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Comment by jacquesm | Hacker News Reader

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...

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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.

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.

Cap and Trade and a Carbon Tax are equivalent in outcome. Cap and trade would impose fees on everyone regardless of how much it costs them to lower emissions also. The problem with Cap and Trade is that it targets the large scale emitters rather than the item desired to be limited.

Imagine that you had five major producers putting out 30% of airborne carbon, and 50,000 minor producers putting out 70%. The cost of administering a cap and trade system to the minor producers would be incredibly expensive - the legislation would instead focus on gouging the five major producers. Also imagine that the 50,000 minor producers could very easily cut their production of carbon in half.

The price should be set to the amount of damage the externality causes. Current estimates of the social cost of carbon is ~$220 per ton. http://www.nature.com/nclimate/journal/vaop/ncurrent/full/nc...

Cap and trade punishes large players - taxes are fair because they impose the same fees on everyone.

Cap and Trade being the least expensive way possible is also a terrible loss for good tax reform. If we implement a responsible carbon tax, the offset income can be used to reduce associated corporation taxes, sales taxes, or even income taxes.

An optimal tax system taxes things and behaviors we don't want, and subsidises things and behaviors we do want. Let's get rid of an income tax, and replace it with a environmental tax. More money in your pocket, and cleaner air.

As California's attempts to tax mileage of hybrid and electric vehicles proves, if you create an additional source of revenue for the government, tax levels will bear no relation to the harm they're designed to compensate for. It becomes just another way for the government to raise taxes without admitting to doing so.

The gas tax was set to charge for road wear, not carbon externialities

And VAT in Europe was only created to rebuild after the war.

Tax repeals are very rare, once they're worked into the budget they are there to stay and usually will expand to pay for other things besides the reason they were originally created.

Hybrids aren't necessarily emitting substantially less.

I was always shocked by the 'good' mpg US hybrids get, compared to Uk/Euro diesels - (though some of the difference is down to different sizes in gallons between us, but still. My 12 year old volvo v70 (not a small car) got 53mpg easily

But are those UK or US gallons? Cars in the UK get 20% more miles per gallon simply because gallons in the UK are 20% bigger.

Prius highway rating of 4.4 L/100 km (53 mpg-US / 64 mpg-imp) Volvo V50 highway rating: 3.8 L/100km - this is the 'extra economical' diesel, with start/stop, aero body and aero wheels, so a good match for the Prius - seems odd that all that extra tech wouldn't give them much improvement? I guess city driving it may be better but I don't have time to dig out the figures now.

It's not a secret that people pay car fees.

If I can save 10 tons of co2 at a cost of 2 dollars and you can save it only at 4 dollars, then if we have to lower the amount by 10 tons with a tax that is evenly distributed the total cost is going to be 3 dollars - 50% more than under a cap and trade system, where I sell you 10 tons worth of co2 credits and implement all the changes.

Since ultimately a carbon limitation is going to mean more expensive products, it is important to limit it as much as possible.

Also I don't see how a cap-and-trade system is going to be more difficult to enforce than a tax, you are still going to have to check if all the companies have paid their taxes.

The 50% in your analysis stems entirely from the fact that you're using ridiculously small integers. At any tax rate greater than $2, the first person would save money by making the change. You say $3, but it could be $2.01. At exactly $2 they would have no preference between enacting the change or not.

Of course, you omitted that the same must be true for cap and trade. The person who can save CO2 at a cost of $2 would have no preference between enacting the change or not if they were only to be paid $2. You'd need to pay them more. Like, $2.01 or $3 if we're only using integers. Exactly like the tax.

> An optimal tax system taxes things and behaviors we don't want

Except for that the goal isn't to punish polluters, it's to get carbon to a level that won't result in the end of human civilization. By moralizing the issue you're just making it more likely that we won't get there.

Of course the goal isn't to punish polluters. It's to convince them to pollute less. This is why tax things and behaviors we don't want - to make it more expensive, so that there's less of it.

> It's to convince them to pollute less.

That's not the goal. What matters is the total amount of pollution, not how much any individual pollutes.

Raising the price of a thing tends to reduce the quantity demanded.

There are perverse cases. Veblen and Giffen goods (higher prices increase consumption). But generally, the relationship holds.

A cap-and-trade or carbon tax system, to work, has to establish how much carbon can be emitted (I'm ignoring for the moment the argument that the answer may well be "none").

A tax or trade mechanism both invoke market mechanisms to allow individual carbon emitters or absorbers to determine how much activity they'll undertake, including seeking alternatives.

If a tax or C&T at a given level isn't sufficient, then the solution is to change the basis level. The result is still (in theory) achieved in the market.

You and ThrustVectoring are arguing two components of the same mechanism.

See also the Jevons Paradox: increasing efficiency (without also increasing prices) increases the amount of a good or resource consumed.

If you want less of something, raise its price. E.g., tax it.

I'm not sure what the distinction you're trying to make is. The total amount of pollution is the sum total of every individual's pollution. In order to reduce the total amount of pollution, individuals have to pollute less (on average). Conversely, if individuals pollute less (on average), then total pollution goes down.

But 'producers' are not the polluters, it's consumers driving cars that are polluting. The goal is not to punish everyone, it's to get them to make other choices.

> it's consumers driving cars that are polluting.

Cars are not the problem, there is no one thing that is the problem. Simply being alive and doing things uses energy, there is no way around that.

And BTW if you do the math a bicyclist (in the US, eating a typical US diet) emits more CO2 per mile than a small car. Assumptions: The bicyclist is riding in addition to any exercise, the riding is not exercise, and the bicyclist eats normal food. A bicyclist who prefers organic, or local, would definitely emit more (both of those emit more CO2 in the growing than regular food).

It's a surprising result, I know. But it's because humans are not very efficient in turning food energy into miles, and cars are reasonably efficient. It doesn't help that growing food takes a lot of energy, especially if you force yourself to only eat local, if you do that energy really goes up.

Source? This study says bicycling is way better than cars: http://bikeportland.org/2011/12/12/new-study-compares-bicycl...

I would be rather wary of bike endorsing studies posted on sites called "bikesomething" just as I would be wary of "rightwingnut.com" publishing studies on immigration or any other contentious issue.

In this case there isn't even a link to rightwingnut.com though.

Just a claim that you need to do math. Parroting climate-denying, anti-intellectual nonsense is worth calling out.

The study EnigmaticLion linked is as bad as you might expect.

They have a chart showing CO2 per calories for different foods which goes from 11 to 1431.

But when they do the final result for a bicycle using some kind of global average food consumption they use the number .144!

Unless I've really messed up my math, the number for a bicycle should be around 200 to 1000 times higher than what they show.

Next they take car emissions, do some "magic math" and change them from 42 g/km to 229g/km.

Using their own numbers, but fixing their math shows a bicycle emitting more than a car.

> Unless I've really messed up my math,

You have.

The chart is in (g per 100 kcal)

>"magic math" and change them from 42 g/km to 229g/km.

42 is for production of the car 229 is for ‘well to wheel' emissions (i.e. exhaust-pipe plus those emitted to produce the petrol).

No "magic" required.

What about CO2 emitted by the driver? They are respiring too.

The real issue with emitted CO2 is not the quantity at the exhaust-pipe versus the quantity exhaled by a cyclist. The CO2 emitted by the cyclist was absorbed by plants in the preceding months. The CO2 emitted by the car was absorbed by plants in a previous era of the earth. The cyclist allows you to leave the oil in the ground keeping the contained carbon out of the atmosphere.

You misunderstand. It's not the CO2 of the plants that are eaten, but the heavy equipment necessary to grow the food, the tractors, and everything else involved in growing food.

That's why produce is so expensive - it takes a LOT of energy to grow it.

Produce is expensive because it's minimally subsidized and it takes a lot of people, land, and care instead of a lot of energy. Dry corn is extremely hardy, fresh lettuce wilts.

At the extreme end, roses are not actually much plant matter, they are expensive in large part because you can't treat them like bricks. On that continuum Produce is closer to flower than grains.

> And BTW if you do the math a bicyclist (in the US, eating a typical US diet) emits more CO2 per mile than a small car. Assumptions: The bicyclist is riding in addition to any exercise, the riding is not exercise, and the bicyclist eats normal food. A bicyclist who prefers organic, or local, would definitely emit more (both of those emit more CO2 in the growing than regular food).

This result is useless since it makes impression that those miles are interchangeable while they are not. No bicyclist will make same amount of miles per unit of time as car driver. Bicyclist will make other choices: living closer to the job, working remotely, etc.

> No bicyclist will make same amount of miles per unit of time as car driver.

Have you never seen urban traffic?

"The cost of administering a cap and trade system to the minor producers would be incredibly expensive - the legislation would instead focus on gouging the five major producers"

Why is that different from the tax approach? Wouldn't taxing the 50,000 minor producers appropriate to their levels of pollution be equally as expensive?

The key part of that is administering part. Cap and trade requires the producer participate in a market for cap allowances. It's that overhead that makes it more expensive.

Ok, yes, I see that there will be some extra expenses in tracking and trading the allowances. I would expect that to be neglible next to the cost of tracking the pollution by all those producers.

No, if they're producing by buying oil or coal. Just tax the source.

I assumed in this scenario that the the producers being taxed are already the ones who extract the oil or coal. If there are 50,000 minor oil producers then taxing all of them will be a bit of a headache.

>Current estimates of the social cost of carbon is ~$220 per ton.

Wikipedia has "from less than $1/tC to over $1,500/tC." It's an inexact science.

cap and trade is a means by which politicians can pick favorites and get around rules that might prevent subsidizing particular businesses.

tax everyone to change behavior is the best route plus it does tend to stop the mini games that go on with trying to transfer funds to contributors and the like

It's eminently reasonable to have a different goal: prevent the activities whose environmental cost (via CO2) is greater than its economic benefit. In that case, the tax is sufficient to achieve that goal because it adds the cost in directly.

Then, for every case where the economic benefit is small relative to such a cost, people will stop doing it. And even if they don't, the government now has collected an amount of money equal to the environmental costs and can work on mitigating them with it! [1]

(That goal is, incidentally, the point of Pigovian taxes -- or at least, it should be, rather than "to give me cover for restricting something I disliked for other reasons", which is how they often get used.)

[1] If you want to go the route of saying that the costs are unqiantifiable ... don't. That way lies insanity (and arbitrary policy).

"Remember, the goal is to cap emissions"

Is it? I would say the the goal is to reduce carbon usage to situations where the benefits outweight all (social and economic) costs. So, our goal shouldn't be to reduce emissions to some arbitrary level, but to reduce usage to the level where benefits=costs.

sorry, what? A tax is simple, like a sales tax or VAT, and there is a strong incentive to collect it at a centralized source that is pretty easy to monitor.

How is that complex vs. creating a new commodity in the form of carbon credits, and checking that the emission is backed up by credits?

At best, cap-and-trade is equivalent to a carbon tax plus some corporate welfare to return the tax to the polluters.

In the most likely scenario, it's an opportunity for rent-seeking politicians to dole out the credits to those who either currently pollute most or just have their ear, for worst current polluters to cash in on opportunity to reduce pollution, for financiers to make big bucks trading credits.

At worst, it's a fraud where people will buy credits from people who don't reduce pollution or would have done so anyway.

> In the most likely scenario, it's an opportunity for rent-seeking politicians to dole out the credits

That's not how the credits work.

How the eff does it work? Who gets the credits to start with? Why do you think the companies prefer cap-and-trade? of course it's more complicated to end up monitoring both the pollution and who owns what credits.

the whole point of cap-and-trade is to avoid the word 'tax', and to create a vast rent-seeking system and potential for gaming the system, and make it politically palatable by paying off the people who might object.

http://www.telegraph.co.uk/finance/newsbysector/energy/69126...

http://www.france24.com/en/20160503-france-trial-multi-billi...

The ethanol credits are linked to ethanol production.

my comment referred to a choice between carbon tax vs. cap-and-trade for reducing emissions, which seems unrelated to ethanol credits.

I just think taxing coal/oil/natural gas as it's produced and sold, based on how much carbon it contains, is easy and effective, enforcing a carbon credit system is hard and prone to shenanigans, fraud, corruption.

Economically they're essentially the same and the shenanigans are a massive bug. But politically, shenanigans are a feature.

You still have to check if everybody has paid their emission tax.

Also a tax has to be high enough to offset the average cost of lowering Co2 emissions (since you force everybody to lower their emissions), whereas in a cap-and-trade system the price will the the lowest cost to lower the emissions, since anybody who would pay a higher price will be better of buying the emission permissions and anybody who can save co2 cheaper will be better of selling them.

Thus a cap-and-trade system is always going to be more efficient.

> You still have to check if everybody has paid their emission tax

Presumably the tax attaches to fossil fuel importers and vendors, rather than trying to tax each individual consumer.

And every time I go shopping at the department store, I get 30% off, so the more I buy, the more money I get.

I think you're confused about the mathematics here - cap and trade for cap (C tons) is EXACTLY equivalent to some carbon tax (T dollars) in the behaviors it incentivizes.

No, I am not. See my other comment here https://news.ycombinator.com/item?id=12110917

> 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.

If you can't generate a good estimate of how much tax is needed to hit your target, hitting the target no matter what is actually a bit of a problem.

If the necessary tax would have been less than you expected then your emissions target is likely too conservative and you could reasonably have picked a more aggressive one.

And if the necessary tax is much higher than you expected then you could end up wrecking the economy, because the cost of credits will then be outrageously high and get passed on as high energy costs.

There is another advantage to cap and trade as opposed to tax.

With cap and trade, you may have a politically motivated allocation of emission rights initially, but it's a one-off transfer and soon enough they end up the hands of the people with the most productive use of emissions.

With a carbon tax, people will continuously expand resources in the form of lobbying to try and receive the proceeds of the tax. The government has to stay in the loop forever.

The missing Carbin tax is correcting an externality which subsidies coal and other fossil fuels. We may chose to produce zero coal or the same amount, but markets only work with accurate information.

Cap and trade doesn't work the way you say. It isn't an auction. See the article.

> Cap and trade doesn't work the way you say. It isn't an auction. See the article.

The initial credits can be allocated either through an auction, by giving them away to existing polluters, or through some combination. But after the initial allocation, credits are traded on the market. That's the 'trade' part in cap and trade.

And Coase theorem says it doesn't matter who gets the credits--they'll eventually find their way to the most efficient allocation.

It doesn't matter who gets the credits as far as efficiency in reducing carbon emissions.

It matters quite a lot financially however, because the credits are worth money, so anybody who gets them for less than the market price is in for a windfall.

The Coase Theorem says it wouldn't matter for purposes of optimal allocation if there weren't transaction costs.

The Coase Theorem doesn't guarantee the absence of transaction costs in practice (and they are likely to be huge here, since the dude who likes incandescent light is going to be very far removed from the high-volume market), and it does guarantee that initial allocation will affect the wealth distribution.

> "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.

> 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?

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.

> "In return for the hollow credits, ConocoPhillips paid Green Diesel $18 million, according to court documents. Shell got stung for $14.4 million, BP for $13.6 million, Marathon Oil for $12.4 million, Exxon $1.2 million. All these companies also were forced to buy new RINs to replace Rivkin’s phony ones."

> Federal agents were watching, as was Houston attorney David Fettner. He’d been appointed by a court to find and seize Rivkin’s property on behalf of commodities trader VicNRG, which had sued Green Diesel and other Rivkin companies for selling it $3.8 million in bogus RINs. “Rivkin left a trail of unhappy people behind him,” he says.

Doesn't seem like everyone else was happy

> 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.

You'd be happy buying $1000 from someone for only $100, until you discovered the money was essentially worthless (counterfeit)

They should have bought FUEL, not RINs.

That's a bit like saying a ripped-off investor should have bought stock, not mutual funds.

These companies needed the RINs, not the fuel. If they had bought the fuel with the RINs they could have been assured the RINs were legitimate, sure. But that has all kinds of associated costs (quality control, finding buyers, the cost of the fuel itself, etc.). A legitimate biodiesel producer is probably better positioned to deal with those costs, so it makes sense for him to keep the fuel and sell the RINs to companies that need them.

And that's precisely the problem. As soon as you start selling something totally abstract in lieu of something that was presumably produced all control mechanisms fail.

Which is why I'm not a fan of these constructs. Even a legitimate biofuel producer will see better margins on the RINs than on the fuel...

I think you just don't understand how a cap and trade system works. You should try doing a google search to read up on it. It's confusing at first, but there's nothing inherently uncontrollable about it. The only reason these scams are allowed to happen is the EPA doesn't have enough manpower to constantly watch over every facility to make sure fuel is actually being produced.

I think I understand it just fine, thank you.

> The only reason these scams are allowed to happen is the EPA doesn't have enough manpower to constantly watch over every facility to make sure fuel is actually being produced.

So, if you don't have that manpower don't set up a scheme like that.

Trust but verify, remember?

I mean, in the end it's impossible to completely prevent any scams from occurring. Even if we used a tax based system people could still lie, and we will wouldn't be able to see if they're telling the truth. It's not feasible to constantly check up on everyone.

They did verify that the RINs were being produced properly, which is what led to the guy being caught.

So I'm not sure what your argument is here. If you understand cap and trade systems, then you know that they aren't inherently gameable (which you just admitted). So are you saying that you think the EPA needs more funding?

> So are you saying that you think the EPA needs more funding?

They should have at least enough funding that they can catch scammers like this before they cause 10's of millions of $ of damage.

How does producing a bunch of biofuel achieve anything? Why is that something we want to incentivize? If this was about credits for sequestering x tonnes of carbon from the atmosphere then I can see how that should be worth a credit, but I don't see how it makes sense to single out biofuel any more than anything else those crops could have been used for.

Again, I recommend reading up on what cap and trade systems are. The goal isn't to produce biofuel, it's to reduce the amount of oil being used. Using biofuel instead of oil results in the production of less pollution.

But nothing actually ensures that the biofuel is used, or that less oil is used.

This is like saying banks should ship gold bars to each other, or maybe we should give up on money and use barter. (Money is an abstraction, after all.)

Abstraction is just how finance works. Yes, there is a risk of fraud, particularly in newer abstractions, but that's why we need auditing and enforcement.

And without sufficient auditing and enforcement you'll get scams and your goals will not be achieved. You're essentially betting the farm on the honesty of corporations controlled by people who now have a direct incentive to cheat. That's putting an awful lot of faith in humanity right where it has the biggest chance of failing (at the CEO level).

Note how in the article the people working there were saying they were 'expecting an audit any day now', but as long as their paycheck depended on not being audited they were all fine with it.

It's rather strange how the CEO is the only person indicted.

> And without sufficient auditing and enforcement you'll get scams and your goals will not be achieved.

Auditing and enforcement are critical. Shipping around physical gallons does not get rid of that need. Physical gallons could just as easily be water if nobody checks. I don't see why you blame the abstraction.

The consumer can't put the water in her tank and drive her car away. Since she has skin in the game, everyone upstream from her does too. It is reasonable to blame an "abstraction" that removes consumer interest entirely, and doesn't substitute some other control of equivalent strength. The minute I heard of "cap'n-trade", which was decades ago, I expected exactly this sort of scam. Those who designed this scheme, unlike the useful fools who provide political cover for it, did so with exactly the same thought.

The consumer gets 100% gasoline in either case. Forcing the oil companies to buy biodiesel does not force them to give it to consumers. The RID abstraction is a completely separate issue from whether anyone actually wants biodiesel.

Firms will be happy to buy a product wholesale that they cannot in turn distribute to consumers? What are they, farm-aid charities? Let's try to remain focused on the plausible.

Who said anything about them being happy? But that has absolutely nothing to do with whether they are forced to buy gallons they don't want or RIDs they don't want.

Now you're talking about maintaining two sets of books, and somehow regularly disposing of vast amounts of some unknown substance that isn't fit for use in automobiles. That sort of scheme won't even get started before it falls apart, because it relies on the silent cooperation of dozens of people throughout the organization. TFA describes schemes that lasted for years, because they depended on the actions of only one or two people. You assume that liquid matter is as easy to store and transport as ephemeral ID numbers, but it really isn't.

You make it sound like anyone at the oil company cares what they're buying. They want to tick a box. As long as they buy something that has the legal weight of biodiesel, and isn't expensive to get rid of, they're happy. One set of books, no distributed conspiracy.

Or they could never even bother to ship the gallons. That's not a 'scheme' of any sort at the oil company, it's just the business focusing on the part where it makes a profit and dealing with the regulation of buying biodiesel in the most minimal way possible.

Okay, but the system isn't going to be abandoned based on one case of fraud. It's gotta be a lot more widespread than that.

It's similar to how we don't see stores abandoning credit cards despite the impressive amount of fraud we see reported on Krebs. Instead the holes get fixed (eventually, with lots of foot-dragging).

The article reports an interesting story but it doesn't seem big enough to have that kind of impact.

I'm not defending the system. It is quite evidently flawed. I'm objecting to the implication that the oil companies are complicit rather than victims of fraud.

>Even a legitimate biofuel producer will see better margins on the RINs than on the fuel...

It certainly seems to create an incentive to cut costs at the expense of quality. I don't understand why Green Diesel didn't just continue to produce poor quality fuel and thereby sell legitimate RINs.

Because they'd end up with a bunch of unusable fuel that they would have to get rid of somehow. They chose the environmentally cleaner route ;)

RIDs and giant tanks of fuel are roughly equal in fungibility. You can even make RIDs into a liquid if you inscribe them on ping pong balls.

Let's imagine a slightly different scenario. Oil companies are forced to directly buy biodiesel, and biodiesel is so bad that they don't even bother adding it to their fuel. Someone could sell them empty tanks and then they wouldn't have to figure out how to dispose of unwanted biodiesel. Think of it as an optimization.

So in that scenario, there are no credits, there is no broken 1-1 link between numbers and gallons. There's just fake-production fraud. The problem there is fake-production fraud, and the problem in real life is fake-production fraud. Not the RIDs.

The numbers were valuable only so long as the fuel existed. As soon as it didn't, they're no longer valuable. Each references fuel. If the fuel it references doesn't exist, then the RIN is fraudulent.

It's not an optimization. It's just plain fraud.

And having people buy actual fuel doesn't solve anything. The fuel could be standard diesel bought at the pump that people are claiming is biodiesel.

That's Jacquesm's point. Fraud is optimizing for metrics without regard for what the metrics correlate to.

But that's true for anything. Counterfeiting is optimizing for obtaining paper instead of the actual units of currency.

The verification process has to be completed and has equivalent cost either way.

"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.

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.

Exactly, it's fungible, so you don't need to track specific gallons. The point isn't to track the specific molecules that represent one specific gallon, the point is to just track that a gallon was made and sold.

Nothing was made, nothing was sold, but he fraudulently tracked a creation and sale by creating the RIN.

How is this so difficult to imagine being games?

I "sell" you 10,000 barrels of fuel. Then I give you back 99% of your money. Rinse and repeat, you've generated lots of RINs with little capacity for anyone to catch you downstream. Contrast this with a carbon tax, where in order to legally generate revenue one must pay the tax.

RINs aren't generated when biodiesel is sold, they're generated when biodiesel is produced.

Affixing numbers to specific units of fuel is actually pretty much precisely what happened under US Interior Secretary Harold Ickes and the "certificates of clearance" oil production quota system implemented by DOI and the Texas Railroad Commission (it confusingly neither regulated railroads nor was called by the sensible acronym, it's referred to as the TRO). This system was in place from 1933 until 1972, and effectively regulated the global price and supply of oil over that period. Absent some initial hiccups and a slightly market disruption known as World War II, the result was a phenomenally stable price and match of oil to global demand from 1945 - 1973.

Daniel Yergin covers this in detail in chapter 13 of his truly epic history of oil, The Prize (1992).

https://www.worldcat.org/title/prize-the-epic-quest-for-oil-...

Also:

https://tshaonline.org/handbook/online/articles/mlc03

https://www.law.cornell.edu/uscode/text/15/715f

And a good, concise overview of the history here: http://www.reuters.com/article/2015/01/29/us-usa-crude-stock...

The RIN scheme makes sense. It allows a 10-percent industry wide requirement without requiring every company to mix 10% in its gas.

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/ )

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.

>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...

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

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).

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.

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