Biodiesel, Soap Makers Clash With Big Oil Over Tax Credit

Federal tax incentives meant to encourage the production of renewable biofuels are having the unintended consequence of threatening the continued existence of the U.S. oleochemical industry, according to an industry official.

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 incentives.

In early April, the Internal Revenue Service 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 raw 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."

"Ironically, a historically 'green' industry is facing elimination by the subsidization of a new one," says Dennis Griesing, vice president of governmental affairs for the Soap & Detergent Association (SDA), referring to the oleochemicals industry.

SDA and NBB are backing legislation introduced on May 17 by Rep. Lloyd Doggett (D-Texas) that would overturn the IRS 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 beef, pork, and poultry by-products and animal fat to the oil refining process (C&EN, April 23, page 25). ConocoPhillips said the fuel would not be commercially viable without the tax break.

Jobe says the bill already has 50 cosponsors, including many members of the tax-writing House Ways & Means Committee. Sen. Maria Cantwell (D-Wash.), who is drafting a companion measure, asserted 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 is backing the legislation because it is concerned about the future availability of animal fats for oleochemicals production. Griesing says 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."

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 the production of corn and soybeans, the main raw materials for ethanol and biodiesel, tallow production is relatively fixed, usually fluctuating less than 2% from year to year, according to SDA.

"From what we can determine, subsidized ???coproduction renewable diesel' on the part of large oil companies poses the greatest issue because it directly threatens the availability of tallow, not just its price," Griesing says.

"While there has been a great deal of attention on the impact of biofuel subsidies on food prices, 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."