Will government ever learn? Every time they try to fool the market with some cockamamie attempt at central planning, they create a discontinuity in the market. These discontinuities can often be exploited for gain. That’s when the jackals rush in.

The EPA runs a program that is supposed to ensure 36 billion gallons of biofuels are blended into the gasoline supply by 2022. Every gallon produced earns something called a renewable identification number, or RINs, which are then sold to and traded among refiners and other “obligated parties” to help meet their annual biofuel quotas.

[Source. WSJ link requires subscription.]

Rodney Hailey owned a company called Clean Green Fuels, based in Baltimore. Clean Green Fuels earned EPA registration as a biofuel producer, despite the fact that it owned no biofuel manufacturing capacity. Clean Green Fuels could sell the RINs, to the tune of $9 million, but there was no biofuel to back them up. Hailey used the illicit proceeds on such necessities as private jets, expensive jewelry and a Rolls-Royce.

Nor was it alone. In the biodiesel market—whose size is second only to corn ethanol—the EPA itself estimates that some 140 million RINs are fraudulent or otherwise invalid, and the true number may amount to as much as 12% of the biodiesel “supply.”

Hailey has been convicted on 42 counts of fraud, but here’s where the story takes an odd turn.

The EPA is punishing the companies Hailey scammed.

The EPA, however, maintains a “buyer beware” policy that says refiners are responsible for ensuring they buy good RINs, even if they are purchased in good faith from companies certified by the EPA. After the EPA’s enforcement gumshoes raided Clean Green Fuels and deduced that it was a fraud, they did not notify the companies buying these credits for 15 months.

Then the agency said the companies would have only 14 days to replace the bad RINs. And then it fined 24 businesses for not conducting due diligence. The total cost came to $40 million.

That’s pretty typical of regulation in my business, too. Time is only of the essence when it’s demanding action of the regulated community. When the ball is in government’s court, it takes its sweet time.

Two reports on the EPA in one day. On one hand, you conduct business with a duly licensed private party, and do so in good faith, and you end up getting fined when it turns out that you’ve been scammed. On the other hand, the government passes a law mandating a product that doesn’t exist, and then fines you for failing to buy it.

Is this a great country or what?

Cross-posted at Maley’s Energy Blog.