The Next Big Cut: Does It Make Cents?

By Angela J. Cyr | August 15, 2011

In June, the U.S. faced new pressure from the Group of 20 nations to end government aid for the biofuels industry at a meeting of farm/agriculture ministers in Paris. The issue for the U.S. trading partners is that the U.S. is alone in actively using trade policy to promote its own industry. At the G20 summit, the discussion included the elimination of government subsidies to promote the use of biofuels. Many of the member nations present at the G20 believe that such reduction in subsidies would reduce the volatility in global food prices. The current biodiesel tax incentive expires on Dec. 31. 

At the same time as the G20 summit was taking place, biodiesel tax credit extension bills were introduced in both the U.S. House of Representatives and the U.S. Senate. The House bill, H.R. 2238, was introduced by Reps. Aaron Schock, R-Ill., and Collin Peterson, D-Minn. The proposed House legislation extends the $1 per gallon biodiesel tax credit to 2014 and changes the tax incentive to a production excise tax credit. The Senate version, S. 1277, was introduced by Sen. Chuck Grassley, R-Iowa, and would extend and modify the existing tax incentives for domestic biodiesel production.

The Senate bill would convert the tax incentive from a blender credit to a production tax credit. If signed into law, the Senate bill would extend the new incentive for five years. The biodiesel tax credit would be increased to $1.10 per gallon for the first 15 million gallons of biodiesel produced by small producers. Additionally, the legislation would require that production of B100 or B99 become a taxable fuel, which would require the producer to collect the 24.4 cents per gallon tax from a marketer when sold outside of a registered terminal. The legislation would still allow blenders to own the renewable identification numbers (RINs), but the blenders would not be eligible to collect the $1 tax credit. The shift from a blenders tax credit to a production tax credit is designed to improve efficiency in the administration of the tax credit and reduce opportunities for fraud and abuse. 

The extension of the tax incentives for biodiesel production is extremely important to the industry’s access to capital and other methods of progress. Many groups in the biofuels industry have argued that a multiyear extension is needed to provide stability and certainty to the still maturing biodiesel industry. However, as previously mentioned, the current $1 blenders tax credit expires at the end of 2011.  Given the federal deficit discussions currently taking place, Congress may not have the desire to renew the biodiesel tax credit. 

Since the introduction of the biodiesel tax credit in 2004, it has helped support the production and use of biodiesel. Biodiesel production in the U.S. increased from 25 million gallons in 2004 to 690 million gallons in 2009, before Congress allowed the tax credit to lapse at the end of 2009, which resulted in the loss of jobs in the biofuels industry throughout 2010 as facilities were shuttered. However, there are many people in the biodiesel industry who believe that elimination of the tax credit would not result in the destruction of the biodiesel industry but instead would strengthen the RIN market. The thought process regarding the RIN market is that gallons earning a tax credit are able to remain in production at a lower RIN value than would be possible without the tax credit. If the tax credit is eliminated, then the thought is that the RIN value will rise approximately the same amount. There is evidence to support the concept that while the biodiesel industry struggled during the lapse of the tax credit, the RIN value traded at high enough prices to fill the void left by the elimination of the tax credit. The strength of the RIN market relies upon the continued RFS mandates.

Author: Angela J. Cyr
Attorney, BrownWinick
(515) 242-2418

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