ENVIRONMENTAL PROTECTION AGENCY

                                40 CFR Part 80

                      [EPA-HQ-OAR-2012-0621; FRL-XXXX-X]

                                 RIN 2060-AR72

      RFS Renewable Identification Number (RIN) Quality Assurance Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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

DATES: Comments must be received on or before [insert date 30 days after date of public hearing].

Hearing: We will hold a hearing on XXXdateXXX at XXXlocationXXX, Washington, DC, beginning at 9:00 am 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 e-mail.  The www.regulations.gov website 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 e-mail comment directly to EPA without going through www.regulations.gov your e-mail 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:<PHONE_NUMBER>; Fax number:<PHONE_NUMBER>; E-mail address<EMAIL_ADDRESS>or the information line for the Office of Transportation and Air Quality Compliance Division; telephone number<PHONE_NUMBER>; E-mail 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:

Category
NAICS[1] Codes
SIC[2] Codes
Examples of Potentially Regulated Entities
Industry
Industry
Industry
Industry
Industry
Industry

Industry
324110
325193
325199
424690
424710
424720

454319
2911
2869
2869
5169
5171
5172

5989
Petroleum Refineries
Ethyl alcohol manufacturing
Other basic organic chemical manufacturing
Chemical and allied products merchant wholesalers
Petroleum bulk stations and terminals
Petroleum and petroleum products merchant wholesalers
Other fuel dealers
[1] North American Industry Classification System (NAICS)
[2] Standard Industrial Classification (SIC) system code.

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

      B.	What Should I Consider as I Prepare My Comments for EPA?

      1.	Submitting CBI

      Do not submit confidential business information (CBI) to EPA through www.regulations.gov or e-mail.  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	8
A.	Purpose of this Action	8
B.	Summary of Major Provisions	9
C.	Impacts	10

II.	Background and Purpose	12
A.	Treatment of Invalid RINs Under the Current Regulations	13
B.	Recent Issues Regarding Liability for Invalidly Generated RINs	15
C.	Industry Systems that Conduct Oversight of RIN Generation	17
1.	Existing Systems	17
2.	Sufficiency of Existing Systems	18
D.	EPA Goals in Proposing New Regulatory Provisions	18

III.	Overview of the Proposed Program	20
A.	Requirements for a Quality Assurance Plan and QAP Audits	21
B.	Requirements for an Affirmative Defense	22
C.	Replacement of Invalid RINs	23
D.	Voluntary Participation	25
E.	Treatment of RINs Prior to Final Rule Promulgation	26
F.	Request for Comment on Prohibiting Producers from Separating RINs	28
G.	Summary of the Two QAP Options	29

IV.	Provisions for RIN Verification Under Option A	31
A.	Requirements for Option A Quality Assurance Plans	32
1.	Elements of an Option A QAP	32
a.	Feedstock-related components	32
b.	Production process-related components	34
c.	RIN generation-related components	36
d.	RIN separation-related components	37
2.	Approval and Use of Option A QAPs	38
a.	Approval of Quality Assurance Plan	38
b.	Frequency of Updates or Revisions to QAPs	38
B. 	RIN Replacement Mechanisms Under Option A	38
1.	Required Replacement Capability for RIN Replacement Mechanisms	40
2.	Financial Assurance Instruments	41
3.	RIN Banks	43
4.	A-RIN Escrow Accounts	44
C.	Affirmative Defenses	45
D.	Treatment of Invalid A-RINs	48
1.	Responsibilities for Replacement of Invalid Verified A-RINs	48
2.	Invalid A-RIN Replacement	49
3.	Process for Replacing Invalid Verified RINs	51
a.	Types of RINs that Can Replace Invalid Verified RINs	51
b.	Impacts of RIN Replacement on Renewable Fuel Demand	52
4.	Cap on RIN Replacement	53

V.	Provisions for RIN Verification Under Option B	55
A.	Requirements for Option B Quality Assurance Plans	55
1.	Elements of an Option B QAP	55
a.	Feedstock-related components	56
b.	Production process-related components	57
c.	RIN generation -related components	58
d.	RIN separation-related components	59
2.	Approval and Use of QAPs	59
a.	Approval of Quality Assurance Plan	60
b.	Frequency of Updates/Revisions to QAPs	60
B. 	RIN Replacement Mechanisms	60
C.	Affirmative Defenses	60
D.	Treatment of Invalid B-RINs	62
1.	Responsibilities for Replacement of Invalid Verified B-RINs	62
2.	Invalid B-RIN Replacement	63
3.	Process for Replacing Invalid Verified RINs	64
4.	Temporary Limited Exemption for Invalid RIN Replacement	65
a.	Determination of the Appropriate Exemption Level	65
b.	How Would the Limited Exemption be Applied?	67

VI.	Proposed Requirements for Auditors	70
A.	Who Can Be An Auditor?	70
1.	Independence	70
2.	Professionally Qualified to Implement a QAP	71
3.	Errors and Omissions Insurance	73
B.	Registration Requirements	73
C.	Other Responsibilities of Auditors	75
1.	Notifying the Agency When There are Problems	75
2.	Indentifying Verified RINs in EMTS	76
3.	Recordkeeping, Reporting, and Attest Engagements	77
a.	Recordkeeping Requirements	77
b.	Reporting Requirements	77
c.	Attest Engagements	78
d.	Prohibited Activities for Third-party Auditors	79

VII.	Proposed Requirements for Audits	80
A.	Document Review and Monitoring	80
B.	Buyer/Seller Contacts	81

VIII.	Additional Changes Related to the Definition and Treatment of Invalid RINs	84
A.	Export and Exporter Provisions	84
1.	Exporter RVO	84
2.	Require Identification of Renewable Fuel Content	84
3.	RIN Retirement Requirements	85
B.	"Downstream" Invalidation and Product Transfer Documents	86
1.	Designation of Intended Renewable Fuel Use	86
2.	Required Actions Regarding Fuel for which RINs have been Generated that is Used for a Non-Qualifying Fuel Use.	89
3.	RIN Generation for Fuel Made with Renewable Fuel Feedstock	89
4. 	Use of Renewable Fuel in Ocean-going Vessels	90
5. 	Treatment of Improperly Separated RINs	91
C.	Treatment of Confidential Business Information	92
1.	Overview	92
2.	Proposal to Disclose Aggregated RFS Registration Information	93
a.	Approach	93
b.	Rationale for Proposal	94
3.	Proposal to Disclose Aggregated RFS Report Information	95
a.	Approach	95
b.	Rationale for Proposal	96
4.	QAP Plans and Independent Engineering Reviews	98
5.	Request for Comments	98
D.	Proposed Changes to Section 80.1452  -  EPA Moderated Transaction System  (EMTS) Requirements  -  Alternative Reporting Method for Sell and Buy Transactions for Assigned RINs	98

IX.	Impacts	101
A.	Direct Costs for Implementing QAPs	101
1.	Time and Cost Assumptions	103
2.	Labor Cost Assumptions	103
3.	Cost Estimate Results	104
B.	Costs for RIN Replacement Mechanisms	104

X.	Public Participation	106
A.	How do I submit comments?	106
B.	Will there be a public hearing?	107

XI.	Statutory and Executive Order Review	108
A.	Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review	108
B.	Paperwork Reduction Act	108
C.	Regulatory Flexibility Act	109
D.	Unfunded Mandates Reform Act	110
E.	Executive Order 13132 (Federalism)	111
F.	Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments)	111
G.	Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks	111
H.	Executive Order 13211 (Energy Effects)	112
I.	National Technology Transfer Advancement Act	112
J.	Executive Order 12898:  Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations	112

XII.	Statutory Authority	113

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.

	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 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.

	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.  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.

	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 §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°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 - §80.67(h)(3)

            ::	Gasoline sulfur allotment trading program - §80.275(d)(5)(i)

            ::	Gasoline sulfur credits - §80.315

            ::	Sulfur credits generated under the MVNRLM diesel fuel program - §80.531 - §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.

	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 allegations in the indictment are mere accusations and all persons are presumed innocent until and unless proven guilty beyond a reasonable doubt in a court of law.

	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.  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.

	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 (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.

	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
      :: MVP: Murex Validity Program for RINs
      :: 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 would 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 a 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.

	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 §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, determine what if any changes may be appropriate, and 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 prior to the final rule's effective date through a "pre-registration" process. EPA will informally 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 website.  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 informal 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 website.  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 §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 replacement of invalidly generated RINs.
                              Third-party auditor
                                Obligated party
Requirement for a RIN replacement mechanism as condition of registration
                                      Yes
                                      No
Affirmative Defense to civil liability for transfer or use of invalidly generated RINs
                                      Yes
                                      Yes
Treatment of a knowing transfer or use of invalidly generated RINs
Affirmative defense requires the party did not know or have reason to know the RIN had been invalidly generated before the RIN was verified
Affirmative defense requires the party did not know or have reason to know the RIN had been invalidly generated at the time it was transferred or used for compliance
Limited exemption for invalidly generated RIN replacement
                                     None
            For 2013-14, up to 2% of the obligated party's RVOs.
Cap on RIN replacement
     For 2013-15, 2% of the most recent five year's worth of verified RINs
                                     None
Requirements for QAPs
              Detailed requirements including ongoing monitoring
                          Less detailed requirements

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 §80.1426 or a petition granted pursuant to §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.  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  §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 §80.1401 is a current RFS requirement.
	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 §80.1450, and meets the requirements of §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 §80.1454 to verify that the land use restrictions of §80.1401 are met and properly reported pursuant to §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 §80.1454(g).  The auditor would also be required to ensure that other feedstocks with additional recordkeeping requirements in §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 §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 §80.1426 (or have an approved petition under §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 §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

                                   Component
                                    Ongoing
                                   Monitoring
                                  Quarterly
                                  Monitoring
                                      1-1
 Feedstocks are renewable biomass
                                       X

                                      1-2
 Separation plan for food or yard waste submitted and accepted

                                       X
                                      1-3
Separation plan for municipal solid  waste submitted and approved

                                       X
                                      1-4
 Feedstocks meet separation plan
                                       X

                                      1-5
 Crop, crop residue feedstocks meet land use   restrictions
                                       X

                                      1-6
 Feedstocks with additional recordkeeping
                                       X

                                      1-7
 Contracts for feedstocks compare to production

                                       X
                                      1-8
 Feedstock processing, storage equipment match engineering review

                                       X
                                      1-9
 Accuracy of feedstock energy calculation

                                       X
                                     1-10
 Feedstock valid for D code, consistent with EMTS
                                       X

                                     1-11
 Feedstock consistent with production process
                                       X

                                     1-12
 Feedstock is not renewable fuel where RINs generated
                                       X

	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 §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 §80.1426 or a petition approved through §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 §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.

	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

                                   Component
                                    Ongoing
                                   Monitoring
                                   Quarterly
                                  Monitoring
                                      2-1
 Mass and energy balances

                                       X
                                      2-2
 Workforce size

                                       X
                                      2-3
 Process-related factors used in feedstock energy  calculation

                                       X
                                      2-4
Production process consistent with EMTS
                                       X

                                      2-5
 Production process consistent with D code
                                       X

                                      2-6
Certificates of analysis verify fuel
                                       X

                                      2-7
Verify existence of quality process controls

                                       X
                                      2-8
Volume production consistent with other reports

                                       X
                                      2-9
Volume production consistent with storage and distribution capacity

                                       X
                                     2-10
Volume production capacity matches RFS registration

                                       X

	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 §80.1401.

      	The QAP would be required to verify that renewable fuel being produced matches the D code being claimed under §80.1426, or approved petition under §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 §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 §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 qualifying uses
                                       X

                                      3-2
Standardization of volumes
                                       X

                                      3-3
Renewable fuel matches D code or petition
                                       X

                                      3-4
RIN generation consistent with wet gallons
                                       X

                                      3-5
Fuel shipments consistent with production
                                       X

                                      3-6
Renewable content R is accurate
                                       X

                                      3-7
Registration, reporting, recordkeeping

                                       X
                                      3-8
 Equivalence value EV is accurate, appropriate
                                       X

                                      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 §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

                                   Component
                                    Ongoing
                                   Monitoring
                                   Quarterly
                                  Monitoring
                                      4-1
Verify RIN separation
                                       X

                                      4-2
Exported fuel not used to generate RINs
                                       X

                                      4-3
Verify accuracy of annual attestation

                                       X

	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 essentially no 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%.  As noted above, we will finalize the replacement cap for 2016 and later years in the final rulemaking, and we request comment on a level or levels of coverage for 2016 and beyond.  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.  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.

      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 § 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 authorized to purchase and retire RINs on demand by the EPA administrator, or to contract with a third-party to perform the replacement.

      In an effort to provide regulated parties with an option where the auditor could use a traditional liability policy as a RIN replacement mechanism while relieving the obligated party of RIN replacement responsibility, we considered a modified Option A approach.  In this modified approach, the obligated party would be responsible for replacing invalid A-RINs that it had retired for compliance purposes, but the auditor would carry a third-party liability policy to cover the cost of that RIN replacement.  In the event that the insurance policy failed for whatever reason to pay out the replacement costs, or paid out only part of the replacement costs, the obligated party would not be liable for fulfilling the remaining portion of its RIN replacement responsibility.  Essentially, the obligated party would be responsible for RIN replacement, but would be assured that their replacement costs would be covered entirely by a third party. However, we found significant problems with this approach.  The primary problem is that if an obligated party incurred a replacement obligation and sought compensation through the insurance policy, it would have little reason to press its claim with any vigor, knowing that any lack of payment from the insurer would effectively be forgiven by EPA.  The obligated party, in short, would be rendered whole regardless of how little the policy paid, or even if the policy paid at all.  As a result, we consider it very likely that under this modified Option A system, the invalid RINs would not be replaced.  This approach would also affect the behavior of the insurer, who would define the limits of its liability on the basis of the potential harm that the obligated party might suffer. Since the obligated party would not be responsible for replacing any RINs not covered by the insurance policy, its "harm" would be limited to whatever amount the insurer chose or intended to pay out. The insurer would not be penalized or pursued for failing to pay out to the limits of the policy because such a decision would cause no harm or loss to the obligated party or the policy holder.  It is arguable that this situation would effectively create a fictitious insurance contract, because the insurer would control most if not all of the total amount of the loss it was insuring against.  We seek comment, however, on whether this or some other modification to Option A would be considered acceptable and feasible.

	The inapplicability of a third-party liability policy as a replacement mechanism under Option A would not, of course, diminish its availability and use under Option B.  While liability insurance is not a required feature of the Option B program, auditors and obligated parties could nonetheless choose to contract for it voluntarily.  Third-party liability insurance, therefore, would still provide a way for obligated parties to cover their potential replacement responsibility under Option B.  Obligated parties and auditors would remain free to set up whatever kinds of contracts and/or third-party agreements to cover potential losses due to invalid RINs.

	We also considered a "hybrid" approach, combining certain features of Option A with certain features of Option B.  Under this approach, the obligated party would retain the replacement responsibility, but the auditor would be required to carry a third-party liability policy to cover the obligated party's potential losses due to the use of invalid A-RINs.  In this scenario, the obligated party would remain liable for replacement of invalidly generated RINs even if the insurance instrument provided only partial coverage, or if it failed to provide coverage at all.  This option would give obligated parties the extra assurances of an Option A QAP and a dedicated liability insurance policy held by the third-party auditor to cover their potential losses.  However, as noted above, this approach is essentially already available under Option B.  An independent third-party auditor could offer a QAP that met the requirements of Option A and could also provide the assurance of a third-party liability policy to cover the RIN purchaser's potential replacement responsibility.  Moreover, by leaving this as an independent and voluntarily chosen option, auditors and obligated parties have more flexibility to decide what level of coverage and risk they are willing to bear, instead of being required to maintain a set minimum amount of coverage.  We therefore decided not to propose this as an independent option, but we request comment on whether this hybrid approach or some variation of it would be a valuable addition to the proposed program.

      3.	RIN Banks

	Another potential replacement mechanism is a RIN bank.  A RIN bank would be a repository for valid RINs to which multiple Option A auditors (the "members" of the bank) contribute, and which could be used as a source of replacement RINs in the event that any one of the members was required to replace invalid RINs. As with any other replacement mechanism, the bank would have to be capable of fulfilling any member's replacement requirement, meaning that it would have to contain RINs sufficient to meet the replacement responsibility of the member with the largest potential replacement requirement at any given point in time.

	The primary advantage of a RIN bank is that it would give each member access to a large quantity of A-RINs in exchange for contributing a relatively small quantity of A-RINs.  However, if RINs from the RIN bank were used to replace RINs for which one of the bank's members was responsible, the withdrawn RINs would have to be replaced in the bank.  While the bank managers might require the responsible party to reimburse the bank for any RINs withdrawn as a result of its actions, if the responsible party declared bankruptcy or was otherwise unable to reimburse the bank, the remaining members would be responsible for re-populating the bank to the required level.

	A RIN bank could be established, funded and managed by members of the bank.  Members would each purchase and contribute verified A-RINs to the bank.  While such contributions could be proportional to each party's RIN replacement liability, it would be up to the bank managers to stipulate how the bank would be populated, how withdrawals from the bank are administered and managed, how to re-populate the bank in the event that RINs are withdrawn to replace invalid RINs, and how to grant or revoke membership in the bank.