Biodiesel Producers Can Meet Mandate Despite Lack of Tax Credit, Experts Say

This story appears in the Dec. 13 print edition of Transport Topics.

U.S. biomass-based diesel producers have the capacity to meet an 800 million-gallon federal mandate in 2011, despite a marked decline in biodiesel production over the past year and a failure by Congress so far to reinstate a $1 per gallon biodiesel tax credit, according to the U.S. Environmental Protection Agency and industry experts.

In its rule mandating renewable fuels, made public last month, the EPA noted that it was increasing its biomass-based diesel requirement for 2011, even though a total of 52 biodiesel production plants are idle and biodiesel production is expected to total only 380 million gallons for 2010.

Domestic production of biodiesel in 2007-2009 has ranged from 490 million to 678 million gallons annually, EPA said.

Currently, there are 145 biodiesel plants registered with EPA that have a production capacity totaling more than 2 billion gallons of 100% biodiesel, according to the agency. The pure biodiesel then is blended in various percentages with diesel — from 2% to 5% is permitted without labeling — destined for the pump.

“Ramping up production will require some time and potentially some reinvestment, but based on feedback from industry, we nevertheless believe that it can occur in time to meet a production goal of 800 million gallons,” EPA said.

However, reinstatement of the biodiesel tax credit would help keep biodiesel price-competitive and go a long way toward helping the industry to increase production, said Gary Haer, vice president of sales and marketing for one of the nation’s largest biodiesel producers, Renewable Energy Group Inc., Ames, Iowa.

At press time, Haer said members of Congress were planning to include a retroactive 2010 and 2011 biodiesel tax credit in a larger tax cut and unemployment insurance bill that gained White House support last week.

“There aren’t any guarantees that it’s going through the legislative process,” Haer, who also is chairman of the National Biodiesel Board, told Transport Topics. “But we’re very optimistic it is going to be reinstated.”

Even without the tax credit, the industry would “continue on just as we have over the past 11 months,” Haer said.

“Without the tax credit, it depends on the blend level,” he said. “But at a B2 or a B5 blend, the cost is minimal.”

A B2 blend is 2% biodiesel and 98% regular diesel; B5 is 5% biodiesel and 95% regular diesel.

A July study by the Congressional Budget Office concluded that congressional EPA production mandates — not the tax credit — are more likely to be driving biodiesel industry production.

“But the tax credit helps make our renewable fuel more affordable and more cost effective until our industry can get more mature and on better financial footing,” Haer said.

He said the biodiesel production decline in 2010 was caused by a combination of factors, including the depressed economy and the expiration of the blenders’ tax credit.

There also has been reluctance by petroleum refiners to purchase quantities of biodiesel greater than required by EPA mandates, said an industry source. Some have played a waiting game this year, holding off some purchases until after the tax credit is reinstated so they can buy it cheaper, according to the source.

In addition to the lack of the tax credit, EPA said, the swings in biodiesel production and net exports in recent years also can be attributed to “splash-and-dash” biodiesel producers who took advantage of the tax credit even though the biodiesel was not actually consumed in the United States but instead was exported to Europe.

Although the cost of feedstocks used to produce biodiesel has increased in recent years, currently there is a good market and demand for biodiesel, Haer said.

Wayne Lee, a Sherwood, Ark.-based biodiesel consultant, said the industry is poised to increase production.

“I see 2011 and beyond as being tremendous opportunities for biodiesel,” Lee said. “I’ve got several clients who are coming on line in fairly short order. Some are ramping back up now, some are coming on line and new plants are being built and commissioned now, so they’re ready.”

Lee added, “The renewable fuel standard is what’s bringing them back in. The EPA basically stuck to its guns the other day and said, ‘No, we’re going to mandate this.’ ”

He said that even without the tax credit, the industry can compete at the pump because it’s still only a few pennies higher. That’s because refiners are only producing 2% biodiesel to begin with. “Only 2/100 of the entire product is biodiesel. So it’s not like it’s making the price of the product jump astronomically,” Lee explained.

Charles “Shorty” Whittington, an Indiana-based tank-truck operator and former chairman of American Trucking Associations, has owned since July one of the 52 biodiesel plants that are idle.

Although he’s optimistic about the industry’s future, Whittington said a number of unanswered questions remained.

“We’ve got an 800 million-gallon mandate out there, but nobody can explain to the industry about how it’s going to be used, who’s going to pay for it, how it’s going to be put into the marketplace, and all those kinds of things,” Whittington said.