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How Regulation of Electric Cars and Renewable Fuels Promotes Fraud

Dysfunctional federal policy is being used to line the pockets of the Bigs at the expense of the Littles.

Editor’s Note:  This article is part of TAC‘s efforts to highlight the cozy relationships between government and business.  To explore further, join us at our crony capitalism conference this Thursday in Washington, DC!

Whatever the government touches, it always changes, often for the worse. Two examples are electric cars and renewable fuels. 

Because some states mandate that electric cars be built, regardless of the economic case for them, there is little incentive to make them affordable. And so, the government ends up subsidizing them. This serves almost no one’s interests except for those receiving the subsidies.

It’s a similar story with renewable fuels such as ethanol and biodiesel. There’s nothing inherently bad about the idea, but the government’s interference creates distortions in the market. This, in turn, raises costs for consumers.

Under the Renewable Fuels Standard (RFS), every refiner and distributor—large and small—is required to supply a certain amount of renewable fuel. However, companies that cannot satisfy the mandate (i.e., smaller ones) can buy Renewable Identification Numbers (RINs) from those that exceed the mandate (i.e., bigger ones.)

By purchasing a RIN, the smaller refiner or distributor receives credit for having supplied renewable fuel despite not having done so, very much in the same way that a car company that doesn’t manufacture any “zero emissions” electric cars can buy credits from a company like Tesla that does to satisfy requirements that they produce X number of such cars each year.

The problem in both cases is that the prices charged for these credits can be jacked up almost at will by those who have them available for sale. This is because there is no market alternative to them and because the government mandate requires them to purchase or else refine/blend the fuel on their own, which may end up being even more expensive or not possible due to lack of equipment, resources and so on.  

The price of RINs has surged as much as 5,000 percent (in 2013) and price volatility continues to be a characteristic of this program. This isn’t surprising given that there is no real market for these renewables beyond the mandate enacted by the government. The cost of renewables based on food/feed stocks is also subject to seasonal and regional factors such as crop yields as well as competing demand for corn and soy for human and animal consumption.

Large refiners and distributors can adopt a take-it-or-leave-it posture, giving the little guys no real option but to pay up. And since they can’t remain in business on a money-losing basis, the smaller refiners and distributors end up having to charge more for the end product: the fuel they sell. The difference amounts to 10 to 50 cents per gallon, depending on the fuel (gas or diesel) and region of the country.

Of course, consumers are under no government obligation to buy fuel at higher prices and tend to shop where prices are lower, which is usually the chain outlets associated with the large refiners and distributors.

Normally, price competition is good, the market’s way of sorting out winners and losers, rewarding the more efficient and chastising the less efficient. But this is government regulations manipulating the market, artificially creating winners and losers.

However one feels about renewable fuels, this business of trading RINs as commodities has nothing to do with either the environment or energy independence. It has become, as in the case of electric cars, a gigantic flim-flam. Last September, federal prosecutors had identified fraud in the program to the tune of $271 million, as well as $71 million in illegal profiteering. In one case, a man set up a company called “Clean Green,” based out of a storage shed, and managed to receive 35 million RINs and sell them despite making no fuel.

Jobs are at issue, too. In southern Pennsylvania, for example, which is home to several independent refiners and distributors, as many as 20,000 jobs could disappear. Nationwide, it is estimated that 150,000 jobs, including clerks and so on at independent gas stations, are threatened by the RFS.

It is so bad that the former head of the EPA’s criminal enforcement division, Doug Parker, has publicly excoriated the way the RFS program is being run. He put together an extensive white paper detailing the way the program has become riddled with fraud.

President Trump promised to make America great again in part by protecting American jobs. Here’s an opportunity for him to do that and do something about perhaps well-intended but clearly dysfunctional federal regulations that are being used to line the pockets of the Bigs at the expense of the Littles.

Eric Peters writes often about regulatory issues and government policy. He is a former columnist and editorial writer for the Washington Times and a frequent contributor to conservative media around the country.



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