Editor's Note

It's reasonable to question tax credit for palm-oil-based biodiesel
By Tom Bryan | January 01, 2006
The National Biodiesel Board (NBB) is feedstock-neutral and should be commended for staying cool in the face of what's become a very hot issue for U.S. farmers, biodiesel producers and federal lawmakers. That is, the controversy over the federal excise tax credit being made available to imported biodiesel derived from palm oil, such as that originating in Malaysia and Africa. The issue has been brewing, albeit on the back burner, since the American JOBS Creation Act of 2004 passed, establishing the federal excise tax credit for biodiesel and what became known as "agri-biodiesel"-the sort derived from virgin oils and fats.

In December 2004, the Internal Revenue Service (IRS) issued a preliminary tax credit guidance document. Later, after the energy bill extended the tax credit through 2008, the IRS issued a modified guidance document that, while still not the agency's final rulemaking on the issue, amended and clarified several specific issues. In addition to several helpful clarifications, the IRS interpreted-some say wrongfully so-that palm oil and fish oil should be included as agri-biodiesel feedstocks eligible for the full 1-cent-per-percentage-point tax credit, as opposed to the half-cent tax credit.

Predicting what might come next, the American Soybean Association (ASA), with farm-state politicians on its side, started to vent. One U.S. representative called the IRS interpretation a "loophole" that would cost American taxpayers millions and imperil the budding biodiesel industry by flooding the U.S. market with subsidized foreign biodiesel. As outlined in our page 40 feature, "The Port of Pandora," the imports have begun.

A company called EarthFirst Americas imported a small amount of palm-based biodiesel in early November and says it wants to import as much as 100 million gallons by 2007. This brazen move, although above-board and technically permissible, has the ASA "outraged" and pushing for a tariff that would offset the tax credit. The NBB is biting its lip on the issue, but, like the ASA, adamantly believes the JOBS bill included a "specific list" of feedstocks that did not-and still does not-include palm oil. "The only position we have taken on the issue is to identify what is biodiesel and what is agri-biodiesel and we argue that agri-biodiesel clearly does not include biodiesel made from palm oil. However, the IRS didn't see it that way," NBB CEO Joe Jobe said at a recent biofuels conference in Toronto.

Referring to the legitimacy of the importer's claims, Jobe said, "Well, I don't think it's time to hit the alarm bell just yet."

That's probably good advice, but if biodiesel made from palm oil does flood the U.S. market, some say there could be ugly consequences. First, biodiesel made from palm oil has a high cloud point, which severely limits its use in many parts of the country. More importantly, though, are the environmental impacts of producing palm oil. A recent report from Friends of the Earth states that the development of palm oil plantations has been responsible for 87 percent of deforestation in Malaysia. In this and other parts of the world, rainforests-not existing cropland-are being converted to palm plantations, irrevocably destroying ecosystems and putting thousands of plant and animal species, as well as indigenous peoples, at risk.
If for no other reason than this, the IRS or Congress itself should reconsider the encouragement of palm oil-based biodiesel production and use.
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