2014's best, worst and mixed scenarios for US biodiesel

A look at how federal policy developments may affect the US biodiesel industry
By Ron Kotrba | December 18, 2013

The best-case scenario for U.S. biodiesel in 2014 would be for EPA to do what’s right and provide a modest increase in the biomass-based diesel mandate under the federal renewable fuel standard (RFS)—an increase that would, at a minimum, match 2013’s actual production volumes—coupled with Congress extending (or renewing after it expires) the $1 per gallon blenders tax credit.

Conversely, the worst-case scenario for U.S. biodiesel in 2014 would be for EPA to ignore logic and common sense, not to mention the agency’s own mandate to protect the environment rather than the interests of Big Oil, by stalling the biomass-based diesel RFS at 1.28 billion gallons and slashing the advanced biofuel bucket to 2.2 billion gallons (down from 2.75 billion gallons in 2013 and 3.75 billion gallons in 2014, per the statute); coupled with an expiration of the tax credit without retroactive renewal in the next legislative session.

Somewhere in the middle are two other scenarios, each of which would have negative consequences on some producers and markets more than others. That, of course, would be increases in the biomass-based diesel/advanced biofuel RFS buckets without an extension of the tax credit; and an extension of the tax credit without an increase in the federal mandate. Given the gravity of the possibilities, however, either of these “middle” options would be better than the worst-case scenario.

Clearly with Congress on the way out for the year, it is fairly safe to say the tax credit will expire. The great unknown, however, is whether an extenders package will be passed early next year (remember early January 2013?). Reuters reported this week that Iowa Sen. Chuck Grassley is confident a tax extenders package will be passed next year.

“We would certainly hope and expect that biodiesel would be included in such a package,” says Anne Steckel, vice president of federal affairs for the National Biodiesel Board. “The biodiesel tax incentive has strong bipartisan support, as evidenced by the letter sent earlier this week by two dozen senators calling for its renewal and by the backing it received when it was renewed last year. There is no question that this tax incentive stimulates economic activity in this industry and creates jobs. Assuming it expires in a few weeks as expected, it will mark the third time in five years that the incentive has lapsed. That creates a tremendous amount of uncertainty in the industry that really limits its growth and development as a mainstream American fuel.”

What could we expect if a lapsed tax credit is reinstated next year but EPA doesn’t allow for an increase in the biomass-based diesel RFS? On the other hand, what would be the outcome of an increase in the mandate but no reissuance of the tax credit? It’s hard to say, certainly, but here are some possibilities.

If the tax credit was reinstated but the mandate stalled at 1.28 billion gallons, one thing we might expect is higher exports. If Congress supports biodiesel production through the tax incentive but the administration doesn’t support its greater consumption through increasing the domestic mandate, there are plenty of foreign outlets for cheaper, subsidized, high-quality U.S. biodiesel. If exports are strong, the RINs associated with those volumes are supposed to be retired, so this may have some consequence on RIN prices as well. Imports may be affected too, but how I just can’t say at this point. Another scenario is a boost in discretionary domestic blending. Regardless of a mandate, if B99 is cheaper than diesel fuel thanks to the tax credit, the fuel will be blended in the diesel fuel supply simply based on economics. However, as the recent NBB study shows, this scenario would be burdened with the loss of 8,000 biodiesel-supported jobs. 

If the mandate is increased to 1.7 billion gallons but the tax credit isn’t reinstated, this doesn’t leave any room for growth over 2013 volumes. But it would set an important, perhaps necessary, precedent for future growth in the industry—not to mention a colossal win for the biodiesel industry given the RVO proposal and the uphill battle we are now facing. Another potential expectation is we could see a modest drop in feedstock prices, given the commentary Dave Elsenbast with REG shared with me during a Q&A in our January/February 2013 issue published a year ago, which is that 25 percent of the tax credit, when in effect, is eaten up by higher feedstock costs. We may also see a drop in imports from some regions, and maybe an increase in imports from others; and a drop in exports. We would also likely see more robust RIN credit prices.

On a side note, I just got word that a group of House members, more than 50 strong, are expected to send a letter today to the Obama administration urging them to increase the biomass-based diesel RVO for next year.

Also, U.S. Sen. Heidi Heitkamp, D-N.D., sent a letter today to EPA’s Gina McCarthy strongly suggesting the agency to reconsider its proposal and boost RFS volumes for biodiesel. North Dakota is home to Archer Daniels Midland’s 85 MMgy canola biodiesel plant in Velva.

If you have thoughts on what repercussions might be had in any of the scenarios I lay out above, the readers and I would be happy to hear from you. Please enter your comments below.