRESS>within five
business days 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 (see Sec.
80.1431), unless the RIN generator replaced the RIN pursuant to Sec.
80.1474.
    Further rationale for several of the elements required for
asserting an affirmative defense are discussed in more depth below. In
regard to element 2, owners of verified Q-RINs must not have known nor
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 unless the RIN
generator had replaced the RIN per the

regulations. See 40 CFR 80.1474. Since the obligated party has the
replacement obligation under the QAP, it would not be appropriate for
it to knowingly commit a prohibited act but still have an affirmative
defense to civil liability. 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 the RIN was invalid. A transfer of the RIN with such
knowledge would subvert the purpose of the quality assurance program,
which is to help ensure the integrity of the RINs used for compliance
purposes and to promote greater liquidity in the market. Knowing
transfer of invalid RINs is inconsistent with these purposes. For these
reasons, the owner of an invalid but verified Q-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.
    In regard to element 3, any party attempting to establish an
affirmative defense will be required to inform the Agency within five
business days of identifying that RINs were invalidly generated. This
requirement should allow a reasonable and adequate amount of time for
RIN owners to communicate this information internally first before
communicating the discovery to the EPA while minimizing the amount of
time available to capitalize on 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 will therefore be both an
element of good faith and a practical safeguard to meet the annual RFS
volume mandates.
    In regard to element 5, 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. In regard to element 6, we
have determined that the affirmative defense for Q-RINs should be
contingent upon obligated parties taking the invalid Q-RINs out of the
system or demonstrating that the producer implemented a remedial action
\8\ by retiring an equivalent number of replacement Q-RINs. This will
help the Agency efficiently ensure that the environmental goals of the
RFS program are achieved.
---------------------------------------------------------------------------

    \8\ A remedial action is an action taken by a party to remedy
certain specific RIN violations of the RFS2 regulations. See the
following link to the RFS2 Remedial Action Guidance page of the EPA
Web site for further information on remedial actions as well as
specific instructions: http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/rfs2remedialactions.htm.
---------------------------------------------------------------------------

    Finally, two requirements of an affirmative defense are that the
RIN was verified under an approved QAP, element 1, and that the party
did not cause the invalidity of the RIN in question, element 4.
    The Agency did receive comments regarding the affirmative defense
provision. All comments were supportive of including an affirmative
defense to civil liability for RIN owners.
    Some biofuel producers commented that the affirmative defense
should be available to RIN generators as well because RINs may be
generated improperly through no fault of the producer due to feedstock
supplier issues as well as the general complexity of the regulations.
The EPA is not extending the affirmative defense to RIN generators. The
affirmative defense provides protection from civil liability in the
event that RIN owners performed adequate oversight by way of
implementing a QAP, yet a RIN was deemed invalid nonetheless. This is
appropriate as the person who owns the RIN after it has been generated
generally has no control over the actual production of the renewable
fuel. Renewable fuel producers, however, have control over the actual
production of fuel and are in a much better position to know if the
RINs associated with that fuel are valid. With this greater control
comes greater responsibility and the associated liability to ensure
valid generation of the RINs. Renewable fuel producers still have
remedial actions at their disposal to correct certain errors that occur
in regard to RIN generation.
    Some obligated parties commented that an affirmative defense should
be available to unverified RINs as well. This would undermine efforts
to minimize the generation of fraudulent RINs, of which the QAP program
is an important element. The structured parameters of the QAP provide a
framework for a specified degree of oversight of RIN generation by RIN
owners when it comes to the RINs they purchase. The Agency defined this
framework and determined that if this degree of oversight and the other
elements of the affirmative defense are met, then an affirmative
defense to RIN owners for RINs that have been verified through an
Agency-designed system is appropriate. RINs outside of that system can
be subjected to whatever degree of oversight the RIN owner may view as
appropriate for their own risk management. It would not be appropriate
to provide an affirmative defense to unverified RINs that do not meet
the specified degree of oversight provided by the QAP, and have not
gone through the process that the EPA has established for efficient
administration of the affirmative defense. For example, auditors and
their QAP plans must be approved by the EPA, and the EPA can monitor
compliance by auditors with their responsibilities, providing
confidence that the oversight will be implemented in practice. This
does not occur outside of the RIN verification process established in
this rule. It should be noted that the EPA considers a number of
factors when deciding what action, if any, to take against a person who
transfers or uses unverified invalid RINs.
    Multiple commenters suggested that the EPA extend the timeframe to
notify the Agency of discovery of a RIN that was invalidly generated.
In element (3), the timeframe for notification was proposed to be
within the next business day. The EPA agrees with extending the
timeframe. The EPA acknowledges that it may take some time for a RIN
owner to adequately communicate within its organizational structure
that it is in possession of an invalid RIN. Therefore, the EPA is
extending the notification timeframe to five business days. This should
allow enough time for the corporate officers to be informed while
providing prompt notification to the Agency to guard against any
incentives for delaying reporting for illicit gains. There is an
administrative process detailed in Section II.A.3 that deals with many
of the concerns of commenters regarding whether a RIN is
``potentially'' invalid. Element (3) of the affirmative defense arises
upon discovery that the RIN in possession has definitively been deemed
``invalid'' and it is then that the QAP provider or RIN owner must
notify the Agency for the purposes of the affirmative defense. The QAP
provider and renewable fuel producer still have the ability to correct
any errors and/or perform a remedial action prior to the RIN being
deemed ``invalid'' and the RIN owner being made aware of this fact.
b. Replacement Obligation for Invalid Q-RINs
    Based on the discussion below and the comments received, the Agency
is finalizing a QAP where invalid Q-RINs may not be used to demonstrate
compliance with a Renewable Volume Obligation (RVO), just as invalid
RINs may not be used under the current ``buyer beware'' program for
unverified RINs. It should be noted that the Agency is also finalizing
an administrative process for replacement of invalidly

generated RINs where the RIN generator is initially responsible for
replacement of invalidly generated RINs. The administrative process
details who has the responsibility to replace invalidly generated RINs
and when those responsibilities begin. For RINs that have been retired
for compliance, obligated parties must replace invalidly generated RINs
when the RIN generator has not fulfilled their replacement obligation
under the administrative process in order to remain in compliance. See
Sec.  80.1474 of the regulations for further details on the
administrative process.
    Regulated parties that purchase Q-RINs will not be subject to
liability for a civil violation if a Q-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 II.A.2.a. However, obligated parties will be responsible
for replacing any invalidly generated Q-RINs used for compliance
purposes. Obligated parties will 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 Q-RINs.
Obligated parties will not be permitted to transfer or use Q-RINs they
know or have reason to know have been invalidly generated. Any such
transfer or use will be a prohibited act, pursuant to Sec.  80.1460.
    The QAP provides flexibility for obligated parties, producers, and
third-party auditors to minimize the cost of verification services for
RINs. Obligated parties that want the protection of an affirmative
defense but would rather contract on their own terms regarding
replacement of invalidly generated RINs should find this approach more
flexible and appealing. Additionally, smaller producers could be drawn
to this because the cost to participate in the quality assurance
program under the QAP would be relatively small.
    The Agency received comments from obligated parties and their trade
associations that they should never have to replace invalid RINs that
were a result of another party's malfeasance. The EPA is rejecting this
approach, as retaining the replacement obligation is important to both
ensure compliance with the renewable fuel volumes specified by Congress
and to ensure that obligated parties take responsibility to make sure
compliant fuel is purchased and introduced into commerce by either
introducing compliant fuel themselves or by validating RIN integrity
before buying RINs. QAP RIN replacement by obligated parties is meant
to create the same ``buyer beware'' type of scrutiny of third-party
auditor performance by obligated parties. By retaining the replacement
obligation under the QAP, obligated parties have the incentive to
provide significant robust oversight of the quality of third-party
auditors, which in turn increases the likelihood of valid RINs and
compliant fuel being introduced into the marketplace.
    The Agency also received numerous comments mirroring the EPA's view
on replacement obligation discussed above. Commenters noted that for
the RFS program to properly function, the obligated parties needed to
retain the obligation to replace invalid RINs, which would ensure that
their individual RVOs would be met as well as the renewable fuel
volumes specified by Congress.
c. Limited Exemption for Q-RINs
    Based on the discussion below and the comments received, we are
finalizing a two percent limited exemption for the QAP as was proposed
for QAP B, except for the fact that it will only apply in calendar
years 2014, 2015, and 2016.
    The limited exemption exempts a small fraction of a party's RVO
from the requirement for RIN replacement if QAP RINs up to the limit
later turn out to be invalid. Given the perceived concerns about RINs
generated by the smallest producers, a limited exemption, during the
beginning of the program while auditors are learning to implement QAPs,
could make obligated parties more willing to buy RINs from smaller,
less well known biofuel producers. The limited exemption will be
available only to obligated parties that are required to replace
invalid RINs, not renewable fuel producers that are required to replace
invalid RINs.
    As described at proposal, we are setting the limit on the limited
exemption for invalid Q-RIN replacement at two percent based on the
uncertainty inherent in the gasoline/diesel production market as
determined by comparing EIA's Short Term Energy Outlook projections
versus actual production of the same year.\9\ We have concluded this
level of exemption is both rational relative to the uncertainty
inherent in the standards process and sufficient to incentivize the use
of QAPs.
---------------------------------------------------------------------------

    \9\ For a more detailed description of the calculation of the 2%
limited exemption, see the NPRM ((78 FR 12184-12187 (February 21,
2013)).
---------------------------------------------------------------------------

    The limited exemption will apply separately to each of the four
standards under the RFS program: cellulosic biofuel; biomass-based
diesel; advanced biofuel; and total renewable fuel.
    The limited exemption will apply separately to each obligated party
that is responsible for replacing invalid Q-RINs rather than to the
industry as a whole. For instance, an obligated party would apply the
two percent limited exemption to each of its four Renewable Volume
Obligations (RVOs) to determine the number of Q-RINs of each of the
four types that would not need to be replaced should they be found to
be invalidly generated.
    The limited exemption is a threshold below which invalid RINs will
not be required to be replaced; it is not a trigger that determines
when all invalid RINs must be replaced. Under this threshold approach,
an obligated party will know at the beginning of each year that two
percent of the RINs needed to meet each of its RVOs will not need to be
replaced if those RINs were Q-RINs and were determined to be invalidly
generated. Under this threshold approach, the number of Q-RINs that an
obligated party will be required to replace will be those in excess of
the applicable limited exemption (LE) as calculated. See Sec.
80.1474(f) for more details on calculation of the limited exemption.
    Finally, the limited exemption will be applicable for Q-RINs
verified under the QAP during the calendar years of 2014, 2015, and
2016 of the quality assurance program. We think the limited exemption
is an important incentive, but at the same time we also recognize it
may reduce the total volume of renewable fuel produced under the
program. As noted below, we intend to monitor the use of the provision
during these years and will propose to extend its use in the future if
we decide, based on the experience gained from 2014-2016, that the
limited exemption, on balance, is valuable to the overall success of
the RFS program.
    Generally, obligated parties and small producers supported the
limited exemption and its methodology. Other comments the Agency
received regarding a limited exemption included: The limited exemption
should apply to unverified RINs as well, and the limited exemption
should be made permanent as the uncertainty it is based on will not
cease after two years. The Agency did receive a comment from a producer
trade association that said that the limited exemption exceeded the
EPA's authority and would effectively be a waiver.
    The Agency believes that it would not be appropriate to apply the
limited exemption to RINs that are not verified by an EPA-approved
independent auditor. The limited exemption for RIN

replacement is a useful 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. Outside of the QAP program, the
limited exemption does not facilitate any of the functions and benefits
achieved by the QAP process. Outside the QAP program, obligated parties
retain full discretion to conduct the oversight they deem appropriate,
and to establish appropriate contract indemnification or other risk
reduction measures. There is no clear reason that a limited exemption
is needed under these circumstances to provide relief to obligated
parties, and providing the limited exemption outside the QAP program
would provide none of the benefits from facilitating the introduction
period of the QAP program. Thus the EPA is not expanding the limited
exemption outside of the QAP program.
    Additionally, in response to making the limited exemption
permanent, we expect regulated parties to be working to optimize
implementation of the quality assurance program for several years. The
limited exemption can help to ensure that the RIN market is more liquid
as the program starts up. But as the program matures, we believe that
there will be much less need for a limited exemption as obligated
parties will gain experience in the first few years of the program with
the QAP, and we would expect their confidence in the validity of Q-RINs
to grow over this timeframe as well. Accordingly, the Agency sees the
work needed by industry to optimize implementation of the QAP
continuing for some time past the proposed 2014 sunset, but not
permanently. The Agency is committed to monitoring the situation
surrounding the limited exemption and its use. We will assess whether
the provision is working as intended and whether it has encouraged the
use of small producer RINs. We will evaluate based on the circumstances
whether it is appropriate to extend the limited exemption past 2016. In
response to the comment that the limited exemption exceeded the EPA's
authority because it would effectively be a waiver, the Agency views
implementing a limited exemption over several years as falling under
the Agency's ability to use reasonable discretion to ensure that volume
mandates are met. There remains an obligation on the renewable fuel
producer to replace the RIN. A limited exemption will properly
incentivize obligated parties to use the QAP, which in turn will
increase the likelihood of valid RINs and compliant fuel being
introduced into the marketplace. This is a reasonable way to ensure
compliance with the volume mandates. It is not a waiver of a national
volume or a waiver of the standards; instead it is a reasonable,
temporary mechanism for determining compliance by an individual party
with their individual RVO.
3. Administrative Process for Replacement of Invalidly Generated RINs
    Based on the discussion below and the comments received, the Agency
is finalizing the administrative process for replacement of invalidly
generated RINs as proposed with minor changes and clarification. The
Agency is changing the notification window from 24 hours to ``within
five business days''. The Agency understands that identification may
occur on a weekend, a holiday, or other period of time when the
responsible corporate official is unavailable. This revision accounts
for those situations where notification within 24 hours would not be
practicable. Additionally, the Agency is clarifying that it is only
asking for email notification of potentially invalid RINs (``PIRs'')
via the EMTS support line (support.com">support@epamts-support.com), along with a
brief initial explanation of why the RIN is believed to be a PIR. The
Agency understands that resolution of the problem will take additional
time in most instances, thus the requirement that the RIN generator has
30 days upon self-identification or notification by the QAP auditor of
a PIR to take a corrective action, which still includes the remedial
actions currently available to industry. See Sec.  80.1474 of the
regulations for details of the administrative process for replacement
of invalid RINs.
    The administrative process for replacement of invalid RINs places
initial responsibility to replace invalidly generated RINs on the RIN
generator responsible for causing the invalidity, regardless of who
actually owns the invalid RINs at the time that the invalidity is
discovered. In the event that the RIN generator does not replace the
invalidly generated RINs according to the administrative process, the
obligated party will be required to replace the invalid RINs if the
RINs were verified under the QAP or were unverified. Thus, for
invalidly generated RINs verified by a QAP and for unverified RINs, the
obligated party who owns the RINs will bear the replacement
responsibility. The administrative process for replacement of invalid
RINs does not, in any way, limit the ability of the United States to
exercise any other authority to bring an enforcement action under
Section 211 of the Clean Air Act, or the fuels regulations at 40 CFR
part 80. Thus, in the event that regulated parties fail to implement
the administrative process for replacement of any RINs, the EPA could
bring an enforcement action seeking injunctive relief and civil
penalties against any or all of the parties that were required to
replace the invalid RINs. The EPA understands obligated parties would
retain the ability to contest the invalidity of RINs in any enforcement
action commenced.
    As an example, the process (fully detailed in the regulations in
Sec.  80.1474) for replacing invalidly generated RINs, whether Q-RINs
or unverified, is outlined below. In general, verified potentially
invalid RINs cannot be transferred or used for compliance purposes.
    In the event that the EPA or the independent third-party auditor
identifies a RIN that may have been invalidly generated, the RIN will
be a PIR. The RIN generator will be required to take one of three
possible corrective actions within 30 days of being notified of the
PIR:
     If the RIN generator no longer has the PIR in its
possession, it must retire a valid RIN of the same D-code as the PIR,
either by purchasing it or by generating a new valid RIN and separating
it from the physical volume it represents;
     If the RIN generator still has the PIR in its possession,
it must retire the PIR; or
     If the RIN generator believes the PIR was in fact validly
generated, it must submit a written demonstration providing a basis for
its claim of validity to the third-party auditor and the EPA. If the
third-party auditor determines that the demonstration is sufficient,
the RIN will no longer be a PIR, and will not need to be replaced;
however, the EPA will reserve the right to make a determination
regarding the validity of the RIN. If the EPA determines that the
demonstration is sufficient, the RIN will not need to be replaced.
However, if the third-party auditor determines the demonstration is not
sufficient and if the EPA confirms that determination, or if the EPA
determines the demonstration is not sufficient, it will notify the RIN
generator of that finding and again require the RIN generator to
replace the invalid RIN 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 finalizing a new provision
in Sec.  80.1429 that will permit producers to separate RINs from
volume they produced for the specific purpose of retiring RINs to
replace a PIR deemed invalid. If the RIN generator retired a valid RIN
to replace a PIR deemed invalid, the invalid RIN that it replaced can
continue to be transferred or used for compliance by any party.
However, if the RIN generator for any reason failed to replace the PIR
deemed invalid, the RIN owner will be notified of the failure and will
be required to retire the invalid RIN within 60 days. If the PIR deemed
invalid had already been used for compliance with its RVO, the
obligated party will be required instead to correct its compliance
reports by removing the invalid RINs from its reports and replacing the
invalid RINs with valid RINs. Unless and until the PIR deemed invalid
is replaced, either by the RIN generator or the obligated party, it
will remain an invalid RIN and cannot be transferred or used for
compliance purposes.
    When an auditor or the EPA determines that a PIR is invalid, the
RIN generator will be notified directly. At this point, the process of
retiring an appropriate valid RIN will begin.
    There will be two forms of invalid RIN replacement:
    (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 will be required to acquire a valid RIN and
retire it in place of the invalid RIN. In this case, since it will be a
valid RIN that is being retired, a new retirement code reason has been
created in EMTS for this purpose.
    The Agency received multiple comments regarding one particular
element of the administrative process for replacement of invalidly
generated RINs. In the administrative process, RIN generators and
independent third-party auditors are required to notify the EPA of
their identification of PIRs within 24 hours. The commenters felt that
24-hour notice of PIRs to the EPA was too short of a window and did not
allow sufficient time for proper investigation of the PIR and
subsequent resolution of the problem. Commenters suggested being
allowed anywhere between three and 30 days to notify the EPA of a PIR.
The Agency's goal of this element is simply identification and
notification of the PIR to the EPA, not resolution of the problem, if
one exists, with the PIR. Therefore, the Agency is changing the
notification window from 24 hours to ``within five business days''. The
Agency understands that identification may occur on the weekend or
holidays or while the responsible corporate official is unavailable.
This revision accounts for those situations where notification within
24 hours would not be practicable.
    Multiple commenters suggested that the administrative process
should revolve around ``confirmed'' problems with RIN validity as
opposed to ``potential'' problems with RIN validity. Commenters
reasoned that if it applied to ``confirmed'' problems as opposed to
``potential'' problems, auditors and producers would have time to fix
any associated problems and that many ``potential'' problems do not
result in invalid RINs. The Agency is clarifying that it is only asking
for email notification of PIRs via the EMTS support line, along with a
brief initial explanation of why the RIN is believed to be a PIR. The
goal of this element is simply identification and notification of the
PIR to the EPA, not resolution of the problem, if one exists, with the
PIR. The Agency understands that resolution of the problem will take
additional time in most instances; thus the requirement that the RIN
generator has 30 days upon identification or notification of a PIR to
take a corrective action, which still includes the remedial actions
currently available to industry. Additionally, only once the
``potential'' problem is ``confirmed'' and the RIN is invalid would the
owner of that RIN be notified, so there will be no effect on liquidity
in the market or any market disruptions for notifying the EPA of
potential problems with RIN validity.
    Additionally, the Agency originally proposed that an invalid
verified RIN must be replaced by a valid verified RIN of the same D
code. After receiving and reviewing several comments that any valid
RIN, whether verified or unverified, should be able to replace an
invalid verified RIN as long as they were of the same D code, the
Agency agrees with this assessment. The purpose of replacement of
invalid RINs is to ensure that a valid RIN has been retired in its
stead to meet an RVO. The key is the validity of the RIN, not whether
it was verified or not. Therefore, the Agency is finalizing that
replacement of invalid verified RINs may be completed with either valid
verified RINs of the same D code or valid unverified RINs of the same D
code.
4. Producer Separation of RINs
    We did not propose but requested comment on a regulatory change in
which renewable fuel producers would be prohibited from separating
RINs. Based on the discussion below and comments received, the Agency
is keeping the separation provisions of the regulations as currently
written, and producers will retain the ability to separate RINs under
the limited circumstances specified in Sec.  80.1429(b)(4).
    Under the current regulations, RINs generally cannot be separated
from the wet gallons they represent until the point of fuel blending or
fuel purchase by an obligated party. However, a renewable fuel producer
can separate RINs from their associated volumes of renewable fuel under
the limited conditions specified in Sec.  80.1429(b)(4), including
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 of the fuel) may separate the RIN from 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.
    In the fraud cases that occurred in 2011-2012, some registered
biodiesel producers exploited this provision and generated, separated,
and sold invalid RINs without an associated volume of renewable fuel.
Some have argued that removing this option and prohibiting producers
from separating RINs from the volumes they produce would 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 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. We
solicited 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.
    The Agency received comments from obligated parties that removing
producers' ability to separate RINs

would greatly reduce the ability of producers to generate fraudulent
RINs. The Agency also received comments from producers, particularly
small producers, as well as their trade associations, that the ability
of small producers to separate RINs is vital to their livelihood. These
comments stated that many of the gallons sold by small producers,
particularly in local and regional markets, are sold to end-users who
use the biodiesel directly and are not obligated parties under the RFS
and do not want to be in the business of owning or selling RINs. These
small producers often sell fuel directly to farmers or municipalities,
and separate the RIN from the wet gallon so the buying party does not
have to deal with the RIN. The producer comments also noted that
allowing producers to separate RINs allows for easier compliance with
the RFS volume requirements as the fuel can be used locally rather than
shipped to obligated parties. The Agency agrees that allowing
producers, particularly small producers, to separate RINs under certain
circumstances is critical to their keeping their businesses viable.
    The Agency notes that the percentage of RIN separations for neat
use is extremely small when compared to the percentage of RIN
separations by obligated parties and blenders. For example, through
September 2013, for biomass-based diesel (D4 RINs), the percentage of
RIN separations attributed to neat use was 1.7%, while the percentage
of RIN separations attributed to obligated parties and blenders was
92.2%. Additionally, the implementation of QAPs will provide an added
layer of scrutiny on producers to ensure they are producing actual
gallons of fuel with the associated RINs. Overall, the EPA believes the
benefits of continuing to allow producer separation of RINs under the
conditions specified in the regulations outweighs the reduction in risk
of invalid RIN generation.

B. Treatment of Interim Period RINs

    In the proposed rulemaking, the EPA set forth guidelines for an
informal ``pre-registration'' process to facilitate the development and
implementation of QAPs in the interim period between publication of the
NPRM and the final rule's effective date. The EPA reviewed auditors'
registration information and proposed QAPs, and provided guidance on
whether the plans appeared to satisfy the proposed requirements. The
EPA identified those auditors whose submissions were consistent with
the requirements in the proposed regulations as part of this informal
pre-registration process. RINs audited prior to the effective date of
the final rule through a QAP which the EPA had informally pre-
registered could be informally verified by the auditor, but they would
only be formally verified after the final rule goes into effect, and
after the EPA approved the QAP that was used in the audit process.
Several auditors made use of this informal process. The names of those
auditors and QAPs whose submissions were consistent with the applicable
requirements in the proposed regulations were published on the EPA's
Web site (http://www.epa.gov/otaq/fuels/renewablefuels/qap.htm).
    Furthermore, given the short time period of RIN generation at issue
in the period between publication of the NPRM and the final rule's
effective date and the desire to have QAP plans start up as quickly as
possible, the EPA allowed auditors to verify RINs generated before the
date the audit was completed. This ``retrospective'' RIN verification
was only available prior to the effective date of the final rule, was
only allowed for auditors whose QAPs were already in place and fully
operational, and could only be performed once per producer. In other
words, the one-time retrospective audit, if used, had to be completed
prior to the effective date of the final rule. These limitations were
intended to ensure that auditors were not inappropriately misusing this
flexibility by doing all retrospective audits until the final rule's
effective date. Instead, they were 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 the start-up lag.
    The EPA's review of proposed QAPs and the informal pre-registration
process was not a final agency decision or approval of any auditor or
QAP. The EPA's initial review of auditors' proposed QAPs provided
guidance as to whether the EPA had any concerns about the plans and
whether they were consistent with the requirements in the proposed
regulations. Publication of the auditors' names and available QAPs was
intended to provide useful information for outside parties who were
evaluating the risk associated with RINs audited prior to the effective
date of the final rule. The EPA's guidance or feedback to the auditors
conferred no legal rights or privileges to the auditors, or to the
production facilities and RINs they reviewed prior to the final rule's
effective date.
    Through this pre-registration process, the auditors began to market
their QAP services and review RINs for purchasers, with a great deal of
confidence that those RINs would receive all the benefits of QAP-
verified RINs after the final rule became effective. We noted in the
NPRM that if the requirements or structure of the QAP program should be
altered in the final rule, we expected that RINs reviewed by auditors
prior to the final rule according to the requirements set out in the
NPRM would still be eligible for treatment as QAP-verified RINs.
    Since publication of the NPRM, the EPA received and reviewed a
number of QAP plans from prospective auditors and informally pre-
registered six of them. These auditors have been developing a clientele
of producers and RIN purchasers and applying their QAP procedures to
RINs. The review and development of the proposed QAPs has been an
iterative process between the EPA and the potential auditors. This
process has been extremely useful both for the auditors in developing a
QAP that is consistent with the NPRM's standards and also for the EPA
in developing the final rule. Both QAP A and QAP B procedures were
developed and applied to RINs during this period, with the vast
majority being QAP B RINs.
    As further discussed in section II.A.1 of this preamble, we are
finalizing only a single QAP for use as of January 1, 2015, with RIN
owners retaining replacement obligation for invalid verified RINs.
However, any RINs audited and informally verified according to a QAP A
or QAP B as proposed in the NPRM prior to the final rule's effective
date will still receive the treatment proposed for QAP A or QAP B RINs
in the NPRM if the auditor's registration and QAP are approved by the
EPA after the final rule is effective. The EPA will review all pre-
registered QAPs after the final rule's effective date and any RINs that
were informally verified under a pre-registered QAP by a registered
auditor will be treated consistently with the proposed provisions for
A-RINs and B-RINs in the NPRM. Also, any RINs generated from the
effective date of the final rule through December 31, 2014 that are
audited and verified according to a registered QAP A or B will also
receive the treatment proposed for QAP A or QAP B RINs in the NPRM. In
other words, all RINs verified by a QAP that is registered as an A or B
QAP after the effective date of the final rule and that are generated
prior to January 1, 2015, are considered ``interim RINs'' because the
``interim period'' is defined as the period from publication of the
NPRM through December 31, 2014. We determined that in order to
facilitate a

smooth transition to EMTS and allow sufficient time for user testing
and development, the interim period (in which auditors can continue to
verify RINs according to an Option A or Option B QAP) would have to be
extended beyond the effective date of the final rule. Auditors applying
Option A and Option B QAPs will continue to maintain records of their
activities and of RINs verified through their QAPs, just as they did in
the period before the final rule's effective date. A-RINs and B-RINs
will not be reflected in any way in EMTS reporting. If the EMTS system
is capable of fully handling the ``tagging'' of RINs as Q-RINs prior to
the end of the interim period, the EPA may offer auditors the
opportunity to begin verifying RINs under the final ``Q-RIN'' protocol
prior to January 1, 2015.
    For A-RINs generated in the interim period, the applicable
provisions, discussed further in section II.C of this preamble, include
an affirmative defense to civil penalties for owners of invalid QAP-
verified RINs who unknowingly transferred or retired the RINs for
compliance with their RVOs. They also include the auditor's replacement
responsibility for any invalid verified A-RINs that are not replaced by
the producer up to a two percent cap, and the RIN owner's corresponding
lack of replacement responsibility for those RINs. Auditors who
verified these interim period A-RINs are obligated to maintain the
replacement mechanism sufficient to meet their potential replacement
responsibility, as set forth in the NPRM. Auditors who marketed and
applied Option A QAP procedures during the interim period are not
required to submit their QAP as an Option A QAP after the final rule,
but may submit it as an Option B QAP. This may be preferable if, for
instance, the auditor does not wish to maintain the replacement
mechanism responsibility for the required 5 year period. The Option A
QAP requirements set out in the NPRM were inclusive of all Option B
requirements, so any QAP fulfilling the Option A requirements would
also fulfill the Option B requirements.
    RINs audited and informally verified according to a QAP B during
the interim period will receive the treatment proposed for B-RINs in
the NPRM, which is the same treatment proscribed generally for verified
``Q-RINs'' in the final rule. Once the EPA registers a QAP B auditor
and approves their QAP, then any RINs that were informally verified
during the interim period by that auditor using that QAP will be
treated as QAP B verified RINs under the final rule, and will receive
the benefits for QAP B verified RINs, including an affirmative defense
to civil penalties for owners of invalid B-RINs who unknowingly
transferred or retired the RINs for compliance with their RVOs. They
also include a limited exemption for the RIN owner's obligation to
replace up to two percent of the invalid verified RINs, if the producer
does not replace them first. These provisions are further described in
section II.D of this Preamble.

C. Provisions of RIN Verification Under QAP A During the Interim Period

    Given that there will be only a single QAP finalized, the
provisions and elements of QAP A that were proposed in the NPRM will be
finalized for a QAP A used in the interim period. A number of comments
were raised regarding QAP A which has led the Agency to not finalize it
outside of the interim period. However, in considering those same
comments for the interim period, we have concluded that it is
appropriate to finalize QAP A as proposed since any benefits to
changing QAP A in response to comments would not be outweighed by the
significant complexity it would entail. This is especially true when
considering parties have already implemented QAP A as proposed during
the interim period. The discussion for why only a single QAP is being
finalized is discussed in Section II.A.1.
    We are finalizing the provisions of RIN verification under a QAP A
used during the interim period as was proposed in the NPRM except for
one element of the affirmative defense.\10\ For consistency in
affirmative defense elements of QAP A and the single QAP after the
effective date of this final rule, the Agency is increasing the
notification timeframe for QAP A from ``within 24 hours'' to ``within
five business days'' as it did for the single QAP. A QAP A used during
the interim period will include an affirmative defense (see Sec.
80.1473(c) of the regulations), a RIN replacement mechanism held by the
auditor (see Sec.  80.1470(b) of the regulations), a cap on auditor
replacement of invalid A-RINs (see Sec.  80.1470(c) of the
regulations), and a process for determining who will replace any
invalid RINs (see Sec.  80.1474 of the regulations).
---------------------------------------------------------------------------

    \10\ Please see 78 FR 12158 (February 21, 2013) for a detailed
description of QAP A as proposed.
---------------------------------------------------------------------------

    With regard to the required RIN replacement mechanism, it must
provide coverage for two percent of each D code of A-RINs verified by
an auditor in the current year and (up to) the previous four years. For
example, the RIN replacement mechanism for A-RINs verified during the
interim period in 2013 should be capable of replacing those A-RINs
until the end of 2017. Likewise, the RIN replacement mechanism for A-
RINs verified during the interim period in 2014 should be capable of
replacing those A-RINs until the end of 2018. Note that the interim
period for verifying RINs under QAP A ends December 31, 2014. However,
the RIN replacement mechanism must be capable of replacement of A-RINs
until the aforementioned dates.
    We also believe it is appropriate to cap the number of A-RINs that
each auditor must replace at two percent of the A-RINs it has verified
in the interim period. In other words, the RIN replacement cap should
be equal to the minimum replacement coverage required for Option A
auditors. Given that QAP A is only available during the interim period
and will cease after December 31, 2014, the cap will apply to all A-
RINs that have been verified by an auditor during the interim period.

D. Provisions of RIN Verification Under QAP B During the Interim Period

    Given that there will be only a single, new QAP finalized after the
interim period, the provisions and elements of QAP B that were proposed
in the NPRM will be finalized for a QAP B used during the interim
period. The majority of commenters did not address individual elements
of QAP B, and were in favor of the affirmative defense and limited
exemption provisions. For consistency in affirmative defense elements
of QAP B and the single QAP after the effective date of this final
rule, the Agency is increasing the notification timeframe for QAP B
from ``within 24 hours'' to ``within five business days'' as it did for
the single QAP. As a result, in the final rule, the Agency is
finalizing a single new QAP that incorporates the majority of the
characteristics of QAP B (there will be one additional verification
component under RIN generation). The finalization of QAP B for the
interim period reflects the fact that parties have already implemented
QAP B as proposed during the interim period. The discussion for why
only a single QAP is being finalized is discussed in Section II.A.1.
    Again, we are finalizing the provisions of RIN verification under a
QAP B used during the interim period as was proposed in the NPRM.\11\ A
QAP B used during the interim period will include an affirmative
defense (see Sec.  80.1473(d) of the regulations), a two percent
limited exemption in calendar

years 2013 and 2014 (see Sec.  80.1474(e) of the regulations), and a
process for determining who will replace any invalid RINs (see Sec.
80.1474 of the regulations).
---------------------------------------------------------------------------

    \11\ Please see 78 FR 12158 (February 21, 2013) for a detailed
description of QAP B as proposed.
---------------------------------------------------------------------------

E. Provisions for RIN Verification Under the QAP

1. Elements of the QAP
    We are finalizing the elements for the QAP based on QAP B as
proposed with one additional element. See Section II.E.1.c, RIN
generation-related components, for this additional element. We are also
removing the requirement that the production process is consistent with
the D code being used. The existence of the element requiring that the
production process is consistent with what is reported in EMTS (see
Table II.D.1.b-1, element 2-1) renders it unnecessary. The QAP will be
used by EPA-approved independent third-party auditors to audit
renewable fuel production. The QAP will have to include a list of
elements that the auditor will 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.
    We requested comment on these proposed elements, including detailed
descriptions of any elements not mentioned below. We also requested
comment on whether quarterly monitoring is appropriate, 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. Some commenters were against the quarterly requirement for
various components of the QAP, stating that there is no reason to
review documentation more frequently than annually if it does not
change regularly. The EPA disagrees with these comments, as verifying
quarterly that procedures and processes have not changed is an
essential part of the QAP. Since RINs will be verified only for the
period following an audit, allowing more time between reviews may
increase the likelihood of fraud and reduce the effectiveness of the
QAP. The one exception to this is the annual attest report, which is
submitted annually, and therefore can be reviewed annually. Other
comments expressed concern over the QAP covering elements of production
that were not required under RFS2. We feel that the requirements are
balanced and give assurance that the production process from feedstock
to RIN generation was performed appropriately, and thus, are finalizing
all requirements for the single, new QAP as were proposed for QAP B.
    Additional comments and the required elements of the QAP are
discussed below.
a. Feedstock-Related Components
    There are eight required elements in the QAP designed to ensure
that the feedstocks used in the production of renewable fuel qualify to
generate RINs. First, for each batch of renewable fuel, the QAP must
verify that feedstocks meet the definition of ``renewable biomass,''
and identify which renewable biomass per Sec.  80.1401.
    There are specific required elements depending on the type of
feedstock. For instance, if the feedstock is separated yard waste,
separated food waste, or separated MSW, the QAP must 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 will verify that the
feedstocks are planted crops or crop residue that meet the requirements
of Sec.  80.1454(g).
    The QAP must 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 will verify that the
feedstock used to produce renewable fuel is not a renewable fuel from
which RINs were already generated, unless the fuel is produced pursuant
to an EPA-approved petition under Sec.  80.1416 and the petition and
approval includes an enforceable mechanism to prevent double counting
of RINs.
    Finally, the QAP must 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 required for
the QAP are shown in the table below. All items will be required to be
monitored on a quarterly basis.

      Table II.E.1.a-1--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.............................  Cropand/or 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
    There are four required elements in the QAP designed to ensure that
the renewable fuel production process is appropriate for the RINs being
generated. Auditors submitting QAPs for EPA approval will be required
to provide a list of specific steps they will take to audit all four
elements.
    First, the QAP must verify that production process technology and
capacity used matches information reported in EMTS and in the
facility's RFS2 registration. The QAP also must 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 requires mass and energy
balances of the production process, and must 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., are required as part of the mass and
energy balances.
    Finally, the QAP must 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 for the QAP are shown in the table below. All items
shall be monitored on a quarterly basis.

 Table II.E.1.b-1--QAP Monitoring Frequency--Production Process-Related
------------------------------------------------------------------------
                                                 Component
------------------------------------------------------------------------
2-1.............................  Production process consistent with
                                   EMTS.
2-2.............................  Mass and energy balances appropriate.
2-3.............................  Accuracy of process-related factors
                                   used in feedstock energy (FE)
                                   calculation.
------------------------------------------------------------------------

c. RIN Generation-related Components
    There are eight required elements in the QAP designed to ensure
that the renewable fuel being produced qualifies to generate RINs, and
that the number of RINs generated is accurate. In finalizing the
elements for the QAP, we have added one requirement to the regulations
that we proposed. The additional requirement is that auditors must
verify that RIN generation is consistent with wet gallons produced. See
the discussion below for more information.
    For each batch of renewable fuel, the QAP must verify that volumes
of renewable fuel for which RINs are being generated are designated for
use as transportation fuel, heating oil, or jet fuel in the 48
contiguous states and Hawaii. This verification should also take into
account the additional Product Transfer Document (PTD) designation
requirements for all renewable fuels, and registration, reporting and
recordkeeping requirements for fuels not typically used as
transportation fuel, heating oil, or jet fuel. See section III.B.1 of
this preamble for further discussion of these additional requirements.
    The QAP must verify a number of things related to the fuel type.
For instance, the QAP will include verification of the existence of
certificates of analysis demonstrating that the renewable fuel being
produced meets any applicable specifications and/or definitions in
Sec.  80.1401, and verify contracts with lab(s) for certificates of
analysis, unless a facility has an on-site laboratory. If on-site, the
QAP must verify lab procedures and test methods. The QAP must 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 must sample and test the final fuel and compare to any
applicable specifications. The QAP must 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 must 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 must
verify that the volume of renewable fuel produced matches expectations
for the amount of feedstock being processed. The QAP also must 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 must verify that the production volume being claimed
matches storage and/or distribution capacity and that actual volume
production capacity matches the value specified in the facility's RFS
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. We are also specifying in the regulations that
the auditor must verify that RIN generation was consistent with wet
gallons produced. While this was discussed in the proposal (see 78 FR
12182), it was not explicit in the regulations. We are making it
explicit in the final regulations. The RIN generation-related elements
for QAPs are shown in the table below. All items will be required to be
monitored on a quarterly basis.

   Table II.E.1.c-1--QAP Monitoring Frequency--RIN Generation-Related
------------------------------------------------------------------------
                                                 Component
------------------------------------------------------------------------
3-1.............................  Renewable fuel designated 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.
3-8.............................  RIN generation consistent with wet
                                   gallons.
------------------------------------------------------------------------

d. RIN Separation-Related Components
    There are three required elements in the QAP to verify that RINs
were separated properly. First, under the limited circumstances where a
renewable fuel producer or importer separates RINs, the QAP will be
required to verify that any RIN separation being done by the producer
was 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 will be required to ensure that renewable fuel producers who
export renewable fuel, or cause the export of renewable fuel, do not
generate RINs, or alternatively that any RINs generated were
appropriately retired. Finally, the QAP must verify the accuracy of the
annual attestation.
    The RIN separation-related elements for the QAP are shown in the
table below. All items must be monitored on a quarterly basis, except
for the annual attestation review, which must be monitored yearly.

   Table II.E.1.d-1--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 QAPs
    A third-party auditor choosing to verify RINs under the quality
assurance program must submit a QAP to the 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. A QAP must be
submitted for approval annually. A QAP will be deemed valid for one
year from the date the EPA notifies the submitting party that its QAP
has been approved. Only an EPA-approved QAP can be used by a third-
party auditor to provide audit services to renewable fuel producers.
b. Frequency of Updates/Revisions to QAPs
    We are finalizing a ``general'' and ``pathway-specific'' QAP
arrangement, where the general QAP will cover the common elements of
the QAP and the pathway-specific QAP will cover elements that require
additional verification steps outside of the general QAP. We are also
finalizing that QAP plans are pathway-specific, and auditors may verify
RINs for any facility that uses a pathway for which they have been
approved. This is consistent with what was proposed in the NPRM, and is
simply a clarification of the method for implementation.

    We requested comment on what changes would require a new QAP to be
submitted for approval. Specifically, we requested comment on whether a
new QAP should be required to be submitted to the EPA if the audited
facility changes operations, feedstock, fuel type, etc. Based on
comments received, we would like to clarify the process for updating
and/or revising a QAP.
    Potential QAP auditors must submit a ``general'' QAP to the agency
that outlines the plan for verifying each of the elements of the QAP.
In addition to the general QAP, a ``pathway-specific'' QAP must be
submitted for each of the pathways they intend to audit. For example, a
general QAP might outline the steps the auditor will use to verify that
equivalence value is appropriate for all producers, whereas a pathway-
specific QAP may outline the steps to verify that a separated food
waste plan has been submitted for producers using used cooking oil as a
feedstock to produce biodiesel. If an auditor feels that a section of
the general or pathway-specific QAP does not apply, they may indicate
``Not Applicable'' in that section of their QAP. An example might be an
auditor that does not intend to audit any facilities that require
testing of renewable content according to Sec.  80.1426(f)(9), and
would therefore indicate in the general QAP that it did not apply.
    Once general and pathway-specific plans have been approved for a
potential auditor by the agency, the auditor may verify production for
any facility using one of their approved pathways. The auditor does not
need to submit any additional information to the agency if they add
producers who use a pathway for which they are approved. If, however, a
producer chooses to use a pathway for which the auditor does not have
approval, then any RINs generated by that producer will not be verified
until the auditor submits an application for that pathway, and it is
subsequently approved. Renewable fuel produced prior to the acceptance
of a pathway for a QAP auditor may later be verified, as long as the
QAP auditor followed the verification steps outlined in the submitted
pathway-specific QAP, and the fuel is still within the eligible RIN
generation window.
    If an auditor finds that it is necessary to make a change to their
QAP, they may submit an updated plan to the EPA for approval. In an
effort to avoid penalizing producers for being proactive in their
ongoing QAP development, submitting a change to the EPA will not affect
the status of any current QAP plans. Rather, the change will be queued,
and the current QAP will remain in effect until approval or rejection
of the updated submittal. If the agency chooses to reject the update,
the existing QAP will remain in place and be unaffected by the attempt
to update. If no QAP is in place, then RINs may not be verified until
the QAP is approved.
3. Importers and the Use of a QAP
    We are finalizing that foreign producers may participate in the QAP
under the same production requirements as a domestic producer, although
the method of implementation for each of the requirements may vary
based on circumstances for each producer, domestic or foreign.
    We requested 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.
    The quality assurance program will also apply to RINs generated for
foreign-produced renewable fuel. Foreign producers of renewable fuel
must be approved by the EPA and must meet all requirements applicable
to non-foreign producers, i.e., the provisions of Subpart M. Such
producers can engage a registered third-party auditor to audit their
facility in accordance with the proposed quality assurance program.
However, RINs generated from imported fuel will only be considered
verified under the quality assurance program if both the associated
foreign renewable fuel production facility, and the corresponding
importer, are audited under the same EPA-approved QAP. If multiple
auditors are involved in the verification process, the procedure for
verification must be explicitly spelled out in a single associated QAP.
In addition, the party submitting the QAP must accept responsibility
for the entire QAP process, even if sections are performed by a partner
organization. If a pre-determined arrangement is not a part of the QAP,
then RINs from foreign producers may not be audited by multiple parties
(for example, Auditor A verifies the foreign renewable fuel production
and Auditor B verifies the importer RIN generation).
    Some commenters indicated that foreign producers should be allowed
to use existing documentation to prove the validity of fuel produced.
While the EPA does not intend to place any additional burdens on
foreign producers above what is required for domestic producers, we do
intend to require foreign producers to be bound by the same QAP
guidelines and verification requirements as domestic producers,
although implementation for these elements (such as the verification of
RIN generation) may vary considerably. For example, an auditor
verifying production for a foreign RIN generating producer will need to
ensure that the recordkeeping and bond requirements under Sec. Sec.
80.1466 and 80.1467 are being met. It will also include verifying any
certificates of fuel transfer, as well as port of entry testing, none
of which are required for domestic RIN generation. This is by no means
an exhaustive list, but rather an example to show that there may be
significant differences in the requirements to verify a RIN, based on
the location of the producer and the type of RIN generation. With these
additional requirements, we believe foreign-produced RINs verified
through a QAP can be treated in the same manner as any RINs verified
from domestically produced fuel.

F. Auditor Requirements

    In the NPRM, we outlined a number of proposed requirements for the
independent third-party auditors that use approved quality assurance
plans (QAPs) to audit renewable fuel production to verify that RINs
were validly generated by the producer. We recognized that qualified,
independent third-party auditors are integral to the successful
implementation of the quality assurance program. Therefore, based on
feedback from public comments and reasons discussed below, we are
finalizing several requirements for third-party auditors in today's
rulemaking. First, all third-party auditors are required to annually
register with the EPA. We also will require that third-party auditors
have professional liability errors and omissions insurance (E&O
insurance). After the EPA has approved a QAP and registered the third-
party auditor, the auditor can flag RINs in EMTS as verified and notify
the EPA of potentially invalid RINs as QAPs are implemented. Finally,
in order to ensure that QAPs are appropriately implemented, we are also
finalizing recordkeeping, reporting, and attest engagement requirements
on third-party auditors consistent with similar requirements on other
parties in RFS.
1. Who can be an auditor?
    One key element of the QAP process is the minimum qualifications
that the auditors conducting facility visits must have. In the NPRM, we
proposed three 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, we proposed that auditors be independent of the
renewable fuel producers that they are auditing. Second, we proposed
that auditors have the professional expertise to effectively implement
QAPs by having a professional engineer participate in the
implementation of an EPA-approved QAP. Third, we proposed that third-
party auditors carry E&O insurance. The EPA continues to believe that
these key qualifications provide reasonable assurances that auditors
can successfully implement QAPs and help avoid the generation of
invalid RINs at the fuel producer level.
a. Independence
    One of the most important requirements for auditors is that they
remain independent of renewable fuel producers. Independence of the
auditor from RIN generators 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. In the NPRM, we
proposed that third-party auditors be subject to the same independence
definition that exists for independent professional engineers that
conduct engineering reviews. In the March 2010 RFS 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 (See 75 FR 14670, March 26, 2010).
    Recognizing the importance of preventing conflicts of interest to
the successful implementation of the QAP program, we sought comment on
whether our proposed definition of independence should be expanded to
ensure that third-party auditors were free from interests from other
parties regulated by the RFS (e.g., RIN owners and obligated parties).
We also sought comment on whether we should preclude parties that have
performed other services, like engineering reviews, attest engagements
or acting as an agent for the RIN generator, from also implementing
QAPs for the same RIN generator. For example, we recognized that
portions of the QAP may involve investigating previous services
provided by a third-party auditor to RIN generators, and third-party
auditors may be hesitant to highlight issues that call into question
their professional reputations creating a potential conflict of
interest. We did not propose further requirements, however, as we did
not believe they were necessary, they could interfere with existing
efforts to ensure compliance, and there could be problems given the
limited number of parties that could be available for approval as an
auditor.
    Public comments overwhelmingly agreed that ensuring the
independence of third-party auditors is paramount to the successful
implementation of effective QAPs. Commenters noted that third-party
auditors that had conflicts of interests with audited producers and
importers or direct or indirect financial interest in RIN markets more
generally could undermine the QAP program and potentially the entirety
of the RFS program by failing to report potential issues and
potentially participating in the perpetuation of fraudulent activities.
Commenters noted that the EPA should do whatever it could to ensure
that third-party auditors remained independent by providing meaningful
oversight and limiting the services that third-party auditors may
provide for audited RIN generators.
    We received several comments asking that we expand the scope of
independence to include independence from various parties and
activities outside of audited RIN generators. Almost all comments that
addressed the question of third-party auditor independence stated that
the third-party auditors should be precluded from owning and trading
RINs. Many commenters expressed concerns that RIN ownership may provide
a clear financial incentive for third-party auditors to not report
potential issues, especially if they owned RINs from facilities they
are auditing. Additionally, commenters argued that allowing third-party
auditors to own RINs would add one more source of uncertainty in an
already turbulent RIN market and that the EPA should preclude third-
party auditors from owning and trading RINs. Some commenters argued
further that third-party auditors should not only be precluded from
owning RINs, but should also be free from interest in parties that own
RINs since an auditor could improperly verify RINs to allow the owners
of those RINs to enjoy the benefits of the QAP program despite the fact
that those RINs may be invalid. On the other hand, one commenter urged
the EPA to allow third-party auditors to trade RINs since that would
make them statutorily responsible for the validity of the RINs. The
commenter argued that the potential civil liabilities from being
convicted of RIN fraud would outweigh the EPA's conflict of interest
concerns.
    We agree with commenters that allowing third-party auditors to own
or trade RINs could lead to a potential conflict of interest that may
inhibit an auditor's ability to effectively implement a QAP. The
benefits to the auditor from allowing third-party auditors to own and
trade RINs does not outweigh our conflict of interest concerns since
third-party auditors are in the best position to identify potentially
invalid RINs and without the proper implementation of a QAP, invalid or
fraudulent RINs may never be identified, especially if the third-party
auditor has an incentive to ignore potential issues because they have a
financial interest in whether RINs are valid. Third-party auditors
could also use their access to confidential business information for a
number of RIN generators to speculate on unverified RINs from audited
RIN generators. Therefore, we are finalizing requirements that preclude
third-party auditors from owning and trading of RINs.
    Some commenters argued that the EPA should expand the independence
criterion for third-party auditors to include conflicts of interest
with obligated parties. In the NPRM, the EPA suggested that it did not
want to interfere with existing efforts by obligated parties or other
intermediaries that may ensure compliance with RFS requirements and
that such interference may hamper existing efforts by industry to
mitigate invalid RIN generation. One commenter argued against this by
pointing out that the EPA initially created the QAP program to be
voluntary so that obligated parties could decide between the level of
assurance in the quality of RINs outside the QAP program (i.e. under
``buyer beware'') or participate in the QAP program. They conclude that
in order to promote consistency in the review for which an affirmative
defense is available, third-party auditors must be independent even
from obligated parties. We also received comments that suggested that
we should allow the quality assurance efforts of an obligated party to
be used in lieu of a QAP provided by an independent third-party auditor
if the obligated party's quality assurance efforts satisfied all the
elements of a QAP.
    Although we recognize that obligated parties have historically
implemented similar downstream quality assurance programs with great
success, we also recognize the potential for conflict of interests to
arise if obligated parties implemented a QAP for a producer or
importer. If we treated RINs verified outside of a QAP by the obligated
parties themselves the same as RINs verified by an approved QAP, there
is a clear potential for the obligated party to verify RINs that are
invalid to take advantage of the affirmative defense

elements and take advantage of, and possible even exploit, the
flexibility of the limited exemption for RIN replacement. This is not
an appropriate situation, and the EPA is not providing for it. Under
the voluntary program adopted in this rulemaking, obligated parties
will have to determine whether their existing quality assurance
measures provide them adequate assurance to purchase RINs under the
``buyer beware'' program or in the alternative they can contract the
services of independent third-party auditors to provide QAP services
and take advantage of today's QAP program. For the same reasons, we are
requiring that QAP auditors be independent from obligated parties the
same way they are required to be independent from the RIN generator.
    We also specifically sought comment on whether third-party auditors
could act as agents for RIN generators that they were auditing.\12\ We
received many comments across the spectrum of support for auditor
agency. Many commenters argued that allowing such a relationship
between third-party auditors and audited RIN generators could increase
the likelihood for the verification of invalid RINs. Some commenters
pointed out that an auditor acting as an agent for an audited RIN
generator could over generate RINs in collusion with the RIN generator
since there may be little policing of QAP providers and the QAP
provider could financially gain from the sale of the additional RINs.
Other commenters stated that providing these services on behalf of RIN
generators financially tied third-party auditors too closely to the
continued success and potentially expansion of audited RIN generators,
which may inhibit the ability for third-party auditors to impartially
implement a QAP.
---------------------------------------------------------------------------

    \12\ For purposes of this preamble, agents are persons that act
on behalf of a regulated party, in this case RIN generators, to
complete requirements under the RFS program (e.g. generate RINs,
submit periodic compliance reports, etc.).
---------------------------------------------------------------------------

    Other comments supported the notion that third-party auditors
should be allowed to serve as agents for audited RIN generators since
being an associated agent would allow the third-party auditor to have
full access to oversee RIN generation data to compare with ongoing QAP
implementation. This access would also allow third-party auditors to
help producers with corrective actions as they are identified via QAPs.
This would allow producers to reduce compliance costs. Some commenters
argued even further suggesting that the EPA require that third-party
auditors serve as agents to take advantage of the benefits of being an
associated agent for an audited RIN generator.
    Some commenters suggested that the EPA stop short of allowing
third-party auditors to act as agents in a RIN generating capacity for
audited RIN generators, but allow third-party auditors to submit
compliance reports on behalf of audited RIN generators so long as the
RIN generator signs off on the report. Such an approach would avoid the
potential for collusion by allowing third-party auditors to generate
RINs while saving time and reducing costs for audited RIN generators.
    We believe, and one commenter also noted, that third-party auditors
need not be agents of audited RIN generators to obtain access to RIN
generation data since we can provide ``read-only'' access to auditors
in EMTS which should provide enough information for auditors to
effectively implement a QAP. Additionally, in the NPRM, we identified
serious concerns about whether third-party auditors would be free from
conflicts of interest if they were allowed to generate RINs for audited
RIN generators. However, the EPA recognizes that submitting compliance
reports, with assurances from the RIN generator of the accuracy and
authenticity of required reported information, may provide an
opportunity to reduce overall compliance costs for RIN generators
without jeopardizing the independence of third-party auditors.
Therefore, we are not allowing third-party auditors to generate RINs
for audited RIN generators, but we are allowing third-party auditors to
submit periodic compliance reports on behalf of audited RIN generators.
    Some commenters noted that however the EPA designs the QAP program,
auditors have an inherent conflict of interest since RIN generators
must pay third-party auditors to enjoy the benefits of the program.
This creates an incentive for auditors to ensure that their customers
continue to produce RINs by not reporting potential issues arising from
audits. The comment suggested that we should expand our definition to
include that auditors should avoid even the appearance of a conflict of
interest.
    One commenter suggested that we adopt the conflict of interest
standard outlined under rule 101 of the American Institute of CPAs. The
commenter stated that the central articulation of this rule is that an
auditor may have no direct or material indirect financial interest in
the client. They argued that this clear and well-established
requirement should be observed since it would better preserve the
integrity of the QAP program compared to the proposed requirement.
    We agree that today's QAP program imposes an implicit conflict of
interest since third-party auditors' services are paid for by RIN
generators, or for that matter any similar situation that applies to
any independent party required under the RFS regulations (e.g.
engineering reviews and attest engagements). We do not agree that the
independence criterion for third-party auditors should be limited to
strictly direct and indirect financial conflicts of interest. We
believe by interpreting conflict of interest more broadly, we will
raise the standard of independence in the QAP program to a higher level
than that seen in other portions of the EPA regulations, especially
considering the importance of maintaining an effective QAP. Therefore,
we are modifying the independence requirements for third-party auditors
to preclude the appearance of a conflict of interest. This does not
preclude third-party auditors from being paid by RIN generators to
provide auditing services. An example of a situation that serves as a
potential appearance of a conflict of interest is if a third-party
auditor has provided consultative engineering services in the
development and construction of a renewable fuel production facility
and then later is selected to implement a QAP at the same facility.
Several elements of the QAP would require the third-party auditor to
verify services previously provided to the producer that owned the
facility and would appear to be a conflict of interest since the third-
party auditor may not wish to tarnish its reputation by reporting
potential issues related to its previous engineering services.
Furthermore, as discussed in greater detail below, we are finalizing
requirements to try to mitigate the inherent conflict of interest in
the QAP program to provide both the EPA and third-party oversight of
third-party auditors.
    We received many comments that addressed the potential for conflict
of interests to arise from a singular party that offered a variety of
services including a QAP for a RIN generator. Some commenters pointed
out that many parties that may serve as third-party auditors have acted
or currently act as consultants for RIN generators and this would
equate to a vested interest by the auditor in the continued success of
the RIN generators being audited. Other commenters highlighted that
some potential third-party auditors have provided numerous services to
a single RIN generator including initial engineering reviews, annual
attest

engagements, the submission of periodic compliance reports on behalf of
RIN generators, and serving as an agent to generate RINs on behalf of
the RIN generator. These comments argue that allowing a single party to
provide ``cradle to grave'' services that will now include the
verification of RINs via a QAP for a RIN generator provides a
substantial financial incentive for third-party auditors to ignore
potential issues that may have occurred during prior services and
identified through a QAP. A third-party auditor that reported such
potential issues may call into question the validity of all prior work
for other RIN generators creating a possibility for cascading losses
for the auditor and RIN generators. Ultimately, these commenters
concluded that such incentives could possibly undermine the QAP program
and lead to more RIN fraud.
    The commenters generally offered two suggestions for the EPA in the
final rule. First, these comments suggested that the EPA limit the
services a third-party auditor can from provide a RIN generator if they
are implementing a QAP for a RIN generator. Comments varied on which
services an auditor should be precluded from providing. For example,
some comments suggested that third-party auditors not be allowed to
have conducted the initial engineering review. Others suggested that
different independent parties should provide each separate requirement
in RFS that calls for an independent third-party to conduct an action.
Other comments argued even further that auditors only be allowed to
implement a QAP and therefore, not allowed to provide any other service
involving RFS requirements for a RIN generator. This would include
providing consultation services to aid RIN generators with registration
paperwork, submitting compliance reports to the EPA or otherwise acting
as an agent for RIN generators.
    Second, these comments generally advocated that the EPA ensure that
a system of checks and balances or a ``check the checker'' program
exist to help ensure that auditors are appropriately implementing QAPs
and free from conflicts of interest.
    On the other hand, other comments argued that RIN generators that
participate in the QAP program should receive relief from requirements
that they believed would be duplicated by the implementation of a QAP
at a facility. For example, many commenters felt that the burdensome
periodic facility audits and documentation reviews should displace
existing requirements for the triennial engineering reviews and annual
attest engagements since much of the information gleaned from these
activities will be available through QAP implementation at a facility.
These commenters pointed out that providing relief for these
requirements would decrease overall compliance costs to facilities
participating in the QAP program which may ultimately increase
participation by facilities in the QAP program. One commenter suggested
that the EPA not go as far as to eliminate triennial engineering review
requirements, but rather allow third party auditors to incorporate the
engineering review within periodic facility audits to reduce some of
the compliance burden on audited RIN generators.
    Commenters also alluded to the EPA's stated concern in the NPRM
that excluding third-party auditors that had conducted initial
engineering reviews for a facility from providing auditing services