"Jumpstart Our Business Strength."

That's what biodiesel proponents had in mind when they added tax incentive language to the acronym-friendly American JOBS Creation Act of 2004, also known as the FSC-ETI bill or H.R. 4520. This legislation finally came to fruition Oct. 22 when President George Bush penned his signature on the bill the U.S. Senate passed 69-17 on Oct. 17 and the House passed 280-141 four days earlier.

For the biodiesel industry, this bill will certainly have the potential to jumpstart business strength. The biodiesel tax incentive gives 1 cent
per percentage point of first-use biodiesel to the fuel blender. First-use biodiesel includes soybean oil or any other virgin non-recycled oil. A gallon of B20, for example, will give the blender 20 cents. Second-use biodiesel, which includes any recycled oil, gives the blender a half-cent per percentage point. A gallon of B20 will give that blender 10 cents.

According to National Biodiesel Board (NBB) President Bob Metz, the different tax incentives were created because recycled oil is typically half the price of virgin oils. "We wanted to keep all feedstocks on a level playing field," Metz told Biodiesel Magazine. "There was an effort to give neither recycled or virgin oil any advantage."
As it stands today, the incentive will take effect Jan. 1, 2005, and last for two years.

A hard-fought battle
The history of the biodiesel tax incentive, from inclusion to passage, is a long one. Simply ask any member of the NBB or American Soybean Association (ASA), who tirelessly lobbied for the bill to be passed. They worked with political figures like Sen. Chuck Grassley, R-Iowa; Sen. Tom Daschle, D-S.D.; Sen. Blanche Lincoln, D-Ark.; Rep. Kenny Hulshof, R-Mo. and many others. "This was a very bipartisan effort," Metz said. Finally they have seen success.

"We knew we needed a tax incentive to be competitive with No. 2 diesel," Metz said. "Diesel has incentives and rightfully so. But it was hard to compete with that. Once we could be competitive in price, we felt our product would sell itself, because it is home-grown and [environmentally] clean."

The biodiesel tax incentive language, combined with the volumetric ethanol excise tax credit (VEETC), was written by Grassley staff member Elizabeth Parish with much help from both sides of the aisle, according to Metz. The package was added to the energy bill, which failed to pass in November 2003. It was then added to the transportation bill, which stalled. Finally, the incentives found a home in the JOBS bill, where it passed through both the House and Senate. "[The biodiesel tax incentive] was more germane to that bill because it's a tax bill," Metz said.

Parish had an advantage when writing the biodiesel tax incentive, Metz said. She looked at the pre-VEETC ethanol tax credit, identified some problems that had surfaced and corrected them in the biodiesel language to make sure biodiesel didn't fall into the same trap. "Many people say, 'Give the incentive to me when I buy [biodiesel],'" Metz said. "But there's no incentive for people to blend it if there's no financial reward. This encourages [blenders] to make the financial inputs to put in an infrastructure to blend right at the pipeline."

When the biodiesel blender receives the tax incentive, the savings will theoretically be passed along to the retail and consumer levels. For example, one Southwest retailer told Biodiesel Magazine that his station would attempt to pass along as much as 12 cents of the 20-cent excise tax credit on B20 to the consumer.
"If they don't pass along part of that incentive, they won't sell any biodiesel, and they will have built the infrastructure for nothing," Metz said. "That's the beauty of this arrangement."

Awarding incentives to the biodiesel blender is common in Europe, where the biodiesel industry is more mature than the United States.
It is currently unofficial how the blender would receive the incentive. NBB Executive Director Joe Jobe told Biodiesel Magazine nothing is certain until more details are worked out. "Our interpretation of statutory language will indicate the terminal owners submit excise tax return papers with their payment, and they would be able to take credit against that liability," Jobe said.

Currently, biodiesel blenders pay 24.4 cents per gallon of fuel sold, no matter the blend. With the legislation in place, one gallon of B20 will give them a 20-cent tax credit, thus the blender will only pay a 4.4-cent tax on the same fuel. The credit is taken from the U.S. general fund and put into the Highway Trust Fund (HTF) before given to the blender. This ensures that HTF funding is unaffected by the program.

Growth projections
In 1999, only 500,000 gallons per year of biodiesel was being produced in the United States. That number grew to 2 mmgy in 2000, and by 2003, the country was producing 25 mmgy, according to Neal Bredehoeft, president of the American Soybean Association (ASA). This year, over 20 biodiesel plants are on task to produce 30 mmgy of the oil-based fuel. When the tax incentive goes into effect, this number could increase dramatically.

After the biodiesel legislation passed, some people estimated biodiesel plant capacity to grow to 150 mmgy in the next few years. If that is the case, soybean demand would increase to 100 million bushels per year. Metz said the new tax incentive could create as many as 50,000 new jobs. Existing biodiesel plants could expand production to meet demand, while several biodiesel projects in the planning stages would be able to move forward. In the end, farmers, producers, blenders and consumers could all benefit from this new legislation.

"This will have a huge effect on the industry," Metz said. "The timing is perfect."

Metz also mentioned the U.S. EPA's recent mandate on oil producers to reduce the sulfur content in diesel fuel. Right now, diesel contains 500 parts per million of sulfur. The EPA said the number must be reduced to 15 parts per million by 2005. The process of removing sulfur from the diesel makes it an extremely dry fuel that won't function in today's diesel engines. Oil producers would need to add a lubricity agent, and a percentage of biodiesel as small as B2 would give diesel fuel more lubricity than it currently has. "When people decide what lubricity to use, they do have several choices," Metz said. "But the fact is, this [biodiesel] incentive is now out there, and it gives us an advantages over the other choices."

Mixed reactions
Enthusiasm for the new bill varies throughout the industry. Between associations, blenders, lenders, and current and future producers, some said the legislation will make a difference in everyday business activities, while others said not much will change.

For example, Imperial Western Products, which didn't produce biodiesel last year because of the lack of Commodity Credit Corporation funding, will not see much significant change, according to Sales Manager Bob Clark. "With this incentive, it will hopefully broaden the markets for us and increase demand," Clark said. "But for us, and I would think for many others, [business] won't change very much."

Ultimately, an increase in demand starts with the consumer. Will lower prices be enough for consumers to use the renewable fuel? No one knows for sure. Clark also said it was tough to project an impact on the industry when it is uncertain how the new incentive will be awarded and used. Oversaturation is also a concern.

"We know of five or six projects in development, which is interesting from my perspective," Clark said. "If only three 30 million gallon plants are built, that will [be enough to] exceed demand."

Mike Ellis, president of Clinch River Valley Energy Group in Sevierville, Tenn., told Biodiesel Magazine that unless the consumer sees the savings from the tax incentive, the bill won't benefit the biodiesel industry. "One of our distributors told me that it's not going to have any effect on the pump at all," Ellis said. "I don't see blenders passing that incentive along. I'd like to think it's going to help, but it's going to depend on whether they pass on the savings."

Ellis also pointed out that biodiesel in Tennessee is already competitive with No. 2 diesel because wholesale regular diesel prices are so high. When asked if the tax incentive would affect his proposed biodiesel project, Ellis replied, "The jury is still out on that."
Roger Peterson, a spokesman for future producer SoyMor, said the biodiesel legislation had no effect on the company's construction plans. SoyMor had already broken ground, and Peterson told Biodiesel Magazine the project would've started with or without the JOBS bill.

In contrast, David Max of future biodiesel producer Sustainable Systems LLC in Missoula, Mont., said the biodiesel incentive is already helping his project move forward. He hopes to break ground this spring.

"This [biodiesel legislation] is the missing piece of the puzzle that will help us really develop a market for our product," Max said. "We needed this to demonstrate that if we build [the plant], we can sell the fuel. With the excise tax lowering pump prices, the sky is the limit."

Pacific Biodiesel Marketing Director Kelly King said the JOBS bill is positive, because it will allow the current biodiesel producer to look at other feedstocks. Pacific Biodiesel currently refines recycled vegetable oil, but, with the new incentive, it can afford to look into other options.

This bill shows support for renewable fuels on a national level," King said. "We've had great support in our county and state. This is a good indication nationally."

Mike Carson of Premier Ag LLC, a biodiesel blender and marketer, said, although exact details were scarce, the company will be sure to pass savings on to the consumer. "We have to do that because of the competitive pricing," Carson said.

Meanwhile, lenders are concerned about the incentive's two-year span. Denny DeVos, senior vice president of Ag Country Farm Credit Services, said lenders and investors need to feel comfortable that the biodiesel industry is a more permanent fixture before they are willing to give funds to new projects. "If you're making a 10-year commitment for lending and the tax credit is only two years, it puts the lender in a bad position," DeVos said. "If it moves forward like the ethanol credit, I think you will see expansion, but there will have to be a pretty concrete assurance."

Despite mixed reactions, organizations like the NBB and ASA celebrated the victory when the JOBS bill finally passed, but they are aware their job is far from over. When the tax incentive expires in 2007, they plan to get the incentive extended.

"We've been a niche market for so long," Bredehoeft said. "Now biodiesel is going to move from a niche market to being more promotionalized."

Jessica Williams is a Biodiesel Magazine staff writer. She can be reached at jwilliams@bbibiofuels.com.