EO12866_Qual Assurance Prog 2060
- AR72 NPRM FRN_2012111 6.docx *** E.O. 12866 Review
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**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 lead to inefficiencies and a significant reduction in the overall liquidity in the RI N market. The result has been greater difficulty for smaller renewable fuel producers to sell their RI Ns. The purpose of today 's action is to address these problems by proposing additional regulatory provisions that would promote greater liquidity

in the RIN market in a way that assur es reasonable oversight of RI N generation and assures use of the required renewable fuel volumes. Intoday 's action we are proposing a voluntary quality assurance program and related provisions intended to meet these goals. This program will include elem ents designed to make it possible to verify the validity

of RINs for all of 2013. We are also proposing a number of new regulatory provisions to ensure that RINs are retired for all renewable fuel that is exported and that RI Ns that become invalid downstr eam of a renewable fuel producer are properl y accounted for. **DATES:** Comments must be received on or before [ **insert date 30 days after date of publication in the Federal Register**  ]. Hearing: We will hold the hearing on XXXdateXXX at XXXlocationXXX, beginni ng at 9:00am local time. **ADDRESSES:** Submit your comments, identified by Docket ID No. EPA
- HQ
- OAR
- 2012
- 0621, by one of the following methods:
• www.regulations.gov : Follow the on
- line instructions for submitting comments. • Email: a - and
- r - docket@epa.gov
. • Mail: Air and Radiation Docket and Information Center, Environmental Protection Agency , Mailcode: 2822T, 1200 Pennsylvania Ave., NW., Washington, DC 20460.
• Hand Delivery : EPA Docket Center, EPA West Building, Room 3334, 1301 Constitution Ave., NW., Washington, DC 20460. Such deliveries are onl y accepted during the Docket’s normal hours of operation, and special arrangements should be made for deliveries of boxed information.*** E.O. 12866 Review
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Page 2 of 139 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 an y p ersonal 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 yo u consider to be CBI or otherwise protected through www.regulations.gov or e
- mail. The www.regulations.gov website is an “anon ym ous access” s ys tem, which means EPA will not know your identity

or contact information unless you provide it in the body of your comment. If yo u 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 co mment, EPA recommends that you include your name and other contact information in the body of your comment and with an y disk or CD
- ROM you submit. I f EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider yo ur comment. Electronic files should avoid the use of special characters, any form of encry ption, and be free of any

defects or viruses. For additional information about EPA’s public docket visit the EPA Docket Center homepag e 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 b y statute. Certain other material, such as copyrighted material, will be publicly

available only

in hard copy . Publi cly

available docket materials are available either electronicall y in www.regulations.gov or in hard cop y at the Air and Radiation Docket and In formation Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW, Washington, DC. The Public Reading R oom is open from 8:30 a.m. to 4:30 p.m., Monday through Friday , excluding legal holiday s. The telephone number for the Public Reading Room is (202) 566
- 1744, and the telephone number for the Air Docket is (202) 566
- 1742. **FOR FURTHER INFORMATION CONTACT:** Mary Manners , Office of Transportation and Air Quality , Compliance Division, Environmental Protection Agency , 2000 Traverwood Drive, Ann Arbor MI 48105 ; Telephone number : 734
- 214
- 4873 ; Fax number: 734
- 214
- 4051 ; E - mail address: manners.mary @epa.gov, or the public information line for the Office of Transportation and Air Qualit y; telephone number (734) 214
- 4333; E
- mail address OTAQ@epa.gov. **SUPPLEMENTARY INFORMATION: I.**  **General Information** A. Does this Action Apply to Me? Entities potentially

affected by

this proposed rule are those involved with the production, distribution, and sale of transportation fuels, including gasoline and diesel fuel or renewable fuels such as ethanol and biodiesel. Potentially regulated categori es include:*** E.O. 12866 Review
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Page 3 of 139 Category NAI CS 1

Codes SI C 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 S ys tem (NAI CS) 2 Standard Industrial Classification (SI C) s ys tem code. This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely

to be regulated b y this proposed action. This table lists the ty pes of entities that EPA is now aware could potentiall y be regulated b y this proposed action. Other ty pes 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. Clearl y 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 electronicall y 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 cop y 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:
• Id entify

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 f or your requested changes.
• Describe an y assumptions and provide an y technical information and/or data that you used.*** E.O. 12866 Review
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Page 4 of 139 • If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reprodu ced.
• Provide specific examples to illustrate your concerns, and suggest alternatives.
• Explain your views as clearl y as possible, avoiding the use of profanity or personal threats.
• Make sure to submit your comments by the comment period deadline ident ified. **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

S ys tems that Conduct Oversight of RIN Generation
................................ .......... 17 1. Existing Sy stems ................................ ................................ ................................ ........... 17 2. Sufficiency

of Existing Sy stems ................................ ................................ ................... 17 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 RI Ns ................................ ................................ ............................ 23 D. Voluntary

Participation
................................ ................................ ................................ ..... 24 E. Treatment of RINs Prior to Final Rule Promulgation
................................ ....................... 25 F. Alternative Mechanism: Prohibit Producers from Separating RINs
................................ . 28 G. Summary

of the Two QAP Options
................................ ................................ .................. 28 IV . Provisions for RI

N Verification Under Option A
................................ ............................. 30 A. Requirements for Option A Quality Assurance Plans
................................ ...................... 31 1. Elements of an Option A QAP
................................ ................................ ...................... 31 a. Verification of feedstock
................................ ................................ ........................... 32 b. Verification of production process
................................ ................................ ............ 33 c. Verification of renewable fuel
................................ ................................ .................. 34 e. Verification of RIN generation and separation
................................ ......................... 36 2. Approval and Use of Option A QAPs
................................ ................................ ........... 37 a. Approval of Quality Assurance Plan
................................ ................................ ........ 37 b. Frequency

of updates/revisions to QAPs
................................ ................................ .. 37 B. RI N Replacement Mechanisms Under Option A
................................ .............................. 37 1. RI N Banks
................................ ................................ ................................ ..................... 39 2. A
- RI

N Escrow Accounts
................................ ................................ .............................. 41 3. Financial Instruments and Alternative A
- RI N Replacement Mechanisms
................... 41 4. Minimum Replacement Capability for RIN Replacement Mechanisms
...................... 43 C. Affirmative Defenses
................................ ................................ ................................ ........ 44 D. Treatment of Invalid A
- RI Ns ................................ ................................ ............................ 46*** E.O. 12866 Review
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Page 5 of 139 1. Responsibilities for replacement of Invalid Verified A
- RI Ns ................................ ...... 47 2. Invalid A
- RI

N Replacement
................................ ................................ ......................... 48 3. Process for Replacing Invalid Verified RINs
................................ ............................... 49 a. Ty pes of RINs that Can Replace Invalid Verified RI Ns ................................ ........... 50 b. Impacts of RIN Replacement on Renewable Fuel Demand
................................ ..... 50 4. Cap on RI

N Replacement
................................ ................................ ............................. 51 V. Provisions for RI

N Verification Under Option B
................................ ................................ . 54 A. Requirements for Option B Qualit y Assurance Plans
................................ ....................... 54 1. Elements of an Option B QAP
................................ ................................ ...................... 54 a. Verification of feedstock
................................ ................................ ........................... 55 b. Verification of production process ................................ ................................ ............ 55 c. Verification of renewable fuel
................................ ................................ .................. 56 d. Verification of RI

N generation and separation
................................ ......................... 57 2. Approval and Use of QAPs
................................ ................................ ........................... 57 a. Approval of Quality Assurance Plan
................................ ................................ ........ 57 b. Frequency

of updates/revisions to QAPs
................................ ................................ .. 57 B. RI N Replacement Mechanisms
................................ ................................ ......................... 58 C. Affirmative Defenses
................................ ................................ ................................ ........ 58 D. Treatment of Invalid B
- RINs ................................ ................................ ............................ 59 1. Responsibilities for Replacement of Invalid Verified B
- RI Ns ................................ ..... 60 2. Invalid B
- RI

N Replacement
................................ ................................ ......................... 61 3. Process for Replacing Invalid Verified RINs
................................ ............................... 62 4. Temporary

L i mited Exemption for Invalid RI N Replacement
................................ ..... 62 a. Determination of the Appropriate Exemption L evel
................................ ................ 63 b. How Would the L imited Exemption be Applied?
................................ .................... 64 VI . Proposed Requirements for Auditors
................................ ................................ ................ 68 A. Who Can Be An Auditor?
................................ ................................ ................................ . 68 1. Independence
................................ ................................ ................................ ................ 68 2. Professionally

Qualified to Implement a QAP
................................ ............................. 69 3. Errors and Omissions Insurance ................................ ................................ ................... 70 B. Registration Requirements
................................ ................................ ................................ 71 C. Other Responsibilities of Auditors
................................ ................................ .................... 73 1. Notifying the Agency When There are Problems
................................ ......................... 73 2. Indentifying Verified RINs in EMTS
................................ ................................ ........... 74 3. Recordkeeping, Reporti ng, and Attest Engagements
................................ ................... 75 a. Recordkeeping Requirements
................................ ................................ ................... 75 b. Reporting Requirements
................................ ................................ ........................... 75 c. Attest Engagements
................................ ................................ ................................ .. 76 d. Prohibited Activities for Third
- part y Auditors
................................ ......................... 76 VII. Proposed Requirements for Audits
................................ ................................ ................... 78 A. Frequency

of Audits
................................ ................................ ................................ .......... 78 B. Elements of an Audit
................................ ................................ ................................ ........ 79 1. Phy sical Examination of Facilit y and Operations
................................ ......................... 79 2. Document Review
................................ ................................ ................................ ......... 80 3. Bu yer/Seller Contacts
................................ ................................ ................................ ... 81 VIII. Additional Changes Related to the Definition and Treatment of Invalid RINs
................ 82*** E.O. 12866 Review
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Page 6 of 139 A. Export and Exporter Provisions
................................ ................................ ........................ 82 1. Clarification of Exporter RVO
................................ ................................ ...................... 82 2. Require Identification of Renewable Fuel Content
................................ ...................... 83 3. RI N Retirement Requirements
................................ ................................ ...................... 83 B. “Downstream” Invalidation and Product Transfer Documents
................................ ........ 84 1. Conditions for RI

N Generation and Designation of Intended Renewable Fuel Use
.... 84 2. RI N Generation for Fuel Made with Renewable Fuel Feedstock
................................ . 85 3. Change Associated with Fuel for which RINs have been Generated that is used for a Non - Qualifying Purpo se ................................ ................................ ................................ ....... 86 4. Treatment of Improperl y Separated RINs
................................ ................................ ..... 87 5. Requirements for Parties that Designate or Use Renewable Fuel in an Application that is not Transportation Fuel, Heating Oil, or Jet Fuel
................................ ............................. 88 C. Treatment of Confidential Business Information
................................ ............................. 89 D. Proposed Changes to Section 80.1452

– EPA Moderated Transaction Sy stem (EMTS) Requirements

– Alternative Reporting Method for Sell and Buy Transactions for Assigned RI Ns ................................ ................................ ................................ ................................ .......... 90 IX . Impacts ................................ ................................ ................................ .............................. 92 A. Direct Costs for Implementing QAPs
................................ ................................ ............... 92 1. Time and Cost Assumptions
................................ ................................ ......................... 94 2. Labor Cost Assumptions
................................ ................................ ............................... 94 3. Cost Estimate Results
................................ ................................ ................................ ... 95 B. Costs for RI

N Replacement Mechanisms
................................ ................................ ......... 95 X. Public Participation
................................ ................................ ................................ ............... 97 A. How do I submit comments?
................................ ................................ ............................ 97 B. Will there be a public hearing?
................................ ................................ ......................... 97 XI . Statutory

and Executive Order Review
................................ ................................ ............. 99 A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review
................................ ................................ ........ 99 B. Paperwork Reduction Act
................................ ................................ ................................ . 99 C. Regulatory

Flexibility

Act
................................ ................................ .............................. 100 D. Unfunded Mandates Reform Act
................................ ................................ .................... 101 E. Executive Order 13132 (Federalism)
................................ ................................ .............. 102 F. Executive Order 13175 (Consultation and Coordinati on with Indian Tribal Governments) 102 G. Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks
................................ ................................ ................................ ............................ 102 H. Executive Order 13211 (Energy Effects)
................................ ................................ ........ 103 I. National Technol ogy Transfer Advancement Act
................................ .......................... 103 J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and L ow - Income Populations
................................ ................................ ............. 103 XII. Statutory

Authorit y ................................ ................................ ................................ ......... 104*** E.O. 12866 Review
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Page 7 of 139*** E.O. 12866 Review
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Page 8 of 139 **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 Securit y Act of 2007 (EI SA), resulting in the publication of major revisions to the regulato ry requirements on March 26, 2010 1

. The RFS program requires that specified volumes of renewable fuel be used as transportation fuel, home heating oil, and/or jet fuel each ye ar. To accomplish this, EPA publishes applicable percentage standards annual ly that appl y 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 renewa

ble 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 way s. Oblig ated 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 renewa ble fuel produced or imported, or b y 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 con ditions under which RI Ns are invalid, the liability carried by

a part y that transfers or uses an invalid RI N, and how invalid RI Ns must be treated. The fundamental basis of the Agency 's treatment of invalid RI Ns is the concept of bu ye r beware, in which al l regulated parties must take steps to verify that the RI Ns 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 parti es to limit their RI N - related business relationships to those parties that they are confident are generating valid RI Ns. 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. Recentl y, the overall liquidity of the RIN market has been significantl y reduced. These circumstances have also created inefficiencies in the RI N market, as some RINs have been treated as having more value and less risk than others. The purpo se of today 's action is to address these issues by proposing changes to the regulations that would promote greater liquidity in the RI N market in a way

that assures reasonable oversight of the validity of RIN generation and assures use of the required rene wable fuel volumes.
1 75 FR 14670*** E.O. 12866 Review
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Page 9 of 139 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 d efense 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 RI Ns must be replaced with valid RI Ns, and by

whom. The voluntary

program would enable smaller renewable fuel producers to demonstrate that their RI Ns are valid, reducing the risk that obligated parties believe is associated with such RI Ns. The proposed program includes elements to allow verification of RINs to occur at the be ginning of 2013. In today's action we are also addressing other circumstances in which RINs may become invalid subsequent to the renewable fuel producer’s introduction of the RI Ns into commerce. For instance, exporters of renewable fuel may not retire an appropriate number and t ype 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 currentl y 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 RI Ns 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 bu siness 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 fu el 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 Provisi ons Today's action proposes two voluntary third part y quality

assurance program options for RI Ns that regulated parties may exercise as an alternative to the “buyer beware” liability as prescribed under existing regulations. The proposed program would p rovide a means for assuring that RINs are properly generated through audits of renewable fuel production conducted by independent third parties using qualit y assurance plans (QAPs), would provide an affirmative defense for 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
- part y auditors

• Replacement instruments or other mechanisms that would provide assurance that invalid RI Ns are replaced with valid RI Ns*** E.O. 12866 Review
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Page 10 of 139 • Requirements for audits of renewable fuel production facilities, including minimum frequency , site visits, review of records, and reporting

• Conditions under which a regulated part y could assert an affirmative defense to civil liability for transferring or using an invalid RI N

• Id entification of the party or parties who are responsible for replacing invalid RI Ns with valid RI

Ns and the timing of such replacem ent

• Changes to the EPA
- Moderated Transaction Sy stem (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 transfer ring 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 t yp e 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 RI Ns in distribution, and thus ensure that valid RINs are traded and used for compliance. As a result, it would help to ensure that the volumes mandated b y Congress are actually used. In this respect, then, there will be no change to the expected impacts of the RFS program as projected in the RFS2 final rulemaking 2 in terms of vo lumes of renewable fuel consumed or the associated GHG or energy

securit y benefits. The primary impacts of the qualit y 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 typ e of RINs are retired for every gallon of renewable fuel exported, consistent with the int ent 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
- part y auditors. However, the fact that the
2 75 FR 14670, March 26, 2010*** E.O. 12866 Review
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Page 11 of 139 quality assurance progr am would be voluntary means that a decision to participate will be made independentl y b y each regulated part y, and thus we cannot accuratel y 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.*** E.O. 12866 Review
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Page 12 of 139 **II. Background and Purpose**  The structure of the RFS program, and in particular the regulatory provisions governing the generation and use of Renewable Identification Numbers (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 proc ess of developing the regulatory program, stakeholders made it clear that requiring each separate obligated part y t o phy sicall y blend renewable fuels into its own gasoline and diesel would require significant and costly changes to the distribution sy stem, fuels markets, and the activities of all involved. At the request of stakeholders, EPA developed the RIN s ys tem as an alternative to a direct blending requirement. Finalized on May 1, 2007, the RI

N s ys tem 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 ye ar. It also permits renewable fuel producers to sell their fuels in a manner that best meets market demands without forcin g sales of volumes directly to obligated parties. Under the RFS program, each RIN is generated b y the producer or importer of renewable fuel, and represents a volume of renewable fuel measured in terms of ethanol
- equivalent gallons. RI Ns 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 generall y leads to its consumption as transportation fuel. 3 When a specified number of RINs are acquired and retired b y an obligated part y, 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 de veloped in cooperation with stakeholders in the fuel production and distribution industries in the context of a notice
- and
comment rulemaking process. The intended result of the RIN s ys tem is that every RI N used for compliance by an obligated part y repre sents phy sical renewable fuel that meets the regulatory criteria and which is used in the United States for transportation fuel, heating oil and jet fuel. To ensure that this result is achieved, EPA specified the conditions under which RINs are invalid, h ow invalid RI Ns must be treated, and which parties are liable for transferring or using invalid RI Ns. These provisions were included in the RFS1 program and were carried into the revised RFS program required b y the Energy

Independence and Security Act of 2007. The provisions concerning invalid RINs and the associated liability have recently

come under scrutin y due to several cases of fraudulentl y generated RINs. The RFS regulations prohibit any

person from transferring invalid RI Ns or using invalid RI

Ns to demonstrate compliance with its RVOs. Thus, parties holding invalid RI Ns are prohibited from transferring or using these RINs to demonstrate compliance with their RVOs. Moreover, all parties holding invalid RI Ns are required to retire them. These circumstances prompted the market response described above that has lead to the current reductions in the liquidity of the market for RINs, and the increased difficulty of small producers of renewable fuel to sell the RI Ns they generate.
3 See 72 FR 23929*** E.O. 12866 Review
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Page 13 of 139 Concerns regardin g 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 RI Ns that have been evaluated by independent third parties to be used for compliance, even if they

are invalid.
A. Treatment of Invalid RIN s 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 RI

N that was based on incorrect volumes or volumes that have not been standardize d to 60°F.

• A RI

N that has expired.

• A RI

N that was based on an incorrect equivalence value.

• A RI

N that is deemed invalid under the regulations applicable to foreign renewable fuel producers.

• A RI

N that does not meet the definition of renewable fuel.

• A RI

N that was assigned an incorrect “D” code value.

• A RI

N that was improperly

separated.

• A RI

N that was otherwise improperl y generated. While the underlying actions that cause RINs to be invalid vary , in all cases of invalid RI Ns the outco me is the same: invalid RI Ns cannot be transferred to an y person, and cannot be used to achieve compliance with the Renewable Volume Obligations of an obligated party or exporter. These restrictions on invalid RI Ns apply regardless of the part y's good fai th 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 b y the statute are met through consumption of renewable fuel as transportation f

uel, heating oil, or jet fuel, and specifies several provisions aimed at achieving*** E.O. 12866 Review
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Page 14 of 139 this result. Based on this, the current regulations prohibit invalid RINs from being used for compliance with the applicable standards. This prohibition forces obligated p arties to replace invalid RI Ns that they

had intended to use for compliance with valid RINs. The "bu ye r beware" approach to RINs in the RFS program is consistent with the approach EPA has taken in all previous mobile source fuels program. Indeed, the regulatory language used to implement the buy er 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 a llotment trading program
- §80.275(d)(5)(i)

• Gasoline sulfur credits
- §80.315

• Sulfur credits generated under MVNRLM diesel fuel program
- §80.531
- §80.536 The buyer beware approach to credits has proven to be an effective mechanism for ensuring that the goals of fuels programs are met. It encourages the industry to self
- police the validity of the credits they

use for compliance and allows the credit market to properl y allocate any risk associated with the generation and transfer of invalid credi ts. Most importantly , the buyer beware approach maintains the environmental benefits of a program if the part y that generates the invalid credits is not financially viable and able to replace the invalid credits, since other regulated parties would then b e responsible for replacing invalid credits. In the recent cases of fraudulentl y generated RINs, it was this very process that ensured that society was getting the benefits promised by the RFS program. 4 We continue to believe that the buyer beware appro ach 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 an y volume of renewable fuel, making it difficult to know what volume the RI N was int ended 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 way s 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 b y the same group of parties that use them for compliance purposes. Instead, renewable fuel producers generate the RIN s, and obligated parties acquire them. These circumstances make it more difficult for obligated parties to monitor RI N generation. The RFS program also allows an unlimited number of parties to own and trade RINs, whereas in other programs credit ownershi p and trading is limited to the parties that must demonstrate compliance
4 California takes a similar approach for addressing invalid carbon offset credits under the stat e’s Global Warming Solutions Act.*** E.O. 12866 Review
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Page 15 of 139 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 part ies that they are able to confidentl y and efficientl y project are generating valid RINs. This behavior has resulted in certain, often smaller, producers that generate valid RINs being excluded from opportunities to transact with obligated parties, creatin g 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 appropriatel y ge nerated 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 RI Ns 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, Rodney

R. Hailey, 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 Mr. Hailey

ran a scheme in which he and his company generated and sold over 32 million RI

Ns, but neither produced nor imported an y renewable fuel. The EPA issu ed Absolute Fuels, LLC an NOV on February 2, 2012. The NOV alleges the compan y generated over 48 million invalid biomass
- based diesel RINs without producing any qualifying renewable fuel and transferred the majority of these invalid RI

Ns to others. On Au gust 8, 2012, a Federal Grand Jury in Lubbock, Texas indicted Jeffrey David Gunselman, doing business as Absolute Fuels, LLC, Absolute Fuels, LLC, and four other corporate entities associated with Absolute Fuels on counts of wire fraud, money laundering, and Clean Air Act false statements. The indictment alleges that Gunselman and his companies were involved in defrauding non renewable fuels companies, brokers, and the EPA b y falsely representing to EPA, through the RFS program electronic data base, that h e was producing biodiesel when in fact he was not producing an y fuel. The allegations in the indictment are mere accusations and all persons are presumed innocent until and unless proven guilty be yond a reasonable doubt in a court of law.*** E.O. 12866 Review
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Page 16 of 139 The EPA issued Green Diesel, LLC an NOV on April 30, 2012. The NOV alleges the compan y generated more than 60 million invalid biomass
- based diesel RINs without producing any qualifyin g renewable fuel and transferred the majority of these invalid RI

Ns to others. 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 invalidl y generated RI Ns. Under the bu ye r beware approach, all regulated parties are responsible for determining the validity

of RINs befor e they

transfer those RINs to another party or use them for compliance. With respect to the RI

Ns generated by

the three companies listed above, many parties did in fact transfer and/or use these RI Ns. In subsequent discussions with these parties, most of them indicated that notwithstanding the buye r 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 partie s to conduct adequate oversight, the EPA implemented a streamlined approach for parties who used invalid RI Ns to correct civil violations and resolve their liabilit y for those civil violations. The Interim Enforcement Response Policy (IERP) provided oblig ated parties who unknowingly used invalid RINs with the opportunity to resolve their civil violations by replacing invalid RI

Ns with valid RINs and paying modest civil penalties. Almost all obligated parties that used RINs generated b y Clean Green and Abs olute Fuels have entere d 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 RI Ns to ensure that they

have sufficient valid RI

Ns to compl y with their Renewable Volume Obligations (RVOs). Man y obligated parties who used invalid RINs for compliance purposes purchased replacement RINs for a substantial additional cost. Under the current buye r beware approach, man y obligated parties have included indemnification clauses in their contracts with RI N suppliers to address situations in which invalid RI Ns must be replaced. In light of the recent experience with invalid RI Ns, 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 RI Ns be determin ed 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 RI Ns at a significant discount relative to RINs from larger producers, assuming they can f ind 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,*** E.O. 12866 Review
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Page 17 of 139 albeit not until after cases of fraudulentl y generated RINs came to light. However, in reaction to these cases, man y regulated parties have reported that obligated parties have shifted their purchasing away

from smaller producers. We believe it is appropriate t o consider new regulatory

provisions that could provide additional confidence in the validity of RINs without restricting access to the market b y small producers.

C. Industry Systems that Conduct Oversight of RIN Generation 1. Existing Sy stems 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 s ys tems that are intended to more efficientl y meet the need for such oversight. An y party can opt to use one of these s ys tems for a fee. To varying degrees, these sy stems offer examples of the ty pes of activities that EPA has evaluated in developing the proposed provisions for a quality assurance program. The s ys tems of which we are currentl y aware include the following:

• Ecoengineers
• GoldRI N b y Turner Mason
• MVP: Murex Validity

Program for RINs
• RI N Integrit y Network by

Genscape
• RI NPlus by EM Biofuels
• RI N - tegrit y Survey b y Weaver • RI NTrust by

Frazier Barnes & Associates This is no t meant to be a complete list, as the market response is still developing, nor is it intended to be an EPA endorsement of an y particular auditing s ys tem or tool. The sy stems 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 energ y, and outputs including b yproducts and renewable fuel production volumes. Some also provides 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 RI Ns are subsequently

discovered to be invalid. 2. Sufficiency of Existing Sy stems While each of these s ys tems has elements designed to help ensure RIN validity , not every sy stem includes all the elements that we believe may be important. For instance, ideally each sy stem would include an array of components to verify

feedstocks, produc tion processes and volumes, qualifying uses of renewable fuel, and generation of the appropriate number and type*** E.O. 12866 Review
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Page 18 of 139 of RINs. However, not all sy stems address all these aspects of production and RIN generation, or address them in the same way . The existence of multiple industry
- run verification s ys tems has also resulted in duplicative efforts wherein multiple auditors visit the same production facility and take the same actions to verify the same volume. Finall y, the existence of these private s ys tems has no t completely resolved the reduction in liquidity in the market for RINs since they provide no assurances of an affirmative defense against a violation. Thus there is still a significant reluctance to purchase RINs from smaller producers. While these ve rification sy stems 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 RI Ns 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 NPRM we are proposing a se t 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 violatio ns for transferring or using invalidly generated RINs for compliance where the RI Ns 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 RI

Ns. M oreover, we are proposing several options that would be available to regulated parties that would provide a range of approaches to replacement of invalidly generated RI Ns, 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 s ys tems already offered in a way

that would facilitate the broadening of the market for producers and increasing market liqu idity 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 bu ye r beware approach under the existing regulations. Nevertheless, the issues we highlighted in the previous section have led u s to believe that it would be helpful to create an additional, voluntary

set of regulatory

provisions that could provide reasonable oversight to verify the validit y of RINs, reasonable assurance of replacement of invalidly generated RINs, and increased liq

uidity in the RI N market. The proposed QAP provisions would serve as the major component for an affirmative defense against liability in the event that a part y transferred or used invalidly

generated RINs. With greater confidence in both the validity of RI Ns and the protection against civil liability that an affirmative defense affords, there may be less of a disparity in value between RI

Ns generated by

large and small renewable fuel producers. As a result, there may

be renewed market liquidity and certa int y.*** E.O. 12866 Review
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Page 19 of 139 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 Q APs 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

part y taking ownership of RI Ns that had been verified as validly generated by a qualifying auditor using an approved QAP would have an affirmative defense against liability

for a civil violation arising from the transfer or use of an invalid RI N 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 qualifying auditor using an approved QAP could be shifted, as specified under the associated RIN replacement mechanism the party chose to put in plac e. 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 RI

N market.*** E.O. 12866 Review
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Page 20 of 139 **III. Overview of the Proposed Program**  EPA is proposing to add two basic compliance related options to the RFS program to achieve the goals described above. Each option contains provisions for a quality assurance plan (“QAP”) designed b y an independent third
- party to meet minimum regulatory re quirements and used to verify

the validity

of RIN generation; provisions for an affirmative defense to liability for transfer or use of a verified RIN that is determined to be invalidly generated; and provisions addressing replacement of verified RINs that were invalidly generated. The proposed options would ensure that RIN owners choosing to exercise one of them would not be liable for transferring or using invalidly generated RINs and, at the same time, would reduce the incidence of invalidly

generated R INs entering the market. 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 appr oach 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

the se provisions would only apply to RINs that are invalidl y generated. RI Ns that become invalid after generation, for example by use for a nonconforming purpose or improper separation, would not be covered b y the affirmative defense mechanism in the quality assurance program we are proposing today . However, we realize that these RINs that become invalid “downstream” of the RIN generator may be problematic for obligated parties and the RI N s ys tem 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
- part y 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 RI Ns that are retired to fulfi ll a Renewable Volume Obligation (RVO) must be replaced b y valid RI Ns in order to make the sy stem whole, even when a part y 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 ensure that the annual RFS volume mandates are met. However, the party responsible for replacement of invalid RI Ns varies between the two new options (“Option A” and “Option B”) that market participants may choose for an y given RIN transaction. The primary

difference between these two options is that under Option A, when verified RI Ns are found to be invalidl y generated, the third
- part y auditor that verified the RINs would be responsible for retiring valid RI Ns to replace the invalid RI Ns if the RIN generator does not do so. Under Option B, an obligated part y would remain liable for replacing any invalidly ge nerated RINs that it owns if the RIN generator fails to do so, even if the obligated part y*** E.O. 12866 Review
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Page 21 of 139 successfull y asserted an affirmative defense. The current s ys tem would also remain in place after the proposed quality assurance program goes into effect, providing a third option for RI N buyers to purchase unverified RI Ns. In other words, the proposed regulations do not require that RI Ns used for fulfillment of an RVO must be verified. In summary , there would be three t ypes of RINs that would be available for purc hase under the proposed regulations: (1) RI Ns verified b y a third
- party auditor, who would be responsible for replacing the RI Ns in the event that they

were invalidity

generated (“Option A”), (2) RI Ns verified b y a third
- party auditor, where the obli gated part y would remain liable for RIN replacement (“Option B”), and (3) Unverified RINs, where the obligated party remains liable for replacement. For both of the two new options we are proposing today (Option A and Option B), there are three mai n 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) Id entification of the party responsible for replacing invalid RINs and limitations on RI N replacement. In this section we also discuss how and wh y the program amendments are proposed as voluntary, how the provisions would apply to an y R IN s 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 for Option A and Option B QAPs are fully discussed in Sections IV.A and V.A, respectivel y. The proposed requirements for QAP auditors and audit procedures are full y discussed in Sections VI and VII of this pr eamble. We would expect that different third
- part y 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 thi rd
- 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
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Page 22 of 139 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 w ith the differing RIN replacement responsibility under the two QAPs.
B. Requirements for an Affirmative Defense The affirmative defense mechanism would allow any part y, other than the generator of an invalid RI N, who holds invalidly

generated RINs v erified through a QAP to avoid civil liability for violation of a prohibited act involving the transfer or use of invalid RINs for purposes of fulfilling an RVO. This mechanism applies onl y 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, specificall y the Diesel Fuel Sulfur Control regulations, 40 CFR §80.613(a) and the Reformulated Gasoline regulations, 40 CFR §80.79(b)(1). Itis full y discussed in Sections IV.C and V.C for Options A and B, respectivel y. Under Option A, in order to establish this affirmative defense, a party would be required to prove five elements b y 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 b y an independent third
- part y auditor with an approved Q AP that meets the applicable regulatory

requirements. Second, a part y 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 RI Ns, the RI N owner must not have been aware of the invalidity prior to the RIN being verified. For Option B RINs, the RIN owner must not have been aware of the invalidity at an y 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 oblig ated part y 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, whe n the auditor has the RI N replacement responsibility under Option A, the obligated party ’s RVO would be backstopped by the auditor’s replacement of the invalid RI Ns and therefore the obligated part y 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 m arket liquidity concerns described above, b y limiting the risk to refiners who purchase these RINs. At the same time, if the obligated part y 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 knowingl y allowed*** E.O. 12866 Review
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Page 23 of 139 invalid RI Ns to enter the marketplace, potentially placing other obligated parties at risk and diminishing the value of other RIN generators’ valid RI Ns. Third, we are proposing that a part y attempting t o establish an affirmative defense would be required to inform the Agency within 24 hours of identifying RINs that were invalidl y generated. This requirement would assure that invalidity is promptly

reported when discovered and would eliminate an y incenti ves 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 b y delayed reporting of invalidl y 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 part y attempting to establish an affirmative defense would be required to demonstrate that they

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 they

did not have any

financial interest in the company that generated the invalid RI N. Requiring that the RIN owner did not have an y financial interest in the RI N generator’s compan y ensures that the RIN owner did not receive and had no intention of receiving a financial benefit from the generation of invalid RI Ns. For Option B, a sixth element for establishing an affirmative defense would be to demonstrate that if the invalid B
- RI N was used for compliance purposes, the part y 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 part y that knowingl y 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 onl y valid RI Ns. The obligated party

must then either carry

forward a deficit or replace the invalid RI N with valid RINs to meet its RVO. Under the two new proposed options, the party responsible for replacin g the invalid RI N would depend on the t yp e of QAP that verified the RIN, Option A or Option B. RIN replacement is fully

discussed in Sections IV.D and V.D of this preamble for Options A and B, respectivel y. We are proposing 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*** E.O. 12866 Review
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Page 24 of 139 of invalid RI

Ns place s initial responsibility to replace invalidl y 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 RI Ns. In the event the generator of the invalid RI

Ns does not replace the invalidly generated RINs according to the administrative process, the replacement obligation would shift to either the third
- part y auditor or the obligated party that owns the invalid RI

Ns, depending on whether the RINs were verified through an Option A or Option B audit, or whether the RINs were unverified. For invalidly generated RINs verified b y an Option A QAP, the auditor would have the responsibility to replace the RINs, and the obligated part y woul d have no responsibility for RIN replacement. For invalidly generated RI Ns verified b y an Option B QAP and for unverified RINs, the obligated party who owns the RI Ns would bear the replacement responsibility . In the event that regulated parties fail to i mplement the administrative process for replacement of an y R INs, the EPA could bring an enforcement action against any or all of the parties that were required to replace the invalid RI Ns. Additionally , the auditor’s RI N replacement responsibility unde r Option A would be capped at a level equal to 2% of the last five ye ars’ of RINs verified b y the auditor. 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 RI N replacement cap of 2% and the limited exemption of 2%. Furthermore, because third
- part y 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 pr oposing a requirement that auditors using Option A to verify RINs must verify

the existence of a RIN replacement mechanism capable of replacing a minimum fraction of the RINs they verify . There are a variet y 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 . Under the proposal, the QAP auditor could apply to EPA for approval, dem onstrating that they meet the requirements applicable to auditors. Auditors would voluntarily decide to obtain EPA approval for their QAP, which once approved would provide the framework for the auditor’s verification process. However, they would be resp onsible under the regulations to fully implement the QAP as approved. Therefore, verifying RI Ns without meeting the requirements of the approved QAP would be a violation by the auditor. At the same time, the auditor’s failure to properl y implement the QA P would not, by itself, render the RINs invalid or constitute a civil violation by the owner of the RI

N. . 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 ap proved, and under Option A to replace RINs as required.*** E.O. 12866 Review
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Page 25 of 139 Likewise, RIN generators would be under no obligation to have their RINs verified under an EPA approved QAP, and obligated parties would be under no obligation to purchase verified RI Ns. 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 provision s 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 b y a QAP. This approach woul d benefit obligated parties by reducing their risk of purchasing an invalid RI N and decrease the likelihood of violations and need for enforcement actions. However, we believe that it is up to the obligated parties to determine whether and to what extent they wish to verify

the RINs they

purchase, balancing their risk tolerance against their ability and desire to pay

for verified RI

Ns. Also, we expect that most RI Ns 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 to no inherent risk in the product being invalidly produced. Overall, we b elieve 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 . These proposed QAP options offer alternative way s 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 part y would make on its own, depending on the level of risk it perceives in the marke t 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 NPRM, determine what if an y changes may be appropriate, and publish a final rule. However, in order to encourage the development an d use of RI N verification processes, and to promote greater liquidity in the RIN market as soon as possible, the proposal applies not only to RINs generated after promulgation of the final rule, but also to RI Ns generated throughout 2013, including those g enerated from January 1, 2013 to the effective date of the final rule. This raises two separate issues on how the final regulatory provisions would apply

to RI Ns generated prior to the effective date of the final rule. First, what*** E.O. 12866 Review
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Page 26 of 139 would be the effect of an audit being performed in the interim period? Second, what QAP requirements would need to be met for an interim RI N to be verified? Under the proposal, once the final rule is effective, auditors would apply to EPA 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. Depending on the plan, RIN verification would start once the elements of the plan were in place. This would ty pic all y involve, for example, conducting the site inspection and appropriate record review, and under Option A, starting the ongoing monitoring. At that point, RI Ns could be verified b y the auditor. However, for RINs generated prior to the final rule’s e ffective date, the process would be different, first because EPA cannot formall y 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 propos ed rule and begin verifying RINs immediately as of January

1, 2013. We recognize that RI N generators and bu yers likely will want to know whether RINs generated and audited prior to the effective date of the final rule are likel y t o receive the proposed be nefits and treatment given to RINs verified once the rule is in effect. First, EPA is ready to facilitate the short
- term verification of RINs b y informally reviewing auditors’ information and proposed QAPs before issuance of the final rule, and providi ng guidance on whether the plans appear to satisfy the proposed requirements. This would not be a final agency decision or approval, and EPA would not be legall y bound b y such an evaluation. It would instead be informal guidance to an auditor as to wheth er EPA has an y concerns about its application and whether it appears to be consistent with the requirements in the proposed regulations. This would provide useful information for outside parties who are evaluating the risk associated with an y particular R INthat is audited prior to the effective date of the final rule. However, RINs audited by 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 can only be deemed “verified” after the final rule goes into effect, and after EPA has approved the QAP that was used in the audit process. It is important to note that the final rule’s provisions for interim RI Ns may not be the same as those in the proposed regulations. Therefore, an y 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, how ever, is that the proposed provisions would be applied to RI Ns audited 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. A second complication in the auditing of RINs prior to the final rule’s effective date involves the substantive requirements for the QAPs. As discussed above, after the final rule is ef fective, a RIN could be verified onl y after the auditor conducted a site inspection and extensive document review, and (for QAP A) initiated ongoing monitoring of production processes. All RI N verification after the effective date of the final will thus b e "prospective." For RINs*** E.O. 12866 Review
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Page 27 of 139 generated earl y in 2013, however, in man y cases those actions could 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 impl emented, 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 auditors could verify RINs generated before the date the audit is completed. This "retrospective" RIN verification wou ld onl y be available prior to the effective date of the final rule. In order to verify

RINs retrospectivel y, a number of criteria would need to be met. First, the audit must be completed before the effective date of the final rule. Second, the auditor must meet certain qualifications such as being a professional engineer and being independent of the producer being audited. Third, the audit must be performed according to the terms of a QAP that meets the Option B requirements set out in the proposed rul e. Since Option A QAPs require ongoing monitoring of a number of indicators, they cannot be the basis of a retrospective audit procedure. The requirements proposed for Option B QAPs, on the other hand, may all be met through a thorough review of a produc er’s records and a site visit to the production facility that occurs after the RINs being audited have been generated. Therefore, RINs retrospectivel y audited prior to the effective date of the final rule could only be officiall y verified as Option B RI Ns , not Option A RINs. We recognize that the retrospective audit process for RINs generated prior to the actual audit being conducted necessaril y will offer less certainty than the process that applies to RI Ns generated after the audit is conducted. Thi s 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 volume of RINs at issue, we believe the risk of invalidity

in this short term transition period is reasonable in light of the benefits of allowing a practical way

to give a reasonable expectation of v alidity to RINs generated as of January 1, 2013. We expect that auditors would set up their permanent QAPs and prospective audit procedures as soon as possible, and both regular (prospective) Option A and Option B type audits could be conducted prior to th e effective date of the final rule. While these measures may give regulated parties and RI N purchasers flexibility

and securit y 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 b y an auditor or not 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. Likewise, it will be the auditors’ responsibility

to communicate the results of their audits to prospective RIN purchasers in whatever manner they

see fit, until the EMTS sy stem is capable o f displaying the verification status of RI

Ns. Once the final rule is in effect, EPA will proceed to register auditors and approve QAP plans 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*** E.O. 12866 Review
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Page 28 of 139 replacement obligation provisions for verified RINs that are determined to be invalidly generated.
F. Alternative Mechanism: Prohibit Producers from Sepa rating RINs We request comment on an alternative option in which renewable fuel producers would be prohibited from separating RINs. Under the current regulations, RI Ns generall y cannot be separated from the wet gallons they represent until the point of blending or purchase b y an obligated part y. 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, an y owner of the RIN and associated gallon (including the producer) may separate the RIN from the fuel, including the producer of the fuel. In the fraud cases that disturbed the RIN market in 2011
- 2012, some registered biodiesel producers exploited this provision and generated and sold invalid RI Ns. Some have argued that removing this option and prohibiting producers in all cases from separating RI Ns 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 th is mechanism might reduce the problem of producer fraud (of the ty pe already seen), it would not eliminate the number of other way s 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 g allons in the limited circumstances that are currentl y 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** *** E.O. 12866 Review
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Page 29 of 139 Parties responsible for replacement of invalidly generated RINs 5

. Third
- part y auditor Obligated part y 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 part y did not know or have reason to know the RI N had been invalidl y generated before the RIN was verified Affirmative defense requires the party did not know or have reason to know the RIN had b een invalidly

generated at the time it was transferred or used for compliance Requirement for a RIN replacement mechanism Yes No Limited exemption for invalidly generated RIN replacement None For 2013
- 14, up to 2% of the obligated part y’s RVOs. Cap on RIN replacement 2% of the most recent five ye ar's worth of verified RINs None Requirements for QAPs Detailed requirements including ongoing monitoring Less detailed requirements

5 The generator of the invalid RIN is always responsible for replacement.*** E.O. 12866 Review
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Page 30 of 139 **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 en suring 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 co mpliance, 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 inva lidly generated, and could use invalidly

generated RINs for compliance under certain conditions. The third
- part y auditors responsible for verifying RINs under this Option would also be responsible for replacing those RI Ns if they are invalidly

generated. In order to implement this approach, we are proposing detailed requirements for qualit y assurance plans (QAPs) used to verify RINs that would include ongoing monitoring of operations at a renewable fuel production facility. We are also proposing that thi rd
- party auditors who verify RI

Ns would be required to demonstrate the existence of mechanism capable of replacing RINs that are invalidl y generated and verified b y the auditor. For clarit y, we refer to RINs that have been verified through Option A as A
- R INs. In this section we first cover the proposed elements of QAPs for Option A and the proposed requirements for 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 RI Ns under a quality

assurance program, both of which would be available to renewab le 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., those production aspects that have sufficient variability 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 mor e 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 quarterl y basis. We request comment on the components we propose to assign to each category of the requirements for QAPs, as well as an y 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 implementi ng the quality assurance program versus the benefits for the RFS program. We also request comment on whether quarterl y monitoring is appropriate for those components proposed to be subject to the less frequent schedule, or whether different*** E.O. 12866 Review
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Page 31 of 139 components cou ld or should be subject to different schedules (e.g., annual, once), and what those schedules should be, and why
. The quality

assurance program that we are proposing would also appl y to RI Ns generated for foreign
- produced renewable fuel. Foreign produce rs 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
- part y 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 approved QAP. We request comment on the likelihood of such producers participating in the quality assurance program, an y difficulties to participating they might encounter, and any issues that could affect the integrit y of the proposed program.

A. Requirements for Op tion A Quality Assurance Plans Quality Assurance Plans (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 fa cility 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 woul d provide a voluntary means by which a production facility that engages an approved auditor, and upon a satisfactory facilit y audit using an approved QAP, would be verified by the auditor as validl y generating RINs. RINs that had been verified through thi s process would provide the basis for an affirmative defense against civil violations for transferring or using invalid RI Ns for compliance, as discussed more fully in Section IV.C. As a result, verified RINs would be more valuable than RINs from a facili ty that had not been verified through a third
- party auditor. We also expect that RIN replacement costs should significantl y decrease as a result of this program. This section discusses the minimum requirements of Option A QAPs under the RFS program, th e 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 b y registered third
- part y auditors to audit renewable fuel production at a particular fa cility . The QAP must include a list of elements that the auditor will check in order to verify

that the RINs generated b y a renewable fuel producer or importer are appropriate given the feedstock, production process, and fuel for which RINs were generate d. 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*** E.O. 12866 Review
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Page 32 of 139 presenting a plan to EPA that the auditor believes is sufficient in scope and depth to ensure that RI Ns generated under such a plan are valid. The proposed required elements of a QAP are discussed below. In the QAP, the auditor would specify how the inclusion of the required elements would be accomplish ed. We request comment on these proposed elements, including detailed descriptions of any elements not mentioned below.

a. Verification of feedstock We propose twelve required elements in Option A QAPs designed to ensure that the feedstocks used in the production of renewable fuel qualify to generate RINs. To begin with, for each batch of renewable fuel, we propose that the QAP should verify that feedstocks meet the definition of "renewable biomas s," and identify which renewable biomass per §80.1401. We are also proposing specific elements depending on the type of feedstock. For instance, if the feedstock is separated yard waste, separated food waste, or separated MSW, the QAP would be require d 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 properl y reported pursu ant 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 t ype 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 ener gy (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. The QAP w ould 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 co vered b y 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. Fi nally , the QAP would be required to*** E.O. 12866 Review
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Page 33 of 139 verify that the feedstock used to produce renewable fuel is not a renewable fuel from which RINs were already generated. 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 Quarterl y

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

(FE) 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. Verification of production process We propose five 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 lis t of specific steps they will take to audit all five 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 ty pe of facility being audit ed (e.g., biodiesel from so ybean oil may have different expectations than biodiesel from non
- food grade corn oil) based on ty pical values from prior input/output values, or similar facilities if prior values are not available. Energy inputs from on
- site e nergy creation (e.g., propane, natural gas, coal, biodiesel, heating oil, diesel, gasoline, etc) and/or energy bills, and mass inputs/outputs such as feedstocks, additional chemicals, water, etc. would be required as part of the mass and energy balances. In addition, the QAP would be required to verify that*** E.O. 12866 Review
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Page 34 of 139 yi elds, production of co
- products, and production of wastes match expectations for the ty pe 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 ty pe being claimed. The QAP would be required to verify the accuracy of all process
- related factors used in calculation of the feedstock energy (FE) 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 a verification that the plant is running as stated, Staffing levels, or a reasonable metric such as is the workforce 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 a easily accessed and useful data. Finally , 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 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 Quarterl y

Monitoring 2
- 1 Mass and energy

balances X 2
- 2 Workforce size X 2
- 3 Process - related factors used in feedstock energy (FE) calculation X 2
- 4 Production process consistent with EMTS X 2
- 5 Production process consistent with D code X

c. Verification of renewable fuel We propose twelve required elements in Option A QAPs designed to ensure that the renewable fuel being produced qualifies to generate RI Ns, and that the number of RINs generated is accurate.*** E.O. 12866 Review
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Page 35 of 139 For each batch of renewable fuel, the QAP would be required to verify that volumes of renewable fuel for whic h RI Ns are being generated meet, are designated for, and are sold for qualifying uses as defined under "transportation fuel, heating oil, and/or jet fuel" in §80.1401. The QAP would be required to verify a number of things related to the fuel ty pe. Fo r instance, the QAP would include verification of the existence of certificates of anal ys is demonstrating that the renewable fuel being produced meets the applicable specifications and/or definitions in §80.1401, and would be required to verify contracts w ith lab(s) for certificates of anal ys is, 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 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 integrit y to ensure proper procedures for equipment replacement, maintenance, and cleaning are in place. The QAP would be required to veri fy that renewable fuel being produced at the facility and that can be produced, matches information in RFS registration in terms of chemical composition, and would be required to sample and test the final fuel and compare to specifications. The QAP would be required to verify that renewable fuel being produced matches the D code being claimed under §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, includ ing 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 and would be required to verify the accuracy

of all fuel
- related factors used in calculation of the feedstock energy (FE), as applicable, including equivalence value for the batch of renewable fuel and the renewable fraction of the fuel as measured b y a carbon
- 14 dati ng test method. The QAP would be required to verify that fuel shipments match production, and would be required to consider purchases (e.g. contracts) and storage of petroleum
- based fuel, if applicable, contracts with any company that removes wastes, co
- products, off
- spec products or any other material other than renewable fuel from the facility , if applicable. The QAP would be required to consider bills of lading (BOL), invoices, product transfer documents (PTDs), EMTS inputs, EPA quarterly

reports and EIA data. Finally , the QAP would be required to verify that production volume being claimed is consistent with storage and/or distribution capacity and that actual volume production capacity matches the value specified in the facility ’s RFS registration. The renewable fuel
- 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.*** E.O. 12866 Review
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Page 36 of 139 Table IV.A.1.c **-** 1 Option A: QAP Monitoring F requency – Renewable Fuel
- Related

Component Ongoing Monitoring Periodic

Monitoring 3
- 1 Renewable fuel sold for qualifying uses X 3
- 2 Certificates of anal ys is X 3
- 3 Process controls X 3
- 4 Standardization of volumes X 3
- 5 Renewable fuel matches D code or petition X 3
- 6 RI N generation is consistent with wet gallons produced X 3
- 7 Fuel shipments match production X 3
- 8 Renewable content R is accurate X 3
- 9 Volume production matches EPA and EIA reports X 3
- 10 Volume production is consistent with storage, distribution capacity X 3
- 11 Volume production capacity matches registration X 3
- 12 Equivalence value EV is accurate, appropriate X

e. Verification of RIN generation and separation We propose three required elements in Option A QAPs designed to verify RI N generation and separation. The QAP would be required to ensure that fuel that is exported was not used to generate RINs, or alternativel y that RINs were generated but retired. Under the limited circumstances where a renewa ble fuel producer or importer separates RI Ns, the QAP would be required to verify that any RI N 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. In addition, the QAP must verify that appropriate RI N generation calculations are being followed under §80.1426(f)(3), (4), or (5) as applicable. The elements related to RI N generation and separation 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.*** E.O. 12866 Review
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Page 37 of 139 Table IV.A.1.e **-** 1 Option A: QAP Monitoring Frequency

– RI N Generation & Separation
- Related Component Ongoing Monitoring Quarterl y

Monitoring 5 - 1 RI N generation calculations X 5 - 2 Fuel used for export not used to generate RINs X 5 - 3 Verify

RIN separation X
2. Approval and Use of Option A QAPs

a. Approval of Quality Assurance Plan We are proposing that a third
- part y auditor must submit a QAP to EPA for approval. 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 part y that submitted the QAP that it h as been approved. Onl y an approved QAP could be used by a third
- part y auditor to provide audit services to renewable fuel producers. b. Frequency

of updates/revisions to QAPs We are proposing that a QAP approval b y EPA only applies to the plan that was submitted to EPA, and there are specific cases in which we believe a QAP should be resubmitted and re
- approved. For example, we are proposing that a new QAP would be required if, downstream of the producer, RINs are discovered to have been invalidly generated, as that situation would be indicative of an ineffective QAP. We are also 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 b y the QAP. Unde r one of these conditions, the plan submitted to EPA would no longer be applicable, and thus approved 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. Specifi call y, we request comment on whether a new QAP would be required to be submitted to EPA if the audited facilit y changes operations, feedstock, fuel type, etc.

B. RIN Replacement Mechanisms Under Option A Auditors operating under Option A would be re sponsible for replacing invalid verified RI Ns if EPA has not recovered replacement RINs from the producer. Upon registration with EPA, auditors would be required to demonstrate that they have access to a RI

N replacement mechanism that can replace a minimum percentage of an y invalid RINs they verify as A
- RI Ns.*** E.O. 12866 Review
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Page 38 of 139 See Section VI.B of this preamble for full registration requirements. Under this approach, when EPA has not recovered replacement A
- RI Ns from the producer that generated the invalid RINs, the RI N 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 onl y producers and obligated parties, not auditors, wou ld 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 th e 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 generall y owners of major capital assets and are capable of self
- f inancing a potential RI N 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 re quirement of a RIN replacement mechanism would provide stability

in the marketplace and ensure that the RI N replacement obligation would in fact be fulfilled. Whatever mechanism is used must be capable of fulfilling the auditor’s potential replacement re quirement for invalid RINs audited under an Option A QAP in a given calendar ye ar, for the current year and the previous four y ears. The calculation of this potential replacement requirement is further discussed in Section IV.D.4, 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 indifferent as to which mechanism is chosen and are proposing to leave the choice to the auditor s, 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 t ypes of mechanisms we would accept. Rather, we propose onl y general minimum requirements for an accepta ble replacement mechanism, and we solicit comments on these and potential additional requirements for these mechanisms. We have considered three possible ty pes of mechanisms that could provide this function: RIN banks, RIN escrow accounts, and other tradi tional financial instruments. However, these mechanisms, outlined below, are not intended to be inclusive of all possible way s a RIN replacement mechanism could work, and are merel y s uggestions of potential pathway s Option A auditors might follow. We request comment on the various factors that will impact the cost of establishing and maintaining the minimum required balance in a RI N replacement mechanism, such as how many ye ar’s worth of RINs the mechanism should be required to be capable of replacing, wh ether 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. Finall y, we seek comment on whether an y of the replacement mechanisms described below or an y other form of replacement mechanism might provide the required ty pe and amount o f coverage, whether an y should be prohibited, and any other relevant comments on this issue.*** E.O. 12866 Review
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Page 39 of 139 1. RI N Banks One 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 an y one of the members was responsible for replacing invalid RINs. The primary

advantage of a RIN bank is that it gives each member access to a large quantity of A
- RI Ns in exchange for contributing a relativel y small quantity of A
- RI Ns. However, if RINs from the RIN bank are used to replace RINs for which one of the bank’s members is responsible, the withdrawn RINs must be replace d in the bank. While the bank managers might require the responsible party to reimburse the bank for any RI Ns withdrawn as a result of its actions, if the responsible party declares bankruptcy or is otherwise unable to reimburse the bank, the remaining me mbers would be responsible for re
- populating the bank to the required level. A RI N bank could be established, funded and managed by members of the bank. Members would each purchase and contribute verified A
- RI Ns to the bank. While such contributions co uld be proportional to each part y's RI N 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 RI Ns are withdrawn to replace invalid RI Ns, and how to grant or revoke membership in the bank. A RI N bank would establish an EMTS account to identify the RINs contributed by

the bank’s members. RINs would be held b y the bank and be available to replace inv alid RINs that were verified under Option A by a member of the bank. Each member of the bank would be required to have access to all of the RINs in the bank to replace A
- RI Ns they had audited that were found to be invalid. If at an y point the number of R INs held by the bank no longer met the EPA’s requirements, either due to the addition of a new member(s) to the bank, an increase in the liability

of one of the members of the bank, or a withdrawal to replace invalid RI Ns, the members of the bank would aga in be required to contribute RI Ns to the bank until the minimum required level of RINs was reached. Consistent with the treatment of an y R IN replacement mechanism and the potential replacement liability

described below, we propose that a RIN bank woul d be required to contain, at minimum, a number of A
- RI Ns equal to 2% of all of the A
- RI Ns verified in the last five years by the member that has verified the greatest number of A
- RI Ns in the previous five years. We believe this percentage is a reasonable estimate of the likely incidences of invalidly

generated RI Ns under the proposed quality assurance program, and would allow an y member of the bank, including the member who has verified the largest number of A
- RI Ns in the last five years, to fulfill its po tential RI

N replacement obligation. Another important issue related to RIN banks is whether RINs deposited in RI N banks expire like other RINs or whether they are a special category

of RINs that do not expire. The*** E.O. 12866 Review
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Page 40 of 139 main advantage of creating a special category of RI Ns that do not expire if deposited in a RIN bank is that it would allow the bank to provide perpetual backing for its members’ replacement responsibilities, as long as the RI Ns were not withdrawn to replace invalid RI Ns. However, RI Ns that d o not expire could acquire a higher market value compared to RINs from the same facility without this new status. I f EPA adopted this sy stem, we would also have to stipulate that RI Ns placed in a RIN bank could not be withdrawn for any reason other than t o replace invalid RI Ns to prevent auditors from depositing RINs into the bank, achieving this new status, and then withdrawing them to be sold with a new higher market value. This stipulation would place restrictions on the use of RI Ns owned by

the audito rs participating in this sy stem and could be problematic in cases where an auditor wanted to disassociate from a bank. The alternative to this system, and the one we are proposing today , would not change the status of RI

Ns deposited in a RI

N bank and wou ld allow them to expire just like any other RINs. Auditors would be free to regularl y withdraw older RINs from the bank and replace them with newer RINs (in addition to their new contributions) to prevent RINs in the bank from expiring and losing their va lue. While we recognize that this would add some administrative burden to auditors and potentially

impact the value of RINs that are deposited in the bank (since RINs from a previous ye ar are limited to being used to cover 20% of an obligated party’s RVO) we nevertheless believe this is a better option than creating a new class of RINs. This approach would allow auditors to have the most control over their own RINs, depositing and withdrawing them at an y time, provided they maintain their required minimum balance in the bank. Further, since the rollover cap at §80.1427(a)(5) limiting of the previous ye ar's RINs that may be used to meet the current years RVO is significantly higher than the percentage of RI Ns that would be required to be held b y a bank, we believe the depreciation in the value of RINs deposited in a bank is likely

to be minimal. Finally , this approach would be the most consistent with the existing program. We request comment on this approach. We also evaluated whether to allow auditors participating in a RIN bank to continue to verify A
- RI Ns if their RIN bank balance fell below the minimum funding level due to a withdrawal to replace invalid RI Ns. In the event that such a withdrawal takes place and the balance of the RIN bank no longer met the minimum requirements, the members of the bank could not verify

an y R IN s until the bank again achieved the minimum 2% requirement. Replacing the withdrawn RI Ns would require additional RI N deposits above and beyond those regularl y scheduled. Manag ers of RIN banks would be free to require more than the 2% minimum we are proposing as a means to ensure that the 2% minimum will be met even in the event of a withdrawal. Nevertheless, we recognize that it could be disruptive to prohibit auditors from verifying RI Ns whenever the balance in a RIN bank falls below the minimum funding requirement due to a withdrawal. An alternative would be to allow the bank members a specified period of time, such as 30 or 60 day s, during which they could continue to ve rify

RINs while building the bank balance back up to the minimum requirements. While this might serve to minimize disruptions to the program, it is not without disadvantages. Allowing for third
- part y auditors to verify RINs for a period of time without a sufficient balance in the RI N bank would create vulnerabilities in the program b y letting validated A
- RI Ns into the market that are not in fact backed by the t ype of mechanism required under the proposed regulations. Due to the potential for this allowan ce to*** E.O. 12866 Review
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Page 41 of 139 create significant vulnerabilities within this program we do not believe it would be appropriate to allow third
- part y auditors to verify RINs for an y period of time when the auditor’s RI N bank has an insufficient balance. 2. A
- RI

N Escrow Account s An A
- RI N escrow account would work very much like a RIN bank, but would be funded by a single auditor instead of a group of auditors, and would be supervised and managed by a third
- part y escrow agent. The advantage of this option is that an auditor wo uld have total control over the funding of the escrow account and, in contrast to the RI N bank, an auditor using an escrow account would never be adversel y affected by the actions of another contributor to the account, such as failure to contribute its req uired share or a large withdrawal from the RIN bank that might leave the bank underfunded. On the other hand, an auditor using an escrow account would be solely

responsible for the funding of the account, and so would be required to maintain a balance equ al to a much larger percentage of its potential replacement responsibility than it might be if using a RIN bank. To qualify

as an acceptably

funded account, we propose that the escrow account would be required to maintain a balance of A
- RI Ns equal to at least 2% of the A
- RINs verified b y the auditor to date for the last five years. As discussed above, we believe this percentage would cover the potential exposure of an auditor to the risk of RI N fraud or other producer
- caused invalidity under the proposed quality assurance program. As with the RI

N bank, the RINs held in escrow would expire just like any other RIN and would have to be retired and replaced on a rolling basis to maintain the auditor’s ability to replace invalid RINs at any given point i n time. Likewise, if the account’s balance fell below the minimum required amount for an y reason, the auditor would be precluded from verifying RINs unless and until the account’s balance was brought back to the minimum level. The escrow account would contain verified A
- RINs and would be used as a source of RI Ns to retire upon a finding that RINs verified by the auditor were in fact invalid. An originall y signed cop y of the escrow account agreement would be submitted by the auditor to EPA as part of its registration. The agreement would stipulate, for example, that the escrow agent would release RINs from the account upon demand b y or with the concurrence of the EPA Administrator. RI

Ns would be released directly to the auditor (for roll
- over purposes or for meeting a replacement requirement) or to a designated third party such as a standby trust (solel y for meeting the auditor’s replacement requirement.) Maintenance of the account’s minimum balance requirements would be part of the auditor’s regular compliance reporting. The auditor would set up a separate account in EMTS to identify RINs placed in the escrow account. 3. Financial Instruments and Alternative A
- RI N Replacement Mechanisms As noted above, we would not presc ribe that auditors under Option A must use only a RI N bank or a RIN escrow account as their replacement mechanism, but would allow other*** E.O. 12866 Review
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Page 42 of 139 mechanisms that would cover an auditor’s potential replacement responsibility . Whatever mechanism is used, however, wo uld have to be capable of providing for the replacement of 2% of the A
- RI

Ns that the auditor had verified in the past five years. Since obligated parties would not be responsible for replacing invalid RI Ns under Option A, any

replacement mechanism held by the auditor would need to make disbursements directly to the auditor or to a third part y contractuall y obligated to perform the auditor’s replacement responsibility
. We have considered a number of traditional financial instruments that we believe are no t suitable to provide the coverage required under Option A. For instance, a liability policy obtained by

an auditor would ty

picall y onl y cover losses incurred b y another part y contracting with the auditor, in this case, most likely the RIN purchaser. Thi s would not be an acceptable replacement mechanism under Option A because the RIN purchaser is not responsible for replacement of A
- RI

Ns 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 would be acceptable as a replacement mechanism under O ption 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 instrument if capable of providing direct replacement of invalid RI Ns, either by

itself or by

contracting with a third part y. A performance bond, for example, might directl y guarantee the performance of the auditor’s RIN replacement responsibility . The bond agreement could allow the suret y the option of purchasing and retiring replacement RINs itself, hiring a third
- part y 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
- part y agent to do so. A pay ment bond, similarly , could b e 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 agent to perform the replacement. In an effort to provide regulated parties with an option where the a uditor could use a traditional liability

policy to backstop RIN replacement, but the obligated party would still bear no potential RI

N replacement responsibility , we considered a modified Option A approach. In this modified approach, the obligated party w ould be responsible for replacing invalid A
- RI Ns that it had retired for compliance purposes, but the auditor would carry a third
- part y 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 part y would not be liable for fulfilling the remaining portion of its RI N replacement responsibility . Essentially , the obligated part y would be responsi ble for RIN replacement, but would be assured that their replacement costs would be covered entirel y b y a third part y. However, we see significant problems with this approach. The primary problem is that if an obligated part y 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 an y lack of pay

ment from the insurer would effectively be forgiven by

EPA. The obligated part y, in*** E.O. 12866 Review
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Page 43 of 139 short, would be rende red 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 sy stem, the invalid RI Ns 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 part y would not be responsible for replacing an y R INs not covered b y 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 th e 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 part y 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 voluntaril y. Third
- part y liability insurance, therefore, would still provide a way

for obligated p arties 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
- part y agreements to cover potential losses due to invalid RI Ns. We also co nsidered a “h ybrid” 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
- part y liability policy to cover the obligated part y’s potential losses due to the use of invalid A
- RI Ns. In this scenario, the obligated party would remain liable for replacement of invalidly generated RINs even if the insurance instrument provided onl y partial coverag e, 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
- part y auditor to cover their potential losses. However, as noted above, this approach is essentiall y 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
- part y liability policy to cover the RIN purcha ser’s potential replacement responsibility . Moreover, b y l eaving 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 bein g 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
. 4. Minimum 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. Instead, we are proposing that c overage must be sufficient to replace 2% of the RINs verified b y the auditor. We are proposing this level of coverage because we believe incidences of invalid RINs will be*** E.O. 12866 Review
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Page 44 of 139 significantl y below historic levels. Invalid RINs in 2010 and 2011 were generated when there was essentiall y no due diligence being performance by downstream parties to ensure that RINs were valid, and we believe that incidences of invalidity would be significantly

fewer in number once the proposed quality assurance program is in place
. Nevertheless, historically, invalid RI Ns have not been generated with equal probability by all biodiesel producers. Instead, it has been a few producers that were responsible, with essentially

all RI Ns generated by

those producers being invalid. If such circumstances were repeated in the future, the potential impacts on auditors would be twofold:

• Some auditors would not have to replace an y of the RINs they verify , since many producers would have generated no invalid RINs.

• In the event that an auditor was required to replace invalidly generated RINs, those invalid RI

Ns would likely

represent more than 2% of the RINs that the auditor verified. As a result, it is possible that the number of invalid RI Ns could be higher than 2% of a single aud itor's throughput even if the total number of invalid RINs represented only 2% of all RI Ns generated for the nation as a whole. While we are proposing that auditors would only be responsible for having a RI N replacement mechanism capable of covering the r eplacement of 2% of the RINs he verifies, we request comment on whether the RIN replacement mechanism should require more than 2% coverage.

C. Affirmative Defenses After meeting with industry stakeholders over the course of several months, we recogn ize that providing an affirmative defense to civil liability arising from the transfer or use of invalid RI Ns would promote greater liquidity in the RIN market, especially the market for RINs generated b y smaller producers. EPA believes that in the circum stances present in the RFS program, an affirmative defense combined with a reasonable QAP and adequate mechanisms to replace RINs that are invalidly generated, is an appropriate way to promote greater liquidity in the RI N market. It is our intent to design a s ys tem that would provide RIN owners with such an affirmative defense to civil liability provided appropriate measures are in place with respect to a QAP and a mechanism for replacement of invalidly generated RINs. To this end, under the proposed regulations renewable fuel producers and obligated parties would have the option of participating in a quality assurance program that would provide significant assurance (Option A) or reasonable assurance (Option B) that RINs are validly generated at producti on facilities. EPA would approve Qualit y Assurance Plans (QAPs) that meet the basic criteria prescribed in the regulations, and these QAPs would be the template for production oversight by

an independent third
- party auditor. Performance of an approved QA P audit would be the foundation of an affirmative defense for parties that transfer or use QAP
verified RINs for compliance purposes. The affirmative defense would only be available to RIN*** E.O. 12866 Review
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Page 45 of 139 owners for RINs that were verified b y an independent third
- part y a uditor using an EPA
- approved QAP, whether Option A or Option B. Additionally, it is our intent that affirmative defenses would not be available to the generator of an invalid RI N. Since the quality assurance program would be voluntary , parties could stil l purchase RINs not verified b y an EPA
- approved QAP and transfer or use these unverified RINs, but they could not assert an affirmative defense if the RINs were found to be invalid, regardless of their level of good faith or any independent due diligence they perform prior to purchase. Once a RIN has been verified by the auditor, any

person, other than the generator of the RI N, who transfers or uses that verified RIN would be eligible for an affirmative defense if the RI N was in fact invalidly generated and the person then transfered it to another part y or used it for compliance purposes. Once a RIN was verified through an audit based on an Option A QAP, it would remain verified and the verification would never be revoked. 6 The QAPs would be designed to verify

valid generation of RINs, and the assertion of an affirmative defense would be limited to the prohibited acts of transferring and using invalidly generated RI

Ns. We are proposing new regulations in Section VIII to address RI Ns that become invalid downstream of the RI N generator, but an affirmative defense would not apply in this situation. It should again be noted that an affirmative defense is not available for a RIN that was not verified under an EPA
- approved QAP. In other words, the s ys tem as it exists under the current regulations would continue to be an option for obligated parties who do not wish to purchase RI Ns verified b y a QAP. As noted above (Section III of this preamble), there are two typ es of verified RI Ns: those verified b y a th ird
- part y auditor who is required to have a replacement mechanism to guarantee replacement of invalidly

generated RINs (“Option A” or “A
- RI Ns”) and those verified b y a third
- part y auditor who is not required to replace invalidly generated RINs (“Option B” or “B
RI Ns”). The requirements for establishing an affirmative defense under Option A are described below, while Option B is described in Section V.C. Inorder to establish an affirmative defense under Option A or Option B, we are proposing that the elem ents would be required to be proven by a preponderance of the evidence. This means that each element was “more likely than not” to have been met. Additionally , we are proposing that when a person seeks to establish an affirmative defense, they

would subm it a written report to EPA, along with any necessary supporting documentation, that would demonstrate how the elements were met. The written report would need to be submitted within 30 day s of the person discovering the invalidity of the RI N. We welcome comment on the elements of the affirmative defense and the effects of establishing an affirmative defense. In the event that invalidly generated A
- RI

Ns are transferred or used, the person could establish an affirmative defense to liability arising from transferring or using the invalid A
- RI Ns for compliance with an RVO if the following elements were proven b y a preponderance of evidence:

6 If a RIN was improperly verified, the QAP auditor could be liable for committing the prohibited act of verifying a RIN without following the requirements of the approved QAP plan. How ever, the RIN would remain verified for purposes of asserting an affirmative defense by parties who transferred or used that RIN after it was verifi ed.*** E.O. 12866 Review
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Page 46 of 139 1) The RINs in question were verified in accordance with an approved Option A QAP as defined in EPA regulations; 2) The RIN owner did not know or have reason to know that the RINs were invalidly generated prior to being veri fied b y the third
- party auditor; 3) The QAP auditor or RIN owner informs the Agency within 24 hours of discovering that the RI

Ns in question were invalidl y generated; 4) The RIN owner did not cause the invalidity ; and 5) The RIN owner did not have a f inancial interest in the company that generated the invalid RI N. Allowing invalid RINs to circulate in the market without EPA’s knowledge would subvert the intent of the quality assurance program and the RFS program. In that context, the knowledge and notification requirements, (2) and (3) of the above list, ensure that the RIN owner did not knowingly

allow invalid RI

Ns to enter the market, and did not benefit from the use or retirement of the invalid RI Ns without informing EPA that the RI N was invalid. We request comment on all the elements we are proposing as prer eequisites to asserting an affirmative defense, and in particular the requirement to report invalid RINs to the EPA within 24 hours of discovery
. An affirmative defense generall y can be asserted in an administrative or judicial enforcement proceeding, an d is a defense that precludes liability even if all of the elements of a claim are proven. In this proposed rule, we are including an explicit notification requirement to allow EPA to evaluate affirmative defense claims before deciding whether or not to c ommence an enforcement action.

D. Treatment of Invalid A
-RINs Under both the current and proposed regulations, RI N purchasers must assess the level of risk associated with purchasing a particular RIN to comply with their Renewable Volume Obligations ( RVOs). For instance, a purchaser unfamiliar with the renewable fuel producer generating the RIN risks the possibility that the RIN is invalid, while a well
- known producer might seem less risky. The use of the QAPs as described in this NPRM would reduce the risk of purchasing invalid RINs, especiall y in situations where the producer of the RIN is unknown or new to the market. Where a producer is considered less risky in a given situation by

a given purchaser, the RIN bu ye r may not need as extensive a QAP to reduce its risk to an acceptable level, and would be willing to risk the obligation to replace the RIN if it were found invalid. On the other hand, a RIN deemed more risky might require a more stringent QAP and additional assurances against the respons ibility to replace it if the RIN turns out to be invalid. The obligation to replace invalid RI Ns that have been retired for compliance purposes will differ depending on whether the RIN was unverified, or verified through an Option A or Option B QAP.*** E.O. 12866 Review
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Page 47 of 139 Additionally , as discussed in Section III.C, we are proposing an administrative process for replacement of invalid RI Ns that places initial responsibility to replace invalidly

generated RI Ns on the RIN generator responsible for causing the invalidit y. In the event the RIN generator does not replace the invalidly generated RINs according to the administrative process, the replacement obligation would shift to the third
- party auditor under Option A. Thus, for invalidly generated RINs verified by an Option A QAP, the auditor would have the responsibility to replace the invalidly

generated RINs, and the obligated part y would have no responsibility for RI N replacement. However, in the event that regulated parties fail to implement the administrative process fo r replacement of an y invalid RI Ns, the EPA could bring an enforcement action against an y or all of the parties that were required to replace the invalid RI Ns. See §80.1474 of the proposed regulations for details of the administrative process for replaceme nt of invalid RI Ns. This section describes the responsibilities of regulated parties that generate RI Ns or take ownership of RINs verified under Option A but which are ultimatel y found to have been invalidly generated. We also describe the condition s under which invalid RINs must be replaced, b y whom, and the mechanisms for doing so. 1. Responsibilities for replacement of Invalid Verified A
- RI Ns For Option A we are proposing a s ys tem wherein RI Ns would be verified by

a third
- part y auditor using an EPA
- approved QAP, and the third
- part y auditor would be liable for replacing invalidly generated RINs. Obligated parties would not be liable for replacing invalid RINs under Option A, and could use invalid A
- RI Ns for compliance. Obligated parties th at purchase A
- RI Ns would not be subject to civil liability if an A
- RI

N transferred or used for compliance purposes was later found to have been invalidly generated, if all the elements of an affirmative defense were successfully asserted, as described in S ection IV .C. Moreover, obligated parties would be under no obligation to replace A
- RI Ns used for compliance that were subsequently found to be invalid and could transfer and use invalidly generated A
- RI

Ns (if they

did not know or have reason to know the A
- RINs were invalidly generated prior to being verified) without violating the Prohibited Acts section, §80.1460. Under Option A, the third
- part y auditor would be required to have a replacement mechanism capable of replacing invalidly generated A
- RI

Ns that were verified by

that auditor. We chose to have the third
- part y auditor replace invalidly generated A
- RI

Ns to provide obligated parties the greatest amount of incentive to buy RINs from smaller producers, who might be perceived to be higher risk produce rs, which would increase the liquidity of the market. The third
- part y auditors would have the greatest oversight of A
- RI N generation because of the robustness of the verification product they are providing to the market under Option A. Thus, charging the m with the corresponding replacement obligation is a reasonable approach to achieving the goals of the proposal. Additionally , as discussed above, after meeting with several third
- part y auditors, we discovered that they, in most cases, do not have the sam e level of financial resources that many obligated parties possess. Therefore, requiring a replacement mechanism provides a level of securit y for the Agency in making sure the statutory volume*** E.O. 12866 Review
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Page 48 of 139 mandate is met. As described more full y in Section IV.B, the form of this replacement mechanism would determine how this replacement occurs. QAP Option A would provide the greatest risk mitigation for obligated parties in the event that their RINs were invalidly generated and later used for compliance purposes. N ot onl y could they

assert a defense to civil liability for using an invalid A
- RI N for compliance purposes, but they would not be responsible for later replacing that RIN. QAP Option A would provide a means for all producers to participate in the market be cause obligated parties would bear no risk of a replacement obligation for an y A
- RI Ns, regardless of who produced them. Smaller producers would thus have access to a larger number of obligated parties as potential customers than they might have under the existing regulations, where obligated parties are alway s subject to a replacement obligation if the RINs they have retired are deemed invalid. We seek comment on this issue. 2. Invalid A
- RI

N Replacement The current regulations do not specify that a party

must replace invalid RINs because RI N replacement is a function of the need to meet an RVO. If the party holding an invalid RIN is an obligated part y, and he does not have a sufficient number of valid RINs to meet his RVO, he must acquire additiona l valid RI Ns. Other parties that retire invalid RINs are not required to replace them because they do not have a requirement to acquire RINs to meet an RVO. Under the qualit y assurance program the requirement to replace an invalid RI N may be placed on a part y other than the owner of the invalid RI N. As a result, the regulations governing the replacement of invalid verified RINs must specify which party

is responsible. Under Option A only the renewable fuel producer or importer who generated the invalid RI Ns and the auditor who verified those RINs would be responsible for replacing them. In general, as discussed above, the administrative process for replacement of invalid RI Ns places initial responsibility of replacement of invalid RI Ns on the RIN ge nerator, regardless of who actually owns the invalid RI Ns at the time that the invalidity is discovered. Even though we are proposing that invalid verified A
- RI Ns could continue to be transferred and used for compliance, RIN generators would never be perm itted to transfer verified A
- RI Ns once they know that those A
- RI

Ns are invalid. If the RIN generator failed to replace invalidly generated A
- RI

Ns, EPA would shift the responsibility

to the third
- part y auditor to replace the invalid A
- RI Ns. A QAP A audit or would be responsible for replacing invalidl y generated A
- RI Ns up to the levels discussed in Sections IV .B and IV.D.5. All regulated parties that are potentially liable for replacing invalid RINs would be free to obtain more coverage for RIN replaceme nt than the regulations require. In the event that regulated parties fail to implement the administrative process for replacement of any RI Ns, the EPA could bring an enforcement action against any or all of the parties that were required to replace the invalid RI Ns.*** E.O. 12866 Review
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Page 49 of 139 The methods for replacing invalidl y generated RINs under QAP Option A are outlined below. See §80.1474 of the proposed regulations for details of the administrative process for replacement of invalid RINs. In general, RINs verified under Option A could alway s be transferred or used even if they are discovered to have been invalidly generated, since RIN replacement would be carried out b y the RIN generator or the auditor. In the event that EPA or the independent third party auditor alleg ed that an A
- RI N was invalidly generated, that RI

N would be a “potentially invalid RIN” or “PIR”. The RIN generator would be required to take one of three possible corrective actions within 30 day s of being notified of the PIR:

• Retire a valid A
- RI

N of the same D
- ty

pe as the PIR, either b y purchasing it or generating a new valid RIN and separating it from the phy sical volume that it represents; • Retire the invalidly

generated RIN (if still in the RI N generator’s possession); or • If the RIN generator believed the PIR was in fact valid, it would submit a demonstration in writing to EPA providing a basis for its claim of validity . If EPA determined that the demonstration was sufficient, it would deem the RIN valid, and if not sufficient, it would notify the RIN generator of that finding and again require the RIN generator to replace the PIR within 30 day s. In order to allow a producer to replace a PIR with a new valid RIN from renewable fuel that it has generated, we are proposing a new provision in §80.1 429 that would permit producers to separate RINs from volume they produced for the specific purpose of retiring RINs to replace a PIR. If the RIN generator retired a valid RIN to replace the PIR, the invalid RI N that it replaced could continue to be trans fered or used for compliance b y an y part y. If the RIN generator did not replace an invalidly generated A
- RI

N for an y reason, EPA would turn to the third
- party auditor to replace the invalid A
- RI N. The auditor would have 60 day s from the day

it received notification of the PIR to retire a valid RIN to replace the PIR. Regardless of whether the RIN generator or auditor replaced the invalid A
- RI N or not, an y other party that owned the potentially invalid A
- RI

N could transfer or use that A
- RI N for complian ce purposes. Under no circumstances would an obligated part y or other third
- part y owner of an A
RI N be responsible for replacing the A
- RI N if it was deemed invalidl y generated. 3. Process for Replacing Invalid Verified RINs When EPA confirms that a verified RIN has been invalidly generated, the RI

N generator who generated the RIN in question would be notified directl y. At this point, the process of retiring an appropriate valid RI N would begin. There would be two forms o f invalid RI N replacement under the proposed quality assurance program:*** E.O. 12866 Review
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Page 50 of 139 1. If a party

that is required to replace an invalid verified RIN owns the RIN in question, it may

be retired through EMTS in the same way that invalid RINs under the current regulati ons are retired. 2. If a party

that is required to replace an invalid verified RIN does not own the RIN in question, or the RI

N has already

been used for compliance, the part y would be required to acquire a valid RI N and retire it in place of the invalid RI N. Inthis case, since it would be a valid RI N that is being retired, a new retirement code reason would be created in EMTS for this purpose.

a. Ty

pes of RINs that Can Replace Invalid Verified RI Ns Parties that retire valid RINs to replace invalid RINs would be required to match the renewable fuel category

and the QAP category

of both the valid and invalid RI Ns. For instance, an invalid verified RIN with a D code of 4, representing biomass
- based diesel, could only be replaced with a valid verified RI N with a D code of 4. Moreover, we propose that invalid RI Ns verified through Option A could only be replaced with valid RI Ns verified through Option A, not Option B (and vice
- versa). Since the balance of cost and risk could be different under Options A and B of the quality

assurance program, RINs verified under the two options could have different prices even though they

have the same D code. Thus there could be a financial incentive for valid RI Ns verified under one option to be used to replace inval id RINs verified under the other option, and this could lead to unforeseen market imbalances. Nevertheless, we request comment on whether valid RINs verified under one option should be permitted to replace invalid RINs verified under the other option. We do not believe that valid RI Ns generated under the existing regulations (i.e. not under the proposed qualit y assurance program) should be permitted to replace an invalid verified RIN. The replacement of invalid RI Ns with valid RINs is an approach that we have designed in the context of the quality

assurance program to allow verified RINs that are found to be invalid to continue to be transfered and used for compliance. We do not believe it would be appropriate to replace a RIN that had been verified through the quality assurance program with one that has not been verified.
b. Impacts of RIN Replacement on Renewable Fuel Demand The purpose of requiring invalid RI Ns to be replaced is to ensure that the annual renewable fuel volume mandates provide d in CAA 211(o)(2) are fulfilled. However, the process of identifying invalid RINs and replacing them could potentially unfold over months or even ye ars. This process could result in some portion of a given y ear's applicable volume requirement being fulf illed in a subsequent year, as replacement RI Ns may not be generated in the same ye ar that the invalid RI

Ns were generated. Thus there is a possibility that RIN replacement could cause greater demand for renewable fuel in a given year than the applicable standards are*** E.O. 12866 Review
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Page 51 of 139 intended to require for that year. While we expect the number of invalidl y generated RINs to be considerabl y less under our proposed qualit y assurance program than they were in 2010 and 2011, nevertheless we believe that this issue should be addressed. While the RFS program is designed to result in the use of specified volumes of renewable fuel within each calendar year, the current regulations include provisions that allow the volumes used in a given year to be more or less than the specif ied volume. For instance, the RIN rollover cap at §80.1427(a)(5) allows up to 20% of a given year's volume requirement to be met with previous
- year RINs. Effectivel y, this means that the demand for renewable fuel in a given ye ar can be up to 20% below th e volumes required. In addition, the deficit carryover provision at §80.1427(b) allows an obligated part y to delay compliance with an y portion of his RVOs by one ye ar. Although an obligated part y cannot carry over a deficit for two ye ars in a row, the fa ct that there is no limit to the size of deficit carryovers means that in theory there could be substantial differences between the volumes required in a given year and the actual demand for renewable fuel in that year. In addition, the applicable percent age standard set by EPA is based on projections of gasoline and diesel production, and to the extent the actual production varies from these projections, the actual volume of renewable fuel may be more or less than the national volume called for in section 211 (o)(2). Finall y, under the current regulations, the future replacement of RINs may occur in the context of an enforcement action related to the transfer or use of invalid RINs. This replacement obligation under the proposed regulations has a similar effect as far as timing of RI N replacement, recognizing that under the proposal there should be many fewer invalid RINs generated, and therefore much less need for future RI N replacement. Consistent with the effect of these various provisions, we believ e it would also be appropriate to permit an invalid verified RIN to be replaced outside of the year in which it was generated. In the case of RI N replacement using valid RI Ns from a RIN escrow account or RIN bank, valid RINs are set aside before invalid R IN s are generated and discovered. The small increase in demand for renewable fuel caused b y s etting aside these valid RINs would occur before RIN replacement, not after, and they would accrue at the same rate that RI Ns are being generated and verified. W e believe that these features of RIN escrow accounts and RI N banks would mitigate the impacts of RI N replacement on the renewable fuel market, and thus the use of future ye ar RINs to replace invalid RINs generated in the past would be very unlikel y to create a difficulty in meeting the volume mandates in a given year. 4. Cap on RI

N Replacement Another mechanism that we are proposing to reduce the costs associated with the quality assurance program is a cap on RIN replacement. Such a cap would help to ensure that QAP Option A would be implementable, and thus help to achieve the overall goals of this proposal. We are proposing that the cap would not appl y to invalid RI N replacement for the nation as a whole, but rather to individual auditors that would be required to replace invalid RI Ns. However, since its primary benefit would be to reduce the costs of a RIN replacement mechanism that an auditor would be required to hold, we are proposing that the cap would appl y only to auditors under QAP Option A, since auditors under QAP Option B would not be required to hold a RI

N replacement mechanism. Th e cap would apply to all RINs that the auditor*** E.O. 12866 Review
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Page 52 of 139 validates through a QAP within a calendar year, and would apply separately to RINs of each D code. The level of the cap should reflect a balance between the need to ensure that the volume mandates of the RFS program are met and providing auditors with reasonable assurance that the costs of replacing invalid RI Ns will not be excessive. We believe that the incidences of invalidly generated RINs would be significantl y lower under Option A than they were over the previous few ye ars. Since we are proposing that the required RIN replacement mechanism should provide coverage for 2% of the RINs verified b y an auditor over the last five years, we likewise believe it would be appropriate to cap the number of A
- RI Ns that an auditor must replace at 2% of the A
RI Ns he verifies over the last five y ears. We believe that this cap would both ensure that most if not all of invalidly

generated A
- RI

Ns would be replaced, and would provide assurances that the costs of a RIN replacement mechanism would not be excessive. However, we request comment on whether a higher cap would be more appropriate. We are proposing that the cap apply to all RI Ns that have been verified by an auditor to date, up to a maximum of the most recent five ye ar's worth of verified RINs. The table below provides an example for how the cap would be applied. Table IV.D.5
- 1 Example of Application of RIN Replacement Cap under Option A A
- RI Ns Verified b y the auditor 2% cap Maximum number of A
- RI Ns that the auditor would be responsible for replacing 2013 50,000,000 1,000,000 1,000,000 2014 30,000,000 600,000 1,600,000 2015 35,000,000 700,000 2,300,000 2016 40,000,000 800,000 3,100,000 2017 60,000,000 1,200,000 4,300,000 While cases of invalid RINs that were unintentionally generated tend to represent a small fraction of a given producer's total production, fraudulently generated RINs have historicall y represented 100% of a single producer's total production. Since in general we would expect a given producer's RINs to be validated b y a single auditor, it is possible that all of the invalidly generated RINs from a single producer may have been validated by

a single auditor. In such a case, we do not believe that a 2% cap would be appropriate. Theref ore, we are proposing that the invalid RI

N replacement cap applicable to auditors under QAP Option A would be the larger of: 1. 2% of all the RINs that the auditor has verified to date, up to a maximum of the

most recent five ye ar's worth of verified RINs , or 2. The largest number of RINs that were generated by a single renewable fuel producer and verified b y the auditor.*** E.O. 12866 Review
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Page 53 of 139 This approach would also mitigate instances wherein a producer and an auditor collude to generate and validate RINs that are fraudulent
. Finally , we are proposing that the 2% cap on RIN replacement would not apply to RINs covered b y the auditor's E&O insurance. This issue is discussed further in Section VI.A.3. While we are proposing that the 2% cap on RIN replacement would appl y i nd efinitely under Option A, it may

be appropriate to make it applicable only to 2013, or alternativel y to have a higher cap for ye ars after 2013. A cap on RIN replacement would help to reduce costs of the quality assurance program, but it also presents the possibility that some invalidly

generated RINs may not be replaced, and that as a result the volume mandates established by Congress may

not be met. In the short term, as a means for assuring smooth implementation of the quality assurance program, we beli eve that a cap on RIN replacement is appropriate. However, in the longer term it may

not be necessary . Recognizing this, we have proposed that the limited exemption applicable under Option B would onl y be available in 2013 and 2014 (see Section V.D.4). Therefore, we request comment on whether the cap on RIN replacement available under Option A should likewise only apply in the short term, with a higher cap or no cap at all for the longer term. We also request comment on whether the minimum required cove rage for RIN replacement mechanisms under Option A should be higher than 2% in the event that the RIN replacement cap is higher than 2%.*** E.O. 12866 Review
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Page 54 of 139 **V. Provisions for RIN Verification Under Option B**  As described in Section IV, the quality assurance program we are proposing today would include two different options that would be available to regulated parties. Both options would be intended to provide a more efficient mechanism for ensuring that RINs are validly generated, and both options would provide an affirmative defense against civil violations for certain actions involving invalid RI

Ns. However, the two options would differ in whether invalidly generated RI Ns could be used for compliance, and in which party would be responsible for replacing invalidly generated RINs. In this section we describe our proposed requirements for Option B. Under this option, obligated parties would be responsible for replacing RINs that were invalidly generated, as un der the current regulations. Also, obligated parties would not be permitted to use an invalidly generated RIN for compliance unless the generator of the invalid RIN replaced it. However, since obligated parties are more likel y to conduct their own oversi ght to verify that the RINs they acquire are valid, we are proposing that the requirements for quality assurance plans (QAPs) used to verify

RINs would be less rigorous than those under Option A. Moreover, we would not require third
- part y auditors who verify RINs as having been validly generated to replace RINs that are invalidl y generated. For clarit y, we refer to RI Ns that have been verified through Option B as B
- RI

Ns. In this section we first cover the proposed elements of QAPs for Option B. We the n describe how regulated parties could assert an affirmative defense for transferring invalidl y generated RINs or using them for compliance. Finally , we discuss the treatment of invalidly generated RINs, from the responsibilities of owners of such RINs to the parties that would be required to replace them.

A. Requirements for Option B Quality Assurance Plans As described more full y in Section IV.A, QAPs would be used to verify that the production of renewable fuel at a given facility meets all EPA req uirements and that corresponding RINs are validly generated. In general, QAPs under Option B would operate in the same way

that QAPs under Option A would operate. The primary difference would be the frequency of monitoring of the required QAP elements. S pecificall y, we propose that there would be no requirement for ongoing monitoring under Option B, rather, all elements of an Option B QAP would be evaluated on a quarterl y basis. In addition, there are fewer required elements under an Option B QAP compar ed to an Option A QAP. 1. Elements of an Option B QAP QAPs would be used b y approved independent third
- part y auditors to audit renewable fuel production. The QAP must include a list of elements that the auditor would check to verify*** E.O. 12866 Review
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Page 55 of 139 that the RI

Ns g enerated by

a renewable fuel producer or importer are appropriate given the feedstock, production process and fuel for which RI Ns were generated. Therefore, each QAP must identify

the specific RI

N - generating pathway from Table 1 to §80.1426 or a petition granted pursuant to §80.1416 that it is designed to audit. The proposed required elements of an Option B QAP are discussed below. We request comment on these proposed elements, including detailed descriptions of any elements not mentioned below. We als o request comment on whether quarterl y m onitoring is appropriate under Option B, or whether different components could or should be subject to different schedules (e.g., monthly , biannuall y, etc), and what those schedules should be, and wh y.

a. Verification of feedstock We propose nine required elements in Option B QAPs designed to ensure that the feedstocks used in the production of renewable fuel qualify to generate RINs. First, for each batch of renewable fuel, we propose that the QAP shoul d verify that feedstocks meet the definition of "renewable biomass," and identify which renewable biomass per §80.1401. We are also proposing specific elements depending on the type of feedstock. For instance, if the feedstock is separated yard waste, separated food waste, or separated MSW, the QAP would be required to verify that a separation plan has been submitted and accepted or approved, as applicable, as part of the registration requirements under §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 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 QAP would be required to verify that the feedstocks used to produce renewable fuel are valid for the D code being claimed under §80.1426 (or have an approved petition und er §80.1416) and must be consistent with the information reported in EMTS. The QAP would be required to verify

that the feedstock used to produce renewable fuel is not a renewable fuel from which RINs were already generated. Finally , the QAP would be re quired 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.
b. Verification of production process*** E.O. 12866 Review
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Page 56 of 139 We are proposing four required elements in Option B QAPs designed to ensure that the renewable fuel production process i s appropriate for the RINs being generated. Auditors submitting QAPs for EPA approval would be required to provide a list of specific steps they will take to audit all four elements. First, the QAP would be required to verify that production process tec hnology and capacity used matches information reported in EMTS and in the facility 's RFS2 registration. The QAP also would be required to verify that the production process is capable of producing, and is producing, renewable fuel of the t ype being claimed
. 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 ty pe of facility being audited (e.g., biodiesel from so ybean oil may have different expec tations than biodiesel from non
- food grade corn oil) based on ty pical values from prior input/output values, or similar facilities if prior values are not available. Energy inputs from on
- site energy creation (e.g., propane, natural gas, coal, biodiesel, heating oil, diesel, gasoline, etc) and/or energy bills, and mass inputs/outputs such as feedstocks, additional chemicals, water, etc., would be required as part of the mass and energy balances. Finally , the QAP would be required to verify the accuracy of all process
- related factors used in calculation of the feedstock energy (FE) under §80.1426(f)(3)(vi) or (f)(4), as applicable.

c. Verification of renewable fuel We propose seven required elements in Option B QAPs designed to ensure that the ren ewable fuel being produced qualifies to generate RI Ns, 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 RI Ns are being generated meet, are designated for, and are sold for qualifying uses as defined under "transportation fuel, heating oil, and/or jet fuel" in §80.1401. The QAP would be required to verify a number of things related to the fuel ty pe. For instance, the QAP would include verification of the existence of certificates of anal ys is 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 ana ly sis, unless a facility has an on
- site laboratory. If on
- site, the QAP would be required to verify lab procedures and test methods. The QAP would be required to verify that renewable fuel being produced at the facility and that can be produced, matches information in RFS2 registration in terms of chemical composition, and would be required to sample and test the final fuel and compare to specifications. The QAP would be required to verify that renewable fuel being produced matches the D code being claim ed under §80.1426, or approved petition under §80.1416.*** E.O. 12866 Review
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Page 57 of 139 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 correc tly . The QAP would be required to verify that volume of renewable fuel produced matches expectations for the amount of feedstock being processed and would be required to verify the accuracy

of all fuel
- related factors used in calculation of the feedstock energy

(FE), 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. Finally , the QAP would be required to verify that production volume being claim ed matches storage and/or distribution capacity and that actual volume production capacit y matches the value specified in the facility ’s RFS2 registration.
d. Verification of RIN generation and separation We propose three required elements in Option B QAPs to verify RIN generation and separation. First, i f applicable, the QAP must verify that RIN separation is appropriate under §80.1429(b)(4). Next, the QAP must verify that appropriate RIN generation calculations are being followed under §80.1426(f )(3), (4), or (5) as applicable. Finally , the QAP must v erify that fuel that is exported was not used to generate RINs, or alternativel y that were generated but retired. 2. Approval and Use of QAPs

a. Approval of Quality Assurance Plan We propose that approval of QAPs under Option B would operate in essentially the same way as under Option A. We are proposing that auditors must submit a QAP to EPA for approval. We are also proposing that a QAP must be submitted for approval every year. A QAP woul d be deemed valid on the date EPA notifies the part y that submitted the QAP that it has been approved. Onl y an approved QAP could be used by a third
- part y auditor to provide audit services to renewable fuel producers. b. Frequency

of updates/revisions to QAPs We are proposing that a QAP approval b y EPA only applies to the plan that was submitted to EPA, and there are specific cases in which we believe a QAP should be resubmitted and re
- approved. For example, we are proposing that a new QAP would be required if, downstream of the producer, RINs are discovered to have been invalidly generated, as that situation would be indicative of an ineffective QAP.*** E.O. 12866 Review
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Page 58 of 139 We are also proposing that a QAP would need to be revised if the renewable fuel producer makes a c hange in feedstock, production process, or fuel that is not covered b y the QAP. Under one of these conditions, the plan submitted to EPA would no longer be applicable, and thus approved new QAP would be required to be submitted and approved. We request co mment on what changes would require a new QAP to be submitted for approval. Specificall y, we request comment on whether a new QAP would be required to be submitted to EPA if the audited facilit y changes operations, feedstock, fuel type, etc.

B. RIN Replacement Mechanisms As outlined in Section IV, auditors operating under Option A must have a replacement mechanism sufficient to cover a minimum percentage of invalid RINs they verify . We are proposing that there would be no requirement for a replace ment mechanism under Option B, though this does not preclude an y regulated part y from setting up such a mechanism voluntaril y or contracting amongst themselves to ensure that the obligated party’s potential replacement responsibility

is accounted for.
C. Affirmative Defenses As discussed in Section IV.C, we believe that making an affirmative defense available against otherwise applicable civil liability arising from the transfer or use of invalid RI Ns would promote greater liquidity in the RI N market , especially

the market for RINs generated b y smaller producers. Under the proposed quality assurance program, there would be two ty pes of verified RI Ns: those verified through an Option A QAP by a third
- part y auditor who is required to replace inval idly

generated RINs, and those verified through an Option B QAP by a third
- part y auditor who is not required to replace such RINs. The requirements for establishing an affirmative defense under Option B are described below. As discussed under Option A, w e are proposing that when a person seeks to establish an affirmative defense, they would submit a written report to EPA, along with an y necessary supporting documentation, that would demonstrate how the elements were met. The written report would need to be submitted within 30 day s of the person discovering the invalidity of the RI N. We welcome comment on the elements of the affirmative defense and the effects of establishing an affirmative defense. In the event that invalidly generated B
- RI

Ns are trans ferred or used, the person could establish an affirmative defense to the prohibited act of transferring or using the invalid B
- RI Ns for compliance with an RVO if the following elements were proven b y a preponderance of evidence:*** E.O. 12866 Review
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Page 59 of 139 1) The RINs in question w ere verified in accordance with an approved Option B QAP as defined in EPA regulations; 2) The RIN owner did not know or have reason to know that the RINs were invalidly generated at the time of transfer or use for compliance, unless a remedial action had been implemented b y the RI N generator; 3) The QAP provider or RI N owner informs the Agency within 24 hours of discovering that the RI

Ns in question were invalidl y generated; 4) The RIN owner did not cause the invalidity ; 5) The RIN owner did not have a f inancial interest in the company that generated the invalid RI N; and 6) If the RIN owner used the invalid RI Ns for compliance, the RIN owner adjusted its records, reports, and compliance calculations in which the invalid RI N was used as required b y regulat ions, unless a remedial action by the RIN generator had been implemented. The affirmative defense requirements pertaining to B
- RI Ns are the same as those for A
RI Ns, except for the element of knowledge, item (2), and for the element dealing with adjusti ng RVO calculations, item (6). Owners of verified B
- RI Ns must not have known or had reason to know of the invalidity

of the RI N at the time they

either transfered a RIN or used a RIN for compliance purposes. This restrains the use of B
- RI Ns more than A
- RI

Ns. This is because under Option B, obligated parties are responsible for replacing an y invalid RINs used for compliance purposes, notwithstanding an affirmative defense to liability for the civil violation arising from the transfer or use of invalid RI Ns . We do not believe it would be appropriate to allow an obligated part y to use an invalid RI N for compliance with its RVO if it already knew of the invalidity and therefore knew that, even if it successfully avoided liability

for a civil violation, it wou ld still be liable for retiring valid RINs in the future to replace the invalid RI Ns. Similarly , we do not believe it would be appropriate to allow a RIN owner to transfer an invalid RI N to a third party

if it knew that the third part y could not retire th e RIN for compliance with an RVO (or even that it would be possible to sell an invalid B
- RI N, given that it had lost its value for compliance purposes). For these reasons, we propose that the owner of an invalid but verified B
RI N cannot assert an affirmative defense if it knows or has reason to know of its invalidity at the time it transfers or uses the RIN for compliance purposes. Such knowledge would subvert the purpose of the quality

assurance program. In regard to item (6), we have chosen to have th e affirmative defense for B
- RI Ns contingent upon obligated parties taking the invalid B
- RI Ns out of the sy stem or demonstrating that the producer implemented a remedial action by retiring a replacement B
- RI

N. This would help the Agency efficientl y ensure that the environmental goals of the RFS program are achieved b y incentivizing obligated parties to make the system whole.

D. Treatment of Invalid B
-RINs The treatment of invalid RI Ns would differ depending on the t ype of verified RIN that is chosen b y the RIN owner. The treatment of invalid RI Ns verified under Option A is discussed in Section IV.D. This section describes the responsibilities of regulated parties that generate RINs or take ownership of RINs verified under Option B, but which are ultimately found to have been*** E.O. 12866 Review
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Page 60 of 139 invalidly generated. We also describe the conditions under which invalid B
- RI Ns must be replaced, b y whom, and the mechanisms for do ing so. Additionally , we reiterate that we are proposing an administrative process for replacement of invalid RINs that places initial responsibility to replace invalidly

generated RINs on the RI N generator responsible for causing the invalidity . In the event the RIN generator does not replace the invalidly

generated RINs according to the administrative process, the replacement obligation would shift to the obligated part y that owns the invalid RI Ns under Option B and for invalid RI Ns were unverified. T hus, for invalidl y generated RINs verified by an Option B QAP and for unverified RINs, the obligated part y who owns the RINs would bear the replacement responsibility . However, in the event that regulated parties fail to implement the administrative proce ss for replacement of any RINs, the EPA could bring an enforcement action against an y or all of the parties that were required to replace the invalid RI Ns. See §80.1474 of the proposed regulations for details of the administrative process for replacement o f invalid RI Ns. 1. Responsibilities for Replacement of Invalid Verified B
- RI Ns Under Option B, RINs would be verified b y a third
- part y auditor using an EPA
- approved QAP just as under Option A. However, under Option B the obligated parties would be responsible for replacing invalidly generated RINs if the RIN generator failed to do so under the administrative process for replacement of invalid RI Ns. Obligated parties that purchase B
- RI Ns would not be subject to a civil violation if a B
RI N tran sfered or used for compliance purposes was later found to have been invalidly generated, if the elements of an affirmative defense were successfull y asserted. See Section V.C. However, obligated parties would be responsible for replacing any invalidly ge nerated B
- RI

Ns used for compliance purposes. Obligated parties would be free to contract with producers, independent third
- party

auditors, or other parties, such as brokers, to limit their exposure for replacement of invalidly

generated B
- RI

Ns. Obligated parties would not be permitted to transfer or use B - RI

Ns they know or have reason to know have been invalidly generated. Any

such transfer or use would be deemed a prohibited act, pursuant to §80.1460. Option B would provide flexibility for obligated p arties, producers, and third
- part y auditors to minimize the cost of verification services for RINs deemed less risky . Obligated parties that want the protection of an affirmative defense but would rather contract on their own terms regarding replacement o f invalidly generated RI

Ns could find this option appealing, as it would be easier for them to find coverage for less risky RINs and/or to demand replacement assurance as a term of their purchase contract or audit service contract. Additionally , smaller p roducers could be drawn to this option because the cost to participate in the quality assurance program could be less under Option B due to the absence of a requirement for a RIN replacement mechanism and the less stringent audit requirements for an Option B QAP. However, as with Option A, Option B might not work for all parties in all situations. Obligated parties could still view the potential risk of replacing invalidly generated B
- RI

Ns, even though they

could be protected by

contracts, as too high to purchase from smaller producers.*** E.O. 12866 Review
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Page 61 of 139 Producers deemed more risky could therefore choose to use Option A QAP auditors. We seek and welcome comments on potential risk containment measures to alleviate obligated parties’ potential concerns of purchasing from sm aller producers 2. Invalid B
- RI

N Replacement As mentioned above and in Section IV.D, the proposed administrative process for replacement of invalid RINs places initial responsibility of replacement of invalid RI Ns on the RI N generator, regardless of who actuall y owns the invalid RI Ns at the time that the invalidity is discovered. If the RIN generator fails to replace invalidly generated B
- RI

Ns, EPA would shift the responsibility

to the obligated parties to replace the invalid B
- RI Ns. In the event that regulated parties fail to implement the administrative process for replacement of an y RI Ns, the EPA could bring an enforcement action against any or all of the parties that were required to replace the invalid RI Ns. The methods (full y detailed in th e proposed regulations in §80.1474) for replacing invalidly generated RINs under QAP Option B are outlined below. In general, and in contrast to Option A, potentially

invalid RI

Ns verified under Option B could not be transfered or used for compliance purp oses. In the event that EPA or the independent third
- party auditor alleges that a B
- RI N was invalidly generated, the RI

N would be a potentially

invalid RIN or “PIR”. The RIN generator would be required to take one of three possible corrective actions within 30 day s of being notified of the PIR: • Retire a valid B
- RI

N of the same D
- ty

pe as the PIR, either b y purchasing it or by generating a new valid RIN and separating it from the phy sical volume it represents; • Retire the invalidly

generated RIN (i f still in the RI N generator’s possession); or • If the RIN generator believed the PIR was in fact valid, it would submit a demonstration in writing to EPA providing a basis for its claim of validity . If EPA determined that the demonstration was sufficient, it would deem the RIN valid, and if not sufficient, it would notify

the RIN generator of that finding and again require the RIN generator to replace the PIR within 30 day s. As discussed in section IV.D.2, producers would be permitted to separate RI Ns f rom volume they produced for the specific purpose of retiring a RI N to replace a PIR. Similarly , if the RIN generator retired a valid RI N to replace the PIR, the invalid RI N that it replaced could continue to be transfered or used for compliance b y an y party . However, if the RIN generator for any reason failed to replace the PIR, the obligated party would be notified of the failure and would be required to retire the invalid RI N within 60 day s. If the PIR had already been used for*** E.O. 12866 Review
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Page 6 2 of 139 compliance with its RVO , the obligated part y would be required instead to correct its RVO by subtracting the number of PIRs from it. Unless and until the PIR was replaced, either by the RIN generator or the obligated party , it would remain a PIR and could not be transfered or u sed for compliance purposes. 3. Process for Replacing Invalid Verified RINs The process for replacing invalid RI Ns under Option B would in general be the same as under Option A. This includes the use of particular codes in EMTS for retiring replacem ent RI Ns, and a requirement that replacement RINs match the invalid RINs in terms of their D codes and ty pe of verification under the qualit y assurance program (i.e. Option A or Option B). See the broader discussion under Section IV.D.3 regarding the gene ral process for replacing invalid verified RINs. In Section IV.D.3.b we discussed the possibility under Option A that replacement RINs may not be generated in the same year that the invalid RI Ns were generated, and that such circumstances could result in a portion of a given year's applicable volume requirement being fulfilled in a subsequent year. Thus there is a possibility that RIN replacement could cause greater demand for renewable fuel in a given year than the applicable standards are intended to r equire for that ye ar. This same situation could occur under Option B. However, we do not believe that this circumstance would create a problem for the renewable fuels market under our proposed program for the reasons discussed in Section IV. In addition , we are proposing a limited exemption to B
- RI N replacement that would absolve obligated parties from replacing a small percentage of invalidly generated B
- RI

Ns. See Section V.D.4 below. The level of this limited exemption may

very well be above the numb er of invalid B
- RI Ns generated, given that our proposed qualit y assurance program is expected to dramaticall y reduce incidences of invalidly generated RINs compared to 2010 and 2011. As such, the occasions in which invalid B - RI Ns must be replaced would be correspondingly smaller, or even non
- existent. 4. Temporary

L imited Exemption for Invalid RI N Replacement During the development of the proposed QAP process for today's NPRM, some regulated parties raised the possibility of a regulatory

provision that would permit a small fraction of invalid RI Ns to not be replaced by

parties downstream from the producer. Given the perceived concerns about RINs generated b y the smallest producers, such a limited exemption for invalid RI N replacement could help pro vide a means for those small producers to sell their RI Ns, particularl y during the first two years while auditors are learning to implement QAPs. We believe that a provision for a temporary limited exemption for invalid RI N replacement may

be appropriate, and we request comment on it. It is important to note that this would only appl y to replacement b y parties other than the producer. The issue is not whether some percentage of RI Ns should never have to be replaced, but instead what is the appropriate ap proach for replacement b y parties other than the producer.*** E.O. 12866 Review
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Page 63 of 139 a. Determination of the Appropriate Exemption L evel The number of invalid RINs that could be exempt from replacement should be a small fraction of the overall volume obligation. We believe th at this fraction should be consistent with some measure of real
- world uncertaint y in whether the renewable fuel volume requirements will be precisely

met. Since there are several potential sources of uncertainty , there are several different way s that an a

ppropriate exemption level for invalid RI N replacement could be calculated. One source of uncertainty is the roundoff in the applicable percentage standards for cellulosic biofuel, biomass
- based diesel, advanced biofuel, and total renewable fuel. In the RFS1 program that was finalized on May 1, 2007, we determined that the applicable percentage standards would be specified to two decimal places. 7 As a result, the total number of RINs that are actuall y used to comply with the applicable standards may dif fer by up to 0.005% from the precise number of RINs that would be needed to exactly match the volume mandates. For example, the applicable 2012 standard for biomass
- based diesel was set at 0.91% on January 9, 2012, corresponding to a volume requirement of 1.0 bill gal. Since this percentage standard was the result of rounding to two decimal places, the actual calculated value could have been as high as 0.91499% and still round to 0.91%. Obligated party compliance with a standard of 0.91% instead of 0.914 99% would mean that the actual volume of biodiesel consumed could be 0.9945 bill gal instead of 1.0 bill gal, a difference of 0.0055%. This same result can be obtained b y dividing the maximum potential rounding error of 0.005% by the applicable percentage standard of 0.91%. If we were to base the exemption for invalid RI N replacement on the roundoff error in the applicable percentage standards, the calculation would be carried out as follows:

= ( 0 . 005% ) Table V.D.4.a
- 1 provides the results if this formula were applied to the applicable 2012 standards. Table V.D.4.a
- 1 Exemption for Invalid RIN Replacement Based on Roundoff Error in Applicable Standards Applicable Standard Exemption for

RI N Replacement Cellulosic biofuel 0.006% 8.3% a Biomass
- based diesel 0.91% 0.55% Advanced biofuel 1.21% 0.41% Total renewable fuel 9.23% 0.05% a Based on a maximum potential roundoff error of 0.0005% instead of 0.005%

7 Since the required volumes of cellulosic biofuel have been significantly less than the volumes specified in the statute, we have used three decimal places for the percentage standard for cellulosic biofuel.*** E.O. 12866 Review
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Page 64 of 139 Another source of uncertainty in whether the required volumes of renewable fuel will actuall y be consumed is the difference between the projected volum es of gasoline and diesel that are used to calculate the applicable percentage standards, and the volumes of gasoline and diesel that are actuall y consumed. Using EIA's Short
- Term Energy Outlook (STEO), we determined that projections of the sum of gasolin e and diesel have t ypicall y exceeded the actual volumes b y an average of 1.7%. Table V.D.4.a
- 2

Comparison of Projected Versus Actual Obligated Volumes Projected (bill gal) Actual (bill gal) Difference 2011 2010 2009 2008 2007 2006 2005 a 196.9

196.6 200.1 210.0 208.4 206.5 204.0 193.1

196.2 193.7 198.4 206.8 205.9 203.7 - 1.9%

- 0.2%

- 3.2%

- 5.5%

- 0.7%

- 0.3%

- 0.2% Average
- 1.7% Source: EIA's Short Term Energy Outlook, Table 4a. Values represent the sum of mo tor gasoline and distillate fuel oil consumption. All projected volumes for a given year are from the October release in the previous year. a STEO for years prior to 2005 do not include projections. Based on the formula used to calculate the applicable percentage standards, a shortfall of 1 .7% in actual gasoline + diesel consumption volumes will produce a 1.7% shortfall in the volume of renewable fuel consumed. Since Congress established the mechanism for calculating the applicable standards, including the use of projected volumes, this sho rtfall represents an acceptable source of uncertainty in the RFS program. As such, it may also represent an acceptable level of uncertainty in the context of establishing a limited exemption for invalid RI N replacement b y parties other than the renewable fuel producer. Based on our review of potential sources of uncertainty , it appears that differences between projected and actual gasoline and diesel volumes is the largest source of uncertainty. Using the historical differences shown in Table V.D.4.a
- 2, we propose that the limited exemption for invalid RIN replacement be set at 2%, approximating the 1.7% value to account for the variability

shown in Table V.D.4.a
- 2. However, we request comment on a different value based on one of the alternative metho ds described above.
b. How Would the L imited Exemption be Applied? A primary

purpose of the overall proposal would be to address the market liquidity concerns discussed above, largel y focused on the ability of small producers to sell RI Ns. As describ ed in Section IV, QAP Option A addresses this by providing a significant degree of oversight on RIN generation, and placing the replacement obligation on the QAP auditor, not the obligated part y. As a result, we do not believe that it would be necessary f or the limited*** E.O. 12866 Review
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Page 65 of 139 exemption to apply

under Option A, and we propose that the limited exemption would only apply under Option B. In addition, we propose that the limited exemption would be available only to obligated parties that are required to replace inval id RI Ns, not renewable fuel producers that are required to replace invalid RINs. Nevertheless, under Option A an auditor would be responsible for replacing invalidly generated RINs. If the limited exemption for RI N replacement was also available to the auditor, it might help reduce the costs associated with an y RI N replacement mechanisms that auditors carry. We do not believe that any such costs reductions would be significant, but we nevertheless request comment on whether the limited exemption should also apply under Option A. While a limited exemption for RIN replacement could also apply under the existing regulations, we do not believe that this would be appropriate. The voluntary QAP process that we are proposing in today's NPRM is an alternative to the existing regulatory provisions governing liability

for the transfer or use of invalid RI Ns and their replacement. We are considering a limited exemption for RI N replacement only

in this context, as a component of the voluntary QAP process and othe r measures aimed at achieving a regulatory structure that facilitates reasonable oversight of RIN generation, adequate assurance that invalid RI Ns will be replaced, and a market for RINs where the opportunity to produce and sell RI

Ns is spread broadly acro ss producers, including small producers. We propose that the limited exemption would apply separately to each of the four standards under the RFS program: cellulosic biofuel, biomass
- based diesel, advanced biofuel, and total renewable fuel. We do not believe it would be appropriate to apply the limited exemption only

to the total renewable fuel standard, since doing so would permit much more than 2% of invalid advanced biofuel RINs to not be replaced. For instance, in 2012 the required volume of advan ced biofuel is 2.0 bill gal, while the total renewable fuel requirement is 15.2 bill gal. If the 2% limited exemption was applied only to the total renewable fuel requirement, allowing up to 258 mill invalid RI Ns to not be replaced, this would represent 1 3% of the advanced biofuel requirement if all the invalid RINs were advanced biofuel RI Ns. It would represent an even larger fraction of biomass
- based diesel. We also propose that the limited exemption would apply separatel y to each obligated party that is responsible for replacing invalid RI Ns rather than to the industry as a whole. For instance, an obligated party would appl y the 2% limited exemption to each of its four Renewable Volume Obligations (RVOs) to determine the number of RINs of each of the four t ypes that would not need to be replaced should they be found to be invalidly

generated. This approach would ensure that each obligated part y can estimate at the beginning of each year how man y RI Ns would not need to be replaced should they be deter mined to be invalid, and moreover would allow him to adjust his RI N acquisition activities in real
- time to address risk based on the number of invalid RINs he had already acquired. If instead we applied the limited exemption to the nationwide volumes, we do not believe it would have the intended effect of reducing perceived risk for obligated parties considering acquiring RINs from smaller renewable fuel producers. So long as the total nationwide number of invalid RINs fell below 2%, no obligated party wo uld be required to replace invalid RINs. However, each individual obligated party*** E.O. 12866 Review
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Page 66 of 139 would never know if an y RI Ns he acquires would be protected from replacement should they be determined to be invalid. Moreover, this approach would create an inherent imbal ance among obligated parties holding invalid RI Ns since it could potentially allow one party

to avoid replacing a large number of invalid RI Ns while effectivel y forcing another party to replace all of its invalid RI

Ns. We propose that the limited exempti on would represent the threshold below which invalid RI Ns would never be required to be replaced rather than a trigger that determines when all invalid RI

Ns must be replaced. Under our proposed threshold approach, an obligated party would know at the begi nning of each ye ar that 2% of the RINs needed to meet each of his RVOs would never need to be replaced if those RINs were B
- RI Ns and were determined to be invalidly generated. The limited exemptions would be calculated as follows: LE CB,i = 0.02 × RVO CB,i LE BBD,i = 0.02 × RVO BBD,i LE AB,i = 0.02 × RVO AB,i LE RF ,i = 0.02 × RVO RF,i where: LE CB,i = Limited exemption for cellulosic biofuel for year i LE BBD,i = Limited exemption for biomass
- based diesel for year i LE AB,i = Limited exemption for advanced biofu el for ye ar i LE RF ,i = Limited exemption for renewable for ye ar i RVO CB,i = The Renewable Volume Obligation for cellulosic biofuel for the obligated party

for calendar ye ar i, in gallons, pursuant to §80.1407. RVO BBD,i = The Renewable Volume Obligation fo r biomass
- based diesel for the obligated

party for calendar year i after 2010, in gallons, pursuant to §80.1407. RVO AB,i = The Renewable Volume Obligation for advanced biofuel for the obligated party

for calendar ye ar i, in gallons, pursuant to §80.1407. RVO RF,i = The Renewable Volume Obligation for renewable fuel for the obligated party for calendar year i, in gallons, pursuant to §80.1407. Under this threshold approach, the number of B
- RINs than an obligated party would be required to replace would be th ose in excess of the applicable limited exemption LE as calculated above. Under an alternative trigger approach, an obligated party would not be required to replace an y invalid RI Ns so long as the number of invalid RINs he owns falls below 2% of his RVOs. However, if at an y time within a calendar year the number of invalid RINs he owns exceeded 2% of his RVOs, he would be required to replace all of them. We do not believe that this alternative would have the intended effect of reducing perceived risk for obligated parties considering acquiring RINs from smaller renewable fuel producers. Finally , we propose that the limited exemption would be applicable onl y during the first two years of the quality

assurance program, for calendar years 2013 and 2014. During this timeframe, we expect regulated parties to be working to optimize implementation of the quality assurance program, and it may not be possible for all of the smallest renewable fuel producers to*** E.O. 12866 Review
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Page 67 of 139 participate under QAP Option A. The limited exemption can help to ensure that the RIN market is more liquid as the program starts up, as o bligated parties would be less concerned about potential invalidity

for B
- RI Ns. However, as the program matures, we believe that there will be much less need for a limited exemption since small renewable fuel producers will have greater opportunities to h ave their RINs verified under Option A. Moreover, obligated parties will gain experience in the first two y ears of the program with Option B, and we would expect their confidence in the validity of B
- RI Ns to grow over this timeframe as well.*** E.O. 12866 Review
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Page 68 of 139 **VI. Proposed Requirements for Auditors**  Today , we are proposing a number of requirements for the independent third
- part y auditors that would use approved quality assurance plans (QAPs) to audit renewable fuel production to verify

that RI Ns were validly

g enerated b y the producer. Qualified, independent third
- part y auditors would be integral to the successful implementation of the combination of provisions EPA is proposing. Under both options, third
- part y auditors would need to meet minimum qualifications (e.g. independence and professional competency requirements). All third
- part y auditors would be required to register with EPA, similar to how other parties (e.g. gasoline refiners, renewable fuel producers, etc.) register for other EPA fuels programs. W e are also proposing to require that third
- part y auditors under both options have professional error and omission insurance (E&O Insurance). However, under Option A, third
- party auditors would also be required to have an approved RIN replacement mechanism since, as discussed in Section IV .B, they

would be responsible to replace RINs that become invalid for any reason after being verified b y the auditor. During registration, third
- part y auditors would submit QAPs to EPA for approval, demonstrate that they meet minimum qualifications, and provide the Agency with other information as discussed below. After EPA has approved a QAP and registered the third
party auditor, we propose that the auditor could flag RINs in EMTS as verified. This would provide partie s throughout the renewable fuel distribution chain the confidence that a RIN has been validl y generated and that an affirmative defense may be established. Finally , in order to ensure that QAPs are appropriatel y implemented, we are also proposing recordke eping, reporting, and attest engagement requirements on third
- part y auditors consistent with similar requirements on other parties in RFS. A. Who Can Be An Auditor? One key element of the QAP process is the minimum qualifications that the auditors conducting facilit y visits must have. Today we are proposing minimum qualifications for an auditor in order to implement a QAP and verify RINs. First, as is required of in dependent third
parties that conduct engineering reviews for renewable fuel producers under RFS, auditors would be required to be independent of the renewable fuel producers that they are auditing. Second, auditors would be required to have the profession al expertise to effectively implement QAPs. Third, under Option A, third
- part y auditors would be required to also have an approved R IN replacement mechanism, as discussed in Section IV above to assure replacement of invalid RINs generated from facilities that an auditor has audited, as well as E&O insurance. EPA believes that these key

qualifications would provide assurances that auditors could successfull y implement QAPs and would help avoid the generation of invalid RI Ns at the fuel producer level. We seek comment on whether an y additional minimum qualifications would be necessary for auditors to successfull y i mplement QAPs or aid in the generation of invalid RI Ns at facilities. 1. Independence The first, and perhaps the most important, requirement for auditors is that they remain independent of renewable fuel producers. Independence of the auditor from upstream parties is*** E.O. 12866 Review
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Page 69 of 139 necessary to ensure that RI

Ns are not inappropriately validated due to a conflict of interest between the third
- part y auditor and the renewable fuel producer. For example, if auditors were employed b y the renewable fuel producers to validate RINs produced from a facility owned b y the producer, the auditor would have an incentive to ensure that RINs produced from that facility app eared valid, while the RI Ns may in fact be invalid. In the RFS2 final rule, we defined an independent third
- party

as a part y that was not operated b y the renewable fuel producer (or an y subsidiary

or employee of the producer) and free from any interest in the renewable fuel producer’s business. Similar provisions have also appeared in RFS1 and other fuels programs when a third
- part y is required to independentl y test fuel samples, audit reporting and recordkeeping requirements, and/or conduct in
- use compli ance survey s. Thus, we are proposing the same independent third
- part y definition for third
- part y auditors that we used in RFS2 for an independent third
- party

to conduct engineering reviews. Additionally , we are proposing that independent third
- party

audi tors submit an affidavit attesting to their independence as part of registration (discussed below). Although the proposed requirement for independence is limited to renewable fuel producers, it could be extended to include independence from other parties as well. However, we believe this is unnecessary . This proposed rulemaking is not intended to discourage any current efforts that an obligated part y or other intermediary may take to ensure compliance with RFS requirements, and requiring that third
- part y auditors be independent of all parties may hamper existing efforts by industry to mitigate invalid RI

N generation. However, some parties may have a conflict of interest with third
- part y auditors that might promote the improper validation of RI

Ns. For e xample, a third
- part y auditor could also be acting on behalf of a RIN
owner, which may

be an incentive to validate RINs fraudulentl y to sell to other parties. Therefore, we specifically seek comment over whether we should expand the proposed definition of independence to include other parties. We also recognize that a conflict of interest may exist if the independent third
- part y implementing a QAP for a renewable fuel production facility was the same party

that conducted the facility ’s engineering review required under §80.1450(b)(2), since the auditor would essentially

be verifying its own assessment of a facility . Similar reasoning could apply to the independent third
- parties that do attest engagements. However, we recognize that, especiall y in the be ginning, there may

be a limited number of qualified independent
- third party auditors capable of implementing QAPs for a facility if we do not allow independent third
- parties that conducted engineering reviews or attest engagements to also implement QAPs fo r a given facility . Therefore, we specificall y seek comment on whether we should exclude a third
- part y that has conducted an engineering review or attest engagement for a facility from implementing a QAP for that same facility. We also seek comment on wh ether an y other situations present a conflict of interest for independent third
- part y auditors that may disqualify a third
- part y from being able to implement a QAP for a facility
. 2. Professionally

Qualified to Implement a QAP Another key

element to ensure the effective implementation of QAPs at renewable fuel production facilities would be that auditors have the necessary professional expertise. In RFS2,*** E.O. 12866 Review
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Page 70 of 139 we require that each renewable fuel production facility undergo an engine ering review b y a licensed professional engineer as part of registration. In this NPRM, we are proposing a similar requirement for auditors since the verification of production capabilities of a quality assurance program should be similar to the ty pe of r eview conducted in the engineering review process for RFS registration. Independent third
- part y auditors would demonstrate that they possess the required professional expertise during registration. However, since the complexity of QAP implementation may vary substantially

based on size and scope of the QAP and whether RINs are verified under Option A or Option B, independent third
- parties that conduct audits may need to demonstrate additional professional qualifications to EPA before they can be register ed to implement QAPs. For example, periodic (e.g. quarterl y) audits may include careful review of several months’ worth of invoices and other bookkeeping records for a facilit y, and this type of audit may be more suitable to a certified public accountant (CPA) than a professional engineer. Additionall y, we require that all responsible parties in RFS undergo annual attest engagements conducted by a licensed certified public accountant (CPA) or certified internal auditor (CIA) to verify similar information. Although we are not proposing that independent third
- parties that implement QAPs demonstrate that CPAs conduct audits, we are seeking comments over whether third
- parties must have an y additional qualifications before we register them as auditors under the proposed quality assurance program. Another potential qualification, suggested b y a party that may conduct third
- part y facility audits, could be that an independent third
- part y auditor has sufficient knowledge of the RFS program in order to conduct audi ts and potentially validate RINs. Although we believe that third
- part y auditors should have thorough knowledge of RFS requirements to implement QAPs, it would be difficult to construct a standard to measure a third
- part y auditors “competency.” It was sug gested b y a part y that may conduct third
- party facility audits that we require elements of various I SO validation standards such as, for example, I SO standards used for validation of international greenhouse gas programs. We believe that these standards c ould serve as a useful template in the development of similar voluntary consensus standard board (e.g. ISO and ASTM International) specifications for third
- part y auditors. However, we also believe that standards such as these are best developed through th e existing collaborative processes that draw upon the expertise of affected stakeholders. It is also important to note that several independent third
parties have developed sufficient expertise with RFS to provide useful validation services to obligated p arties, and we believe that there exist adequate incentives for parties to ensure that third
- part y auditors understand the RFS program sufficientl y to prepare and implement QAPs. Therefore, we are not proposing to create such a requirement for auditors, b ut we do seek comment on whether the Agency should be responsible for the development of a similarly detailed professional competency standard to validate RINs. 3. Errors and Omissions Insurance An additional element to ensure the effective implementation of QAPs at renewable fuel production facilities would be to require independent third
- part y auditors to maintain professional liability

insurance, commonly

known as Errors and Omissions or E&O insurance.*** E.O. 12866 Review
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Page 71 of 139 We are proposing this as a registration requir ement for both QAP Option A and Option B. The amount of insurance should be sufficient to cover replacement of an y R IN s verified b y an auditor that turn out to be invalid as a result of auditor error, omission, or negligence. Additionally , we are proposi ng that independent third
- part y auditors would be required to use insurance providers that possess a financial strength rating in the top four categories from either Standard & Poor’s or Moody ’s (i.e., AAA, AA, A or BBB for Standard & Poor’s and Aaa, Aa, A , or Baa for Moody ’s). We feel that requiring E&O insurance would help to achieve the level of professionalism necessary for the qualit y assurance program to work as intended. Possession of E&O insurance would lend business and financial credibility to a potential QAP auditor in the eyes of their customers, as well as provide a level of comfort for the Agency that the statutory volume mandate would be met in the event of error, omission, or negligence on the part of a QAP auditor. We seek comment on (1) whether the requirement of E&O insurance would fulfill the goals discussed above, (2) whether the requirement would prevent some third
- part y auditors from being able to participate in the quality assurance program, and (3) what, if any , minimum amount of c overage should be required and how should that minimum amount be calculated. Since E&O insurance policies are intended to provide coverage for any failings on the part of the auditor, we do not believe that the 2% cap on RIN replacement proposed for Opti on A should apply

to RIN replacement that is covered by an E&O insurance policy . Thus we are proposing that the 2% cap on RI N replacement would only appl y to invalidly generated RINs that the auditor is responsible for replacing, but which are not the res ult of errors, omissions, or negligence on the part of the auditor. B. Registration Requirements In order to implement and enforce the new quality assurance program that we are proposing today , we believe that third
- party auditors must become regulate d parties under the RFS program. We believe that it would be necessary to impose registration, recordkeeping, and reporting requirements on third
- part y auditors to ensure that appropriate QAPs are executed according to the requirements specified in the pr oposed regulations. This would allow EPA and affected parties to monitor and have confidence that third
- part y auditors are implementing QAPs appropriatel y. One necessary

requirement for third
- part y auditors would be that they have to register with EPA as a regulated party through the Agency’s Central Data Exchange (CDX). We already require that obligated parties, renewable fuel producers, and RIN owners register with EPA, and that those parties provide us with production information, basic company in formation, and in the case of renewable fuel producers, third
- party engineering reviews. Requiring third
party auditors to register would allow EPA to determine that the basic minimum requirements discussed in Section VI.A. are met. Registering auditors would also facilitate the process of allowing third
- part y auditors to indentifying RINs as having been verified. During registration, we propose that third
- part y auditors would need to provide basic contact information as well as their basic corporate s tructure. This information is useful both as contact information and to help the Agency determine whether a third
- party auditor is a*** E.O. 12866 Review
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Page 72 of 139 legitimate legal entity . Third
- part y auditors would be required to indicate which facilities they intend to audit. EPA r ecognizes that a third
- part y auditor may contract with additional renewable fuel producers and facilities to implement QAPs after initial registration, and therefore, we are also requiring that a third
- part y auditor be required to update their registration each time they

wish to verify

RINs for additional renewable fuel producers or new facilities. This information would help the Agency ensure that QAPs submitted to the EPA as part of the registration process are consistent with the ty pe of renewable fuel f

acilities being audited. Since we are proposing a requirement that third
- party auditors implementing QAPs under both Options A and B have E&O insurance (see Section VI.A.3), third
- party auditors would be required to provide copies of an y applicable E&O insurance policies during the registration process. If a third
- part y auditor is implementing a QAP under Option A, they would need to also provide EPA with copies of pertinent documents and other evidence that demonstrate they have an adequate replacement mechanism in place. This information is necessary to ensure that third
party auditors have the ability

to cover their RIN replacement responsibilities. Third
- part y auditors would also be expected to provide EPA with copies of professional certification s (see Section VI.A.2) and a signed affidavit that states that the third
- part y auditor is independent of and free from an y conflicts of interest with an y renewable fuel producer that for which they intend on verifying RINs. Third
- part y auditors would also be required to provide QAPs for Agency approval during registration, and EPA would be required to approve a QAP before a third
- party auditor could be registered and use a QAP for a facility audit. EPA believes that it would be inappropriate to regist er a third
- part y auditor without an appropriate QAP. QAP details are discussed in more detail in Sections IV.A and V.A for Options A and B, respectivel y. Recognizing that foreign third
- part y auditors may have unique challenges compared with domestic thi rd
- part y auditors, EPA is proposing additional registration requirements for foreign third
- part y auditors. In the final RFS2 rulemaking, we outlined a number of requirements that applied to foreign RIN owners (see 40 CFR 80.1467). These additional requir ements are designed to ensure enforcement of RFS regulations at the foreign RIN owner’s place of business and are similar to requirements for foreign parties under other fuels regulations. For example, under RFS, foreign RIN owners must submit reports in English and provide translated documents in English upon demand from EPA inspectors or auditors, must submit themselves to administrative and judicial enforcement powers and provisions of the United States without limitation based on sovereign immunity , an d post a bond covering a portion of the gallon
- RI Ns that a foreign RIN owner owns. EPA is proposing the same requirements be extended to foreign third
- part y auditors and seeks comment over whether fewer or additional requirements would be necessary . The effectiveness of this proposed rule is contingent on the integrity of the third
- part y auditors and their ability

to competently

implement approved QAPs. The registration process is designed to help ensure that QAPs are implemented by competent, qualified and independent third
- part y auditors. A third
- part y auditor may only verify RINs under a voluntary quality assurance program if the auditor is registered with EPA. In order to ensure that auditors fulfill their regulatory

obligations, we propose that ea ch auditor would renew its registration on an*** E.O. 12866 Review
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Page 73 of 139 annual basis. The renewed registration submissions would include updates to information required for initial registration and an affidavit by the auditor that it is in full compliance with applicable QAP regul ations. The affidavit would include a specific certified statement that the third
- part y auditor 1) has only verified RINs that it reviewed under an EPA
- approved QAP, 2) has informed EPA and RIN generators about all potentially invalid RINs that it discove red, and 3) has fulfilled its RI

N replacement obligation if applicable. Third
- part y auditors that fail to accuratel y and completely renew their registrations will no longer be registered and therefore can no longer implement QAPs and verify RINs. We also propose that we may revoke a third
- part y auditor’s registration at any time if it determines that the third
- part y auditor has failed to meet its regulatory

requirements. Furthermore, we are proposing that we can den y a registration application from an y third
- part y auditor that employs an y person that was involved in the verification of RINs for a third
- part y auditor whose registration was revoked. We seek comment on whether this approach is appropriate. We also seek comment on whether we should require that third
- part y auditors’ registration information, including QAPs, be made publicly available. We believe that there is a positive correlation between the effectiveness of a quality assurance program and the amount of transparency

in the third
- party

au ditor’s registration and QAP implementation processes. By making registration information publicly available, it would allow other parties to evaluate whether they

have confidence in a QAP conducted by a third
- part y auditor. This would also allow affecte d stakeholders to notify EPA of concerns or deficiencies in a third
- part y auditor’s registration or QAP. Some third
- part y auditors may argue that such information is confidential business information. To address this concern, EPA could allow third
- part y auditors to submit both confidential and public versions of registration documents to ensure that sensitive information is protected. C. Other Responsibilities of Auditors 1. Notifying the Agency When There are Problems We believe that an important element of today ’s proposed quality assurance program is the timely

notification and correction of problems that are identified during the facility audit process, and a requirement to communicate potential problems that are uncovered through this process . Historically , in other EPA fuels programs, such as the RFG, UL SD, and E15 Survey Programs, we require that the independent part y that implements the program report potential violations of standards within 24 hours of identifying the potentiall y non - comp liant fuel sample. This has allowed the Agency to work with responsible parties to correct potential issues in a timely manner, thereb y reducing the potential environmental impact of the non
- compliant fuel. We believe that the utility of this third
- party notification would enhance the effectiveness of today ’s proposed qualit y assurance program. Therefore, we are proposing requirements that third
- part y auditors would be required to notify EPA and the renewable fuel producer of potential problems, includin g but not necessaril y limited to fraud, errors, and/or omissions, within 24 hours after a problem has been identified. We seek comment on whether EPA should allow third
- part y auditors more or less time to report potential issues that arise during audits o f renewable fuel production facilities.*** E.O. 12866 Review
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Page 74 of 139 2. Indentifying Verified RINs in EMTS The primary

goal of today ’s proposed qualit y assurance program is to allow downstream parties to feel confident that RI Ns are being appropriately generated at renewable fu el production facilities. Third
- party

auditors have an integral role in providing this assurance by verifying that facilities are in fact producing the typ e and quantity of renewable fuels from the appropriate feedstocks using specified pathway s, and that the associated RINs have been validly generated. The next step would be for third
- part y auditors to identify RINs as having been verified so that downstream parties would know which RINs had been subjected to review by an auditor and thus can be the basi s for an affirmative defense. To attain this goal, we are proposing requirements that third
- party auditors would be responsible for tagging RINs as having been "verified" in a way

that would be clearly

visible in EMTS after they have been generated. We propose that verifying a RIN in EMTS be prospective, meaning that a RI N could only be verified after an auditor has audited a facility in accordance with an approved QAP and met other conditions discussed below. Apart from the verification of RINs during the interim period between release of the NPRM and the final rule, we do not believe that there are any benefits from allowing verification of RINs retroactivel y i n EMTS that warrant the complication, confusion, and risks associated with it. We also beli eve that before a QAP can be implemented b y a third
- part y auditor, a relationship must be established in CDX between the third
- part y auditor and the renewable fuel producer or importer. This process would occur during the initial registration of a third
- p arty auditor and after an y updates to a third
- party auditor’s registration. This procedure would be necessary to ensure that both the third
- part y auditor and the renewable fuel producer or importer have agreed to establish a quality assurance program unde r a proposed affirmative defense option. Also as discussed in Section IV.B, EPA may not recognize this relationship unless the third
- part y auditor satisfy applicable replacement mechanism requirements. Hence, we propose that renewable fuel producers woul d have to acknowledge through an update of their registration that a third
- part y auditor will implement a QAP and verify RINs at the renewable fuel producer’s facility
. Third
- part y auditors should also have the ability to stop verification of newly generated RI Ns should a problem arise during the QAP implementation process. Since third
- part y auditors would be in the best position to identify potentially

invalid RINs before EPA and other parties, allowing third
- part y auditors this flexibility is necessary to ensure that problems with invalid RI Ns are quickl y identified and corrected. Additionally, since under Option A and potentially as a contractual matter Option B, a third
- part y auditor may have some liability to replace RINs, they should have the abili ty

to limit their liability

should they

notice through the implementation of a QAP that RINs may

be invalid. However, if a third
- part y auditor removes the “flag” for a facility that is generating RI

Ns, this will not affect a previousl y verified RIN’s abil ity to be used for compliance if it has been generated prior to the third
- part y auditor choosing to no longer validate a facility ’s RINs. Since one of the goals of today ’s proposed quality assurance program would be to mitigate the transaction and use of invalid RI Ns for compliance purposes, we are*** E.O. 12866 Review
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Page 75 of 139 proposing that third
- party auditors under both options be required to remove the validation flag for RINs generated at a facility until problems are rectified and confidence is restored to both the third
- part y and EPA that newly generated RINs are valid. As mentioned above, one key requirement for the effective implementation of a QAP by a third
- part y part y auditor would be that the third
- party auditor must be free from conflicts of interest with renewable fuel producers that are being audited. However, some existing third
party auditors currentl y act as agents for renewable fuel producers b y not only verifying that RI Ns are appropriately

generated at renewable fuel producer’s facilities, but by also handling a renewable fuel producer’s reporting activities in EMTS (e.g. they submit reports to generate RI Ns in EMTS for renewable fuel volumes produced at a facility owned/operated by

the renewable fuel producer). This may present a conflict of interest since thos e third
- part y auditors have a contractual relationship to act on behalf of the renewable fuel producer. On the other hand, since third
- part y auditors are going to be responsible for verifying all RI Ns generated at a facility in EMTS, they

may be able to s erve as an agent for a renewable fuel producer in this capacity without an apparent conflict of interest. We seek comment on whether we should allow third
- part y auditors to act as agents in the generation of RINs for renewable fuel producers. We also see k comment on any element of today ’s proposal to require third
- party auditors to validate RI Ns in EMTS. 3. Recordkeeping, Reporting, and Attest Engagements a. Recordkeeping Requirements Under both options, we propose third
- party auditors would be required to implement EPA
- approved QAPs and maintain records of all verification and validation activities related to the implementation of a quality assurance program. These records would serve to demonstrate that a QAP was appropriately implemented if invalid RI Ns are reported at a later date. b. Reporting Requirements Under the existing RFS program, obligated parties, exporters of renewable fuel, producers and importers of renewable fuel s, and any party who owns RINs must report appropriate information to EPA on a regular (e.g. quarterl y and/or annual) basis. Similarly , we are proposing that the third
- part y auditors would be required to submit quarterly reports, in line with existing RFS quarterly reporting deadlines, identifying how man y R INs the auditor has verified the previous quarter. We are also proposing that independent third
- part y auditors would have to include the facilities audited and the dates of those audits. This information would allow EPA to compare a third
- party auditor's reported activity to information gleaned from EMTS to ensure that third
- part y auditors are appropriatel y i mplementing QAPs. If a third
- part y auditor were to implement a QAP under Option A, then he w ould be required to also report the size of the replacement mechanism he has obtained to cover their potential RI

N replacement liability . We believe that these reports would help the Agency ensure that third
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Page 76 of 139 invalid RI Ns relative to the number of RINs verified by the third
- part y auditor. For example, renewable production facilities sometimes increase production levels, which may increase the size of the RI

N replacement mechanis m a third
- party auditor would need to have. We recognize that some may see this as providing the same information twice since we are proposing to require that independent third
- party auditors identify

facilities they

intend to audit and provide proof o f an appropriate replacement mechanism during registration. However, we believe that quarterl y reports indicating where and when audits occurred and the size of the appropriate RIN replacement mechanism relative to the number of RINs validated b y third
- part y auditors would provide a useful compliance tool to better ensure that third
- party auditors are effectivel y implementing QAPs. We seek comment on whether we should require quarterl y reports from third
- part y auditors, or more/less frequent reporting, an d whether we should require third
- part y auditors to report additional information on a regular basis.

c. Attest Engagements We seek comment on whether to require that third
- part y auditors have an annual attest engagement similar to those required of o ther parties currentl y required under §80.1464. Attest engagements are used in many of the Agency ’s fuels programs and are similar to financial audits. Attest engagements consist of an independent, professional review of compliance records and reports. D uring discussions with stakeholders, some suggested that we establish an “audit the auditor” program. We believe that attest engagements may be an appropriate means of verifying the accuracy

of the information reported to us by the third
- part y auditors. Similar to current RFS requirements, the attest engagement could consist of an outside certified CPA or certified independent auditor following agreed upon procedures to determine whether underl yi ng records, reported items, and transactions agree, and issu ing a report as to their findings and that attest engagements occur annually . These requirements would be similar to those we require of other parties in RFS. d. Prohibited Activities for Third
- part y Auditors We are proposing new prohibition and liabi lity provisions applicable to third
- part y auditors. Since we are creating a new regulated party that will be integral to the successful implementation of voluntary quality assurance programs, we believe it is appropriate to hold these parties liable if th ey fail to comply

with the proposed requirements. The prohibition and liability provisions would be similar to those of other fuels programs. We propose to identify certain prohibited acts, such as failing to properly implement an EPA
- approved QAP; faili ng to timely notify RIN generators and EPA of potentially invalid RINs; failing to replace invalid RI Ns, if applicable; and verifying RINs that are invalid. In addition, a third part y auditor who is subject to an affirmative requirement under this proposa l will be liable for a failure to comply with the requirement. For example, third
- part y auditors will be liable for separate violations for failing to comply with the registration, reporting and recordkeeping requirements. L ike other fuels programs, we p ropose that if the third part y*** E.O. 12866 Review
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Page 77 of 139 auditor causes another person to violate a prohibition or fail to comply with a requirement, the third party

auditor may

be found liable for the violation. The penalt y and injunction provisions in section 211(d) of the Clean Air Act appl y to violations of the renewable fuels regulations implemented pursuant to section 211(o). Accordingl y, under the proposed rule, an y person who violates an y proposed prohibit ion or requirement may

be subject to civil penalties of $37,500 for every day of each such violation and for the amount of economic benefit or savings resulting from the violation. We request comment on the need for an y additional prohibition and liabil ity provisions specific for third
- part y auditors.*** E.O. 12866 Review
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Page 78 of 139 **VII. Proposed Requirements for Audits**  We are proposing that a renewable fuel producer’s facility must be visited and assessed as part of an y audit conducted under the proposed quality assurance program. An auditor would use an approved QAP as the basis for the verification of renewable fuel produced and RINs generated at a facility . In order to verify production, the auditor must conduct site visit s, review documents, and contact entities that do business with the facility . The proposed components of audits are discussed in this section. As with other provisions of the RFS program, the proposed use of a QAP and the associated audit would also be available to foreign producers of renewable fuel. We request comment on specific aspects of the proposed program vis
- a - vis foreign producers, and specifically request comment on possible additional program elements that may only be applicable to foreign pr oducers.

A. Frequency of Audits We are proposing that an auditor conduct at least four (4) onsite visits per year, or every three (3) months. We believe this is an appropriate time frame for evaluating factors that onl y need to be evaluated “periodic ally” (see Section IV.A). We request comment on this proposed standard audit frequency , and whether this frequency should be different if an Option A QAP or an Option B QAP is used. We are proposing that new production facilities should be audited befor e verification of RINs and, subsequentl y, according to the standard schedule. We expect that each visit could take from one to several day s, depending on the size and complexity

of the facility, the availability of records, changes since the last audit, etc. It is possible that there may

be some value to requiring unannounced visits as well, and we request comment on the value and impact that such unannounced site visits/audits would have on the effectiveness of the program and its associated costs. Based on the proposed audit schedule, we are also proposing that RINs would be verified only for a specified period following an audit. To the extent that an audit of any entity usuall y certifies what was done, the audits we are proposing are prospective in that the audits are verifying that past practices and procedures have been followed, and are currentl y in place for future RINs that will be generated. We believe this prospective approach is appropriate for the proposed quality

assurance program beca

use the audit (and accompanying satisfactory outcome based on the applicable QAP) would be verifying the starting point from which future RINs would be generated. In that sense, the upcoming period of RIN generation is starting with a “verified slate”. In addition, it could place a serious impediment in the market for RINs if their verification followed their generation by any applicable period of time. To allow for some flexibility around the proposed standard audit schedule (i.e., quarterl y, or roughly

every 90 day s), we are proposing that RI Ns generated for up to 110 day s after the last audit could be verified, unless the real time monitoring data or o ther information obtained by the QAP auditor prior to the onsite audit indicates that RI Ns are invalid. If another audit was not*** E.O. 12866 Review
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Page 79 of 139 conducted within 110 day s, RINs could no longer be verified for that facility until a new audit was conducted. We request comment on this coverage period. If a verified RIN was invalidly generated, it would indicate that the QAP that had been used to verify

that RIN was deficient in some aspect. As remedy, we are proposing a more frequent audit schedule than the standard a s one change to the applicable QAP if such invalid verified RINs are found. We are proposing that the onsite frequency be changed from every three months to once a month in the event of invalid RI Ns. We are also proposing that this schedule would remain in effect for one year, assuming no additional invalid RI Ns are discovered during that time frame. We request comment on this proposed schedule for facility audits when the facility

is found to have generated invalid RI Ns. For those components of the au dit that we propose to require ongoing, or batch
- level monitoring, the QAP would be required to provide details of the means for collection and evaluation of the data collected on an ongoing basis.

B. Elements of an Audit The elements of a QAP are dis cussed in some detail above in sections IV and V. The following provides some additional detail on the elements of an audit. 1. Phy sical Examination of Facilit y and Operations The goal of the onsite visit is to verify that plant has the technology to produce, store, and blend biofuels at registered levels, is operating in accordance with the facility ’s registration, and that the RI

Ns generated since the last visit are valid. The auditor will likely use plant maps and photos as part of this analy sis, and should compare and contrast the plant’s infrastructure with the third
- part y engineering review reports on file with EPA. The auditor should note the size and number of storage and blending tanks, and observe the measurement of volume in the tanks. The auditor should determine whether the process rate is consistent with annual and quarterly production of the facility , and whether the facility has quality

process controls in place (e.g., are ASTM specifications being followed where appropriate). We bel ieve that mass and energy balances on the facility

are critical components of any audit. Because integrated facilities will likely have energy

usage that is not directly related to biofuel production, the auditor should have alternate means of assessing and correlating energy usage to production. We request comment on whether and how the ph ysical examination of the facility should occur more frequentl y for facilities subject to an Option A QAP than for those subject to an Option B QAP.*** E.O. 12866 Review
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Page 80 of 139 2. Document Re view The auditor should ensure that the producer has and is fulfilling the EPA record
- keeping requirements at §80.1454(c)(1)(i)(A)
- (B) and (ii). We expect the auditor to evaluate reports submitted to EPA, and propose that these be reports year - to - date, as applicable, and from the previous year, for comparison. These include Activity Reports, RIN transaction reports, RIN generation reports, and Renewable Fuel producer Co
- product reports. The third
- part y engineering review and annual attestation report s hould also be reviewed. Reports submitted to EPA should be cross
- checked with other records. For instance, the auditor should have access to certificates of anal ysis. The auditor must check recent feedstock receipts (if the producer uses a variet y of feedstocks, then the auditor should be provided with receipts for each feedstock). Integrated facilities may not have internal sales receipts for feedstock usage, so an alternative paper trail will likely be required. Similar to the feedstock document r eview and crosscheck, renewable fuel and co
- product delivery documentation should be part of an y audit. For all documentation reviews, we would expect the auditor to anal yz e reports to determine whether a producer is reporting volumes consistently , and to require (from the producer) explanation for missing or inaccurate reports. The auditor should investigate discrepancies between volumes reported and processed. Other reports the auditor should consider as part of its review include the EIA M22 Survey , any state reports, federal and state tax returns, and association dues reports. Of prime concern to the proposed quality assurance program is the verification of RI Ns, and there are man y aspects to this part of the audit. The auditor should evaluate monthly RIN generation reports submitted through the EMTS, verify that RINs generated match wet gallons sold, determine if the facility purchases or separates RINs, and review product transfer documents for all RIN activity . We propose that this review encompass random samples of documentation; however, based on the documentation provided by the producer, the auditor could decide to review all documentation . Furthermore, and in order to ensure that renewable fuel producers will maintain their records in a manner that will allow third party auditors and the EPA to efficientl y evaluate whether RINs were properly generated, we are also proposing to change § 80.1426 to state that RI Ns may onl y be generated for fuel that is demonstrated pursuant to the reporting requirements of § 80.1451, the recordkeeping requirements of § 80.1454, or in other records maintained by the producer, to be produced in accordance with the applicable pathway listed in Table 1 to § 80.1426(f) or a petition approved by EPA pursuant to § 80.1416. Finally , the auditor should also determine if there is any import or fore ign biofuel producer documentation. We request comment on whether and how the document review discussed here should be more detailed (and/or include different details) for facilities subject to an Option A QAP than for those subject to an Option B QAP.*** E.O. 12866 Review
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Page 81 of 139 3. Bu yer/Seller Contacts At the end of an audit, the auditor should know all customers of and suppliers to the facility , and all parties that distribute feedstock to and fuel from the facility. We expect the auditor to contact the customers and suppli ers in order to verify sales and purchases, in accordance with the requirements under the applicable QAP (i.e., Option A or Option B). We envision this proposed requirement as a “spot check”; the auditor should be able to provide a reason for such calls r egarding the entity called, questions asked, etc. We request comment on whether and how the audit requirements for Bu ye r and Seller contacts should differ between facilities subject to an Option A QAP than for those subject to an Option B QAP.*** E.O. 12866 Review
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Page 82 of 139 **VIII. Additional Changes Related to the Definition and Treatment of Invalid RINs** 

A. Export and Exporter Provisions In this action, we propose to address the following issues regarding the export of renewab le fuels: clarify

exporter RVO requirements, require identification of renewable fuel content for all fuel transfers, and change rules to require retirement of RINs at the time of export. The Agency

is proposing to address these issues primarily because they

were not clearl y addressed in the previous regulation, and because the export of renewable fuel, particularl y ethanol and biodiesel, has become more prevalent in the transportation fuel market. These proposed changes will make the RVO obligations of e xporters clear, and address how RINs should be handled when the renewable fuel is exported. In addition, it will provide EPA with the data needed to track renewable fuel exports. The intent is to insure that exported fuel is not included in meeting the m andated domestic annual renewable fuel volume requirement. 1. Clarification of Exporter RVO Proposed language will clarify that RINs must be generated for renewable fuel volumes produced for export. Any volume of renewable fuel which is exported, either neat or blended, requires calculation of an export RVO. How these RI Ns are managed is addressed in additional sections below. One alternative is to exempt exported renewable fuel from the RVO, but only if the fuel producer is the exporter of record, and has the necessary documentation to prove that the fuel was exported. EPA is proposing this change because the requirements for exported renewable fuel were not addressed directl y in the current regulations. Export was not one of the specified exe mptions from the RVO requirement, nor was export volume addressed. This is because the United States was not a renewable fuel exporter at the time that these regulations were written. With changes in the global fuel market, the US has now become a renewa ble fuel exporter and the requirements for exports must be addressed. 40 CFR section 80.1430 requires “an y party that owns an y amount of renewable fuel, whether in its neat form or blended with gasoline or diesel, that is exported from any of the regions described in section 80.1426(b) shall acquire sufficient RINs to comply with all applicable Renewable Volume Obligations under paragraphs (b) through (e) of this section representing the exported renewable fuel.” Exporters of biodiesel must declare and c omply with an obligation to bu y an amount of RI Ns (x 1.5) equivalent to the volume exported. 40 CFR section 80.1427 requires “each part y that is an obligated part y under section 80.1406 and is obligated to meet the Renewable Volume Obligations under secti on 80.1407, or is an exporter of renewable fuels that is obligated to meet the Renewable Volume Obligations under section 80.1430, must demonstrate pursuant to section 80.1451(a)(1) that it is retiring for compliance purposes a sufficient number of RINs.”*** E.O. 12866 Review
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Page 83 of 139 EPA is proposing to clarify that “any part y that owns an y amount of renewable fuel, ... that is exported” also covers heating oil. As the regulation is written, the intended use of the fuel is not a relevant factor. In addition, we propose that even par ties which transact in RIN
- less fuel register with the EPA. We believe this will enable greater compliance for those that sell RINs without regard to the underl yi ng volumes of fuel. Further, we believe it will allow for enhanced traceability of biodiesel used in exported fuel. 2. Require Identification of Renewable Fuel Content Section 205(a) of the Energy Independence and Security Act of 2007 provides that “each retail diesel fuel pump shall be labeled in a manner that informs consumers of the percent of biomass
- based diesel or biodiesel that is contained in the biomass
- based diesel blend or biodiesel blend that is offered for sale, as determined b y the Federal Trade Commission.” EI SA also specificall y addresses three categories of biodiesel fuel bl ends, requiring labels with precise wording for two. First, fuel blends containing no more than five percent biodiesel and no more than five percent biomass
- based diesel, and that meet ASTM D975 (“Standard Specification for Diesel Fuel Oils”), need not be labeled. Second, fuel blends containing more than five but no more than twent y percent biomass
- based diesel or biodiesel “shall be labeled ‘contains biomass
based diesel or biodiesel in quantities between 5 percent and 20 percent.’” EI SA Sec. 205(b)(2) (emphasis added). Finally, blends containing more than twenty percent biodiesel or biomass
based diesel “shall be labeled ‘contains more than 20 percent biomass
- based diesel or biodiesel.’” EISA Sec. 205(b)(3) (emphasis added). We recommend disclosure language similar to the following, based on a successful state law now in effect. Such documentation will prevent innocent failure to use fuel properl y or create blends greater than B5, and create a paper trail for use in enforcement actions. Any person that sells or otherwise transfers title to a biomass
- based diesel blend or biodiesel blend to any

other person for resale of the product shall prepare a document evidencing such transfer. Such transfer documents may be in the form of an invoice, bill of lading, bill of sale or other written instrument meeting the requirements of this subsection. All such transfer documents shall include the name of the transferor, the name of the transferee, the date of transfer, the volume in gallons of the product tran sferred, and either the volume in gallons or percentage of biomass
- based diesel or biodiesel that is contained in the blended product. Each person making such transfer shall maintain each transfer document required by this subsection for a period of four ye ars from the transfer date. 3. RI N Retirement Requirements Under the RFS, final compliance reports for the immediately preceding ye ar are made on February 28 th . For parties exporting renewable fuel without the intention of retiring sufficient*** E.O. 12866 Review
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Page 84 of 139 RI Ns, we believe this allows the exporter to continue their malfeasance for nearl y 14 months (January 2013 to February

2014, as an example) without detection or any requirement to report. The problem was anticipated, as stated in the final RFS2 Rule: “However , we are aware of some exporters who sell RI Ns that they

separate as a source of revenue, with the intention to purchase replacement RINs on the open RIN market later in the ye ar to comply with their RVOs. At this time we are not aware of such activities resulting in noncompliance, and thus the RFS2 regulations promulgated today will continue to allow this. However, we may revisit this issue in the future if there is evidence that exporters are failing to comply because they

are selling RINs that they sep arate from exported volumes.” It has now come to our attention that some exporters are intentionall y purchasing fuel for export, separating the RINs and selling them for additional revenue, and closing down business before they

are required to ever report their activities to EPA. We recommend changes to the recording and RIN retirement requirements for exported renewable fuel volumes. One approach would require exporters to clearly demonstrate on a quarterly basis that they are acquiring RINs suff

icient to cover volumes exported. This shorter time frame would significantl y reduce the window of opportunity for large exports of renewable fuel without the required RINs to be retired. Alternativel y, EPA could require the immediate retirement of RINs, at the time of export. This would prevent rolling deficits carried b y exporters, and guard against “shell companies” closing up shop in order to avoid the cost of meeting their export RVO.

B. “Downstream” Invalidation and Product Transfer Documents In order to clarify

the intent of the existing regulations and alleviate some problems caused b y activities that invalidate RINs after the RI N has left the producer, we are proposing the following changes. 1. Conditions for RI

N Generation and Designation of Intended Renewable Fuel Use The existing regulations at § 80.1426(a) and (c) require renewable fuel producers and importers to generate RINs for fuel that: (1) qualifies for a D code pursuant § 80.1426(f) or a petition approved pursuant t o § 80.1416, and (2) is demonstrated to be produced from renewable biomass pursuant to the recordkeeping and reporting requirements in the regulations. However, § 80.1426(c) also specifies that RINs may not be generated for fuel that is not designated or intended for use as transportation fuel, heating oil or jet fuel. We are proposing amendments to §§ 80.1426(a) and (c), and conforming amendments to the product transfer document (PTD) regulations in § 80.1453, to specify that designation of a fuel as transportation fuel, heating oil or jet fuel is to occur in the PTDs that a renewable fuel producer or importer prepares to accompany a fuel shipment. These changes would clarify the existing “designation” requirement for RIN generators by

specifying the ex act location and content of the designations. The requirement to designate intended fuel uses in PTDs would operate as a constant reminder to renewable fuel*** E.O. 12866 Review
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Page 85 of 139 producers and importers that RI Ns may onl y be generated for fuel intended for use as transportati on fuel, heating oil or jet fuel, and would facilitate EPA enforcement of the “designation” requirement. The proposed regulations would require that any designation reflect the renewable fuel producer’s or importer’s intent regarding the use of the fuel. This would ensure that designations are made in good faith; parties designating fuel for a qualifying use who in fact knew that the fuel would likely be used for other purposes would be in violation of this proposed regulation. As proposed, section 80 .1426(f)(12) includes requirements related to the distribution and sale of renewable naptha, biobutanol, and other renewable fuels, as designated by EPA, that must also be satisfied if RINs are to be generated for those fuels. These special conditions were developed because these fuel ty pes are ty picall y used for purposes other than as transportation fuel, heating oil or jet fuel. We are proposing to reference these existing requirements together with other conditions for RI N generation in § 80.1426(a). In addition, we seek comment on whether we should adopt additional regulatory requirements designed to ensure that fuel for which RINs have been generated are in fact used for qualifying purposes. We do not believe that such additional requirements would likely be necessary

or appropriate for certain renewable fuels, such as denatured ethanol, for which non
- qualifying uses either do not exist or are likely only de minimis in nature. However, other biofuels such as butanol or naptha could readily be put to non - qualifying uses in the chemicals market, in the production of cosmetics, etc. For such fuels, we seek comment on whether it would be appropriate to adopt additional conditions for RI N generation designed to ensure appropriate end use of the fuel, and what those conditions should be for specific ty

pes of fuel. For example, we seek comment on the option of limiting RI N generation for renewable fuels, such as naptha and butanol, for which the only significant qualifying uses under the Act would be as g asoline blendstock, to situations where the renewable fuel producer or importer itself uses the products as gasoline blendstock, or enters into a contract with the fuel purchaser providing that it may only be used as gasoline blendstock. We solicit comment on the extent to which there is a potential for biodiesel, heating oil, renewable diesel and other fuels to be used for non
- qualifying purposes, and what, if any , conditions related to ensuring qualifying end use would be appropriate to impose on renewa ble fuel producers and importers as a condition of RIN generation for such fuels. Existing section § 80.1426(c) identifies situations in which RINs may not be generated. We propose a conforming amendment to this section that would specify that RI Ns may not be generated unless the conditions specified in § 80.1426(a) are satisfied. 2. RI N Generation for Fuel Made with Renewable Fuel Feedstock The existing regulations do not provide a pathway for an y party to generate RI Ns for a fuel produced usi ng another renewable fuel as a feedstock. Parties seeking to do so, however, may submit a petition requesting approval pursuant to §80.1416. 40 C.F.R. § 80.1426(c)(6)(ii) sets forth certain prohibitions that would apply if, in the future, EPA approved a pathway that allowed a party

to generate RI

Ns for a fuel that was produced using another renewable fuel as a feedstock. These prohibitions are designed to prevent parties from generating more than one RI N for the same volume of renewable fuel. For exampl e, the production of ETBE uses ethanol*** E.O. 12866 Review
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Page 86 of 139 as a feedstock, and RINs may have been previously

generated if the ethanol used to make the ETBE was denatured. The ETBE producer in this example should not be allowed to generate RI Ns representing the full energy e quivalence of the finished ETBE, if RINs were previousl y generated for the ethanol feedstock. In order to address this ty pe of scenario, we are proposing to modify § 80.1426(c)(6) to prohibit a part y from generating new RINs for a fuel that is made from a feedstock that is a renewable fuel, where the feedstock that is a renewable fuel was produced b y another party, unless EPA approves a petition under §80.1416 to allow for the generation of RINs for a fuel that was produced using another renewable fuel as a feedstock and the petition and approval include an enforceable mechanism to prevent double counting of RINs. Lastl y, we propose to amend § 80.1426(f)(4) to address the problem of “double discounting” for non
- renewable feedstocks. Specifically , w e h ave discovered that the existing regulations inadvertentl y cause the number of RINs generated to be discounted twice for the presence of non
- renewable feedstocks. The first would be in the calculation of the equivalence value, and the second would be in the calculation of the number of RINs generated under § 1426(f)(4)(i). To correct this problem, we are proposing to add a new paragraph (f)(4)(iii) so that the equivalence value must be based onl y on the renewable fuel made from renewable biomass, not from non - renewable feedstocks. 3. Change Associated with Fuel for which RINs have been Generated that is used for a Non
- Qualifying Purpose Section 80.1429(f) of the existing regulations provides that any person who uses a renewable fuel for an application other than transportation fuel, heating oil or jet fuel use must retire RINs if RINs were received with that renewable fuel. Section 80.14 29(f) was intended to require that the person that uses RIN generating fuel for a non
- qualifying purpose retire RINs received with the fuel so that they cannot be used for RFS compliance. This approach makes sense since the part y that uses the fuel for a non - qualifying purpose is the party that is choosing the non
- qualifying use and has the most direct knowledge about how the fuel is used. We propose to amend the regulations to require an y person who uses fuel for which RI Ns were generated for a non
- quali fying purpose to retire the appropriate t ype and number of RINs, regardless of whether RINs were received with the fuel. Parties using a renewable fuel need only review the PTDs associated with the fuel to ascertain if RINs were generated for the fuel, or if the biofuel is RI

N - less. If RINs were generated and have been separated from the fuel, the RI Ns are bought and sold in the marketplace under the assumption that the associated fuel will be put to a qualifying use. We believe that any person using f

uel for which RI

Ns have been generated for a non
- qualifying use should make the RIN s ys tem whole by retiring an equivalent number and t ype of RIN. This approach would place the burden of ensuring an appropriate number of RINs is retired if the fuel is no t used for a qualifying purpose on the part y with the best knowledge about how the fuel is used. In order to accomplish this, we propose to remove and reserve paragraph 80.1429(f) of the regulations and propose adding a new section 80.1433 to require part ies that use or designate for use fuel for which RINs were generated in an application other than transportation fuel, heating oil, or jet fuel to retire an appropriate number and type of RI Ns within specified timeframes. We further propose new subsectio n 80.1460(g) which would prohibit a person from using qualifying renewable fuel for which RINs were generated in an*** E.O. 12866 Review
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Page 87 of 139 application other than as transportation fuel, heating oil, or jet fuel, unless the requirements of 80.1433 have been met. The proposed ame ndments would require retirement of applicable RINs within a 10
- 20 day

period (depending on whether the fuel was purchased with assigned RINs or not). As discussed below, EPA is proposing that a similar RI N - retirement provision apply to exporters of fuel or which RI Ns were generated. The 10
- 20day RIN retirement requirement would replace the existing annual exporter RVO calculation and compliance demonstration. Since parties using RIN
- generating fuel for purposes other than as transportation fuel, heating oil or jet fuel would be required to retire RI Ns for such fuel under today ’s proposal, we believe that it would also be appropriate to allow obligated parties who may have purchased the original RINs generated for this fuel to use those RINs for compliance purposes, under certain conditions. We propose to amend 40 CFR 80.1460(c)(2) and (3) to prohibit obligated parties who acquire R INs for fuel that is ultimate ly used for non
- qualifying purposes from using these RI Ns for compliance, where the obligated part y itself used the fuel for a non
- qualifying purpose but failed to retire an appropriate number of RINs, or knows that the fuel associated with the RI Ns they g enerated for that fuel was used for a non
- qualifying purpose, but the party or parties engaged in that fuel use failed to retire an appropriate number of RINs. We also propose to amend section 80.1460 to prohibit the use of a fuel for which RINs have been generated for a purpose other than as transportation fuel, heating oil or jet fuel unless the party engaged in that use complies with the requirements of 80.1433. Amending the regulations in this manner will provide obligated parties with assurance that a RIN that was properl y generated for a fuel that was designated and intended by the fuel producer to be used as a transportation fuel, heating oil or jet fuel may

be used for compliance purposes, even if a third
- part y uses the fuel associated with the RI

N for a non
- qualifying purpose, so long as a sufficient number of RINs are retired as required b y 80.1433. 4. Treatment of Improperl y Separated RINs Section 80.1431(a)(1)(viii) provides that a RIN that was improperl y separated pursuant to 80.1429 i s invalid. Under section 80.1460(c)(1), obligated parties may not use invalid RI

Ns for compliance purposes. EPA proposes to remove 80.1431(a)(1)(viii) of the regulations, and instead add section 80.1460(h), identifying the improper separation of RINs as a prohibited act. The net effect of these changes would be to allow obligated parties to use RINs that were improperly

separated for compliance purposes, since the RINs would no longer be considered invalid. However, improper RIN separation would be a prohibited act under the regulations. EPA also seeks comment on whether the RFS regulations should instead maintain section 80.1431(a)(1)(viii), but also require a more comprehensive and robust mechanism to allow parties that acquire separated RINs an d EPA to evaluate whether the RINs were properl y separated and used for a qualifying purpose. The goal would be to make it easier for EPA and obligated parties to determine whether RINs are valid. These mechanisms could require a designate and track app roach, with corresponding recordkeeping and reporting requirements, similar to the program set forth in the diesel sulfur regulations at 40 C.F.R. Part 80, Subpart I. In general, under Subpart I, each time custody of fuel is transferred from one facility to another facility , the transferor must designate the fuel and record its volume. The party who receives*** E.O. 12866 Review
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Page 88 of 139 custody of the fuel must record the same information, to ensure that each party relies on the same designation and volume for its own compliance purpo ses. Maintaining proper PTDs, with proper designations, is also part of the diesel sulfur program’s recordkeeping requirements. EPA seeks comment on whether the RFS regulations should establish similar designation and track requirements addressed at tra cking and recording RI N separation events and end use of renewable fuels. Additionally , EPA requests comment on whether we should require RIN separators to include with their quarterly reports additional records related to qualifying separation events th at are already required as part of the recordkeeping regulations. See § 80.1454 for a description of the records that must be retained b y parties. EPA believes requiring this information to be reported quarterl y will allow EPA to review the information i n a more timely than in the existing structure, where EPA must request it from RIN separators on an ad hoc basis. Additionally , all parties who separate RINs must sign and certify that the information reported to EPA under the RFS program is true and accurate. In accurate, misleading, and/or false reports submitted to EPA may be used in a criminal prosecution against the submitter and other culpable persons. Enhanced reporting requirements for RIN separators would facilitate EPA’s ability to investigat e and prosecute persons who engage in RIN separation violations. EPA seeks comment on the ty pe and scope of reporting that would most likely

assist EPA in identifying RIN separation violators. 5. Requirements for Parties that Designate or Use Renewable Fuel in an Application that is not Transportation Fuel, Heating Oil, or Jet Fuel EPA is proposing a new section §80.1433 that states the requirements for those parties that designate or use a fuel for which RINs have been generated for a use other than transportation fuel, heating oil, or jet fuel. As discussed in the amendments to section § 80.1429, EPA is proposing to require the retirement of an equivalent number and type of RINs b y the party that designates or uses such a fuel for a non
- qual ifying use. This approach will make the RI N s ys tem “whole” while also minimizing transaction costs for all parties and EPA. The proposed regulations specify formulas for a party

putting fuel for which RINs were generated to a non - qualifying use to use in calculating the number of RINs that should be retired. However, EPA also seeks comment on the alternative of requiring such users to refer to the PTD accompan yi ng the fuel to determine the number and ty pe of R INs to retire. Proposed section 80.1453(a) wou ld require RI N generators and all subsequent transferors of renewable fuel to identify on PTDs the number and t ype of RINs generated for it. If this section is finalized it could offer a more accurate and easier s ys tem for identifying the correct number o f RINs that should be retired in order to make the RIN s ys tem whole when biofuel for which RINs were generated are put to a non
- qualifying use. EPA requests comments on whether we should include a provision to exempt small entities from the requirements proposed in 40 C.F.R. §80.1433. EPA is taking comment on the extent to which it would be appropriate to relieve certain small entities from the r equirement of retiring RINs when they

use fuel for which RINs were generated for a non
- qualifying purpose.*** E.O. 12866 Review
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Page 89 of 139 EPA understands there are instances, such as emergencies, where small parties may have no practical choice but to use fuel that was produced as rene wable fuel for a use other than as transportation fuel, heating oil or jet fuel. This exemption would allow small parties to avoid not only the RIN retirement requirement in 80.1433 itself, but also the RFS2 requirements of registering, recordkeeping and reporting that are associated with being a RIN owner. EPA envisions that any

such exemption would apply only to end users of fuel for which RINs have been generated who are themselves small entities, and only for a very

small amount of fuel. We seek comment on a possible maximum volume of fuel, such as 200 to some maximum number of gallons per year that would be exempt from 80.1433 requirements for qualified small entities. We also seek comment on factors such as the number of emplo ye es or value of assets that could be used to identify

qualified small entities. EPA requests comment on the proof and or documentation we should collect in order to identify parties as small entities entitled to the exemption. We propose that this provision would not a pply to parties that designate renewable fuel for a non
- qualifying end use. Instead, the provision would only appl y to those parties who actuall y use fuel for which RI Ns have been generated for a non
- qualifying use, such as a stationary generator. We be lieve that it is unlikely that parties engaged in the transfer and re
designation of fuel uses have a need for a small volume exemption to § 80.1433, but EPA solicits comment on this issue.

C. Treatment of Confidential Business Information EPA is pr oposing to summarize and publish registration and QAP information required under 40 CFR 80.1450 (b) and (c) from independent third
- part y auditors and renewable fuel producers and importers that are registered with the RFS program, and that such summarized information shall not be considered confidential. This information does include QAP plans and independent engineering reviews. In cases where QAP plans and independent engineering reviews include proprietary information, we propose that registrants provi de the Agency with two versions of those documents, one clearly marked as containing CBI, with appropriate areas denoted as CBI, and a second public version with CBI information redacted. Additionally , we are proposing to publish monthly , quarterl y and /or annual averaged information, required to be reported under 40 CFR 80.1451(b) for renewable fuel producers and importers, on a corporate and/or facility
- by
- facility basis, and that such averaged information shall not be considered confidential. We bel ieve that the added transparency of making this information available to the public, along with the implementation of the QAP process, will strengthen the RFS program and act as a deterrent to fraudulently generated RINs. We welcome comment on these propo sals to publicize this registration and reporting information.*** E.O. 12866 Review
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Page 90 of 139 D. Proposed Changes to Section 80.1452

– EPA Moderated Transaction System (E MTS) Requirements

– Alternative Reporting Method for Sell and Buy Transactions for Assigned RINs Reporting and p roduct transfer document (PTD) requirements, found in sections 80.1452 and 80.1453, respectively , currentl y state that the reportable event for a RIN purchase or sale occurs on the date of transfer. Sellers must report the sale of RINs within five (5) bus iness day s of the reportable event via the EPA Moderated Transaction Sy stem (EMTS). Buy ers must report the purchase of RINs within ten (10) business days of the reportable event via EMTS. The date of transfer is the date on which title of RI Ns is transfe rred from the seller to the buyer. Some buyers and sellers of assigned RINs have expressed concerns with these requirements stating they have difficulty

determining the date of transfer since title of the renewable fuel is not transferred until the fuel p hy sicall y reaches the buyer. Some transactions, for example those by rail or barge, may

take several weeks, and their current accounting sy stems do not include a means for capturing the buyer’s receipt date. EPA understands this concern, but also reco gnizes that some regulated parties have modified their accounting s ys tems to address the current reporting and PTD requirements in RFS2. We also believe that for parties separating, retiring, and selling or buying separated RINs, the current reporting and PTD requirements are effective and should remain unchanged. Therefore, at this time EPA is not proposing to replace existing requirements, but is instead proposing an additional, alternative method for reporting sell and buy transactions involving assign ed RINs only
. The proposed alternative method for sell and bu y transactions of assigned RINs would redefine the reportable event for both the seller and the buyer, introduce a unique identifier that the seller must provide to the buy er, and require the buyer to report the date of transfer. Bu ye rs and sellers would need to agree on which method they would be using to report transfers of assigned RINs; either the current method or the alternative method. EPA believes that this alternative would provide the regulated community with the flexibility

to address their reporting concerns and also provide EPA with the data necessary to effectivel y administer and enforce transactions of assigned RI Ns. EPA welcomes comment on this proposed alternative method for reporting assigned RIN buy and sell transactions. We propose that sellers of assigned RINs under the alternative method be required to do the following:

 Within five (5) business day s of shipping renewable fuel with assigned RINs, report a sell transact ion, using the alternative method, via EMTS;  In clude in the EMTS sell transaction report other required information per section 80.1452; and  Provide a PTD to the assigned RIN bu yer with a unique identifier, also reported via EMTS, in addition to the information in section 80.1453. The date of transfer is not required for the alternative method.*** E.O. 12866 Review
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Page 91 of 139 We propose that buyers of assigned RINs under the alternative method be required to do the following:

 Within five (5) business day s of receiving a shipment of renewable fuel with assigned RI Ns, report a bu y transaction, indicating use of the alternative method, via EMTS;  In clude in the EMTS bu y transaction report other required information per section 80.1452;  In clude in the EMTS bu y transaction report the un ique identifier provided by the seller; and  In clude in the EMTS bu y transaction report the date the renewable fuel was received, i.e. the date of transfer. If this proposed alternative method is finalized, the EMTS would be modified to accept such transac tions. EPA would provide additional instruction and guidance at the time of the new EMTS version release. EPA invites comment on all aspects of this proposal.*** E.O. 12866 Review
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Page 92 of 139 **IX. Impacts**  The quality

assurance program that we are proposing in today 's NPRM would provide a voluntary mechanism for regulated parties to verify that RINs are validly

generated, provide an affirmative defense against violations if a regulated party transfers an invalidly

generated RIN o r uses it for compliance, and provide clarit y regarding the responsibility of regulated parties to replace invalidly

generated RINs. The proposed program would not change the volume requirements of the RFS program, but instead would merely help to ensure that those volume requirements are met. Likewise, the proposed changes to the regulations governing export of renewable fuel, separation of RINs from wet gallons, and qualifying uses of renewable fuel would also be intended to ensure that the RFS volume r equirements are met with qualifying renewable fuel. As a result, there would be no change to the expected impacts of the RFS program in terms of volumes of renewable fuel consumed or the associated GHG or energy securit y benefits. Instead, the primary impacts of the quality

assurance program would be improved liquidity

in the RI N market and improved opportunities for smaller renewable fuel producers to sell their RINs. The quality

assurance program that we are proposing in today 's action would be volunt ary . As a result, there would be no obligatory costs. There would likely be costs associated with an individual part y's participation in the quality assurance program. However, the fact that the quality

assurance program would be voluntary means that a decision to participate will be made independentl y b y each regulated part y, and thus we cannot estimate the costs that might be incurred for the nation as a whole. Furthermore, an y costs incurred would only be borne if the industry

believed that those cos ts were less than current costs in the marketplace resulting from efforts to verify , acquire, and trade RINs. In the discussion below, Section IX.A addresses direct costs associated with implementing Quality

Assurance Plans (QAPs), such as the time required to develop a QAP and the associated recordkeeping and reporting, site visits to renewable fuel production facilities, costs for accounting services, etc. Section IX.B addresses potential costs associated with RIN replacement mechanisms that would be required under Option A.

A. Direct Costs for Implementing QAPs Currently , there are approximately 485 biofuel producers operating more than 600 biofuel production facilities. These numbers are expected to increase as the biofuel market expands. While it is unlikely

that all biofuel producers would opt to participate in the quality assurance program, that was the assumption for these cost estimates in order to reflect the maximum potential cost of the program. EPA staff met with seven parties who are already developing RIN validation programs for the biofuels indu stry . We also met with several industry groups and obligated parties which have been affected b y R IN fraud. These parties all provided informal estimates of the costs*** E.O. 12866 Review
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Page 93 of 139 associated with this ty

pe of quality

assurance program which was used to inform our cos t calculations. For those biofuel producers who opt into the quality assurance program, each biofuel production facilit y must be visited and assessed as part of an y audit conducted under the proposed quality

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

Time Prof./Tech.

Time Clerical

Time No.

Per yr . Capital

$ Total Hours Total

$ Site Visit 1 16 4 2 42 3,588 Reporting 2 12 4 3 54 4,560 Recordkeeping 0 0 2 3 6 222 TOTAL 102 8,370 Table IX.A
- 2 Costs to the QAP Auditor for Implementing a QAP Category Manager

Time Prof./Tech.

Time Clerical

Time No.

Per y r. Capital $ Total Hours Total

$ Auditor: Contract Init. 4 4 2 1 530 10 1,428 Site Visit 4 16 0 1 1,060 20 3,036 Follow
- up 2 28 5 3 1,060 105 12,459 Monitoring 2 50 0 52 5,020 Consultants 4 1,000 4,000 Reporting 0 4 12 16 1,656 QAP Prep 2 16 4 22 3,808*** E.O. 12866 Review
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Page 94 of 139 EMTS 0 25 0 25 2,400 Recordkeeping 0 12 25 37 2,077 TOTAL 250 38,839 Table IX.A
- 3 Costs to the EPA for Implementing a QAP Category Manager

Time Prof./Tech.

Time Clerical

Time Capital

$ Total

Hours Total

$ Implementation 3 3 267 EMTS Data Management 1 1 89 TOTAL 4 356 1. Time and Cost Assumptions The specific times estimated for each task are shown in Tables IX.A
- 1, IX.A
- 2, and IX .A
- 3. These estimates are based on a number of basic assumptions. An initial site visit of the facility to be audited is assumed to require two day s, and include estimat ed travel and per diem costs. For simplicity , we have estimated an average $600 for airfare, $150 for lodging, and $80 for the per diem expenses. It is assumed that a plant manager would meet briefl y with the auditor, and that a plant chemist or other professional would escort the auditor throughout the visit. Some clerical support would be required to locate files for the related document reviews. It was assumed that an auditor would travel and spend half a day on contract initiation. Any follow up site visits were assumed to be shorter in duration, as the auditor would now be familiar with the facility

and its normal operation. A substantial amount of the auditor’s time would be spent in follow up documentation of the facility , such as checking fe edstock suppliers, process fuel suppliers, doing volume and mass balances, and monitoring the ongoing operation of the facility . It was assumed that an auditor would employ specialized consultants and/or local agents to perform some portion of the audit s upport. In addition to tracking facility operation, an auditor would also be responsible for preparing the QAP, maintaining recordkeeping, monitoring and/or brokering activities on EMTS, and assisting with RFS reporting requirements. 2. Labor Cost A ssumptions The labor costs used in this cost estimation are average mean wages for each labor category , as provided in the Bureau of Labor and Statistics Report dated May 2011. Based on this data, we used the following hourl y wages for each emplo ye e ty p e: Managerial $55.04 per hour Technical/Professional $47.81 per hour Clerical $18.35 per hour*** E.O. 12866 Review
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Page 95 of 139 Doubling to account for compan y overhead and benefits, and for convenience, rounding up to the dollar, gives the following hourl y rates:

Manageria l $110 per hour Technical/Professional $96 per hour Clerical $37 per hour For the Agency

costs, the work was assumed to be performed b y a GS
- 13 technical employee, doubled and rounded up, for an hourl y rate of $89. 3. Cost Estimate Results We made our total cost estimate based on the number of registered biofuel producers in the CDX as of July

2011, assuming that all parties choose to participate in the voluntary quality assurance program. This assumes 485 RIN generators with 600 biofuel production facilities. This results in a total cost for the program of $27,576,450. If all parties are participating in the program and all RI

Ns are verified, this results in a per RIN cost of less that $0.01. However, these costs are assumed to be linear and there are no economies of scale. Therefore, the per RIN cost will vary

depending on the number of RINs generated by each fuel producer. The following section includes a number of scenarios based on the size of the plant, and the QAP options that can be chosen.
B. Costs for RIN Replacement Mechanisms For reasons described previously , some QAP providers may choose a replacement mechanism to insure against invalid RINs. Such mechanisms would be required under Option A, but would not be required und er Option B. There is large uncertainty in estimating the costs of these mechanisms because it is an entirel y new market. Informal discussions with potential QAP auditors, as well as other parties involved in similar markets or financial surety mechanism s in general, have suggested a broad range of potential costs. For these reasons the costs for such a mechanism were not included in the anal ys is above, and EPA welcomes comments on the cost impacts of an y potential financial suret y mechanisms. In orde r to full y inform cost impacts of the various QAP options, we discuss the relevant cost factors of the three possible ty pes of mechanisms discussed in Section IV above. The discussion includes RI

N banks, RIN escrow accounts, and other traditional financia l instruments. As noted previousl y, these mechanisms are not intended to be inclusive of all possible ways a RI N replacement mechanism could work, and are merel y suggestions of potential pathway s Option A auditors might follow. A RI N bank is a managed repository of valid audited RI

Ns which are available to all members of the bank for replacement purposes. The costs associated with a RIN bank are*** E.O. 12866 Review
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Page 96 of 139 directly proportional to the value of the RINs banked, and the number of banked RINs required to meet the obli gations of the bank members. There would also be bank management costs, which would be impacted by the number of bank members, and how the bank is managed in terms of RIN deposit, withdrawal, update, and replacement. In addition, bank managers would need to come up with a sy stem to maintain current year RINs in the bank, which may involve additional costs for the sale of expiring RINs and any differential in the value of the RIN at the time of deposit and the time of sale or release. These costs would be born by the members of the bank, but would likely

be passed on to RIN purchasers to the maximum extent possible. These parameters will vary

so much from bank to bank that it is impossible to estimate an average per RI N cost across the entire program. Ho wever, it is reasonable to assume that the cost would be effectivel y the per RIN value of banked RINs plus some fractional percentage to cover management costs. A RI N escrow account would work very much like a RIN bank, but would be funded by a single au ditor instead of a group of auditors, and would be supervised and managed by a third
party escrow agent. The advantage of this option is that an auditor would have total control over the funding of the escrow. However, an auditor using an escrow account would be solely responsible for the funding of the account, and so would be required to maintain a balance equal to a much larger percentage of its potential replacement responsibility than it might be if using a RI N bank. The cost of a RI N escrow account is entirely dependent upon the number and value of the RINs covered b y the escrow. Traditional financial instruments, such as surety bonds, letters of credit, or expanded insurance coverage, are also options under Option A. The costs for this t yp e of coverage is dependent on the level of risk determined b y the surety provider, as well as the value of the RINs to be covered. This ty

pe of financial instrument would most likely provide a maximum dollar amount of coverage, which would translate into a pe r RIN cost depending on the number of RI Ns covered, relative to the number of RINs audited by the the QAP provider purchasing the financial protection. EPA has learned that the cost of these policies vary greatl y among the parties looking into these optio ns. For this reason, this ty pe of financial protection was not included in the cost anal ysis outlined above.*** E.O. 12866 Review
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Page 97 of 139 **X. Public Participation**  We request comment b y [ **Insert date 30 days after publication in the Federal Register**  ] on all aspects of this proposal. This section describes how you can participate in this process.
A. How do I submit comments? We are opening a formal comment period b y publishing this document. We will accept comments through [ **insert date 30 days after date of public ation in the Federal Register**  ]. If yo u have an interest in the program described in this document, we encourage you to comment on any aspect of this rulemaking. We request comment on various topics throughout this proposal. Your comments will be most useful if you include appropriate and detailed supporting rationale, data, and analysis. I f you disagree with parts of the proposed program, we encourage yo u to suggest and anal yze alternate approaches to meeting the goals described in this proposal. You should send all comments, except those containing proprietary information, to our Air Docket (see ADDRESSES) before the end of the comment period. If you submit proprietary information for our consideration, you should clearly separate it from other comme nts by labeling it ‘‘Confidential Business Information (CBI).’’ You should send CBI directly to the contact person listed under FOR FURTHER INFORMATION CONTACT instead of the public docket. This will help ensure that no one inadvertently places proprietary

information in the docket. If you want us to use your confidential information as part of the basis for the final rule, yo u should send a non
- confidential version of the document summarizing the key data or information. We will disclose information co vered by a claim of confidentiality only through the application of procedures described in 40 CFR Part 2. I f you do not identify information as confidential when we receive it, we may make it available to the public without notifying you.
B. Will there be a public hearing? We will hold the hearing on XXXdateXXX at XXXlocationXXX. It will start at 9:00 a.m. and continue until everyone has had a chance to speak. If you would like to present testimony at the public hearing, we ask that you notify the contact person listed above under FOR FURTHER INFORMATION CONTACT at least ten days before the hearing. You should estimate the time you will need for your presentation and identify any needed audio/visual equipment. We suggest that you bring copies of yo ur statement or other material for the EPA panel and the audience. It would also be helpful if you send us a copy of yo ur statement or other materials before the hearing. We will make a tentative schedule for the order of testimony based on the notificat ions we receive. This schedule will be available on the morning of the hearing. In addition, we will reserve a block of time for anyone else in the audience who wants to give testimony . We will conduct the hearing informally , and technical rules of evid ence won’t appl y.*** E.O. 12866 Review
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Page 98 of 139 We will arrange for a written transcript of the hearing and keep the official record of the hearing open for 30 day s to allow you to submit supplementary information. You may

make arrangements for copies of the transcript directl y with the court reporter.*** E.O. 12866 Review
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Page 99 of 139 **XI. Statutory and Executive Order Review**  A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is a "significant regulatory

action” because it raises novel legal and policy issues. Accordingl y EPA submitted this action to the Office of Management and Budget (OMB) for review und er Executive Orders 12866 and 13563 and an y changes made in response to OMB recommendations have been documented in the docket for this action. This action is being proposed today as a result of several cases of fraudulently generated RI Ns. As discuss ed above, several biodiesel production companies have been identified as having generated RINs that did not represent qualifying renewable fuel. While these invalid RI Ns represented a very

small amount (about 5%) of the nationwide biodiesel volume in the 2009
- 2011 timeframe, the net result is that this fraud has impacted the liquidity of the biodiesel RI N market as some biodiesel RI Ns are perceived as having less value than others. In addition, as a result of fraudulent activities, obligated parties have been subject to monetary penalties and the additional cost of purchasing new RINs to cover the invalid RINs, even though they purchased the original RINs in good faith believing that they were valid. These issues have raised novel legal and policy issu es for the RFS program and EPA believes it is necessary put in place an additional regulatory mechanism that could provide an alternative way to assure that RI Ns used for compliance are valid to restore confidence in the RIN market and level the playing fi eld for large and small producers.
B. Paperwork Reduction Act The information collection requirements in this proposed rule have been submitted for approval to the Office of Management and Budget (OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. The Information Collection Request (ICR) document prepared b y EPA has been assigned EPA ICR number 2473.01. The RFS program requires that specified volumes of renewable fuel be used as transportation fuel, heating oil, and/or jet fuel each year. Obligated parties demonstrate compliance with the RFS standards through the acquisition of unique Renewable Identification Numbers (RINs) assigned by the producer or importer to every batch of renewable fuel produced or imported. Validly

generated RINs show that a certain volume of qualifying renewable fuel was produced or imported. The RFS program also includes provisions stipulating the conditions under which RINs are invalid, the liability carried by

a part y that transfers or uses an invalid RI N, and how invalid RINs must be treated. In this action we are proposing a voluntary quality assurance program intended to provide a more structured way

to assure that the RINs entering commerce are valid. The voluntary*** E.O. 12866 Review
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Page 100 of 139 quality assurance program for RINs woul d provide a means for regulated parties to ensure that RI Ns are properl y generated, through audits of production facilities conducted by independent third parties using quality assurance plans (QAPs). The annual public reporting and recordkeeping burde n for this collection is estimated to be 320 hours per response. A document entitled “Supporting Statement for Renewable Fuels Standard (RFS2) Voluntary RIN Qualit y Assurance Program (Proposed Rule)” has been placed in the public docket. The supporting s tatement provides a detailed explanation of the Agency ’s estimates by

collection activity . The estimates contained the supported statement are briefl y summarized here: TOTAL NO. OF RESPONDENTS: 485 TOTAL BURDEN HOURS: 192,270 TOTAL COST TO RESPONDENTS: $ 4,062,000 Burden is defined at 5 CFR 1320.3(b). An agency

may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The OMB control numbers fo r EPA's regulations in 40 CFR are listed in 40 CFR Part 9. To comment on the Agency 's need for this information, the accuracy of the provided burden estimates, and any suggested methods for minimizing respondent burden, EPA has established a public doc ket for this rule, which includes this I CR, under Docket ID number EPA
HQ
- OAR
- 2012
- 0621. Submit any comments related to the I CR to EPA and OMB. See ADDRESSES section at the beginning of this notice for where to submit comments to EPA. Send comments to O MB at the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street, NW, Washington, DC 20503, Attention: Desk Office for EPA. Since OMB is required to make a decision concerning the IC R between 30 and 60 day s after [ **I nsert date of publication in the Federal Register.**  ], a comment to OMB is best assured of having its full effect if OMB receives it b y [ **Insert date 30 days after publication in the Federal Register.**  ]. The final rule will respond to any OMB or public comments on the information collection requirements contained in this proposal.
C. Regulatory Flexibility Act The Regulatory

Flexibility

Act generally

requires an agency

to prepare a regulatory flexibility anal ys is of an y rule subject to notice and comment rulemaking requirements under the Administrative Procedure Act or an y other statute unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, s mall organizations, and small governmental jurisdictions. For purposes of assessing the impacts of this rule on small entities, small entity is defined as: (1) A small business as defined by the Small Business Administration’s (SBA) regulations at 13 CFR 1 21.201 (see table below); (2) a small governmental jurisdiction that is a government of a*** E.O. 12866 Review
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Page 101 of 139 city , count y, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not - for
- profit enterprise whic h is independently owned and operated and is not dominant in its field. The following table provides an overview of the primary SBA small business categories potentially affected by this regulation: Industry Defined as small entity by SBA if: NAI CS a c odes Petroleum refineries ≤1,500 employees. 324110

a North American Industrial Classification Sy stem. The program proposed in today ’s action is a voluntary quality assurance program intended to provide a more structured way to assure that RINs entering commerce are valid. As a result of the recent fraud issue, obligated parties are reluctant to purchase RI Ns from smaller refiners because of the uncertainty of their validity. While this voluntary program could be beneficial for both larger and small er refineries it could be particularl y beneficial for smaller petroleum refineries if they choose to participate. In the current climate, these smaller producers have been forced to offer their RINs at a significant discount relative to RINs from larger p roducers, assuming they can find obligated parties or distributors willing to purchase them at all. While there will be some cost to opt into the program, we believe these costs will be offset by leveling the playing field between larger producers and sma ll producers, allowing small producers to effectivel y compete in the market. After considering the economic impacts of this action on small entities, I certify that this action will not have a significant economic impact on a substantial number of smal l entities. This action will not impose any requirements on small entities. We continue to be interested in the potential impac t s of the proposed rule on small entities and welcome comments on issues related to such impacts.
D. Unfunded Mandates Reform Act This rule does not contain a Federal mandate that may result in expenditures of $100 million or more for State, local, and tribal governments, in the aggregate, or the private sector in any one year. The agency

has determined that this action does no t contain a Federal mandate that may result in expenditures of $100 million or more for the private sector in any one year. Because the program outlined in this proposal is optional, entities subject to this rule will have the flexibility

to participate o r not. Thus, this action is not subject to the requirements of sections 202 or 205 of the UMRA. This action is also not subject to the requirements of section 203 of the UMRA because it contains no regulatory requirements that might significantly or uniquel y affect small governments.*** E.O. 12866 Review
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Page 102 of 139 E. Executive Order 13132 (Federalism) Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timel y i nput by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132. These rules will apply to manufacturers of on
- highway engines and not to state or local governments. Thus, Executive Order 13132 does not apply to this action. In the spirit of Executive Order 13132, and consistent with EPA policy to promote communications between EPA and State and local governments, EPA specifically soli cits comments on this proposed rule from State and local officials.
F. Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments) This action does not have tribal implications, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This rule will be implemented at the Federal level and impose compliance costs onl y on engine manufacturers who elect to participate in the program. Thus, Executive Order 13175 does not apply to this rule. EPA specificall y solicits additional comment on this pro pose d action from tribal officials. G. Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks EPA interprets Executive Order 13045 as appl yi ng only to those regulatory actions that are based on health or safety risks, such that the analy sis required under section 5
- 501 of the Order has the potential to influence the regulation. This rule is not subject to Executive Order 13045 because it does not est ablish an environmental standard intended to mitigate health or safet y risks.*** E.O. 12866 Review
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Page 103 of 139 H. Executive Order 13211 (Energy Effects) This action is not a “significant energy action” as defined in Executive Order 13211 (66 FR 28355 (May

22, 2001)), because it is not likely to have a significant adverse effect on the supply , distribution, or use of energy . We have concluded that any energy impacts of this rule will be negligible because the voluntary QAP audit process would ensure that the volume consumption goals of the statute are met while addressing the unique features of the RFS program that have resulted in inefficiencies and poor liquidity in the RIN market.
I. National Technology Transfer Advancement Act Section 12(d) of the National Technology Transfer an d Advancement Act of 1995 (“NTTAA”), Public Law No. 104
- 113, 12(d) (15 U.S.C. 272 note) directs the agencies to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractica l. Voluntary consensus standards are technical standards (e.g., materials, specifications, test methods, sampling procedures, and business practices) that are developed or adopted b y voluntary consensus standards bodies. NTTAA directs EPA to provide Congr ess, through OMB, explanations when the EPA decides not to use available and applicable voluntary consensus standards. This proposed r

ule making does not involve technical standards. Therefore, EPA is not considering the use of any voluntary

consensus standards.
J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low
-Income Populations Executive Order 12898 (59 FR 7629, February 16, 1994) establishes federal executive policy on environmental justice. It s main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or e nvironmental effects of their programs, policies, and activities on minority populations and low
income populations in the United States. Today ’s action proposes a voluntary set of regulatory

provisions that could provide regulated parties with a speci fic mechanism for demonstrating that they have conducted due diligence to verify

the validity

of RINs. Therefore, EPA has determined that this action will not have disproportionatel y high and adverse human health or environmental effects on minority or lo w - income populations.*** E.O. 12866 Review
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Page 104 of 139 **XII. Statutory Authority**  Statutory authorit y for the rule finalized today can be found in section 211 of the Clean Air Act, 42 U.S.C. 7545. Additional support for the procedural and compliance related aspects of today ’s rule, including the recordkeeping requirements, come from Sections 114, 208, and 301(a) of the Clean Air Act, 42 U.S.C. 7414, 7542, and 7601(a). **List of Subjects in 40 CFR Part 80** Administrative practice and procedure, Air pollution control, Diesel fuel, Environmental protection, Fuel additives, Gasoline, Imports, Oil imports, Petroleum. Dated:

_______________________

**______________________________ Lisa P. Jackson,**  Administrator.*** E.O. 12866 Review
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Page 105 of 139 For the reasons set forth in the preamble, 40 CFR part 80 is amended as follows: **PART 80**
**— REGULATION OF FUELS AND FUEL ADDITIVES**  1. The authorit y citation for part 80 continues to read as follows: **Authority:** 42 U.S.C. 7414, 7542, 7545, and 7601(a). **Subpa rt M** 
**— [Amended]**  2. Section 80.1401 is amended b y adding the definitions of "A
- RI N", "B
- RI

N", "Independent Third
- Part y Auditor", "Quality assurance plan", "Quality assurance audit", and "Verified RIN" to read as follows: **§80.1401 Definitions.**  * * * * * A
- RI N means a RIN verified by a registered independent third
- part y auditor using a QAP that has been approved under §80.1469(a) following the audit process described in §80.1472. B - RI N means a RIN verified by a registered independent third
- part y auditor using a QAP that has been approved under §80.1469(b) following the audit process described in §80.1472. Independent Third
- Part y Auditor means a party meeting the requirements of §80.1471(b) that conducts QAP audits and verifies RINs. Quality Assurance Plan , or QAP, means the list of elements that an independent third
- part y auditor will check to verify that the RINs generated by a renewable fuel producer or importer are valid. Quality Assurance Audit means an audit of a renewable fue l production facility conducted by

an independent third
- party

auditor in accordance with a QAP that meets the requirements of §80.1469. Verified RIN means a RIN generated by a renewable fuel producer that was subject to a QAP audit executed by

an independ ent third
- part y auditor, and determined b y the independent third
party auditor to be valid. Verified RINs include both A
- RI Ns and B
- RI

Ns. * * * * **** E.O. 12866 Review
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Page 106 of 139 3. Section 80.1426 is amended as follows: a. By revising paragraph (a)(1)(i) b. adding paragraphs (a)(1)(iii) and (a)(1)(iv). c. By revising paragraphs (c)(1) and (c)(6). d. By revising paragraphs (f)(4)(i)(A)(1) and (f)(4)(i)(B). e. By adding paragraph (f)(4)(iii). e. By revising paragraph (f)(12). f. By adding paragraph (f)(13). **§ 80.1426 How are RINs generated and assigned to batches of renewable fuel by renewable fuel producers or importers?**  (a) * * * (1) * * * (i) Qualifies for a D code pursuant to § 80.1426(f), or EPA has appr oved a petition for use of a D code pursuant to § 80.1416, and is demonstrated pursuant to the reporting requirements of § 80.1451 and the recordkeeping requirements of § 80.1454, or other records maintained b y the producer, to be produced in accordance wi th the applicable pathway listed in Table 1 to § 80.1426(f) or a petition approved b y EPA pursuant to § 80.1416. * * * (ii) I s designated on a product transfer document (PTD) for use as transportation fuel, heating oil, or jet fuel in accordance w ith §80.1453(a)(12); and (iv) For renewable electricity , biogas, renewable naptha, biobutanol, or any other renewable fuel designated by EPA that are t ypically not used as a transportation fuel , is distributed and sold in accordance with §80.1426(f)(10), §80.1426(f)(11), or §80.1426(f)(12), as appropriate. * * * * * (c) * * * (1) Fuel producers and importers may not generate RI

Ns for fuel that does not satisfy the requirements of subsection (a)(1) of this section. * * * * * (6) A party

is prohibited from generating RINs for a volume of fuel that it produces if the fuel has been produced by a process that uses a renewable fuel as a feedstock, and the renewable fuel that is used as a feedstock was produced b y another part y, except that*** E.O. 12866 Review
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Page 107 of 139 RI Ns may be generated for such fuel if allowed by EPA in response to a petition submitted pursuant to §80.1416 and the petition approval specifies a mechanism to prevent double counting of RINs
. * * * * * (f) * * *
(4) * * * (i) * * * (A) * * * ( 1 ) V RI

N shall be calculated according to the following formula:

V RI N = EV * V s * FE R / (FE R + FENR) Where: V RI N = RI N volume, in gallons, for use in determining the number of gallon
- RI Ns that shall be generated for the batch. EV = Equivalence value for the batch of renewable fuel per §80.1415, subject to qualification in paragraph (f)(4)(iii) of this section. V s = Standardized volume of the batch of renewable fuel at 60 o F, in gallons, calculated in acc ordance with paragraph (f)(8) of this section. FE R = Feedstock energy from renewable biomass used to make the transportation fuel, in Btu. FENR = Feedstock energy from non
- renewable feedstocks used to make the transportation fuel, heating oil, or jet fuel, in Btu. * * * * *

(B) Method B
. V RI N shall be calculated according to the following formula: V RI N = EV * V s * R Where: V RI N = RI N volume, in gallons, for use in determining the number of gallon
- RI Ns that shall be generated for the batch. EV = Equivalence value for the batch of renewable fuel per §80.1415, subject to qualification in paragraph (f)(4)(iii) of this section. V s = Standardized volume of the batch of renewable fuel at 60 o F, in gallons, calculated in accordance with paragra ph (f)(8) of this section.*** E.O. 12866 Review
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Page 108 of 139 R = The renewable fraction of the fuel as measured b y a carbon
- 14 dating test method as provided in paragraph (f)(9) of this section.

* * * * (iii) In determining the RIN volume V RI N according to paragraph (f)(4)(i)(A) or (f)(4)(i)(B) of this section, the equivalence value used to determine V RI N which is calculated according to §80.1415 shall use a value of 1.0 to represent R, the renewable content of the renewable fuel.
* * * * (12)(i) For purposes of this section, ren ewable naptha, biobutanol, or an y other renewable fuel designated b y EPA that is ty picall y not used as a transportation fuel, is considered renewable fuel and the producer may generate RINs if all of the following apply : (A) The fuel is produced from rene wable biomass and qualifies for a D code in Table 1 to this section or has received approval for use of a D code by the Administrator; (B) The fuel producer has entered into a written contract for the sale and use of a specific quantit y of fuel derived fro m renewable biomass sources with a party that uses that fuel for transportation purposes; (C) The fuel produced from the renewable naptha, biobutanol, or other designated renewable fuel for which RI Ns were generated was sold for use as a transportation fue l and for no other purposes; and (D) The renewable naptha, biobutanol, or other designated renewable fuel is used as or in a transportation fuel. (ii) Reserved. (iii) Reserved. (13) For purposes of Table 1 to this section, process heat produced from comb ustion of gas at a renewable fuel facility

is considered derived from biomass if the gas is biogas. (i) For biogas directl y transported to the facilit y without being placed in a commercial distribution sy stem, all of the following conditions must be met: (A) The producer has entered into a written contract for the procurement of a specific volume of biogas with a specific heat content. (B) The volume of biogas was sold to the renewable fuel production facility, and to no other facility
. (C) The volume and heat content of biogas injected into the pipeline and the volume of gas used as process heat are measured b y continuous metering.*** E.O. 12866 Review
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Page 109 of 139 (ii) For biogas that has been gathered, processed and injected into a common carrier pipeline, all of the following conditio ns must be met: (A) The producer has entered into a written contract for the procurement of a specific volume of biogas with a specific heat content. (B) The volume of biogas was sold to the renewable fuel production facility, and to no other facility
. (C ) The volume of biogas that is withdrawn from the pipeline is withdrawn in a manner and at a time consistent with the transport of fuel between the injection and withdrawal points. (D) The volume and heat content of biogas injected into the pipeline and th e volume of gas used as process heat are measured b y continuous metering. (E) The common carrier pipeline into which the biogas is placed ultimately serves the producer's renewable fuel facility
. (iii) The process heat produced from combustion of gas at a renewable fuel facility described in paragraph (f)(12)(i) of this section shall not be considered derived from biomass if any

other party

relied upon the contracted volume of biogas for the creation of RINs.

4. Section 80.1429 is amended b y adding paragraph (b)(10) and revising paragraph (f) to read as follows: **§ 80.1429 Requirements for separating RINs from volumes of renewable fuel.** * * * * * (b) * * * (10) An y party that produces a volume of renewable fuel may separate an y RI Ns that have been generated to represent that volume of renewable fuel or that blend if the separated RINs are retired to replace invalid RI Ns according to §80.1474. * * * * * (f) [Reserved] * * * * * 5. Section 80.1430 is amended b y .... to read as follows:*** E.O. 12866 Review
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Page 110 of 139 **§ 80.1430 Requirements for exporters of renewable fuel.** (a) Any part y that owns an y amount of renewable fuel, whether in its neat form or blended, that is exported from any

of the regions described in §80.1426(b) shall acquire sufficient RINs to comply with all applicable Renewable Volume Obligations under paragraphs (b) through (e) of this section representing the exported renewable fuel. (b) Exporter Renewable Volume Obligation s. An exporter of renewable fuel shall determine its Exporter Renewable Volume Obligations from the volumes of the renewable fuel exported. (1) Cellulosic biofuel. ERVO CB,k = VOLk * EVk Where: ERVO CB,k= The Exporter Renewable Volume Obligation for cel lulosic biofuel for

discrete volume k in gallons. k = A discrete volume of renewable fuel that the exporter knows or has reason

to know is cellulosic biofuel that is exported in a single shipment. VOLk= The standardized volume of discrete volume k, in gallons, calculated in

accordance with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k. (2) Biomass
- based diesel. ERVO BBD,k = VOLk * EV k Where: ERVO BBDI ,k= The Exporter Renewable Volume Obligation for biomass
- based diesel f or discrete volume k, in gallons. k = A discrete volume of renewable fuel that is biodiesel or renewable diesel

and is exported in a single shipment. VOLk= The standardized volume of discrete volume k calculated in accordance

with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k. (3) Advanced biofuel. ERVO AB,k= VOLk * EVk Where: ERVO AB,k= The Exporter Renewable Volume Obligation for advanced biofuel for

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Page 111 of 139 k = A discrete volume of renewable fuel that is advanced biofuel (including

biomass
- based diesel, renewable diesel, cellulosic biofuel and other advanced biofuel) and is exported in a single shipment. VOLk= The standardized volume of discrete volume k, in gallons, calculated in

accordance with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k. (4) Renewable fuel. ERVO RF,i = VOLk * EVk Where: ERVO RF,i = The Renewable Volume Obligation for renewable fuel for discrete volume

k, in gallons. k = A discrete volume of exported renewable fuel that is exported in a single

shipment. VOLk= The standardized volume of discrete volume k, in gallons, calculated in

accordance with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k.
* * * * * (e) For renewable fuels that are in the form of a blend at the time of export, the exporter shall determine the volume of exported renewable fuel based on one of the following:
* * * * * 6. Section 80. 1431 is amended b y revising paragraph (a)(1)(viii) and paragraph (b) to read as follows: **§ 80.1431 Treatment of invalid RINs.** (a) * * * (1) * * * ( viii) [Reserved]
* * * * (b) Except as provided in § 80.1473, the following provisions apply in the case of RINs that are invalid:*** E.O. 12866 Review
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Page 112 of 139 (1) Upon determination by an y part y that RINs owned are invalid, the part y must keep copies and adjust its records, reports, and compliance calculations in which the invalid RI Ns were used. The part y must retire the invalid RINs in the applicable RIN transaction reports under § 80.1451(c)(2) for the quarter in which the RINs were determined to be invalid. (2) Invalid RINs cannot be used to achieve compliance with the Renewable Volume Obligations of an obligated part y or exporter, regardless of the party's good faith belief that the RI Ns were valid at the time they were acquired. (3) An y valid RINs remaining after invalid RINs are retired must first be applied to correct the transfer of invalid RI Ns to another party

before appl yi ng the valid RI Ns to meet the party's Renewable Volume Obligations at the end of the compliance ye ar.
7. Section 80.1433 is added to read as follows: **§80.1433 Requirements for parties that designate or use fuel**  **for which RINs were generated for an application that is not transportation fuel, heating oil, or jet fuel.**  (a) Any part y that designates or uses an y amount of fuel originall y produced as renewable fuel, whether in its neat form or blended, for an application that is not transportation fuel, heating oil, or jet fuel shall retire an appropriate number and ty pe of RINs according to one of the following equations and as specified in paragraph (b). (1) Except as provided as (a)(5), Cellulosic biofuel. RI NRET CB, i = Σ(VOLk * EVk) i Where: RI NRET CB,i = The quantity of cellulosic biofuel RINs that must be retired for day i, in gallons. k = A discrete volume of fuel which the part y used in an application other than

as transportation fuel, heating oil or jet fuel and which the party knows or has reason to know would have qualified as cellulosic biofuel if not put to a non - qualifying use. VOLk= The standardized volume of discrete volume k, in gallons, calculated in

accordance with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k. (2) Except as provided as (a)(5), Biomass
- based diesel. RI NRET BBD,i = Σ(VOLk * EVk) i Where:*** E.O. 12866 Review
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Page 113 of 139 RI NRET BBD,i = The quantity of biomass
- based diesel RINs that must be retired for day i, in gallons. k = A discrete volume of fuel which the part y used in an application other than

as transportation fuel, heating oil or jet fuel and which the party knows or has reason to know would have qualified as biomass
- based diesel if not put to a non - qualifying use. VOLk= The standardized volume of discrete volume k, in gallons, calculated in

accordance with §80.1426(f)(8). EVk= The equivalence value asso ciated with discrete volume k. (3) Advanced biofuel. RI NRET AB,i = Σ(VOL k * EVk) i Where: RI NRET AB,i = The quantity of advanced biofuel RINs that must be retired for day i, in gallons. k = A discrete volume of fuel which the part y used in an application other than

as transportation fuel, heating oil or jet fuel and which the party knows or has reason to know would have qualified as advanced biofuel if not put to a non - qualifying use.. VOLk= The standardized volume of discrete volume k, in gallons, calcu lated in

accordance with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k. (4) Renewable fuel. RI NRET RF ,i = Σ(VOL k * EVk) i Where: RI NRET RF ,i = The quantity of renewable fuel RINs that must be retired for day i, in gallons. k = A discrete volume of fuel which the part y used in an application other than

as transportation fuel, heating oil or jet fuel and which the party knows or has reason to know would have qualified as renewable fuel if not put to a non - qualifying use. VOLk= The standardized volume of discrete volume k,, in gallons, calculated in

accordance with §80.1426(f)(8). EVk= The equivalence value associated with discrete volume k. (5) If the part y has reason to know that the fuel would have qualified as cellulosic die sel if not put to a non - qualifying use, he must choose either the formula specified in paragraph*** E.O. 12866 Review
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Page 114 of 139 (a)(1) or that in paragraph (a)(2) to calculate the number and type of RINs that must be retired. (b) For the purposes of calculating the number of RINs that must be retired under paragraphs (a) of this section: (1) If the equivalence value for the discrete volume k can be determined pursuant to §80.1415 based on its composition, then the appropriate equivalence value shall be used in the calculation pursuant to paragraph (a). (2) If the discrete volume k is known to be biomass
- based diesel but the composition is unknown, the EVk shall be 1.5. (3) If neither the category nor composition of discrete volume k can be determined, the EVk shall be 1.0. (c) VOLk shall be based on one of the following: (1) In formation from the supplier of the blend of the concentration of fuel originally produced as renewable fuel in the blend; (2) Determination of the renewable portion of the blend using Method B or Method C of ASTM D 6866 (incorporated b y reference, see §80.1468), or an alternative test method as approved b y the EPA; or (3) Assuming the maximum concentration of the renewable fuel in the blend as allowed by law and/or regulation. (d) [Reserved] (e) All RI Ns r etired pursuant to this section shall be identified in EMTS according the following schedule: (1) Within ten (10) business day s of the designation or use of a fuel for which RI Ns were generated for a use other than as transportation fuel, heating oil, or jet fuel, where assigned RINs were received with the fuel. (2) Within twenty

(20) business day s of the designation or use of a fuel for which RINs were generated for a use other than as transportation fuel, heating oil, or jet fuel, where assigned RINs wer e not received with the renewable fuel. (f) Any volume of fuel which is designated or used for a purpose other than as transportation fuel, heating oil or jet fuel cannot be redesignated or used as renewable fuel. 8. Section 80.1450 is amended by revising paragraph (g) and adding paragraph (j) to read as follows: **§ 80.1450 What are the registration requirements under the RFS program?***** E.O. 12866 Review
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Page 115 of 139 * * * * * (g) An y independent third
- part y auditor described in §80.1471 must register with EPA as an independent third
- party

auditor and receive an EPA issued company identification number prior to conducting quality

assurance audits pursuant to §80.1472. Registration information must be submitted at least 30 days prior to conducting audits of renewable fuel production facilities. The independent third
- party

auditor must provide to EPA the following: (1) T he information specified under § 80.76, if such information has not already been provided under the provisions of this part. (2) Documentation of p rofessional qualifications as described in §80.1450(b)(2)(i)(A) and §80.1450(b)(2)(i)(B). (3) Documentation of professional liability insurance as described in §80.1471(c). (4) An y qualit y assurance plans as described in §80.1469. (5) Name, address, and company and facility

identification number of all renewable fuel production facilities that the independent third
- party auditor intends to audit under §80.1472. (6) An affidavit from each renewable fuel producer or foreign renewable fuel producer stating its intent to have the independent third
- party auditor conduct a quality assurance audit of an y of the renewable fuel producer’s or foreign renewable fuel producer’s facilities. (7) An affidavit stating that an independent third
- party auditor is independ ent, as described in paragraphs §80.1471(b), of an y renewable fuel producer or foreign renewable fuel producer. (8) Proof of a RIN replacement instrument, if applicable, as described under §80.1470. (9) The name and contact information for each person employed b y the independent third
party auditor to conduct audits or verify RINs. (10) Registration updates.

— (i) An y independent third
- part y auditor who makes changes to his quality assurance plan(s) that will allow him to audit new renewable fuel production facilities, as defined in § 80.1401 that is not reflected in the producer's registration information on file with EPA must update his registration information and submit a copy of an updated QAP on file with EPA at least 60 day s prior to produci ng the new ty pe of renewable fuel.*** E.O. 12866 Review
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Page 116 of 139 (ii) Any independent third
- part y auditor who makes an y other changes to a QAP that will affect the third
- party

auditor’s registration information but will not affect the renewable fuel category

for which the producer is r egistered per paragraph (b) of this section must update his registration information 7 days prior to the change. (iii) Independent third
- party auditors must update their QAPs at least 60 days prior to verifying RINs generated by a renewable fuel facility

u ses a new pathway
. (iv) Independent third
- party auditors must update their QAPs at least 60 day s prior to verifying RINs generated by an y renewable fuel facility not identified in their existing registration. (11) Registration renewal. Registrations for independent third
- part y auditors expire at the end of the calendar year, December 31, after EPA has approved a registration under this paragraph (g) unless: (i) The independent third
- part y auditor resubmits all information, updated as necessary , describe d in §80.1450(g)(1) thru (g)(7) no later than October 31; and (ii) The independent third
- part y auditor submits an affidavit affirming that he or she has only verified RINs using a QAP approved under §80.1469, notified all appropriate parties of all potenti all y invalid RI Ns as described in §80.1471(d), and fulfilled all of his or her RIN replacement obligations under §80.1474. (12) Revocation of Registration. (i) The Administrator may issue a notice of intent to revoke the registration of a third
party aud itor if the Administrator determines that the auditor has failed to fulfill any requirement of this subpart. The notice of intent shall include an explanation of the reasons for the proposed revocation. (ii) Within 60 day s of receipt of the notice of intent to revoke, the independent third
- part y auditor may

submit written comments concerning the notice, including but not limited to a demonstration of compliance with the requirements which provide the basis for the proposed revocation. Communications should be sent to the following address: XX The Administrator shall review and consider an y such submission before taking final action concerning the proposed revocation. (iii) If the auditor fails to respond in writing within 60 day s to the notice of intent to revoke, the revocation shall become final b y operation of law and the Administrator shall notify the independent third
- part y auditor of such revocation. (iv) EPA may

den y the registration of an independent third
- part y auditor if the independent third
- party auditor employ s an y person that was previousl y employed b y an independent third
- party

auditor whose registration was revoked.*** E.O. 12866 Review
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Page 117 of 139 * * * (j) Registration shall be on forms, and following policies, established by the Administrator. 9. Secti on 80.1451 is amended as follows: a. By revising paragraphs (a)(1)(ix), (a)(1)(x), (a)(1)(xi), (a)(1)(xii), and (a)(1)(xiii). b. By adding paragraphs (a)(1)(xiv), (a)(1)(xv), and (a)(1)(xvi). c. By revising paragraphs (c)(2)(x), (c)(2)(xi), (c)(2)(xii), (c)(2)(xiii), (c)(2)(xiv), (c)(2)(xv), and (c)(2)(xvi). d. By adding paragraphs (c)(2)(xvii) and (c)(2)(xviii). e. By revising paragraph (g). f. By adding paragraph (h). **§ 80.1451 What are the reporting requirements under the RFS program ?**  (a) * * * (1) * * * (ix) The total current
- ye ar RINs by category of renewable fuel, as those fuels are defined in §80.1401 (i.e., cellulosic biofuel, biomass
- based diesel, advanced biofuel, renewable fuel, and cellulosic diesel), reti red for compliance that are invalid as defined in §80.1431(a). (x) The total prior
- year RINs b y renewable fuel category , as those fuels are defined in §80.1401, retired for compliance. (xi) The total prior
- ye ar RI Ns b y renewable fuel category , as those f uels are defined in §80.1401, retired for compliance that are invalid as defined in §80.1431(a). (xii) The total cellulosic biofuel waiver credits used to meet the party's cellulosic biofuel RVO. (xiii) A list of all RI

Ns generated prior to July 1, 2010 that were retired for compliance in the reporting period. (xiv) A list of all RI

Ns that were retired for compliance in the reporting period and are invalid as defined in §80.1431(a). (xv) Any deficit RVO(s) carried into the subsequent year. (xvi) Any additional information that the Administrator may require. * * * * * (c) * * **** E.O. 12866 Review
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Page 118 of 139 (2) * * * (x) The total current
- ye ar RI Ns retired that are invalid as defined in §80.1431(a). (xi) The total prior
- ye ar RI Ns retired. (xii) The total prior
- ye ar RI Ns retired that are invalid as defined in §80.1431(a). (xiii) The number of current
- ye ar RINs owned at the end of the quarter. (xiv) The number of prior
- year RINs owned at the end of the quarter. (xv) The number of RINs generated
. (xvi) The volume of renewable fuel (in gallons) owned at the end of the quarter. (xvii) The total 2009 and 2010 retired RINs reinstated. (xviii) Any

additional information that the Administrator may require. * * * * * (g) All independent third
- part y auditors. An y party that is an independent third
- part y auditor as defined in §80.1471 that verifies RINs must submit to EPA reports according to the schedule, and containing all the information, that is set forth in this paragraph (g). (1)(i) For RINs verified beginning on January 1, 2014, RI

N generation verification reports for each facility

audited by

the independent third
- party auditor shall be submitted according to the schedule specified in paragraph (f)(2) of this section. ( ii) The RIN generation verification reports shall include all the following information for each batch of renewable fuel produced or imported verified, where “batch” means a discrete quantity of renewable fuel produced or imported and assigned a unique bat ch
- RI N per §80.1426(d): (A) The RIN generator's name. (B) The RIN generator's EPA company registration number. (C) The renewable fuel producer EPA facilit y registration number. (D) The importer EPA facility registration number and foreign renewable pro ducer compan y registration number, if applicable. (E) The applicable reporting period.*** E.O. 12866 Review
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Page 119 of 139 (F) The quantity

of RINs generated for each batch according to §80.1426. (G) The production date of each batch. (H) The fuel t ype of each batch. (I) The volume of d enaturant and applicable equivalence value of each batch. (J) The volume of each batch produced. (K) The volume and ty

pe of each feedstock used to produce the batch. (L) Which batches met the definition of Renewable Biomass. (M) The quantit y and t yp e of co
- products produced. (N) An y additional information the Administrator may require. (2) RIN verification activity reports shall be submitted to EPA according to the schedule specified in paragraph (f)(2) of this section. Each report shall summarize RI N verification activities for the reporting period. The quarterl y R INverification activity reports shall include all of the following information: (i) The submitting part y's name. (ii) The submitting part y' s EPA company registration number. (iii) The number of current
- ye ar RINs verified at the start of the quarter. (iv) The number of prior
- ye ar RINs verified at the start of the quarter. (v) The total current
- ye ar RI Ns verified. (vi) The total prior
- ye ar RI Ns verified. (vii) The number of current
- ye ar RINs verified at the end of the quarter. (viii) The number of prior
- year RINs verified at the end of the quarter. (ix) A list of all RI

Ns subject to the audit that were not verified or that were identified as Potentially

Invalid RINs (PIRs) pursuant to 80.1474, along with a narrative description of wh y the RI Ns were not verified or were identified as PIRs. (x) Any additional information that the Administrator may require.*** E.O. 12866 Review
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Page 120 of 139 (3) All reports required under this paragraph (g) must be signed and certified a s meeting all the applicable requirements of this subpart by the independent third
- part y auditor or a responsible corporate officer of the independent third
- part y auditor. (h) All reports required under this section shall be submitted on forms and following procedures prescribed b y the Administrator.
10. Section 80.1452 is amended b y adding paragraph (g) as follows. **§ 80.1451 What are the requirements related to the EPA -**  **Moderated Transaction System (EMTS)?**  * * * * * (g) Alternative method of reporting buy and sell transactions in EMTS . For buyers and sellers of assigned RINs that agree to utilize this alternative reporting method, the reporting requirements of paragraph(c) of this section are modified as follows: (1) The seller of assigned RINs shall do the following: (i) Report the sell transaction in EMTS within five (5) business day s of shipping, and; (ii) Indicate that the alternative reporting method is being utilized; and (iii) Report the date the renewabl e volume is shipped in place of the date of transfer (c)(7) in the EMTS sell transaction report; and (iv) Report a unique identifier and provide a product transfer document (PTD) that meets all requirement of § 80.1453 and that includes the unique identif ier agreed upon by the buyer and seller. (2) The buyer of assigned RINS shall do the following: (i) Report the buy

transaction in EMTS within five (5) business day s of receipt; (ii) Indicate that the alternative reporting method is being utilized; (iii) In clude the unique identifier provided b y the seller under paragraph (g)(1)(iii) in the EMTS buy

transaction report; and (iv) Report the date the renewable volume is received in place of the date of transfer (c)(7) in the EMTS buy

transaction report
. 11. Section 80.1453 is amended as follows: a. Revising paragraph (a) introductory text and paragraph (a)(5); and b. Adding paragraphs (a)(12), and (a)(13).*** E.O. 12866 Review
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Page 121 of 139 **§80.1453 What are the product transfe**  **r document (PTD) requirements for the RFS program?**  (a) On each occasion when an y part y transfers ownership of neat and/or blended renewable fuels or separated RINs subject to this subpart, the transferor must provide to the transferee documents identifyin g the renewable fuel, designated fuel uses, and an y R INs generated for the fuel (whether assigned or separated) which include all of the following information, as applicable:
* * * * (5) Name and blend level of all blending components in a product conta ining renewable fuel, if applicable.
* * * * (12) For the transfer of renewable fuel with or without RI Ns, an accurate and clear statement on the product transfer document of the fuel ty pe from Table 1 to § 80.1426, and designation of the fuel use(s) int ended b y the transferor, as follows: (i ) Ethanol. “This volume of neat or blended ethanol is designated and intended for use as transportation fuel or jet fuel in the 48 U.S. contiguous states and Hawaii. Any use by the end user in another application in the 48 U.S. contiguous states and Hawai i is a violation of 40 C.F.R § 80.1460(g), unless the requirements in § 80.1433 are met.” (ii) Biodiesel. ” This volume of neat or blended biodiesel is designated and intended for use as transportation fuel, heating oil or jet fuel in the 48 U.S. contiguo us states and Hawaii. Heating oil may

only be used to heat interior spaces of homes or buildings. Any use by the end user in another application in the 48 U.S. contiguous states and Hawaii is a violation of 40 C.F.R § 80.1460(g), unless the requirements in § 80.1433 are met.” (iii) Renewable Heating oil. “This volume of heating oil is designated and intended to be used to heat interior spaces of homes or buildings. Any use by the end user in another application the 48 U.S. contiguous states and Hawaii is a violation of 40 C.F.R § 80.1460(g), unless the requirements in § 80.1433 are met.” (iv) Renewable Diesel. “This volume of neat or blended renewable diesel is designated and intended for use as transportation fuel, heating oil or jet fuel in the 48 U.S. contiguous states and Hawaii. Any use by the end user in another application in the 48 U.S. contiguous states and Hawaii is a violation of 40 C.F.R § 80.1460(g), unless the requirements in § 80.1433 are met.” (v) Naphtha. ” This volume of neat or blende d naphtha is designated and intended for use as transportation fuel or jet fuel in the 48 U.S. contiguous states and Hawaii. This naphtha may

onl y be used as a gasoline blendstock or jet fuel. An y use b y the end user in another application in the 48 U.S. contiguous states and Hawaii is a violation of 40 C.F.R §80.1460(g), unless the requirements in § 80.1433 are met.” (vi) Butanol. “This volume of neat or blended butanol is designated and intended for use as transportation fuel or jet fuel in the 48 U.S. contiguous states and Hawaii. This butanol may

onl y be used as a gasoline blendstock or jet fuel. An y use b y the end user*** E.O. 12866 Review
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Page 122 of 139 in another application in the 48 U.S. contiguous states and Hawaii is a violation of 40 C.F.R § 80.1460(g), unless the requirements i n § 80.1433 are met.” (vii) Renewable fuels other than ethanol, biodiesel, heating oil, renewable diesel, naptha or butanol. “This volume of neat or blended renewable fuel is designated and intended to be used as transportation fuel, heating oil, or jet fuel in the 48 U.S. contiguous states and Hawaii. Any use by the end user in another application in the 48 U.S. contiguous states and Hawaii is a violation of 40 C.F.R §80.1460(g), unless the requirements in § 80.1433 are met.” (13) For purposes of veri fication, in order for facilities to meet the renewable process electricit y production requirement for the biogas
- derived cellulosic diesel and cellulosic naphtha pathway s, all conditions below apply
. (i) The quantit y of renewable process electricity prod uced must be measured by continuous metering. (ii) The electricity

must be used to provide power to process units or process equipment at the facilit y. (iii) The electrical energy must derive from raw landfill gas, waste heat from the production process, unconverted s yn gas from the F
- T process, fuel gas from the hydroprocessing or combined heat and power (CHP) units that use non
- fossil fuel based gas or other renewable sources. 12. Section 80.1454 is amended as follows: a. By adding paragraph (b)(7). b. By revising paragraphs (m), (n), (o), and (p). c. By adding paragraph (q). **§ 80.1454 What are the recordkeeping requirements under the RFS program?** * * * * * (b) * * * (7) Records related to the implementation of a QAP under §80.1469. * * * * * (m) Requirements for independent third
- part y auditors. Any independent third
- part y auditor (as described at §80.1471) must keep all of the following records for a period of at least five (5) ye ars: (1) Co pies of all reports submitted to EPA under §80.1451(g), as applicable. (2) Records related to the implementation of a QAP under §80.1469 for each facility including records from facility audits and ongoing and quarterly monitoring activities.*** E.O. 12866 Review
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Page 123 of 139 (3) Record s related to the verification of RINs under §80.1471(e). (4) Copies of communications sent to and received from renewable fuel producers or foreign renewable fuel producers, feedstock suppliers, purchasers of RINs, and obligated parties. (5) Copies of al l notes relating to the implementation of a QAP under §80.1469. (6) L ist of RINs reported to EPA and renewable fuel producers or foreign renewable fuel producers as potentially

invalidly generated under §80.1474 compliance. (7) Records related to the pro fessional liability insurance requirement under §80.1471(c). (8) Copies of all records related to an y financial assurance instrument as required under §80.1470 under a quality assurance plan implemented under §80.1469(a). (9) Such other records as may be requested b y the Administrator. (n) The records required under paragraph (e) of this section shall be kept through calendar year 2022. (o) On request b y EPA, the records required under this section and under §80.1453 must be made available to the Administrator or the Administrator's authorized representative. For records that are electronically

generated or maintained, the equipment or software necessary to read the records shall be made available; or, if requested by EPA, electronic records shall be converted to paper documents. (p) The records required in paragraphs (b)(3) and (c)(1) of this section must be transferred with any renewable fuel sent to the importer of that renewable fuel by an y foreign producer not generating RINs for his renewable fuel. (q) Copies of all reports required under §80.1464. 13. Section 80.1460 is amended as follows: a. By revising paragraphs (c)(2) and (c)(3). b. By adding paragraphs (g), (h), and (i). **§ 80.1460 What acts are prohibited under the RFS program?**  * * * * * (c) * * **** E.O. 12866 Review
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Page 124 of 139 (2) Use a validly

generated RIN to meet the person's RVOs under §80.1427, or separate and transfer a validl y generated RIN, if the person using the validly generated RI

N to meet the person’s RVO used the fuel for a non
- qualifying purpose, but failed to retire an appropriate number of RINs as required b y 80.1433. (3) Use a validly

generated RIN to meet the person's RVOs under §80.1427, or separate and transfer a validl y generated RIN, if the perso n using the validly generated RI

N to meet the person’s RVO, at the time they purchased the RI

N, knew or had reason to know that the fuel associated with the purchased RINs was used for a non
- qualifying purpose and that the part y or parties engaged in that non - qualifyinguse failed to retire an appropriate number of RINs as required by 80.1433. * * * * * (g) Failing to retire RINs when fuel for which RINs have been generated is used or designated for use in an application other than transportation fuel, heating oil or jet fuel. No person shall use or designate for use fuel for which RINs were generated, in an application other than transportation fuel, heating oil, or jet fuel unless the requirements of 80.1433 have been met. (h) RIN Separation Violations . No person shall do any of the following: (1) Separate RINs in EMTS using the wrong separation reason code (2) Separate RINs in EMTS without having a qualifying separation event pursuant to 80.1429 (3) Separate more than 2.5 RI Ns per gallon of renewable fuel that has a valid qualifying separation event pursuant to §80.1429. (4) Separate RINs outside of the requirements in §80.1452(c). (5) [Reserved] (6) Improperl y separate RI Ns in an y other way not listed in paragraphs (i)(1)
- (5) of this section. (i) Independent third
- party auditor violations. No person shall do any of the following: (1) Fail to f

ully and competently

implement a QAP approved under §80.1469. (2) Fail to notify

appropriate parties of potentiall y invalid RI Ns under §80.1474(b). (3) Identify

a RIN as verified in accordance with §80.1471(e) that is invalid under §80.1431. 1 4. Section 80.1461 is amended b y revising paragraphs (a)(1) and (a)(2) as follows. **§ 80.1461 Who is liable for violations under the RFS program?** * * * * **** E.O. 12866 Review
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Pa ge 125 of 139 (a) * * * (1) An y person who violates a prohibition under §80.1460(a) through (d) or §80.1460(g) through (h) is liable for the violation of that prohibition. (2) An y person who causes another person to violate a prohibition under §80.1460(a) through (d) or §80.1460(g) through (h) is liable for a violation of §80.1460(e). 15. Section 80.1469 is added as follows: **§80.1469 Requirements for Quality Assurance Plans**  This section specifies the requirements for two ty pes of Qualit y Assurance Plan (QAP). (a) Option A QAP Requ irements. (1) Feedstock
- related components. (i) Components requiring ongoing monitoring: (A) Feedstocks are renewable biomass as defined in §80.1401. (B) Feedstocks are being separated according to a separation plan, if applicable under §80.1426(f)( 5)(ii). (C) Crop and crop residue feedstocks meet land use restrictions, or alternatively the aggregate compliance provisions of §80.1454(g). (D) If applicable, verify

that feedstocks with additional recordkeeping requirements meet requirements of §80.1454 (d). (E) Feedstocks are valid for the D code being used, and are consistent with information recorded in EMTS. (F) Feedstock is not renewable fuel for which RINs were previousl y generated. (G) Feedstock is consistent with production process and D code bein g used as permitted under Table 1 to Section 80.1426 or a petition approved through section 80.1416. (ii) Components requiring quarterl y monitoring: (A) Separated food waste or separated yard waste plan is accepted and up to date, if applicable under §8 0.1426(f)(5)(ii). (B) Separated municipal solid waste plan is approved and up to date, if applicable under §80.1426(f)(5)(ii).(C) Contracts or agreements for feedstock acquisition are sufficient for facilit y production. (D) Feedstock processing and storage equipment are sufficient and are consistent with engineering review. (E) If applicable, accuracy of feedstock energy (FE) calculation factors related to feedstocks, including average moisture content m and feedstock energy content E.*** E.O. 12866 Review
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Pa ge 126 of 139 (2) Production proc ess - related components. (i) Components requiring ongoing monitoring: (A) Production process is consistent with that reported in EMTS. (B) Production process is consistent with D code being used as permitted under Table 1 to §80.1426 or a petition appro ved through §80.1416. (ii) Components requiring quarterl y monitoring: (A) Mass and energy

balances are appropriate for ty pe and size of facilit y. (B) Workforce size is appropriate for ty pe and size of facility , and sufficient workers are on site for facility

operations. (C) If applicable, process
- related factors used in feedstock energy (FE) calculation are accurate, in particular the converted fraction CF. (3) Renewable fuel
- related components. (i) Components requiring ongoing monitoring: (A) S tandardization of volumes pursuant to §80.1426(f)(8) are accurate. (B) Renewable fuel t ype matches the D code being used. (C) RIN generation matches wet gallons produced. (D) Fuel shipments match production volumes. (E) If applicable, renewable content R i s accurate pursuant to 80.1426(f)(9). (F) Equivalence value EV is accurate and appropriate. (ii) Components requiring quarterl y monitoring: (A) Renewable fuel was intended and sold for qualifying uses as transportation fuel, heating oil, or jet fu el. (B) Certificates of anal ys is verifying fuel t ype and quality, as applicable. (C) Verify

existence of quality

process controls designed to ensure that fuel continues to meet applicable property and quality

specifications. (D) Volume production is consis tent with that reported to EPA and EIA, as well as other federal or state reporting. (E) Volume production is consistent with storage and distribution capacit y. (F) Volume production capacit y matches RFS registration. (4) RI N generation and separation
- related components. (i) Components requiring ongoing monitoring: (A) If applicable, verify

that RI N separation is appropriate under §80.1429. (B) Verify

that appropriate RI

N generation calculations are being followed under §80.1426(f)(3), (4 ), or (5) as applicable.*** E.O. 12866 Review
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Pa ge 127 of 139 (ii) Components requiring quarterl y monitoring: (A) Verify

that annual attestation report is accurate. (B) Verify

that fuel that is exported was not used to generate RINs, or alternatively that were generated but retired. (b) Option B QAP Requirements. (1) Feedstock
- related components requiring quarterly monitoring: (i) Feedstocks are renewable biomass as defined in §80.1401. (ii) Feedstocks are being separated according to a separation plan, if applicable under §80.1426(f)( 5)(ii). (iii) Crop and crop residue feedstocks meet land use restrictions, or alternatively the aggregate compliance provisions of §80.1454(g). (iv) Feedstocks are valid for the D code being used, and are consistent with information recorded in EMTS.(E) Fe edstock is consistent with production process and D code being used as permitted under Table 1 to Section 80.1426 or a petition approved through section 80.1416. (v) Feedstock is not renewable fuel for which RINs were previousl y generated. (vi) Separated food waste or separated yard waste plan is accepted and up to date, if applicable under §80.1426(f)(5)(ii). (vii) Separated municipal solid waste plan is approved and up to date, if applicable under §80.1426(f)(5)(ii). (viii) If applicable, accuracy of feedstock energy

(FE) calculation factors related to feedstocks, including average moisture content m and feedstock energy content E. (2) Production process
- related components requiring quarterl y monitoring: (i) Production process is consist ent with that reported in EMTS. (ii) Production process is consistent with D code being used as permitted under Table 1 to §80.1426 or a petition approved through §80.1416. (iii) Mass and energy

balances are appropriate for ty pe and size of facilit y. (iv) If applicable, process
- related factors used in feedstock energy (FE) calculation are accurate, in particular the converted fraction CF. (3) Renewable fuel
- related components requiring quarterl y monitoring: (i) Renewable fuel t ype matches the D code bei ng used. (ii) RI N generation matches wet gallons produced. (iii) If applicable, renewable content R is accurate pursuant to 80.1426(f)(9). (iv) Equivalence value EV is accurate and appropriate. (v) Renewable fuel was intended and sold for qualifying uses a s transportation fuel, heating oil, or jet fuel. (vi) Certificates of anal ys is verifying fuel t ype and quality, as applicable.*** E.O. 12866 Review
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Pa ge 128 of 139 (vii) Volume production capacity matches RFS registration. (4) RI N generation and separation
- related components requiring quart erl y monitoring: (i) If applicable, verify

that RI N separation is appropriate under §80.1429(b)(4). (ii) Verify

that appropriate RIN generation calculations are being followed under §80.1426(f)(3), (4), or (5) as applicable. (iii) Verify

that fuel that is exported was not used to generate RINs, or alternatively that were generated but retired. (c) Each QAP shall represent a specific RIN
- generating pathway as provided in Table 1 to §80.1426 or as approved by the Administrator pursuant to §80.1416, and shal l contain elements specific to particular feedstocks, production processes, and fuel types as applicable. (d) Submission and approval of a QAP. (1) Each independent third
- part y auditor shall annually submit a QAP to the EPA which demonstrates adherence t o the requirements of paragraphs (a) and (c) or (b) and (c) of this section, as applicable, and request approval on forms and using procedures specified by the Administrator. (2) No third
- part y independent auditor may present a QAP as approved b y the E PA without having received written approval from the EPA. (3) A QAP is approved on the date that EPA notifies the third
- part y independent auditor of such approval. (4) EPA may

revoke its approval of a QAP for cause, including, but not limited to, an EPA determination that the approved QAP has proven to be inadequate in practice. (5) EPA may

void ab initio its approval of a QAP upon EPA’s determination that the approval was based on false information, misleading information, or incomplete information, or if there was a failure to fulfill, or cause to be fulfilled, any of the requirements of the QAP. (e) Conditions for revisions of a QAP. (1) A new QAP shall be submitted to EPA according to paragraph (d) of this section whenever the following changes occur at a production facility audited b y a third
- part y independent auditor using an approved QAP: (i) Change in feedstock. (ii) Change in ty

pe of fuel produced. (iii) Change in facility

operations or equipment that may impact the capability

of the QAP to verify

that RINs are validl y generated.*** E.O. 12866 Review
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Pa ge 129 of 139 (2) A new QAP shall be submitted to EPA according to paragraph (d) of this section whenever RINs are discovered to have been invalidly generated after they

were verified b y a third
- part y independent auditor. (3) An original QAP ceases to be valid as the basis for verifying RINs until a new QAP, submitted to EPA under this paragraph (e), is approved pursuant to paragraph (d). 16. Section 80.1470 is added as follows: **§80.1470 RIN Replacement Mechanisms for Option A Independent Third Party**  **Auditors.** (a) Applicability . This section applies to independent third part y auditors using a QAP a pproved under Option A pursuant to §80.1469(a) and (c). (b) Requirements . An independent third party auditor must establish or participate in the establishment of a RIN replacement mechanism. The RIN replacement mechanism must fulfill, at a minimum, the following conditions: (1) The RIN replacement mechanism must be capable of fulfilling the independent third party auditor’s RIN replacement responsibility , as described in section 1474(c) of this subpart. (2) The independent third party auditor is responsible for calculating and maintaining the minimum coverage afforded by the RIN replacement mechanism at all times. (3) RINs held b y the RIN replacement mechanism (if an y) must be identified in a unique EMT S account designated for the exclusive use of the replacement mechanism. (4) Distribution and removal of RINs from the replacement mechanism may not be under the sole operational control of the third
- part y auditor. (5) An originall y signed duplicate of the agreement or contract establishing the RIN replacement mechanism must be submitted to EPA by the independent third party auditor in accordance with 40 CFR § 1450(g)(7). (6) An y substantive change to the agreement establishing the RIN replacement mec hanism must be submitted to EPA within 30 day s of the change.*** E.O. 12866 Review
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Pa ge 130 of 139 17. Section 80.1471 is added as follows: **§80.1471 Requirements for QAP Auditors**  (a) QAP audits conducted pursuant to §80.1472 must be conducted b y an independent third
- party auditor that is a professional engineer, as specified in paragraphs §80.1450(b)(2)(i)(A) and §80.1450(b)(2)(i)(B). (b) To be considered an independent third
- part y auditor under paragraph §80.1471(a): (1) The independent third
- part y auditor s hall not be owned or operated by the renewable fuel producer or foreign ethanol producer, or an y subsidiary or emplo ye e of the renewable fuel producer or foreign ethanol producer. (2) The independent third
- part y auditor shall be free from an y interest in the renewable fuel producer or foreign ethanol producer's business. (3) The renewable fuel producer or foreign renewable fuel producer shall be free from an y interest in the third
- part y auditor's business. (4) The independent third
- part y auditor must not be debarred, suspended, or proposed for debarment pursuant to the Government
- wide Debarment and Suspension regulations, 40 CFR part 32, or the Debarment, Suspension and Ineligibility provisions of the Federal Acquisition Regulations, 48 CFR, part 9, subpart 9.4. (c) Independent third
- party auditors shall maintain professional liability insurance, as defined in 31 CFR 50.5(q), in amounts reasonabl y related to the risk of invalid verified RI Ns due to auditor error, omission, or negligence. Independent thir d
- party auditors shall use insurance providers that possess a financial strength rating in the top four categories from either Standard & Poor’s or Moody ’s, i.e., AAA, AA, A or BBB for Standard & Poor’s and Aaa, Aa, A, or Baa for Moody’ s. Replacement of any

such invalid verified RINs is not subject to the cap on RI N replacement set forth in §80.1474(e). (d)(1) In the event that an independent third
- party auditor identifies a RIN that may have been invalidly generated, the independent third
- part y auditor shall, within 24 hours, send notification of the potentially invalidl y generated RI

N to EPA and the renewable fuel producer that generated the RIN. (2) The independent third
- part y auditor shall provide the notification required under paragraph (d)(1) of this section in writing (which includes e
- mail or facsimile) and, if requested b y the part y being notified of a potentially invalidly generated RIN, by telephone.*** E.O. 12866 Review
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Pa ge 131 of 139 (e) The independent third
- part y auditor shall identify RINs generated from a renewable fuel producer or foreign renewable fuel producer as having been verified under a QAP. (1) For RINs verified under QAP Option A pursuant to §80.1469(a), RINs shall be designated as A
- RI

Ns. (2) For RINs verified under QAP Option B pursuant to §80.1469(b), RINs shall be designated as B
- RI

Ns. (3) The independent third
- part y auditor shall not indentify RINs generated from a renewable fuel producer or foreign renewable fuel producer as having been verified under a QAP if a revised QAP must be submitted to and appro ved by EPA under §80.1469(e). (f) (1) Except as specified in paragraph (f)(2) of this section, auditors may onl y verify

RINs that have been generated after the audit required under §80.1472 has been completed. (i) For A
- RI

Ns, ongoing monitoring must have been initiated. (ii) Verification of RINs may continue for no more than 100 day s following an audit. (2) Auditors may

verify RINs that were generated before the audit required under §80.1472 has been completed, under the following conditions: (i ) The RINs in question were generated between January 1, 2013 and December 31, 2013 inclusive. (ii) The audit is completed between January 1, 2013 and December 31, 2013. (iii) The audit is performed in accordance with the elements specified in a QAP that has been approved b y the EPA per §80.1469(c). (iv) The audit requirements of §80.1472(e)(1) are met for every batch of renewable fuel for which RINs were generated and are being verified. (g) The independent third
- part y auditor shall permit any represe ntative of EPA to monitor at any time the implementation of QAPs and renewable fuel production facility audits. (h) An y person who fails to meet a requirement under (f)(1) of this section shall be subject to a separate violation pursuant to section 1460(f ) of this subpart. 18. Section 80.1472 is added as follows: **§80.1472 Requirements for Quality Assurance Audits** *** E.O. 12866 Review
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Pa ge 132 of 139 (a) General requirements. (1) A qualit y assurance audit shall be performed in accordance with the elements specified in a Quality Assurance Plan (QAP). (i) An audit based on an Option A QAP per §80.1469(a) shall meet the requirements in paragraphs (b) and (c) of this section. (i i) An audit based on an Option B QAP per §80.1469(b) shall meet the requirements in paragraphs (b) and (d) of this section. (2) An audit shall be performed by an auditor who meets the requirements of §80.1471. (b) A QAP must have been approved b y EPA per §80.1469(c) prior to its use in a quality assurance audit, unless the following circumstances apply : (1) The audit was conducted prior to the effective date of this section and (2) The audit was based on an Option B QAP. (c) Frequency

of audits. (1 ) Regular schedule. (i) The auditor shall audit a renewable fuel production facility at least 4 times per calendar year. (ii) The audits specified in paragraph (b)(1)(i) of this section shall be spaced at least 60 day s apart. The 60 day

period shall start the day after the previous audit ends. (2) Amended schedule due to invalid RI Ns. (i) In the event that invalid RI Ns are identified, the auditor shall audit the renewable fuel production facilit y at least 12 times over the following 365 days, beginning the day after the invalid RI

Ns are discovered. (ii) The audits specified in paragraph (b)(2)(i) of this section shall be spaced at least 20 day s apart. The 20 day

period shall start the day after the previous audit ends. (d) Requirements for an aud it based on an Option A QAP. (1) Each audit of a renewable fuel production facility shall verify

every element contained in an applicable and approved Option A QAP. (2) (i) Each facility

audit shall include an on
- site visit to the renewable fuel producti on facility
. (ii) An on
- site visit shall include verification of all QAP elements that require inspection or evaluation of the ph ys ical attributes of the renewable fuel production facility , except*** E.O. 12866 Review
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Pa ge 133 of 139 for an y ph ys ical attribute that is verified through remote monitoring equipment per the applicable QAP. (3) Each audit shall include direct contact with all feedstock suppliers to the facility to obtain documents related to the feedstocks used in the production of renewable fuel at the facility
. (4) Each audit s hall include a review of documents generated by the renewable fuel producer. (5) Each audit shall include direct contact with all purchasers of renewable fuel produced at the facility

to obtain documents related to renewable fuel purchased from the facili ty . (e) Requirements for an audit based on an Option B QAP. (1) Each audit of a renewable fuel production facility shall verify

every element contained in an applicable and approved Option B QAP. (2) (i) Each facility

audit shall include an on
- site visit to the renewable fuel production facility
. (ii) An on
- site visit shall include verification of all QAP elements that require inspection or evaluation of the ph ys ical attributes of the renewable fuel production facility
. (3) Each audit shall include direct contact with all feedstock suppliers to the facility to obtain documents related to the feedstocks used in the production of renewable fuel at the facility
. (4) Each audit shall include a review of documents generated b y the renewable fuel produce r. (5) Each audit shall include direct contact with all purchasers of renewable fuel produced at the facility

to obtain documents related to renewable fuel purchased from the facilit y.

19. Section 80.1473 is added as follows: **§80.1473 Affi rmative Defenses**  (a) An y person deemed liable for a violation of the provisions of either §80.1460(b)(2) or (c)(1), other than the generator of an invalid RIN, will not be deemed in violation if the person demonstrates that the criteria under §80.1473 (c) or (d) are met. (b) Applicability of affirmative defenses. The following provisions appl y t o affirmative defenses asserted under subsection (a) of this section:*** E.O. 12866 Review
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Pa ge 134 of 139 (1) Affirmative defenses only appl y to RINs that were invalidl y generated and verified thro ugh a quality

assurance audit using an EPA
- approved Option A or Option B QAP. (2) Affirmative defenses only appl y in situations where an invalidly generated verified RIN is either transferred to another person (violation of §80.1460(b)(2)) or used for c ompliance for an obligated part y’s RVO (violation of §80.1460(c)(1)). (3) Affirmative defenses do not apply to the generator of an invalid RIN. (c) Asserting an affirmative defense for invalid A
-RINs. To establish an affirmative defense to a violation of §80.1460 (b)(2) or (c)(1) involving invalid A
- RI Ns, the person must meet the notification requirements of §80.1473(e) and prove by a preponderance of evidence that: (1) The RIN in question was verified through a quality assurance audit pursuant to §80 .1472 using an approved Option A QAP as defined in §80.1469(a). (2) The person did not know or have reason to know that the RINs were invalidly generated prior to being verified b y the independent third
- party auditor. (3) If the person self

- identified th e RI

N as having been invalidly generated, the person notified EPA within 24 hours of discovering the invalidity
. (4) The person did not cause the invalidity
. (5) The person did not have a financial interest in the company that generated the invalid RI N. (d) Asserting an affirmative defense for invalid B
-RINs. To establish an affirmative defense to a violation of §80.1460 (b)(2) or (c)(1) involving invalid B
- RI Ns, the person must meet the notification requirements of §80.1473(e) and prove by a preponder ance of evidence that: (1) The RIN in question was verified through a quality assurance audit pursuant to §80.1472 using an approved Option B QAP as defined in §80.1469(b). (2) The person did not know or have reason to know that the RINs were invalidly generated at the time of transfer or use for compliance, unless a remedial action as defined in §80.1474 was implemented. (3) If the person self

- identified the RI

N as having been invalidly generated, the person notified EPA within 24 hours of discovering the invalidity
. (4) The person did not cause the invalidity
. (5) The person did not have a financial interest in the company that generated the invalid RI N.*** E.O. 12866 Review
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Pa ge 135 of 139 (6) If the person used the invalid B
- RI N for compliance, the person adjusted its records, report s, and compliance calculations in which the invalid B
- RI N was used as required b y §80.1431, unless a remedial action as defined in §80.1474 was implemented. (e) Notification Requirements. A person asserting an affirmative defense to a violation of §80.1 460 (b)(2) or §80.1460(c)(1), arising from the transfer or use of an invalid A
- RI N or B RI N, must submit a written report to the EPA, including all pertinent supporting documentation, demonstrating that the requirements of §80.1473(c) or (d) were met. The written report must be submitted within 30 day s of the person discovering the invalidit y.*** E.O. 12866 Review
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Page 136 of 139 20. Section 80.1474 is added as follows: **§ 80.1474 Replacement Requirements for Invalidly Generated RINs.** (a) Responsibility for replacement of invalid verified RINs. (1) The generator of the A
- RI N and the independent third
- part y auditor that verified the A
RI N are required to replaceinvalidly generated A
- RI

Ns with valid RINs pursuant to the procedures specified in paragraph (b) of this section. (2) The generator of the B
- RI N and the obligated party that owns the B
- RIN are required to replace invalidly

generated B
- RI

Ns with valid RINs pursuant to the procedures specified in paragraph (b) of this section. (3) The producer of an unverified RIN a nd the obligated part y that owns an unverified RIN are required to replace invalidly generated and unverified RINs pursuant to the procedures specified in paragraph (b) of this section. (b) Identification and treatment of Potentially Invalid RINs (PIRs) (1) An y R IN can be identified as a PIR b y the RIN generator, an independent third
- party auditor that verified the RI N, or EPA. (2) For PIRs identified by the RIN generator, the generator is required to notify EPA within 24 hours of the identification, inc luding a detailed explanation of why the RIN is believed to be invalid, and is required to take one of the following corrective actions within 30 day s: (i) Retire the PIR, or (ii) Retire a valid RIN meeting the requirements of paragraph (c) of this sec tion. (3) For PIRs identified by the independent third
- party auditor that verified the RI N, the independent third
- party

auditor is required to notify EPA and the RIN generator in writing within 24 hours of the identification, including a detailed explanat ion of wh y the RI N is believed to be invalid. (4) Within 30 day s of being notified by EPA or the independent third
- part y auditor that verified the RIN that a RIN is a PIR, the RIN generator is required to take one of the following corrective actions: ( i) Retire the PIR, (ii) Retire a valid RIN following the requirements of paragraph (c) of this section, or (iii) Submit a demonstration in writing to EPA that the PIR is valid.*** E.O. 12866 Review
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Page 137 of 139 (A) If EPA determines that the demonstration is satisfactory , the PIR will be deemed to be a valid RIN. (B) If EPA determines the demonstration is not satisfactory, the PIR will be deemed invalid and the PIR generator must retire the PIR or a valid RIN following the requirements of paragraph (c) of this section within 30 day s of not ification by EPA. (5) Within 60 day s of receiving a notification from EPA that a PIR generator has failed to perform a corrective action required pursuant to this section, (i) For A
- RI

Ns, the independent third
- part y auditor that verified the PIR is requi red to retire valid RINs meeting the requirements of paragraph (c) of this section. (ii) For B - RI

Ns and unverified RINs, the obligated party that owns the PIR is required to either (A) Retire the PIR. (B) If the PIR has already been used for compliance with the obligated party ’s RVO, correct the RVO to subtract the PIR. (c) The following specifications apply when retiring valid RINs to replace PIRs or invalid RINs: (1) When a RIN is retired to replace a PIR or invalid RI N, it must be of the same verifi cation ty pe, either A
- RI

N,B - RIN, or unverified, and of the same D code as the PIR or invalid RI N it is replacing. (2) The number of RINs retired must be equal to the number of PIRs or invalid RI Ns being replaced, subject to paragraphs (d) and (e) of this section. (d) Limited Exemption for invalid B
-RINs. (1) In the event that an obligated party is required to retire or replace a PIR that is a B
- RI N pursuant to paragraph (b) of this section, the obligated part y will be afforded a “limited exemption” equ al to 2% of its annual Renewable Volume Obligation (RVO) for calendar ye ars 2013 and 2014. (2) Limited examptions are calculated as follows: LE CB,i = 0.02 × RVO CB,i LE BBD,i = 0.02 × RVO BBD,i LE AB,i = 0.02 × RVO AB,i LE RF ,i = 0.02 × RVO RF,i Where:*** E.O. 12866 Review
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Page 138 of 139 LE C B,i = Limited exemption for cellulosic biofuel for year i LE BBD,i = Limited exemption for biomass
- based diesel for year i LE AB,i = Limited exemption for advanced biofuel for ye ar i LE RF ,i = Limited exemption for renewable for ye ar i RVO CB,i = The Renewable Volume Obligation for cellulosic biofuel for the obligated

party for calendar year i, in gallons, pursuant to §80.1407. RVO BBD,i = The Renewable Volume Obligation for biomass
- based diesel for the obligated

party for calendar year i after 2010 , in gallons, pursuant to §80.1407. RVO AB,i = The Renewable Volume Obligation for advanced biofuel for the obligated

party for calendar year i, in gallons, pursuant to §80.1407. RVO RF,i = The Renewable Volume Obligation for renewable fuel for the obligated party

for calendar ye ar i, in gallons, pursuant to §80.1407. (3) If the number of invalidly generated B
- RI

Ns required to be retired or replaced in a calendar year is less than or equal to LE as calculated in paragraph (d)(2) of this section, the entire R IN retirement obligation is excused. (4) If the number of invalidly generated B
- RI

Ns required to be retired or replaced in a calendar year is greater than LE as calculated in paragraph (d)(2) of this section, the retirement of a number of B
- RI Ns equal to 2% of the obligated part y's RVO is excused. (5) The limited exemption applies only in calendar years 2013 and 2014. (e) Cap on RIN Replacement for Independent Third Party Auditors of A
-RINs. (1) If required to replace an invalid A
- RI N pursuant to para graph (b) of this section, the replacement obligation of the independent third party auditor who verified the A
- RI N in question shall be no greater than the larger of: (i) The aggregate of: (A) 2% of the A
- RI

Ns verified by

the auditor in the current year, and (B) 2% of the number of A
- RI Ns verified b y the auditor in each of the previous four (4) calendar ye ars; or (ii) The aggregate of: (A) The largest number of A
- RI Ns that were generated by a single renewable fuel producer and verified b y the aud itor in the current year, and (B) The largest number of A
- RI Ns that were generated by a single renewable fuel producer and verified b y the auditor in the previous four (4) calendar ye ars. (2) The cap on RIN replacement does not appl y when invalid verified RI Ns are a result of auditor error, omission, or negligence.*** E.O. 12866 Review
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Page 139 of 139 (f) Failure to Take Corrective Action. Any person who fails to meet a requirement under paragraph (b)(5) of this section shall be liable for full performance of such requirement, and each day of non
- compliance shall be deemed a separate violation pursuant to section 1460(f) of this subpart.