## Biodiesel Tax Credit Opens the Door for Mainstream Adoption

##### 27 October 2004

There’s been a great deal of interest and more than a few questions on the green tax breaks embedded within the massive “JOBS” tax breaks bill (earlier post), so I’ll provide more specifics by sector as I get them.

Dave wrote in first with a pointer to the website of the National Biodiesel Board and its summary and analysis of the biodiesel section of the bill—we’ll start with that first.

An excise tax is a tax on the sale or use of specific products or transactions. A tax credit is a dollar-for-dollar reduction in the tax.

Biodiesel Credit Highlights of HR 4520

• Creates a new excise tax credit for biodiesel: $1.00 per gallon for biodiesel made from virgin oils derived from agricultural products and animal fats, and$.50 per gallon for biodiesel made from recycled oils. The credit applies to pure B100 and pro-rated to blends based on percentage. The blend credit thus works out to one penny per percent of biodiesel from virgin oils in a fuel blend, and one-half penny per percent for recycled oils.

• Allows the credit to be claimed for both taxed and tax-exempt fuels.

• Streamlines the tax structure and refund system to encourage blenders to blend biodiesel as far upstream as possible, allowing more biodiesel to be used in the marketplace. Tax refunds are to be paid within 20 days of blending.

• Any taxpayer eligible for the biodiesel tax credit will be able to file for a refund for every gallon of biodiesel used in the marketplace without regard to the income of the taxpayer or whether the fuel is used in a taxed fuel or tax exempt fuel.

• The credit is taken by the blenders/distributors. It is then up to them to decide how to use the extra money. The industry in general hopes than competition will drive the blenders to pass the credit along to the consumer, resulting in lower biodiesel fuel prices.

The timing of the credit is excellent. If diesel prices were stable at the level of a few months ago, then applying the credit would make biodiesel and biodiesel blends cost-competitive with petroleum diesel.

What makes this very interesting at this particular point in time, however, is the trajectory that petroleum diesel prices are taking.

The chart to the right (Click to enlarge) plots the average weekly US retail sales price of No. 2 diesel for the last 10+ years. As you can see, and as commercial drivers especially are feeling, the price is higher than it has ever been.

There are multiple reasons for the strong rise in diesel but some of them are structural. Outside of the US, diesel demand is growing very strongly, and there just isn’t that much left for the US to import from foreign refineries. Internally in the US—we’re not really geared up for diesel production, and the winter heating season (which consumes a fuel oil similar to diesel) is upon us. It is a classic supply/demand crunch.

What this means for biodiesel is that not only could it meet the price of diesel with the tax credit, but it could beat it. This is a terrific time for the producers and the distributors to establish a strong position in the market, and then build from that.

According to the National Biodiesel Board, the domestic industry will produce some 30 million gallons of biodiesel this year, although it has a capacity of 150 million. The USDA thinks demand will grow to 124 million—but with the soaring costs of crude and diesel, demand could be higher, and more quickly.

One of the things we’ve seen is that building a biodiesel facility is much less involved and costly than building, say, a petroleum refinery or a gas-to-liquids plant. If demand surges, the industry should be able to keep up with that demand.

There is no better time than right now. Increased production will help lower costs. Combining that prospect with the tax credit, biodiesel could rapidly become not only the immediately useable renewable supplement or alternative to diesel, but a bargain on top of it.

Resources