The Uncertain Tomorrow

Expiring biofuel tax credits and a dysfunctional Congress
By Ron Kotrba | October 25, 2011

Several major biofuel tax incentives are set to expire at the end of this year, including the $1 per gallon biodiesel blender credit. Petroleum has enjoyed tax breaks for years, even though the 100-plus year old oil and gas industry reaps record profits quarterly. The Center for American Progress recently stated that the top five oil companies—BP, Chevron, ConocoPhilips, ExxonMobil, and Shell—have combined on-hand cash resources totaling $59 billion. Between that and nearly $1 trillion (that's a one with 12 zeroes) in combined profits over the past decade, why they need tax breaks at all, especially $41 billion over the next 10 years as President Obama said he will strive to eliminate, is a mystery to everyone. Obama wanting to eliminate oil and gas tax loopholes and Congress actually doing it, however, are two different things. Anne Steckel, the National Biodiesel Board’s new vice president of federal affairs, says oil and gas subsidies add up to more than $4 billion a year. “We certainly believe that if Congress can find resources to encourage an entrenched and highly profitable oil industry,” she says, “it can find resources to support cleaner alternative fuels.” Capitol Hill’s iron triangle, however, is strong and oil lobbyists hold much influence.

“Is our tax policy a bunch of special interest loopholes or is it aligned with the objectives of the U.S.?” asked president of the Advanced Biofuels Association Michael McAdams at the International Biorefining Conference & Trade Show in Houston in September. In addition to the favorable tax credits the oil and gas industry receive, McAdams brings to light another point of contention with the policy structure associated with petroleum: greenhouse gas emissions reductions—or lack thereof, to be more precise. “Ironically, the only industry in the U.S. regulated by GHGs is the advanced and cellulosic industry,” he says.

The irony, says Joe Jobe, CEO of the NBB, is that “everyone knows that America’s singular addiction to oil has dramatically dangerous direct and indirect impacts” including “watching oil run up to almost $150 per barrel in the spring of 2008, which contributed to the biggest economic recession since the [Great] Depression. It includes turning on the television and watching the Gulf of Mexico on fire in 2010. It includes America’s current involvement in three different wars right now in three different countries whose strategic interests for America all include oil … Clearly biofuels are being held to a different standard in terms of GHGs and indirect environmental impacts … Either estimate indirect impacts for all fuels, or for none.”

But given Congress subsidizing an obviously profitable oil industry, coupled with subjecting biofuels to stringent GHG emissions reductions while the petroleum industry has none, in addition to expiring biofuels tax incentives that are critical to continued development and U.S. objectives of energy security, Congress’ actions have made one thing clear: the possibility of anything moving through the gridlocked legislative body this year is slim to none. The dysfunction in Washington is evidenced by the development of a super committee of 12 to do what the 535 elected senators and representatives couldn’t do: get our government’s runaway debt and financial situation under control.

“This is an unusual time in Washington,” Steckel says. “Many of the old rules that have applied in the past seem to be getting thrown out the window. There is obviously a sharp focus on reducing deficits, but with deep divisions over how to do it and how far to go. That’s creating tremendous uncertainty surrounding what Congress can ultimately pass and, frankly, a very difficult environment for any tax or spending measures.”

While the ethanol industry is preparing to enter a new world without its longtime and successful blend credit of 45 cents per gallon (previously it was 54 cents), the biodiesel industry has been there before. What we’ve all learned about the U.S. biodiesel complex from 2010, the worst year in our industry’s history when almost 12 months without the $1 per gallon blender credit shuttered plants and halted production, is how resilient our industry is. During that time, plants that did remain open and producing were able to do so thanks to strong state policies, such as the Minnesota mandate and the Illinois fuel tax exemption for biodiesel blends above B10. “But the experience [of 2010] also reaffirmed just how vulnerable our industry still is,” Jobe says, “and how important federal policy is in helping it succeed. People forget—we’ve had commercial-scale production for only about six years compared with a petroleum industry that has enjoyed policy support and been entrenched in our economy for decades.” McAdams says if the biofuels industries must face a future without tax credits, then it’s time to lay them all on the line, including oil subsidies, and start fresh. After all, our current national biofuel tax provisions are inconsistent, McAdams points out. “One’s a blender credit, another is production, others yet are feedstock credits,” he says. “It’s all over the board.”

Biodiesel Policy Priorities

The NBB’s No. 1 policy priority right now is the successful implementation of RFS2—and extension of the tax credit is at the heart of this strategy, Jobe tells Biodiesel Magazine. “The RFS program faces a three-pronged attack,” he says. “It faces on-going legal challenges, administrative challenges with waiver requests, and it will face political challenges with current and predicted legislation calling for various modifications or repeals to the program … The best defense for all three categories of attack would be the extension of the biodiesel tax credit. Without it, we know there would be a more robust effort by some of our critics to chip away at the program,” chiefly because the credit makes biodiesel cost competitive with diesel. “There are still some people out there who have suggested that we abandon the tax credit and focus all our resources on defending the RFS,” Jobe says. “This approach ignores that the RFS and the tax credit are complementary policies designed to work together.” Let’s not forget, also, that 2011 is the first year in history these two policies have worked in tandem, and as a result the industry is producing record volumes. “Of course, we know that having the tax credit lapse for a time creates extraordinarily undesirable business uncertainty. But killing the tax credit would not reduce uncertainty, it would increase it. It would put all our industry’s eggs in the RFS basket.” Jobe says RFS2 was extremely hard to get passed with a specific role for biodiesel. “It was difficult for us to achieve advanced biofuel status under the program and make no mistake, it will be difficult to defend the program,” but as it goes forward, and as volume levels increase, the attacks will continue, Jobe says, “and likely become increasingly fierce. We will need every tool available to defend it.” 

Steckel adds, “The RFS is an incredibly important policy for our industry, not just in that it includes a biodiesel requirement but also that it designated biodiesel as an advanced biofuel. It is imperative that Congress stand behind the programs.” She also highlights how important the farm bill programs have been over the years providing much-needed policy support to the biodiesel industry and, she says, “we will continue to advocate for a strong energy title in the next farm bill,” one that includes both the Biodiesel Education Program and the Advanced Bioenergy Program.“While we understand the pressures that Congress is facing and agree that deficits should go down, we think there is a very compelling case for extending the biodiesel tax incentive,” she says, “particularly in this kind of economy where most people believe Congress’ top priority should be helping create jobs.”

And speaking of fuel tax credits and jobs, the Center for American Progress noted recently that the House Natural Resources Committee Democrats found that despite generating $546 billion in profits between 2005 and 2010, ExxonMobil, Chevron, Shell, and BP combined to reduce their U.S. workforce by 11,200 employees over that time. In 2010 alone, the big five oil companies reduced their global workforce by a combined 4,400 employees, while making a combined $73 billion in profits.

“Clearly, the biodiesel industry creates jobs,” Steckel says, referencing the 31,000 employees who will be supported by our industry in 2011 alone. “Congress is looking for ways to stimulate the economy, and the biodiesel tax credit is one of those items that Congress understands is good for the economy.”

And that approach of aligning biofuel incentives with broader U.S. objectives—job creation, economy revitalization, energy security, improved environment—is critical to the vitality of future federal policy support for the biomass-based fuels industries, experts say. “How do we craft biofuel policy that’s in alignment with the goals (reducing GHG emissions and reliance on foreign oil) of the U.S.?” McAdams asks. In that vein, maybe future tax policy should consider approaches such as fuels that produce fewer emissions should receive greater subsidies, he offers, or maybe the more energy dense a fuel, the more credit it receives.

But whichever direction future biodiesel and other advanced biofuel tax policy takes, there is no question what happens when it goes away completely: Plants close and thousands of green-collar jobs are lost. “Specifically,” Jobe says, “U.S. biodiesel production plummeted by 42 percent, resulting in the loss of nearly 8,900 jobs and a drop in household income of $485 million.” When it was reinstated at the end of 2010, in just a few short months the industry was producing at record capacity. “With the ongoing economic downturn,” Jobe says, “now is not the time to allow that to happen again. Under projected expansion by 2015, biodiesel is expected to support more than 74,000 jobs, $4 billion in income, and some $7.3 billion in [gross domestic product],” according to a recent economic study. “That growth will be severely jeopardized by the expiration of the tax incentive, and we strongly encourage Congress to provide a seamless extension of the biodiesel, renewable diesel and biojet tax credit.” 

“At this point,” Steckel says, “there is a lot of wait-and-see regarding what the deficit super committee will do. Once their path is clearer, we think there could be some openings for moving legislation,” she says. “Though it’s too early to say what those vehicles might be, we are resolute to do all we can so the tax credit is best positioned, should any opportunity arise.”

The NBB launched its biggest program to date, the Advanced Biofuel Initiative, a comprehensive national communications campaign including a nationally aired television commercial. “It’s already having a significant impact,” Jobe says, urging biodiesel producers to personally join the fight in defense of RFS2 through extension of the biodiesel tax credit by calling their senators and representatives. “Members of Congress should be as motivated by biodiesel as we are,” he says, “and that will only happen if every biodiesel plant does its part.”

Author: Ron Kotrba
Editor, Biodiesel Magazine
(701) 738-4942

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