Talking Point

Why all the fuss about renewable diesel?
By Monte Shaw | August 03, 2007
Although a "renewable" diesel molecule and a biodiesel molecule don't resemble each other, the future of biodiesel has become intertwined with renewable diesel ever since the IRS ruled that oil refineries can coprocess animal fats and vegetable oils with crude oil and receive the $1 per gallon renewable diesel tax credit. Many in the biodiesel industry have expressed concerns about how they will compete for feedstocks with established oil refiners.

Some observers believe that the inherent advantages the oil refiners receive from the tax credit will allow them to push the cost of feedstock beyond the profitable reach of most biodiesel producers. But, emotions aside, what are the facts? Two fundamental questions need answering:
• Are oil refiners being given a better deal than farmer-owned biodiesel plants?
• Does coprocessed renewable diesel deserve the same (or actually better) tax treatment as biodiesel?

The oil company lobbyists have done a good job framing the debate in the halls of Congress as: "Don't pick winners and losers. If it's good for farmers then it should also be good for oil companies."

Yet a close look at the two incentives shows that a winner has been (inadvertently) picked-and the winner is renewable diesel. The very structure of the renewable diesel tax credit provides oil refiners with two significant advantages over biodiesel producers.

1. The renewable diesel tax credit is a production tax credit. Oil companies receive it on the product they purchase and put into the process. Feedstocks like animal fats or used cooking grease may contain 3 percent to 15 percent water or other impurities, but the oil companies get paid on every gallon that goes into the process.

On the other hand, biodiesel receives a blenders' tax credit. It only applies to the gallons of biodiesel actually produced and blended into diesel fuel. The biodiesel producer must remove the water and other impurities and won't receive one cent for that portion of the feedstock.

2. With a production credit, the oil refiners receive their tax incentive directly. With a blenders' tax credit, a biodiesel producer must negotiate for its part of the credit with its customers in the marketplace. Based on some posted prices, the biodiesel producer may only receive 95 cents of the dollar, and that amount could go lower based on supply and demand.

Combined, these two attributes impart a huge financial advantage to oil refiners and leave biodiesel producers fighting uphill against an established, quite profitable industry for feedstocks.

Should the U.S. taxpayer care? This leads us to our second question. Biofuels, like ethanol and biodiesel, receive public support because they help address pressing public policy issues, including environmental, economic and energy security concerns. Biofuels burn cleaner, protect our water, create American jobs, attract investment capital, increase U.S. refining capacity and reduce our dependence on foreign oil.

The same cannot be said for an oil refiner's coprocessed renewable diesel. The end product is essentially indiscernible from regular diesel. There is little to no environmental, economic or energy security benefit from co-processed renewable diesel. Renewable diesel simply does not give the U.S. taxpayer the same bang for the buck.

Washington, D.C., gets pretty hot in August and legislators usually head home. Take this opportunity to turn up the heat on this issue. Congress must act to close the oil refinery renewable diesel loophole.

Monte Shaw is the executive director of the Iowa Renewable Fuels Association. Reach him at mshaw@iowarfa.org or (515) 252-6249.
 
 
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