On April 3, the Internal Revenue Service (IRS) issued notice 2007-37. The Notice states that fuel produced by coprocessing biomass and petroleum feedstocks can qualify for favorable tax incentives provided by the Energy Policy Act of 2005. The notice has sparked debate in Congress, as well as disagreement between the biodiesel and oil industries.

As part of the 2004 and 2005 legislation, Congress enacted measures to boost the biodiesel industry: 1) the biodiesel fuels credit, which provides a credit of 50 cents per gallon of biodiesel ($1 per gallon for agri-biodiesel), and 2) the small agri-biodiesel producer credit, which provides a 10-cents-per-gallon credit for up to 15 million gallons of a small producer's annual production.

Additionally, the 2005 Energy Policy Act created the renewable diesel credit, which provides a $1-per-gallon credit for renewable diesel fuels. This credit is the subject of Notice 2007-37; it allows tax credits for renewable diesel fuel derived from biomass using a "thermal depolymerization process." Biomass is defined as any organic material other than oil, natural gas, coal or any product thereof.

In the notice, the IRS stated that the co-processing of biomass and petroleum feedstocks usually involves the use of catalysts. However, the notice found that neither the 2005 Energy Policy Act nor its legislative history addressed whether a process that uses catalysts is a thermal depolymerization process eligible for the credits. Based on analysis by the U.S. DOE, the IRS concluded that "thermal depolymerization should be defined generically and broadly to include processes that use heat and pressure, with or without the presence of catalysts." As a result, it expanded the definition of "renewable diesel" to include current, conventional petroleum refining processes that will allow oil companies to claim a $1-per-gallon tax credit for renewable diesel fuel produced utilizing existing petroleum refining processes that add raw vegetable oil or animal fats.

Biodiesel Industry
The National Biodiesel Board (NBB) expressed significant concern over the notice, stating the renewable diesel tax credit was established to help stimulate an emerging industry and technology, not to provide tax incentives for large oil companies. In an April 16 press release, the NBB called the measure "bad energy policy. If Congress lets this stand, our government will be handing over U.S. taxpayer money to some of the richest companies in the world, and it will not provide many of the benefits that the biodiesel tax incentive has given back to America."

Oil Industry Comments
The oil industry maintains that the notice was correct. It notes the renewable diesel tax credit applies broadly to refining processes that use heat to break polymers, rather than to a specific method of thermal depolymerization. It further stated that the notice will provide opportunities for greater use of vegetable oils and animal fats in the renewable fuels sector.

Congressional Response
Several members of Congress have agreed with the biodiesel industry. The sponsor of the renewable diesel tax credit provision, Missouri Rep. Roy Blunt, said the original intent was to provide a credit for new technologies used to produce renewable fuels. He expressed concern in a Sept. 7, 2006, letter to Treasury Secretary Henry Paulson that the oil industry's position, and presumably the notice, is at odds with original legislative intent. "Clearly, interpretations that would allow credits to large unintended producers for fuel processed would require a substantial legislative policy change that far exceeds current law and could be very expensive in terms of potential revenue loss," his letter stated.

In an April 19, Senate Finance Committee hearing, Washington Sen. Maria Cantwell said she and other members of Congress will work to overturn the notice.

While the outcome of this controversy remains uncertain, it will definitely have wide-reaching implications for the biodiesel and renewable fuels industries.

Terrance A. Costello and Todd J. Guerrero are members of the Agribusiness & Energy Group at Lindquist & Vennum PLLP, a leading provider of legal assistance on renewable energy projects across the country. For more information, visit www.lindquist.com or call (612) 371-3211.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced legal advisor for your specific situation or particular questions.