[Federal Register Volume 78, Number 35 (Thursday, February 21, 2013)]
[Proposed Rules]
[Pages 12157-12217]
[FR Doc No: 2013-03206]

Vol. 78

Thursday,

No. 35

February 21, 2013

Part II

Environmental Protection Agency

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40 CFR Part 80

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

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

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

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

RFS Renewable Identification Number (RIN) Quality Assurance
Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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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, have led to inefficiencies and
a significant reduction in the overall liquidity in the RIN market. The
result has been greater difficulty for smaller renewable fuel producers
to sell their RINs. Today's action proposes additional regulatory
provisions that would promote greater liquidity in the RIN market in a
way that assures reasonable oversight of RIN generation and assures use
of the required renewable fuel volumes. The proposal includes a
voluntary quality assurance program and related provisions intended to
meet these goals. The proposed program also includes elements designed
to make it possible to verify the validity of RINs for all of 2013.
Additionally, we are proposing a number of new regulatory provisions to
ensure that RINs are retired for all renewable fuel that is exported
and to address RINs that become invalid downstream of a renewable fuel
producer.

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

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

FOR FURTHER INFORMATION CONTACT: Mary Manners, Office of Transportation
and Air Quality, Compliance Division, Environmental Protection Agency,
2000 Traverwood Drive, Ann Arbor, MI 48105; Telephone number: 734-214-
4873; Fax number:<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:

I. General Information

A. Does this action apply to me?

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

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

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

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

Outline of This Preamble

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

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

I. Executive Summary

    The Renewable Fuel Standard (RFS) program began in 2006 pursuant to
the requirements in Clean Air Act (CAA) section 211(o) which were added
through the Energy Policy Act of 2005 (EPAct). The statutory
requirements for the RFS program were subsequently modified through the
Energy Independence and Security Act of 2007 (EISA), resulting in the
publication of major revisions to the regulatory requirements on March
26, 2010.\1\
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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, and/or jet fuel each
year. To accomplish this, EPA publishes applicable percentage standards
annually that apply to the sum of all gasoline and diesel produced or
imported. The percentage standards are set so that if every obligated
party (refiners and importers of gasoline or diesel transportation
fuel) meets the percentages, then the amount of renewable fuel,
cellulosic biofuel, biomass-based diesel, and advanced biofuel used are
projected to meet the volumes required on a nationwide basis.
    Obligated parties demonstrate compliance with the renewable fuel
volume standards in one of two ways. Obligated parties can demonstrate
compliance either by acquiring the required volumes of renewable fuels
together with the associated Renewable Identification Numbers (RINs),
which are assigned by the renewable fuel producer or importer to every
batch of renewable fuel produced or imported, or by acquiring just the
RINs without the associated fuel. Validly generated RINs show that a
certain volume of qualifying renewable fuel was produced or imported.
The RFS program also includes provisions stipulating the conditions
under which RINs are invalid, the liability carried by a party that
transfers or uses an invalid RIN, and how invalid RINs must be treated.
The fundamental basis of the Agency's treatment of invalid RINs is the
concept of buyer beware, in which all regulated parties must take steps
to verify that the RINs they acquire are valid, and all parties are
liable for transferring or using invalid RINs.

A. Purpose of This Action

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

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

B. Summary of Major Provisions

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

C. Impacts

    The quality assurance program would help to reduce the number of
invalidly generated RINs in distribution, and thus ensure that valid
RINs are traded and used for compliance. As a result, it would help to
ensure that the renewable fuel volumes mandated by Congress are
actually used. In this respect, then, there would be no change to the
expected impacts of the RFS program as projected in the RFS2 final
rulemaking \2\ in terms of volumes of renewable fuel consumed or the
associated GHG or energy security benefits. The primary impacts of the
quality assurance program would be improved liquidity and efficiency in
today's RIN market and improved opportunities for smaller renewable
fuel producers to sell their RINs.
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    \2\ 75 FR 14670, March 26, 2010.
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    Likewise, the proposed changes to the regulations governing export
of renewable fuel would ensure that the appropriate number and type of
RINs are retired for every gallon of renewable fuel exported,
consistent with the intent of the program.
    The quality assurance program that we are proposing in today's
action would be voluntary. As a result, there would be no required
costs. There would likely be costs associated with an individual
party's participation in the quality assurance program, and in Section
IX we have provided estimates of some elements of the costs of
participation. We have also provided cost estimates as provided by
several potential third-party auditors. However, the fact that the
quality assurance program would be voluntary means that a decision to
participate will be made independently by each regulated party, and
thus we cannot accurately project the costs that might be incurred for
the nation as a whole. Furthermore, any costs incurred would only be
borne if the industry believed that those costs were less than current
costs in the marketplace resulting from efforts to verify, acquire, and
trade, and use RINs and the risks associated with such activities.

II. Background and Purpose

    The structure of the RFS program, and in particular the regulatory
provisions governing the generation and use of RINs, originated during
the development of the initial RFS program required by the Energy
Policy Act of 2005. Under the statute, refiners, blenders, and
importers of non-renewable fuels were responsible for ensuring that
specified volumes of renewable fuel were used in the transportation
sector. During the process of developing the regulatory program,
stakeholders made it clear that requiring each separate obligated party
to physically blend renewable fuels into its own gasoline and diesel
fuel would require significant and costly changes to the distribution
system, fuels markets, and the activities of all involved in the fuel
supply chain. At the request of stakeholders, EPA developed the RIN
system as an alternative to a direct blending requirement. Finalized on
May 1, 2007, the RIN system provides obligated parties with flexibility
in satisfying their responsibility to ensure that a specified volume of
renewable fuels is used as transportation fuel in the U.S. each year.
It also permits renewable fuel producers to sell their fuels in a
manner that best meets market demands without forcing sales of volumes
directly to obligated parties.
    Under the RFS program, each RIN is generated by the producer or
importer of renewable fuel, and represents a volume of renewable fuel
measured in terms of ethanol-equivalent gallons. RINs are used by
obligated parties to demonstrate compliance with their Renewable Volume
Obligations (RVO). This reflects EPA's judgment that production and
sale of renewable fuel generally leads to its consumption as
transportation fuel.\3\ When a specified number of RINs are acquired
and retired by an obligated party, EPA is confident that a certain
volume of renewable fuel has been produced and blended for use as
transportation fuel. This RIN-based approach to the development and
implementation of the RFS program was developed in cooperation with
stakeholders in the fuel production and distribution industries as part
of a notice-and-comment rulemaking process.
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    \3\ See 72 FR 23929.
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    The intended result of the RIN system is that every RIN used for
compliance by an obligated party represents physical renewable fuel
that meets the regulatory criteria and which is used in the United
States for transportation fuel, heating oil or jet fuel. To ensure that
this result is achieved, EPA specified the conditions under which RINs
are invalid, how invalid RINs must be treated, and which parties are
liable for transferring or using invalid RINs. These provisions were
included in the RFS1 program and were carried into the revised RFS

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

A. Treatment of Invalid RINs Under the Current Regulations

    The RFS regulations identify the conditions under which RINs are
invalid at Sec.  80.1431(a). These include:
     A duplicate of a valid RIN.
     A RIN that was based on incorrect volumes or volumes that
have not been standardized to 60 [deg]F.
     A RIN that has expired (has not been used for compliance
in the year it was generated or the following year).
     A RIN that was based on an incorrect equivalence value.
     A RIN that is deemed invalid under the regulations
applicable to foreign renewable fuel producers.
     A RIN that does not meet the definition of renewable fuel.
     A RIN that was assigned an incorrect ``D'' code value.
     A RIN that was improperly separated.
     A RIN that was otherwise improperly generated.
    While the underlying actions that cause RINs to be invalid vary, in
all cases of invalid RINs the outcome is the same: Invalid RINs cannot
be transferred to any person, and cannot be used to achieve compliance
with the RVO of an obligated party or exporter. These restrictions on
invalid RINs apply regardless of the party's good faith belief that the
RINs were valid at the time they were acquired, transferred, or used
for compliance. Parties that take ownership of RINs are responsible for
the validity of the RINs they transfer and use, and are expected to
take whatever measures they deem appropriate to reduce the risk that
they have acquired invalid RINs.
    The statute requires that EPA promulgate regulations so that the
national volume mandates required by the statute are met through
consumption of renewable fuel as transportation fuel, heating oil, or
jet fuel, and specifies several provisions aimed at achieving this
result. Based on this, the current regulations prohibit invalid RINs
from being used for compliance with the applicable standards. This
prohibition forces obligated parties to replace invalid RINs that they
had intended to use for compliance with valid RINs.
    The ``buyer beware'' approach to RINs in the RFS program is
consistent with the approach EPA has taken in all previous mobile
source fuel programs. Indeed, the regulatory language used to implement
the buyer beware approach in the RFS program is essentially identical
to that used in these other programs:
     Benzene credits generated under the reformulated gasoline
(RFG) program--Sec.  80.67(h)(3).
     Gasoline sulfur allotment trading program--Sec.
80.275(d)(5)(i).
     Gasoline sulfur credits--Sec.  80.315.
     Sulfur credits generated under the MVNRLM diesel fuel
program--Sec.  80.531-Sec.  80.536.
    In these other fuels programs, the buyer beware approach to credits
has proven to be an effective mechanism for ensuring that program goals
are met. It encourages the industry to self-police the validity of the
credits they use for compliance and allows the credit market to
properly allocate any risk associated with the generation and transfer
of invalid credits. Most importantly, the buyer beware approach
maintains the environmental benefits of a program if the party that
generates the invalid credits is not financially viable and able to
replace the invalid credits, since other regulated parties would then
be responsible for replacing invalid credits. In the recent cases of
fraudulently generated RINs, it was this very process that ensured that
society was getting the benefits promised by the RFS program, albeit at
a cost to the regulated parties.\4\
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    \4\ California takes a similar approach for addressing invalid
carbon offset credits under the state's Global Warming Solutions
Act.
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    We continue to believe that the buyer beware approach gives
industry the greatest flexibility in determining how best to manage
credit trading practices while providing society the assurance that the
benefits of a program will materialize. However, we also recognize that
there are some aspects of the RFS program that make it more difficult
to implement a buyer beware approach. For instance, once RINs are
generated and leave the producer, they can be fungibly assigned to any
volume of renewable fuel, making it difficult to know what volume the
RIN was intended to represent. As a result, it can be difficult to
verify that the RIN was validly generated once it has left the
producer. The use of RINs in the RFS program is also unique in ways
that may make the buyer beware approach more challenging for regulated
parties to implement in an efficient manner, while retaining market
liquidity. Unlike other credit programs, RINs are not generated by the
same group of parties that use them for compliance purposes. Instead,
renewable fuel producers generate the RINs, and obligated parties
acquire them. These circumstances make it more difficult for obligated
parties to monitor RIN generation. The RFS program also allows an
unlimited number of parties to own and trade RINs, whereas in other
programs credit ownership and trading is limited to the parties that
must demonstrate compliance with applicable standards. In recent
months, obligated parties have taken actions to avoid the purchase of
invalid RINs, including limiting their business relationships to those
parties that they are able to confidently and efficiently project are
generating valid RINs. This behavior has resulted in certain, often
smaller, producers being excluded from opportunities to transact with
obligated parties, creating inefficiencies in the RIN market, in
particular the inclination of obligated parties to treat some RINs as
having higher value and lower risk than others.
    Our proposal for an additional, alternative mechanism for ensuring
that RINs are appropriately generated is an attempt to address the
inefficiencies that have arisen in the RIN market. We continue to
believe that the integrity of the program depends on the scrutiny
applied to it by regulated parties. However, in the specific case of
the RFS program we also believe that it would be appropriate to provide
additional

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

B. Recent Issues Regarding Liability for Invalidly Generated RINs

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

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

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

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

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

C. Industry Systems That Conduct Oversight of RIN Generation

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

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

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

D. EPA Goals in Proposing New Regulatory Provisions

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

III. Overview of the Proposed Program

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

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

A. Requirements for a Quality Assurance Plan and QAP Audits

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

B. Requirements for an Affirmative Defense

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

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

C. Replacement of Invalid RINs

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

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

D. Voluntary Participation

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

E. Treatment of RINs Prior to Final Rule Promulgation

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

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

F. Request for Comment on Prohibiting Producers From Separating RINs

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

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

G. Summary of the Two QAP Options

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

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

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

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

IV. Provisions for RIN Verification Under Option A

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

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

A. Requirements for Option A Quality Assurance Plans

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

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

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

would be required to be monitored on an ongoing basis.

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

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

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

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

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

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

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

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

B. RIN Replacement Mechanisms Under Option A

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

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

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

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

trust that could, in turn, fulfill the replacement responsibility on
its own or by hiring a third-party agent to do so. A payment bond,
similarly, could be established to pay out to a standby trust