The Fake Factory That Pumped Out Real Money

http://www.bloomberg.com/features/2016-fake-biofuel-factory/

by petethomas • 10 years ago

200 120 10 years ago

jacquesm10• 10 years ago

It's a typical case of creating a wrong metric and then steering by it.

I really don't like these 'credits' systems, the same goes for CO2 credits and all the other systems out there like this. They're a magnet for fraud and rarely if ever serve to actually remedy the issue they're aimed at.

It's just a way to move money around, not to solve problems.

The interesting bit here is that is actually quite hard to figure out why what they did was illegal, at first glance you'd say that the agency that created the opportunity is just as culpable as those that took advantage of it, it doesn't take genius to figure out that this would lead to trouble.

http://econlife.com/2012/04/government-guidelines-and-uninte...

Pxtl• 10 years ago

Yes, that's why most economists I've read seem to agree that carbon tax is better than co2 credit cap-and-trade systems - simpler and harder to game, flawed only because it includes the word "tax" which is unpalatable to the public.

Alex39174• 10 years ago

A tax is actually vastly more complicated and easier to game.

Remember, the goal is to cap emissions, not to raise money. When you start with a cap and work backwards towards the clearing price, you are guaranteed to be meet that cap. But when you start by setting a price, there is zero guarantee that you're going to meet your emissions target.

Also, the point of cap and trade is that it lets societies meet their emissions target in the least expensive way possible. Whereas a tax imposes the same fees on everyone, regardless of how much it would cost them to lower their emissions. This makes zero sense.

tajen• 10 years ago

"tax" which is unpalatable to the public.

They're right to be concerned: A tax goes to the government and the price is set wrong. What's the correct amount? $5 per barrel[1]? $25? $250? $3000? $3000 would be insane, right? The People would rise up against those who decide that price. Plus, if it's a government tax, it goes to the pocket of the government. If it's traded on the stock exchange, at least it's not the government who's to blame if the pricing is too high, and it's not the government who gets the money - it's redistribution at its most noble name[2].

There are two axes: How high it should be to reduce demand of petrol to a sustainable level, and how high to account for the cost of the global warming. CO2 emissions were stable in 1990, meaning they were consumed by plants which would emit the equivalent O2. All those policies do is attempt to come back to the levels of 1990. So we just have to let companies purchase their emission rights and see where the price goes. If we don't succeed, it will cost trillions, so again we need to factor those trillions into the cost of barrels. If we just get the cost high enough, we'll either use alternative sources or avoid spending[3]. So, yes, basically, the right cost of a barrel of petrol is the cost of switching to an alternate source, plus the cost of the damage of the global warming: It could very well be $3000.

And fact is, a government isn't going to raise a $3000 tax per barrel. So, when replacing a stock-exchange-traded price with a tax, I wonder why "most economists we read seem to agree".

[1] Meaning: 5% of the price of a publicly-traded barrel of petrol that have the same effect on global warming.

[2] The only thing against trading emissions on the stock exchange is that a lot of people don't trust stock trading anymore. They point out speculation, HFT, subprimes. Sometimes it's a misunderstanding of the usefulness of capitalism, sometimes the public is correct (The financial industry reaps the benefits instead of the end user does). Whether or not it's right, it's extremely sad for the Earth if we replace a $3000 emission cost with a $5 carbon tax.

[3] "Avoid spending" is not a light term here. It basically means a group is going to be really, really poor because we can't build enough goods for them given the CO2 limit.

dkokelley2• 10 years ago

that is actually quite hard to figure out why what they did was illegal

How so? They produced fraudulent RINs and sold them, knowing they were not attached to actual biofuels. It's only a couple of steps removed from printing fake currency.

Did I miss something in how Green Diesel justified their actions?

jacquesm10• 10 years ago

Well, given that the buyers bought just the numbers and not did not go to the authorities immediately it would seem that everybody in the deal was happy except for the EPA.

If you make it so that a number is assigned to something liquid that is as fungible as can be then you really can't claim surprise if someone then decides to short-circuit the whole thing and bypass the manufacturing step.

Think of it as an optimization. After all it seems the numbers where the valuable bit, the fuel was worthless in comparison.

rayiner6• 10 years ago

Cap and trade systems have the huge advantage that no revenue goes to the government. That eliminates the incentive to set tax levels for revenue generation purposes instead of at levels linked to the real purpose.

fsargent2• 10 years ago

True, but looked at holistically it'd be better to have the revenue go to the government, and reduce a tax that punishes behaviors we want - such as employment being punished by the income tax. https://en.wikipedia.org/wiki/Pigovian_tax

ac29• 10 years ago

Cap and trade systems have the huge advantage that no revenue goes to the government.

The revenue certainly goes to the government in California, unless I am completely misunderstading the program: http://www.lao.ca.gov/reports/2014/budget/cap-and-trade/auct...

pmorici• 10 years ago

"The interesting bit here is that is actually quite hard to figure out why what they did was illegal"

I wouldn't go that far. Each RIN needs to correspond to some physical bio-fuel. They were generating RINS but not manufacturing the corresponding fuel. Seems like straight forward fraud. Now had they been actually making the fuel but then dumping it in the trash and just selling the RIN I agree it would be harder to see what it was they were doing wrong but they weren't doing that.

jacquesm10• 10 years ago

You can't exactly affix a number to a specific gallon of bio-fuel. That's where the whole scheme goes off the rails, to create unique ids that only exist in spreadsheets with no 1-1 link to some quantity of product.

It's a liquid, not a box of stuff.

gus_massa• 10 years ago

It's not necessary to dump it, they can burn it to run the rest of the factory, or a bitcoin mining site, or the biggest communal sauna ever, or ...

(I'm not sure that there are not some provisions to close these loopholes. https://xkcd.com/1494/ )

paulsutter• 10 years ago

Whether actual fuel is exchanged - or numbers - audits are the only way to catch a cheater. A fraudulent biofuels producer could resell ordinary diesel with just a bit more effort than selling fake credits. A site visit to verify the production of actual biofuels is the method to detect either scheme, so the resolution would be no different.

The interesting bit here is that is actually quite hard to figure out why what they did was illegal

This was outright fraud (creating and registering identifiers for fuel that never existed).

rwmj• 10 years ago

I don't know if RINs are good or bad, but I don't think you can say that this article proves anything.

It might equally be that the system is open to widespread fraud, but with a bit of effort it can be made watertight.

Or that there is a tiny amount of fraud which the authorities are mostly on top of, as the case of the two imprisoned felons from the article shows.

Bromskloss• 10 years ago

I'd much appreciate a description of the core thing here, without the narrative.

dkokelley2• 10 years ago

Biodiesel company unable to produce quality product, resorts to selling fraudulent biofuel credits (without underlying biofuel). Founder is caught and jailed.

brianwawok• 10 years ago

If you don't read the article not sure this kind of comment adds anything to the community. Yes it's a long article. If too long for you skip it.

foobarbecue• 10 years ago

Your comment, on the other hand, was suuuuper helpful.

seibelj• 10 years ago

EPA allows biodiesel refiners to make up their own serial numbers. They sell the numbers in excel spreadsheets to oil companies. No one ever verifies that the numbers match real barrels of biodiesel. Criminals moved in

ryandrake• 10 years ago

THANK YOU. >3000 words to 36. These long form articles are not for everyone, a TL;DR summary is always welcome.

blaisio4• 10 years ago

People do verify it (that's how this guy was caught). They just can't watch every facility all the time; there are too many.

mrob• 10 years ago

Methanol is not a catalyst in biodiesel production, it's a reactant. See:

https://en.wikipedia.org/wiki/Biodiesel_production#Transeste...

This example shows ethanol but it works the same way with methanol.

edkennedy2• 10 years ago

Other hilarious and frightening "business ideas" with US government issued carbon credits:

Dumping giant piles of iron sulfate into the ocean in Northern Canada: http://www.timescolonist.com/news/local/haida-readying-for-s...

Driving a train full of biodiesel across the border and back again numerous times while never unloading it: http://www.cbc.ca/news/canada/biofuel-credits-behind-mystery...

shard972• 10 years ago

I tried to find a follow up to the iron sulfate story but couldn't find one, would be interesting to hear what happened.

aaron695• 10 years ago

Evidence seems like it worked. Much as people didn't want it to.

http://www.cbc.ca/news/canada/british-columbia/haida-gwaii-o...

hackaflocka• 10 years ago

Interesting that there's no easily found mug shot of him considering he's in Fed Prison.

In India, about 25 years ago, the govt instituted export credits. Basically, in order to import anything, you needed to have export credits. So, export credits became a fungible currency. And people started exporting all kinds of crap under the guise of something legit, just to obtain export credits. People were exporting bricks, calling them shoes, and then selling the export credits. Of course, government officials were involved end-to-end in the scam (via relatives and friends, as is usually done there). Sad to see similar things are happening in the US now.

josinalvo• 10 years ago

Nevermind the scam. How is the system supposed to work?

A company produces biodiesel and can sell, separately, the biodisel and the RIN. A fuel company can buy the RIN instead of biodiesel, and, in theory, that would mean that another fuel company bought the biodiesel, and is using more biodiesel and less petroleum. Correct?

What if, instead, the biodiesel is used in a previously non existent or previously carbon neutral industry? That does not seem to reduce pollution at all. How does the system prevent it? Does the system prevent it?

dmurray• 10 years ago

The biodiesel was meant to be equivalent to regular diesel, so it could be sold at the same price, but more expensive to produce. So a "previously non existent or previously carbon neutral industry" wouldn't have any reason to switch to biodiesel, unless it was already good for them to switch to regular diesel.

fit2rule• 10 years ago

He kept a miniature, stainless-steel working model of it in his office. “I could put vegetable oil through it and get a cup of the most beautiful biodiesel you ever saw,” Harvey Greenwood, Green Diesel’s former director for engineering, says of the model.

The most interesting part of this whole story, imho. Doesn't anyone else want their own desktop vegetable-oil to perfect diesel machine?

Spooky23• 10 years ago

I had exactly the same thought! This would be a great christmas gift for the mechanically inclined.

hexane360• 10 years ago

I really want to make something like this. I wonder if that would need a little agitator, or some temperature control, or valves, or what?

And then once you have the piping, you can get some automatic control, and some management software. . .

The Fake Factory That Pumped Out Real Money

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