Corporate subsidies, in an era of fiscal-cliff attacks on Social Security and Medicare, have dodged attention despite their magnitude and absurdity. Take the renewable-fuels subsidy ecosystem—and a train of tankers filled with biodiesel that shuttled back and forth across the border between Sarnia, Ontario, and Port Huron, Michigan, twelve times, without unloading its cargo. It generated millions of dollars in profits.
The mystery train was an outgrowth of the EPA’s Renewable Fuel Standard mandate that requires oil companies to blend (subsidized) biofuels with (subsidized) fossil fuels—or alternatively, purchase Renewable Identification Numbers, or RINs, as offsets.
Each RIN is a serial number for a batch of biofuel, such as biodiesel or ethanol. RINs are generated when the biofuel is produced or imported. Under the mandate, oil companies must blend 1 billion gallons of biodiesel a year into the fuel stream. Each refiner’s contribution is determined by its market share. If a refiner doesn’t want to comply, it can instead buy RIN credits from biodiesel producers. Hence, a $2 billion market for biodiesel RIN credits, policed by the ever so vigilant EPA. But RIN credits can be traded independently from the batches of biofuel that generated them. And this has opened up some opportunities.
Last year, Clean Green Fuels in Maryland was accused of selling 32 million fake biodiesel RIN credits to oil companies and brokers. In June 2012, CEO Rodney Hailey was convicted of wire fraud, money laundering, and of violating the Clean Air Act.
Absolute Fuels in Texas, was sent an EPA Notice of Violation in February this year. On July 19, owner Jeffrey David Gunselman was arrested for having allegedly created on his computer more than $50 million in RIN credits that he then sold. He didn’t even have the facilities to produce biodiesel. Earlier this month, he pleaded guilty to a laundry list of charges and is contemplating a maximum sentence of $20 million in fines and 1,268 years in the hoosegow.
Buyers of these credits got tangled up as well: “30 refiners settled with the EPA without admitting wrongdoing.” The usual suspects. Exxon would pay a fine of $165,000; ConocoPhillips $250,000, and BP $350,000. They’d also have to buy real RINs to replace the fake ones. The chaos in the RIN market prompted the House Energy and Commerce Oversight Subcommittee to hold hearings.
But a small outfit in Toronto, Bioversel Trading Inc., was particularly resourceful in milking the RIN system—and may not have done anything illegal, according to an excellent investigative series by CBC News. Bioversel hired Canadian National Railways (CN) to shuttle the same trainload of biodiesel twelve times across the US-Canadian border without unloading the cargo. All in the second half of June, 2010. For $2.6 million.
To generate RINs from importing biodiesel into the US, ownership of each trainload was transferred to Bioversel’s US partner, Verdeo, which then, rather than selling the biodiesel in the US, exported it back to Canada. But by exporting the biodiesel, Verdeo would have been required to “retire” the associated RINs, instead of being able to sell them. So Verdeo retired ethanol RINs instead, which cost only a fraction. The difference, less the cost of transportation back and forth, was profit.
It might have remained under wraps. But the “importer of record,” Northern Biodiesel of Ontario, NY, found out that the same rail cars were being shuttled back and forth and generated new RINs each time they came into the US; something was fishy. So the owner blew the whistle.
CBC News contacted the EPA to get some clarity, but the agency refused to comment. And the railroad? Didn’t they have a clue? Nope. “As required by law, CN discharged its common carrier obligation regarding these biodiesel shipments,” spokesman Mark Hallman wrote to CBC News. “CN is not aware of any pending investigation of an alleged fraud. CN has and will continue to co-operate fully with….” etc. etc.
Alas, CBC News had obtained a copy of an internal CN email, dated June 14, 2010, sent by Teresa Edwards, CN’s Sarnia transportation manager. In addition to some technical details, it included these priceless words: “It will be the same cars flipping back and forth and the product will stay on the car. Target is to get at least 25 flips across the border and back by June 30.” And a word of corporate encouragement: “This move has the potential to make a lot of money for CN so need everyone’s assistance to maximize the number of trips we make and ensure that it all moves smooth.”
In a follow-up email, dated June 28, 2010, of which CBC News also obtained a copy, Edwards wrote: “The Bioversal move back and forth across the border at Sarnia has now completed. Records show that we moved 1984 cars total…. This equates to approximately 2.6 million dollars of revenue….”
Though the Canada Border Services Agency and the EPA are investigating, CBC News emphasized that it “has found no evidence Bioversel or its partners broke any laws.” Apparently, regulations at the time permitted importing biofuels to generate RIN credits, re-export the fuel, retire cheaper ethanol credits instead of biodiesel credits, and laugh all the way to the bank. A perfect example of how huge corporate welfare programs, such as fuel subsidies, throw off unexpected crumbs in surprising directions.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.