Aggressive policy changes need to be considered carefully

By Nicholas Zeman | May 11, 2009
Recent rumblings within the biodiesel industry have called for the existing $1 per gallon tax credit for blenders to be converted to instead directly benefit producers. This means the Internal Revenue Service would pay plants for each gallon of biodiesel they produce and end incentives for oil companies and blenders to buy the fuel. Sound logic, however, differs with that line of reasoning, said David Swenson, professor of economics at Iowa State University. "The problem with changing policy in this way is that it could over-stimulate the capacity of the industry," he told Biodiesel Magazine. "This can lead to a market glut coupled with no incentives for consumer absorption-that could kill the price of biodiesel."
Tellurian Biodiesel, with offices in Los Angeles and San Francisco, represents a cross-section of biodiesel companies that have terminals and blend operations already in place. "Many producers are already receiving the subsidy because they are blending the fuel themselves," said Joe Gershen, vice president of sales and marketing for Tellurian. "Distributors want to have B99 delivered to them, so the market has already turned the subsidy into one for production, which lowers the price of the fuel." This in itself is a sales stimulant, he added.

Incentives only work if there is clear and viable consumer demand, Swenson said, and without the development of market acceptance a production credit could actually hurt the industry more than help it. Gershen claimed however, that if a producer can get a feedstock for $1.10 per gallon-recycled cooking oil is currently the cheapest- and manufacturing costs add another $1 per gallon, then the fuel is being made for slightly more than $2 per gallon at the very least. "Even if I collect the subsidy, I'm still losing money, because it doesn't make sense to make fuel, pay to store it and not be able to sell it," Gershen said. "So I don't see how changing the recipients of the credit would over-stimulate production."

It is further observed that switching the subsidy to benefit producers would increase the support for those who have risked the capital and built the infrastructure that enabled the industry to get off the ground, but right now there's more capacity than feedstock availability in the biodiesel industry. "It is a concern that if the credit was switched entirely to one for production there'd be a new wave of people running out to build plants and that's not what we need," said Jeff Plowman, executive director of the Sustainable Biodiesel Alliance in Austin, Texas. "It would be nice to see more direct support for producers, but we also need to develop a domestic market because most of our capacity is going overseas."

There does seem to be a consensus that ending all incentives for consumption could essentially hurt the development of the U.S. sales. "We don't know if shifting the entire dollar to benefit the producer would be an entirely good thing," said Jeff Kleinschmit, director of the rural communities program at the Institute for Agriculture and Trade Policy in Minneapolis. "There might need to be a mix of incentives, some of which we would like to see tied to sustainable, local production and those companies that perform with the least environmental footprint."

Almost everyone agrees that the credit, despite to whom it goes, should be put in place for more than one year at a time.
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