Tax Break For Biofuel Targeted | October 8, 2007 Issue - Vol. 85 Issue 41 | Chemical & Engineering News
Volume 85 Issue 41 | pp. 35-38
Issue Date: October 8, 2007

Tax Break For Biofuel Targeted

Credit for fuel from fat sparks fight on Capitol Hill
Department: Government & Policy | Collection: Economy
ConocoPhillips is fighting to preserve a subsidy for producing diesel fuel from animal fat at its refinery in Borger, Texas.
Credit: ConocoPhillips
ConocoPhillips is fighting to preserve a subsidy for producing diesel fuel from animal fat at its refinery in Borger, Texas.
Credit: ConocoPhillips

AN ATTEMPT BY some members of Congress to repeal the expansion of a federal tax incentive for producing alternative energy is threatening a joint venture announced in April by ConocoPhillips and Tyson Foods. The companies intend to produce "renewable" diesel fuel from animal fat such as beef tallow and pork lard. But without the tax credit, they argue, the process is not economically viable in the U.S.

A group of mostly Democratic House lawmakers, led by Rep. Lloyd Doggett (D-Texas), argues that the credit was established in the American Jobs Creation Act of 2004 to stimulate the growth of the fledgling biodiesel industry and its many small players, not to give major U.S. corporations another tax break. "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 taxpayers' dime," says Doggett, a member of the tax-writing Ways & Means Committee.

A bill (H.R. 2361) introduced in May by Doggett and subsequently rolled into the broad energy package that easily passed the House on Aug. 4 would overturn a ruling by the Treasury Department early this year that allows petroleum refiners to take advantage of a $1.00-per-gal tax credit for producing diesel fuel from food wastes or vegetable oils in existing refineries.

Doggett insists that the tax credit was intended to encourage the production of fuel from purely renewable resources. "It was not intended to benefit oil companies that simply mix an undetermined amount of biomass into ordinary petroleum and call it renewable diesel," he asserts. Prohibiting the oil industry from taking advantage of a tax incentive that was meant for small biodiesel refiners, Doggett contends, "is a fiscally responsible way to prevent green energy initiatives from being converted into boondoggles."

The Senate, however, narrowly rejected an attempt to limit eligibility for the tax break when it passed its version of the energy legislation in June. House and Senate negotiators will try to reconcile differences in their bills and resolve the tax dispute this fall.

ConocoPhillips, the nation's third-largest oil company, and Tyson, a major meat processor, plan to use Tyson's beef, pork, and poultry by-product fat to produce 175 million gal of diesel fuel per year by the end of 2008 at several ConocoPhillips refineries. Limited production is scheduled to begin before the end of the year at the company's plant in Borger, Texas, near Amarillo.

The two companies say the animal fat will be processed with hydrocarbon feedstock to produce a fuel that is chemically equivalent to petroleum-derived diesel and meets all federal standards for ultra-low-sulfur diesel. The processing technology was developed by researchers at Houston-based ConocoPhillips and was tested at the company's Whitegate Refinery in Cork, Ireland. Commercial production using soybean oil began in Ireland late last year. Tyson has access to about 2.3 billion lb of animal fat annually. The Springdale, Ark.-based company says the venture will use more than half of the fat that it currently sells as a commodity.

BUT THE DEAL depends on the companies' access to the $1.00-per-gal tax credit that will make the fuel cost-effective. "Thanks to tax incentives, renewable diesel's retail price will be competitive at the pump," ConocoPhillips Chairman and Chief Executive Officer James J. Mulva remarked in announcing the joint venture in April. "It's not profitable without the $1.00 tax credit. It's very important in going forward at this point in time."

ConocoPhillips and Tyson maintain that incentives are necessary to spur production of alternative fuels and help reduce the nation's dependence on foreign crude. "Our initiative is about increasing the supply of renewable fuels and contributing to U.S. energy security efforts," says Tyson spokesman Gary Mickelson. "We believe our alliance qualifies for a federal production tax credit."

The incentive was modified two years ago when Congress added a provision to the original biodiesel tax credit to include a chemical process called thermal depolymerization. TDP is a new technology that uses heat and pressure to turn food wastes into a boiler fuel. The provision was inserted into the Energy Policy Act of 2005 by then-House Majority Whip Roy Blunt (R-Mo.) to help a plant in his home district produce fuel from turkey carcasses.

After the legislation was enacted into law, ConocoPhillips and Tyson began lobbying the Bush Administration to rule that the tax credit could also apply to diesel fuel production that uses TDP technology to coprocess animal fat or other biomass with hydrocarbon feedstock. The companies argued in several meetings with White House officials that their process qualifies for the credit under Rep. Blunt's provision and is consistent with President George W. Bush's goal of boosting production of renewable fuels to combat the country's dependence on foreign oil.

"We wanted to get some certainty around the economics," says Louis Burke, manager of alternative energy programs for ConocoPhillips. "The feedstock cost is substantially more than what the fuel sells for, so there's no economics at all if it doesn't get tax supported." Burke says ConocoPhillips plans spend up to $100 million over the next three to five years to enable several of its refineries to produce the new fuel. "This is a very difficult thing to do," he remarks. "Everyone seems to think you just dump animal fat or vegetable oil in a diesel hydrotreater. It doesn't quite work that way. You've got a whole lot of unit conversion work."

Credit: Courtesy of Roy Blunt
Credit: Courtesy of Roy Blunt

In a letter to Treasury Secretary Henry M. Paulson Jr. last September, Blunt urged the department to rule against the effort to expand eligibility for the tax credit. "My intention in enacting this provision was to provide a credit for a new class of technologies for the production of alternative fuels, which would utilize the whole waste stream of the biomass defined in the provision," Blunt wrote. "Interpretations that would allow credits to large unintended producers ... would require a substantial legislative policy change that far exceeds current law and could be very expensive in terms of potential revenue loss."

The tax break was initially projected to cost the government about $46 million. But with ConocoPhillips claiming the credit, the added cost would start at $175 million based on the company's plan to produce 175 million gal of diesel fuel. The expense could skyrocket if other companies that are openly exploring bioenergy possibilities, like Smithfield Foods, launch similar ventures.

Credit: National Biodiesel Board
Credit: National Biodiesel Board

Over Blunt's objections, the Internal Revenue Service (IRS) ruled, in a notice published on April 2 and designated as Notice 2007-37, that fuel produced by coprocessing biomass and petroleum feedstock is eligible for tax-favored treatment under the 2005 energy act. Andrew DeSouza, a spokesman for the Treasury Department, says the IRS ruling reflects a desire by the Administration "to incentivize the growth of alternative energies and alternative and renewable fuels." The tax break is due to expire at the end of 2008.

The IRS ruling and the ConocoPhillips-Tyson venture announced shortly thereafter have raised the ire of small biodiesel producers, who say they will not be able to compete if large petroleum refiners are able to claim the $1.00-per-gal tax credit. "It's our belief that this credit was developed to help a specific emerging technology and not to further subsidize existing petroleum refineries," says Joseph Jobe, CEO of the National Biodiesel Board (NBB), a Jefferson City, Mo.-based industry trade association.

Credit: Courtesy of Lloyd Doggett
Credit: Courtesy of Lloyd Doggett

Allowing oil companies to claim a tax credit for converting biomass into diesel fuel at existing refineries "will do nothing to expand our nation's renewable production capacity and will hinder the growth of America's biodiesel industry," Jobe declares. "This is a question about what makes sound energy policy," he adds. "Do you take limited taxpayer dollars and invest them in new energy companies and technologies built from the ground up, or do you take those same dollars and give them to already large, mature, highly profitable oil companies?"

There are now 165 biodiesel plants operating throughout the U.S, according to NBB. Domestic production has increased from 25 million gal in 2004 to more than 250 million gal in 2006. Output is expected to exceed the 300 million-gal mark this year. But Jobe fears that large oil companies will put a stranglehold on the raw materials used to make biodiesel by artificially inflating feedstock costs. "The price of all vegetable oils and animal fat will be bid up, and eventually, it won't be economical to make biodiesel," he says. "Some plants are likely to go out of business, and the growth of the industry will be stunted."

Jobe stresses that the oil industry should not be painted with one broad brush. "We are talking about just a few companies that are engaged in this activity with respect to renewable diesel," he says. "Many segments of the petroleum industry, especially on the distribution side, have embraced biodiesel and supported its growth."

ConocoPhilips' Burke maintains that biodiesel refiners are fearful of competition from a second-generation product that offers a number of environmental advantages. Renewable diesel, for which petroleum remains a primary ingredient, is cleaner burning, produces less nitrous oxide, and has lower sulfur content, he says. And unlike biodiesel, which must be transported by truck or rail, renewable diesel does not absorb moisture, so it can be transported through the existing pipeline distribution system. "The beauty of this product is that its system fully integrates downstream," says Burke. "If you want to do biofuels on a really big scale, such as tens of billions of gallons, you have to fit within the existing infrastructure, or it will not work."

THE EXPANSION of the tax credit has also angered soap and detergent makers, who rely on tallow-based oleochemicals to make cleaning products. In the U.S., fatty acids and other oleochemicals are primarily derived from beef tallow, a natural fat extracted from cattle.

"Although unintended, subsidies for biofuels are threatening the continued existence of the U.S. oleochemical industry," says Dennis Griesing, vice president of government affairs for the Washington, D.C.-based Soap & Detergent Association. "Ironically, a historically green industry is facing elimination by the subsidization of a new one. We believe that both can and should coexist as well as thrive."

Oleochemical producers were already under cost pressure because steeply rising corn prices, driven by the federal requirement to increase fuel ethanol production, have prompted farmers to switch to tallow and other less expensive ingredients for their livestock feed. The drawdown of the tallow pool has boosted prices into the range of 27–31 cents per lb in recent months, compared with only 15 cents a year ago. The type of operation announced by ConocoPhillips and Tyson poses an even greater challenge, Griesing says, because "it directly threatens the availability of tallow, not just its price."

It's estimated that the ConocoPhillips-Tyson venture could consume as much as one-quarter of the total U.S. beef tallow supply. Griesing says a few more similar ventures could gobble up all of the key feedstock. "There is no real elasticity in the tallow supply," he notes. Production is relatively fixed, usually fluctuating less than 2% from year to year. Cattle herds are not expanded to produce tallow; it's a by-product. "If tallow becomes unavailable, the oleochemical industry will be lost to producers in Southeast Asia, and the U.S. will lose yet another traditional industry," Griesing says.

Burke expresses sympathy for the soap makers, but he says the government's fuel subsidies are altering markets and creating problems for a lot of companies. "I understand the concerns of the folks in the soap and oleochemical businesses," he remarks. "The feedstock concerns about taking a triglyceride and turning it into fuel are legitimate. But if you want renewable fuels, there are going to be a lot of unintended consequences. It is a feedstock-limited world."

ConocoPhillips and Tyson officials say they will work hard to save their tax credit when House and Senate negotiators meet in a conference committee to hammer out a final energy bill. "Denying the tax credit will only serve to limit the expansion and availability of alternative fuels and also damage the ability of livestock farmers and ranchers to participate in the renewable energy business," says Tyson's Mickelson.

HE NOTES THAT a number of livestock producer groups, including the National Cattlemen's Beef Association, National Pork Producers Association, National Chicken Council, and Texas Cattle Feeders Association, support Treasury's position on the tax break for producing diesel from renewable feedstocks. "Our nation needs a diverse base of new energy sources. That's why it makes sense for our government to give emerging energy technologies and processes equal treatment," Mickelson says.

Burke argues that without the full $1.00-per-gal subsidy, it would be impossible to make the new fuel in the U.S. without losing money. "If you do not have parity on the processing—say biodiesel gets a buck and we get 50 cents—they win, because I can't afford the feedstock. If there's a 50-cent-a-gal difference, we can't compete with them economically," he says. "So we hope to see the tax credit maintained."

While the oil industry has been sharply criticized for not doing enough to promote the use of renewable energy, Burke says many members of Congress simply do not want to see oil companies get a tax credit. "They do not think the oil companies should get any help," he says. "But they also tell us we should be doing biofuels work. Except you can't do biofuels work without some form of tax support. We find the inconsistencies frustrating."

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