Breathing Room

In what could be considered a gloomy year for biofuels, Congress passed much-needed tax incentive extensions for the biodiesel industry as part of the Emergency Economic Stabilization Act of 2008.
By Kris Bevill | January 01, 2009
High feedstock prices made life difficult for most biodiesel producers in 2008. Relief finally came in the form of lower feedstock prices and in a way that only the U.S. Congress can deliver-as part of a large unrelated emergency economic stimulus package. Biodiesel industry representatives lobbied all year for the extensions and other provisions. Had it not been for the sudden need for a $700 billion lifeline for financial institutions, well, there's no saying what would have happened to the biodiesel incentives.

The Emergency Economic Stabilization Act included four provisions relating to biodiesel. Income tax credits, the blenders excise tax credit, and the small producer tax credit all were extended for one year and will now expire Dec. 31. A provision allowing all biodiesel to be eligible for the $1 per gallon tax incentive was added, effective Jan. 1 2009, leveling the playing field for producers using yellow grease. The $1 renewable diesel tax credit was modified, and disallowed renewable diesel produced with petroleum products from benefiting.

The so-called "splash and dash" loophole, which permitted foreign biodiesel producers to benefit from U.S. tax incentives, was closed and effective retroactively to May 15, 2008.

No More Splash and Dash
The loophole had to be corrected, says John Fox, chief executive officer at Innovation Fuels Inc. "I think the splash and dash closure is probably one of the more instrumental mechanisms that Congress has put into place," says Fox, whose company produces biodiesel and exports it to Europe. He believes that the elimination of the loophole will make U.S.-produced biodiesel more competitive. The loophole basically roped U.S. taxpayers into funding foreign biodiesel production with little benefit to U.S. producers, he says.

While most of the industry stands to benefit from the loophole closure, Innovation Fuels may be impacted more than others because of its efforts to build up its export business.

The company currently operates a production facility in New York Harbor, which Fox says is being expanded to produce 40 MMgy. In late November, he told Biodiesel Magazine that operations were running at about 30 percent of capacity. Innovation Fuels is also building a facility at the Port of Milwaukee. The plant was in the pre-construction phase at press time. Both locations are ideal for exports as they offer direct deep-water international access. In April 2008, Innovation Fuels and its European partner, Arpadis Group SA, announced the formation of Innovation Fuels Europe, which was created to market biodiesel in Europe. In August, the company exported more than 2,000 metric tons (600,000 gallons) of biodiesel to Rotterdam for distribution via its European counterpart.

Fox says his company has imported some biodiesel from South America but never took advantage of the splash and dash loophole. "Most of our [export] sales go through our own production, but we work with other [U.S.] companies in aggregating product and providing alternative sales channels for them," he says. "We're in business to support the U.S. market, not necessarily the other world markets. It's just the nature of the business today that the world is much farther along than the U.S. and we'd really like to change that."

The closure of the splash and dash loophole is a good start, he says. Combined with the biodiesel mandate in the renewable fuels standard (RFS), Fox expects domestic sales to increase. "We're starting to see that now," he says. "More U.S. distributors are interested in biodiesel, and we're also seeing an interest in imports coming from international sources and being sold in the United States."

The Fate of Co-Processed Diesel
While the splash and dash loophole closure has far-reaching affects, the wording change that disallows co-processed diesel from receiving the $1 per gallon renewable diesel tax credit will affect few companies. In fact, Tyson Foods Inc. spokesman Gary Mickelson told Biodiesel Magazine he thinks the exclusion was aimed directly at Tyson because "we're the only ones doing it."

In 2007, Tyson teamed up with petroleum titan ConocoPhillips Co. to produce renewable diesel by combining animal fats from a Tyson beef processing plant in Amarillo, Texas, with petroleum from a ConocoPhillips refinery in Borger, Texas. The companies have been producing renewable diesel at a demonstration-scale facility at the Borger refinery since late 2007 and fought hard to remain included under the biodiesel tax incentive umbrella. In October 2008, Tyson said that denying co-processed renewable diesel from receiving the $1 tax credit would limit the expansion and availability of alternative fuels and the participation of the livestock industry in renewable energy. Now that they are no longer eligible for the tax credit, the future of the Tyson-ConocoPhillips project is unclear. During the company's 2008 fourth quarter earnings conference call, Tyson President and Chief Executive Officer Richard Bond told stakeholders that the alliance with ConocoPhillips would need to be rethought because their project was unprofitable without the $1 tax credit.

Bond drew a correlation between biodiesel and ethanol incentives and said he thinks the government favors ethanol over biodiesel. "I know many people don't like the idea of big oil companies getting tax credits, but they may not realize it is the oil companies that receive the $1 [per] gallon tax credit for blending ethanol into gasoline," Bond added. "I believe new energy technologies should compete on a level playing field and the superior technology, whatever that may be, should prevail."

In the meantime, Tyson is proceeding with a renewable diesel project in Louisiana that will be eligible for the $1 per gallon tax credit. A groundbreaking ceremony was held in October in Geismar, La., for Dynamic Fuels LLC, a 75 MMgy renewable diesel production facility that will use animal fats produced or procured by Tyson.

Other than the Tyson venture, ConocoPhillips is not currently working on any other renewable diesel projects in the United States and appears less than optimistic about its future involvement. According to the company, "Congress has closed the door on an important source of renewable energy and placed in jeopardy our ability to expand production of renewable diesel beyond the current demonstration phase. ConocoPhillips believes that all forms of energy, conventional, renewable and alternative, are needed to ensure reliable, affordable and domestic sources of fuel. And while we are doing our part by developing ever-cleaner technologies and making the investments needed to help secure America's economic future, we are disappointed that Congress is willing to pass legislation that picks energy winners and losers and that fails to recognize that multiple technology-driven approaches are needed to increase our energy security."

Yellow Grease Gets the Nod
While Tyson and ConocoPhillips believe they've been ostracized, another sector of the biodiesel community received the legislative equivalent of a warm embrace when the tax incentive for biodiesel produced from yellow grease was increased by 50 cents, making it equal to all other forms of biodiesel. "We're happy that finally happened," says Imperial Western Products Division Manager Curtis Wright. "We've been pushing for equal credits for all feedstocks since the beginning. It makes it simpler for everybody." Imperial has been operating a 12 MMgy multifeedstock production facility in Coachella, Calif., since 2001. Had the yellow grease incentive increase not passed, Wright says business probably would have continued as usual, which means operating at less than full capacity and using a combination of yellow grease and virgin fats and oil to remain competitive. Wright hopes the 50 cent increase will allow them to use more yellow grease, but says it will be interesting to see how things shake out. As always, feedstock decisions are made based on the best price and quality. "A lot of things could happen," he says. "Yellow grease could get more expensive, the market could get more competitive or some of the tallows could drop in price to narrow the spread. I don't know how it's going to pan out, but I'm sure there's going to be some changes in the market."

It's uncertain how Congress will treat biodiesel in the long term, but for now, producers have another year to breathe. Wright says he's cautiously optimistic that the incentives, combined with the 2009 RFS mandate for biodiesel, will allow the industry to gain a stronger foothold in the fuel market. Fox of Innovation Fuels believes the mandate will play a crucial role, and that the biodiesel industry needs more mandates and long-term incentives. "We have our own investment plans, and when you enact legislation that's only year-to-year it doesn't prompt large companies to make longer-term investments," he says.

Kris Bevill is a Biodiesel Magazine staff writer. Reach her at [email protected] or (701) 373-8044.
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