There’s been a lot of e-discussion since July 4th about the New York Times article on renewable fuel credits that were fraudulently sold by a not-so-clever crook in Maryland. He claimed to be producing millions of gallons of biodiesel, which gave him rights to resellable credits (RINs – Renewable Identification Numbers) under the EPA’s Renewable Fuels Standard. The guy had pipes, tanks and pumps in his garage, but nothing was hooked up and he never produced any fuel. He sold the credits for about $9 million before he was caught.
This activity is deplorable, though not without humor: while the neighbors in his middle-class Baltimore neighborhood never saw fuel tankers picking up biodiesel, they did see his new Maserati, Lamborghini, and other fancy cars that he parked on the street, which tipped off neighbors, who then called the police.
But the NYT article, and some readers I’ve spoken with, interpreted this as a problem with tradable credits as a way to subsidize alternative energy. Subsidizing alternative energy rather than taxing polluting fuels is misguided and inefficient for many reasons, which I discussed in a recent paper that was publish in Journal of Economic Perspectives (see pages 78-81), but the enforcement problem here could arise in any pollution control system.
As long as there have been taxes on transactions there have been people trying to hide transactions. Subsidies for alternative energy (which is what RINs are) pose a slightly different enforcement problem than taxes, because the scofflaw has to conjure up a fake transaction rather than hide a real one. I would think, however, that enforcement is generally easier in those cases. Maybe it is, and that’s the lesson learned by the sports car-owning, faux biodiesel entrepreneur. The jury convicted him in under two hours.
For the rest of us, the lesson might be that enforcing any regulation — including taxes and subsidies – is costly. The perp in this case took advantage of the fact that the EPA was allowing sellers to create a RIN by simply claiming they sold a gallon of renewable fuel, and was doing little or no verification. Government intervention in a market, whether with financial incentives or command and control regulation, requires a budget for adequate oversight and enforcement. That’s not a convincing case against intervention, but it is one of the costs to weigh in policy making.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.