Biodiesel tax credit extension will pay industry for fuels produced while it was expired

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Michael Bastasch DCNF Managing Editor
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As part of the deal between congressional Republicans and President Obama to avert tax hikes and spending cuts, a tax credit for biodiesel producers was retroactively extended for another year.

It will subsidize producers for biofuels produced and already used while the tax credit had not been in effect.

“Obviously it’s not the most ideal way to do it, it would have been better to have a seamless extension at the end of last year,” Ben Evans, spokesperson for the National Biodiesel Board, told The Daily Caller News Foundation. “There are a lot of benefits to doing it, even retroactively.”

The tax credit is a $1 per gallon subsidy, which was first implemented in 2005 and allowed to expire twice since then — once in 2010 and again in 2012. Now biodiesel producers will be paid for fuels that have already been produced and used even though the tax credit had expired.

“We have had a tax incentive for five years, our industry has had commercial scale production only since about 2005, we’re a very young and growing industry,” Evans said. “The tax incentive has accomplished what is was supposed to, the industry has grown since it was implemented.”

Biodiesel production is expected be be somewhere around one billion barrels for 2012, according to Evans. With the tax credit now in place, along with the federal Renewable Fuels Standard, Evans said the industry predicts a record year for biodiesel production in 2013.

A $1 per gallon subsidy would mean that the biodiesel industry could see $1 billion in taxpayer support in retroactive tax credits, just based on multiplying the subsidy by the expected production levels.

“Lumped into the 157-page fiscal cliff bill are extensions of energy handouts that were originally scheduled to retire, as well as retroactively rewarded tax breaks for renewable energy that expired at the end of 2011,” Nick Loris, energy policy fellow at the conservative Heritage Foundation, told TheDC News Foundation in an email.

However, the biodiesel industry was not alone in benefiting from retroactive tax increases as other energy tax extensions did the same, like the tax credit for energy efficient buildings and appliances, as well as the credit for electric motorcycles.

“The inclusion of these targeted tax breaks is a clear indication that Congress is not serious about (1) reducing spending, (2) ending the government’s meddling in the energy sector, or (3) standing up against political interests,” Loris said.

Biodiesel is fuel made from renewable resources like recycled cooking oil, soybean oil, and animal fats, making it more environmentally friendly. In 2005, the federal government implemented the RFS which mandates the level of renewable fuels to be blended into gasoline. The program was expanded in 2007.

The RFS mandates that 1 billion gallons of biomass-based diesel be used annually until 2022 and mandates the U.S. use at least 21 billion gallons of advanced biofuels by 2022. According to NBB, biodiesel can be used to meet both of these requirements.

“The costs of tailpipe pollution and carbon emission are tremendous,” Evans said. “Biodiesel significantly reduces tailpipe pollution and carbon emissions.”

The RFS allowed the biodiesel industry to significantly grow and increase production, from 112 million gallons produced in 2005 to 1.07 billion gallons produced in 2011. Reinstating the tax credit will help further grow the industry and increase production because it will be more cost-effective to do so, says Evans.

“We’re talking about building a new American industry,” Evans said “Our fuel sector has one source, and that is petroleum, and it is incredibly important that we diversify that so that we have more choices and that consumers have more choices, and that’s what this will help do.”

However, biofuel production levels dipped substantially in 2010 from 2009 levels when the tax credit was allowed to expire for the first time — from 545 million gallons in 2009 to 315 million gallons in 2010.

“Congress choked under pressure, took a bad idea, and ran with it,” Loris concluded. “Far from addressing the real problem of spending, Congress prolonged some of the worst energy policy. Congress played when it should have passed on extending expiring energy subsidies and broadly lowered tax rates–and passed when it should have played on making real fiscal change.”

Update: The Joint Committee on Taxation projects that the biodiesel tax credit will cost more than $1.8 billion in 2013 alone.

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