The biodiesel tax credit: gone today, here tomorrow?
EcoEngineers had previously suggested that the expiration and retroactive reinstatement of the $1-per-gallon biodiesel tax credit leads to unique record-keeping and value-allocation issues. This article is an attempt to tease out the issues related to value allocation and to look at what impact, if any, the proposed legislation for tax credit extension (S.2021, U.S. Sens. Grassley and Cantwell) has on the price of B100.
If there is a possibility of the tax credit being reinstated retroactively for 2014, there would be a monetary value placed on the option to apply for and receive the tax credit when reinstated. Since the credit goes to the person blending the biodiesel from B100 to B99.9 by adding 0.1 percent ultra-low sulfur diesel (ULSD), buyers of biodiesel should pay a premium for B100 over B99.9. If there was no hope of the tax credit being reinstated, there would be no price differential between B99.9 and B100, and we can assume that the actual value of the premium for B100 over B99.9 is a function of the probability of reinstatement.
A look at daily average fuel prices at the Des Moines Terminal published by the Iowa Department of Transportation reveals an average 18-cent premium for B100 over B99.9 for the first three days of the week of March 10 (B99.9: $3.84-$3.89; and B100: $4.03-$4.055). Assuming both are 2014 products with RINs, this suggests that, for 18 cents, a fuel blender can have the option to apply for and receive the dollar in the future, if the tax credit were to be reinstated. This simple review of rack prices at one terminal supports the theory that some buyers and sellers may be attaching a value to the possibility of the biodiesel tax credit being reinstated.
On Feb. 12, Cantwell and Grassley introduced S.2021, “Biodiesel Tax Incentive Reform and Extension Act of 2014.” The bill proposes a four-year extension of the biodiesel tax credit from Jan. 1, 2014, to Dec. 31, 2017. The bill also proposes an amendment to the tax code, which will make the biodiesel tax credit a producer’s credit (as opposed to a blender’s credit). If S.2021 were to become law, the dollar would be a production tax credit for domestic biodiesel production and not a tax credit for blending (purchased) biodiesel with ULSD. This amendment adds a new variable to the issue of tax credit reinstatement; namely, even if the tax credit were to be reinstated, will a blender buying B100 have the option to apply for and receive the dollar under a future amended rule?
Rack prices at the Des Moines Terminal reflect that some blenders are currently willing to pay a small premium for B100 , which means they do not account for S.2021 (or a similar future amendment to the tax code) becoming law. However, the proposed legislation reinforces our opinion that the expiration and rebirth of the credit under various forms requires buyers and sellers to be vigilant of changing rules and adopt agile business practices. To round off the discussion, we asked our tax advisers at McGladrey LLP to assemble a detailed guidance document on the background of the biodiesel tax credit, which is provided here for your review.
Author: Shashi Menon
Managing Partner, EcoEngineers