Oleochemical Makers Fear Oil Tax Break

U .S. OLEOCHEMICAL EXECUTIVES say a federal tax incentive meant to encourage the production of renewable biofuels is having the unintended consequence of threatening the continued existence of their industry.

Joined by small biodiesel refiners, oleochemical makers say they are under threat by large integrated oil companies that have gained access to a federal tax incentive designed to stimulate renewable diesel production. The two groups have teamed up to support legislation to stop oil companies from partaking in the tax break.

In early April, the Treasury Department approved a request to expand the definition of "renewable diesel" in the Energy Policy Act of 2005 to include the addition of small amounts of biomass to conventional refinery processes. As a result, oil companies that add vegetable oils and fats at their existing refineries now qualify for a $1.00-per-gal tax credit.

"This is bad energy policy, bad agricultural policy, and bad fiscal policy," says Joe Jobe, chief executive officer of the National Biodiesel Board (NBB). "If Congress lets this stand, our government will be handing over U.S. taxpayer money to some of the richest companies in the world."

Oleochemical producers, represented by the Soap & Detergent Association, are concerned that oil refiners will soak up supplies of the animal fats they depend on as a raw material. "Ironically, a historically 'green' industry is facing elimination by the subsidization of a new one," says Dennis Griesing, SDA's vice president of governmental affairs.

SDA and NBB are backing legislation introduced on May 17 by Rep. Lloyd Doggett (D-Texas) that would overturn the Treasury Department ruling and prevent big oil from cashing in on the federal subsidy.

Doggett says the credit was originally designed to encourage the production of "clean-burning, biodegradable diesel fuel that is fully independent of petroleum products." Under his bill, producers making biodiesel solely from renewable agricultural resources would continue to be eligible for the credit.

"Unless the abuse of this tax credit is prohibited, it will have the exact opposite effect of what Congress intended. It will discourage the creation of real renewable diesel fuel—and all on the taxpayer's dime," Doggett says. "Green energy initiatives must not be converted into public boondoggles."

NBB says the ruling was made to benefit ConocoPhillips and Tyson Foods. On April 16, the two companies announced an agreement to make a "renewable" diesel fuel by adding chemically altered beef, pork, and poultry fat to the oil refining process (C&EN, April 23, page 25).

ConocoPhillips CEO James J. Mulva said the companies would not proceed with the venture if they did not qualify for the tax break. "It's not profitable without the $1.00-per-gal tax credit," Mulva remarked at a news conference in Houston announcing the deal. "With the tax break, it's barely commercially viable."

The U.S. needs a diverse base of new energy sources, adds Tyson spokesman Gary Mickelson. "That's why it makes sense for our government to give emerging energy technologies and processes equal treatment. The renewable diesel we plan to produce with animal fat burns cleaner than conventional diesel and will help supplement the nation's traditional diesel supply."

Mickelson notes that the National Cattlemen's Beef Association, National Pork Producers Council, National Chicken Council, and Texas Cattle Feeders Association have each come out in support of the Treasury Department's position on the tax credit for renewable diesel.

"Denying the tax credit will only serve to limit the expansion and availability of alternative fuels and will also damage the ability of livestock farmers and ranchers to participate in the renewable energy business," Mickelson asserts.

The Doggett bill already has 50 cosponsors, Jobe says, including many members of the tax-writing House Ways & Means Committee. Sen. Maria Cantwell (D-Wash.), who is drafting a companion measure, charged at an April 19 Senate Finance Committee hearing that ConocoPhillips and Tyson tried to "go around" Congress and that the tax credit needs to be "reexamined."

SDA's Griesing adds that the legislation is a step toward "restoring a balance between biofuel production and other green industries, such as the domestic oleochemical industry, which have historically relied on some of the same raw materials."

EVEN WITHOUT the ConocoPhillips process, Griesing says, government subsidies for biodiesel and ethanol production have driven up the cost of tallow more than 80% since late 2006 by diverting the key raw material away from its traditional uses. In the U.S., oleochemicals such as fatty acids are primarily based on tallow, an animal fat.

Unlike corn and soybean plantings, which can be expanded to accommodate new biofuel applications, tallow production is relatively fixed, usually fluctuating less than 2% from year to year, according to Griesing. Cattle herds are not expanded to produce tallow. It is a by-product, not a crop.

"There has been a great deal of attention on the impact of biofuel subsidies on food prices, but the oleochemical industry is also being hurt," he adds. "If tallow becomes unavailable, the oleochemical industry will be lost to overseas producers, and the U.S. will lose yet another traditional industry."