Talking Point

The U.S. Industry Can Still Look to Europe for Lessons
By Robert H. Edwards, Jr. | November 10, 2006
Even though the U.S. biodiesel industry is experiencing record growth-with a recent tripling of production capacity-the European Union's (EU) biodiesel industry remains eight to 10 times its size.

There are many factors that have contributed to the proliferation of biodiesel in the EU as compared to the United States, including a larger percentage of diesel vehicles (i.e., 40 percent of passenger vehicles in Germany run on diesel as compared to 1 percent in the United States), commitments to reducing greenhouse gases under the Kyoto Protocol, and the introduction of aggressive tax incentives for the renewable fuel. As industry participants and government policy-makers in the United States come together to create an environment in which the biodiesel industry can continue to grow, Europe's experience with biodiesel continues to serve as a model for U.S. policymakers to look to.

In May 2003, a European Parliament directive set a non-binding target of 5.75 percent biofuels, calculated on the basis of energy content of petroleum-based transportation fuels placed on EU markets by Dec. 31, 2010.

Under the EU system, each country develops its own implementing legislation. While there are current discussions concerning Germany's generous excise tax break for biodiesel-and some questions surrounding the direction the EU will take after 2010-there's no doubt that the consistency of Germany's tax and agricultural policies have been a cornerstone of the rapid development of its biodiesel industry. As recently stated by Stefan Schreiber, head of Cargill's biodiesel operations in Germany, "For Cargill and other businesses, it is important to have a stable regulatory policy, as it is otherwise very difficult to make these long-term investment decisions."

At current prices for oil, the demand for biodiesel in the United States is primarily driven by tax incentives and legislation. For the biodiesel industry to grow on a sustainable basis, it will be necessary for federal policies to be consistent over time. In other words, they must avoid the "yo-yo" effect of tax incentives coming in and going out. When our developer clients try to raise money for biodiesel projects, they must evaluate the current tax policy and make an educated guess about whether the tax incentives will be extended beyond their present term. This tends to limit their ability to raise debt to fund their projects. Accordingly, biodiesel industry leaders should work closely with government policy-makers to ensure the development of a sound and consistent policy toward the industry, setting a framework conducive for long-term investments.

As 2010 rapidly approaches, the EU will be assessing the progress, or lack thereof, by the member states in reaching the 5.75 percent target for biofuels. Member states, such as Germany, will also be considering their own programs targeted at increasing biofuels production. For example, Germany's total exemption from the excise tax on fuel for biofuels is set to expire in 2009. In addition, Germany may embark on a different policy path as it considers a bill that is due to become law Jan. 1, 2007. This bill would require the petroleum industry to place a certain proportion of its fuel sales on the market in the form of pure biofuels or biofuels blends. With these measures, Germany's leaders believe it can reach the EU target of 5.75 percent by 2010.

The prospects for the biodiesel industry are bright. Major oil companies have shown some interest, and the product has been well-received in parts of the country where it is available. There is a growing focus on renewable energy and reducing greenhouse gases in the United States, which should help to broaden the support for the biodiesel industry. With a sound tax and policy framework, the biodiesel industry can continue to grow and contribute to America's energy security.

Robert H. Edwards Jr. is a partner in Hunton & Williams LLP's Energy and Project Finance practice. Reach him at [email protected] or (202) 955-1548.
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