Where Does Biodiesel Legislation Stand?

The good news is the House Ways and Means Committee supports provisions in the Energy Bill that strengthen the biodiesel industry, and the House version of the Farm Bill would expand the Commodity Credit Corporation Bioenergy Program and the Biodiesel Education Program. The bad news is that nothing is written in stone, and the administration strongly opposes any provisions that could hamper international trade.
By Nicholas Zeman | September 04, 2007
Argentina wants to be a net exporter of biodiesel and the country is providing incentives for the processing of soybeans so the commodity doesn't leave its shores. The biodiesel that's produced in the South American country is often bound for the United States to capitalize on renewable fuels subsidies here. Argentina taxes biodiesel exports at 5 percent and taxes exports of soybean oil at 24 percent. This 19 percent Differential Export Tax (DET) provides an incentive worth 43 cents per gallon for Argentina's soybean processors to convert soybean oil into biodiesel prior to export. "The whole bean is taxed more than double what biodiesel is in Argentina," says Rick Ostlie, a Northwood, N.D., farmer and member of the American Soybean Association (ASA). "They're building plants all over the place, really trying to grow their industry."

Integrated petroleum enterprises also want to benefit from the hefty $1-per-gallon tax credit available for biodiesel and renewable diesel. Biodiesel producers and the National Biodiesel Board (NBB), however, have argued that the simple act of adding biomass to conventional refinery practices shouldn't receive the same federal support as new energy companies and technologies built from scratch. But the oil companies say they are looking at ways to reduce their carbon footprint, and that these efforts should be rewarded as well.

These two examples illustrate the conditions that are causing friction for biodiesel producers as they look to build up the industry in the United States. There are efforts though to legislate in favor of domestically produced methyl esters in the competition for federal funds and markets. Most of this work is being done in the Energy Bill and the Farm, Nutrition and Bioenergy Act of 2007, commonly called the Farm Bill. The Biodiesel Incentive Program-included in the energy title of the Farm Bill-would authorize the Commodity Credit Corporation (CCC) to use eligible commodities to reimburse U.S. biodiesel producers on domestic production. The reimbursement would equal the 43-cent-per-gallon benefit to biodiesel exported under Argentina's DET export subsidy program, essentially offsetting the so called "splash and dash" loophole.

U.S. biodiesel producers say they need an incentive to offset foreign subsidies in order to compete in their own market. Unlike ethanol, biodiesel is not protected by a secondary import tariff that offsets the value of its tax incentive.

In addition to competing with subsidized imports, the U.S. biodiesel industry is struggling to establish itself at a time of extremely volatile energy and commodity markets.

Biodiesel producers, the ASA and the NBB all believe that allowing foreign countries to capitalize on American incentives is essentially subsidizing production abroad. "It seems like there is a pretty strong feeling in the Senate to get these loopholes closed," Ostlie says. Others, however, say that because the United States is hankering to get "fuel from renewable resources wherever it can," providing incentives for oil companies to benefit from existing incentives as well as allowing foreign imports of renewable fuels is good policy.

Controversial Credit
In May, Rep. Lloyd Doggett, D-Texas, introduced a bill to prevent large integrated oil companies from "exploiting a federal tax incentive designed to stimulate biodiesel and renewable diesel production," according to the NBB. Doggett's proposal followed on the heels of the Internal Revenue Service's (IRS) approval of a request to expand the definition of "renewable diesel" in the Energy Policy Act of 2005. "Economic analysis shows that biodiesel production will create at least 40,000 new jobs and will add $24 billion to the U.S. economy," said NBB CEO Joe Job. "By contrast, subsidizing the existing operations of oil refineries accomplishes none of these goals, and in fact, could endanger free-standing biodiesel and renewable diesel producers by artificially inflating feedstock costs."

Other lawmakers believe that the United States should support fuel from all possible renewable and domestic resources. "First and foremost is reducing our dependence on foreign oil," says USDA Undersecretary for Rural Development Thomas Dorr. His stance is in keeping with the administration's position that reducing the country's dependence on foreign oil and fostering economic trade with foreign countries is as important to America's future as providing solid subsidies for the domestic agricultural and biofuels sectors.

Using biomass in conventional refining processes, however, doesn't increase domestic capacity, Ostlie says. "By subsidizing that mix you're not gaining a single gallon of refining capacity," he says. "If they're importing low-quality palm oil to use in the front end of the refinery, then the U.S. is supporting imported energy and not increasing refining capacity." The conclusion to Ostlie's argument is that by blending biodiesel with petroleum on the back-end, domestic capacity is being increased.

Administration's Stance, National Conflict, Media Firestorm
In the long term, liberal trade practices equal good policy, Dorr tells Biodiesel Magazine. This is essentially the Bush administration's standpoint, which is to foster diplomatic relations and trade with South America. President George W. Bush has been outspoken about the need to repeal the 54-cent tariff on imported ethanol and it might be hard to get similar prohibitions for biodiesel across his desk. Also, Jeb Bush, the president's brother and former Florida governor is involved with a coalition called the Florida Free Trade Association. This group counts Brazilian President Luiz Inacio Lula da Silva among its members and making ethanol trade between the United States and South America free and easy is one of its primary goals.

The battle lines are drawn with farm groups, agribusiness giants and biodiesel clearly on one side, and the president and others rallying for reform. The first group says that getting a new industry off the ground requires support and protection from volatile market forces. The second group says that it's time for the United States to start playing fairly in global markets and repair some of the fractured foreign relations that have occurred over the past decades.

In the meantime, people all over the world are watching the Farm Bill discussions. Australian farmers are even urging Bush to veto the Farm Bill. The House Agriculture Committee responded to veto threats from President Bush with some strong language. "This is not the first time that the Bush administration has turned its back on American agriculture and rural America," said Rep. Collin Peterson, D-Minn., chairman of the House Agriculture Committee. "They repeatedly threatened to veto disaster assistance for agriculture, which the Democratic leadership passed this year. The administration also vigorously opposed the 2002 Farm Bill, which [USDA Agriculture] Secretary [Mike] Johanns and others now praise as 'the right bill at the right time.'"

Where the Farm Bill is concerned, the biodiesel industry wants to see expansion of the CCC Biodiesel Incentive Program and the Biodiesel Education Program. The first of these supports domestic biodiesel production by providing farm payments to help U.S. biodiesel producers offset rising feedstock costs. The NBB says educational efforts are critical to raise consumer awareness and support for the fuel it represents, and energy titles in the Farm Bill would double funding for the Biodiesel Education Program from $5 million to $10 million.

The current Farm Bill debate has sparked a firestorm of political and media attention. Critics of the 2002 document say that the new version does nothing to fix the trade-distorting subsidies that are a shameful violation of international agreements. The Los Angeles Times reported that subsidy programs since 2002 "have been managed so badly that the U.S. Government Accountability Office turned up $1.1 billion paid out over seven years to dead people." There have been hundreds of articles written from coast to coast over the past few weeks on this subject representing the press' widespread criticism of Congress. The Denver Post, for instance, said it supported the president's promise to veto the "misbegotten form" in which the bill left the House Agriculture Committee. Many who are opposed to the House version of the Farm Bill say that America's agriculture programs are ripe for reform, and currently serve only to enrich special interests.

Ostlie and the ASA, on the other hand, applaud the House's actions because of a couple of key provisions. First the soybean target price is increased 30 cents to $6.10 per bushel, and it includes a new CCC Bioenergy program funded at $1.4 billion to support domestic biofuels production. Ultimately, the big issue here is one of image. Johanns said that increasing the target prices for 12 crops and raising loan rates on 14 clearly represents a step backward in farm policy. "Planting should be based on free-market demand, but these measures create incentives to plant one crop over another regardless of market forces," he said. "Additionally, the marketing loan program is seen as the most trade-distorting, amber-box (all domestic support measures considered to distort production and trade with some exceptions) program under our World Trade Organization obligations, making it subject to intense scrutiny. That's the bull's eye I talk about being on the farmers' backs."

The administration also wants to end subsidies for a small percentage of wealthy farms that make more than $200,000 per year. "We believe strongly that there is a point at which people graduate from receiving government cash subsidies," Johanns said at a July 25 press conference.

Dorr tells Biodiesel Magazine that he is a strong supporter of the biodiesel industry and that he thinks methyl esters are indeed a long-term alternative fuel, but support of the industry cannot come at the expense of tax increases, diplomatic relations and international trade. Could biodiesel and soybean farmers pay the political price for sought-after subsidies and become associated with trade distortion and wealthy, specialized farming interests? Ostlie says no. "We're growing fast, but we're not 100 percent up and running and we need some help to get there," he says.

In the meantime, this could be the first omnibus Farm Bill vetoed by a president since former President Dwight Eisenhower did it in 1956.

Nicholas Zeman is a Biodiesel Magazine staff writer. Reach him at [email protected] or (701) 746-8385.
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