The Biodiesel Lobby Cries Foul
Let me be clear that I strongly support biodiesel. It has a better energy return than does corn ethanol, and diesel engines are far more efficient than gasoline engines. Each gallon of biodiesel displaces far more fossil fuel than a gallon of ethanol. Therefore, I am much more in favor of biodiesel production than I am of corn ethanol production. I am also not opposed to subsidies directed at giving alternative fuels a boost. (However, in order to avoid picking technology winners, I think a better system would be to boost carbon taxes on fossil fuels. That would mean all alternatives competed on equal footing).
So, I was quite pleased to read the announcement yesterday of the collaboration between Tyson Foods and ConocoPhillips to produce biodiesel from animal fats (technically, the term used is “green diesel” to differentiate it from the product made from reacting vegetable oil with methanol and caustic. This is defined as biodiesel).
ConocoPhillips, Tyson Team on Diesel Fuel Project From Animal Fat
Source: Associated Press
HOUSTON–Oil major ConocoPhillips and Tyson Foods Inc., the world’s largest meat producer, said they are teaming up to produce and market diesel fuel for U.S. vehicles using beef, pork and poultry fat.
The companies said Monday they have collaborated over the past year on ways to combine Tyson’s expertise in protein chemistry and production with ConocoPhillips’ processing and marketing knowledge to introduce a renewable diesel fuel with lower carbon emissions than conventional fuels.
ConocoPhillips said it planned to spend about $100 million over several years to produce the fuel, Chairman and Chief Executive Jim Mulva said at a news conference. It hopes to introduce the fuel at gas stations in the U.S. Midwest in the fourth quarter of this year.
The oil company and Tyson, based in Springdale, Arkansas, said the finished product will be renewable diesel fuel mixtures that meet all federal standards for ultra-low-sulfur diesel. They expect to ramp up production over the next couple of years to as much as 175 million gallons (662.4 million liters) a year – which Mulva said would amount to about 3 percent of ConocoPhillips’ total U.S. diesel production.
But the biodiesel lobby has cried foul, saying that it isn’t fair that an oil company is going to receive the $1/gallon tax credit that was designed to help the biodiesel industry. This raises the question: Is the credit designed to promote alternative fuels, or is it designed to only help certain biodiesel producers? The National Biodiesel Board seems to take the latter position. In a press release issued yesterday, they bemoaned the fact that an oil company could get the same credit that they have enjoyed:
It was with an extreme sense of irony that I read this press release, because it brought to mind many of the arguments people have used against alternative energy subsidies in general. Let’s look at some excerpts from the press release:
JEFFERSON CITY, Mo. – When he first decided to open a biodiesel plant, Delaware farmer Marty Ross knew that it wouldn’t be easy. But he believed in biodiesel’s potential for both providing energy security and adding value to the Delaware soybean crop. Seven years later, his Clayton, Del. plant is in production, and beginning to enjoy some hard-earned success. The plant has the capacity to produce 5.5 million gallons of biodiesel a year, and Ross has plans to expand that as demand increases.
So, at a $1/gallon subsidy, Delaware farmer Marty Ross stands to pull in $5.5 million a year in just subsidies. But competition is on the horizon:
However, a dark cloud now hangs over his business and threatens to dampen the benefits that the biodiesel industry brings to all Americans. “There’s no question that the government has encouraged our plant and others like us through grant programs and a federal tax incentive for biodiesel,” said Ross, president and founder of Mid-Atlantic Biodiesel. “Now, we feel like we are about to be stranded on a bridge to nowhere.”
Yes, in fact it did not escape the attention of certain oil producers that there was a credit available for biofuels production. This credit, in my opinion, is designed to promote the use of biofuels, not to favor certain producers. Mr. Ross also has received (as he notes) funds from grant programs and probably low-interest small business loans designed to help the small producers.
Ross and many others in the biodiesel industry are under threat by some large integrated oil companies, who have aggressively pursued access to a federal tax incentive that was designed to stimulate an emerging technology. Special interests have successfully lobbied the U.S. Department of Treasury to exploit a loophole in a renewable diesel tax credit law for their own benefit.
This is where my irony meter pegged out. The biodiesel and ethanol lobbies successfully lobbied for these tax credits in the first place. If your interest is truly in promoting biofuels, then why shouldn’t anyone willing to invest in the necessary infrastructure be eligible for the credit? Again, there are plenty of other incentives that the small producer receives on top of this credit.
“Certain powerful oil companies have managed to get the government to expand the definition of a separate provision that was added into the biodiesel tax credit law late in the legislative process,” said Joe Jobe, CEO of the National Biodiesel Board (NBB). “It’s our belief that this credit was developed to help a specific emerging technology, and not to further subsidize existing petroleum refineries.”
The provision in question allows fuel made from a specific process called thermal de-polymerization (TDP) to qualify for the same dollar-per-gallon incentive that was created for biodiesel produced from agricultural resources. The TDP process is a new technology to turn hazardous wastes, plastics, and food wastes like poultry offal and carcasses into a boiler fuel. Congress never had a chance to debate the provision, but it passed, along with the biodiesel tax incentive extension, in the 2005 Energy Policy Act.
This provision was inserted by Missouri congressman Roy Blunt to help the CWT plant in his state. This was in fact an emerging technology to turn waste animal fats into “green diesel.” Now that an oil company plans to do the same thing, it is interesting to see the special interests line up in opposition. That really tells me that they aren’t so much interested in promoting biofuels, as they are in promoting a certain flavor of biodiesel. They are interested in protecting their special interests.
Here is a bit more on the Roy Blunt angle from a Bloomberg article.
ConocoPhillips and Tyson Foods Inc. successfully lobbied the White House and other Bush administration officials to expand a tax break originally intended to help a plant in a top House Republican’s district.
The provision’s sponsor, Missouri Representative Roy Blunt, said he had wanted to provide a credit for diesel fuel produced with new technologies using animal carcasses and other food waste. Under rules issued by the Internal Revenue Service on April 2, the credit can now also be claimed by companies that use existing methods involving vegetable oil and animal fats.
The tax credit was “hijacked,” said Brian Appel, chief executive officer of West Hempstead, New York-based Changing World Technologies, the privately held company that owns the plant in Carthage, Missouri, that Blunt was attempting to help when he inserted the provision into an energy bill in 2005.
Jumping now back to the National Biodiesel Board press release:
Now the Internal Revenue Service (IRS) has ruled in the oil companies’ favor to expand the TDP definition to include the conventional petroleum refining process. Those companies want to add raw vegetable oils and fats at their existing oil refineries and qualify for the credit.
That is simply a false claim. You don’t just dump vegetable oil into the refinery. This is a hydrogenation process. It will require the installation of new equipment. Hydrotreaters are not cheap, and you also have to have a source of hydrogen. That may require investing in incremental hydrogen capacity, also not cheap. This will almost certainly be more expensive to produce than biodiesel produced conventionally, and this is not something that would make economic sense without the credit. So, do you favor biofuels or not? If so, you should have no problem with someone taking advantage of the incentive when without it the project would not have made economic sense.
They then list a number of reasons that oil companies should not be allowed to receive the credit. Listed among the reasons are these gems:
It will be an unanticipated drain on the U.S. Treasury.
It will be a fraction of the current amount paid to biodiesel producers, and an order of magnitude (or two) lower than the amount paid in ethanol subsidies.
It sends dangerous signals to other countries to engage in unsustainable agriculture practices to quickly meet the rising demand for raw vegetable oil.
I am not even sure what that is supposed to mean. How is a credit for animal-fat derived diesel sending dangerous signals? Wouldn’t the current biodiesel subsidy – based on vegetable oil – be more likely to send those signals?
Rather than helping our country achieve energy independence, this rule goes in the exact opposite direction…discouraging development of the renewable fuels industry.
Wow, talk about your hyperbole. Here we have an incentive for a company producing diesel from a renewable alternative source via an alternative method, and this is going to discourage the development of the renewable fuels industry? Give me a break! Nothing has been taken away from the current renewable fuels industry. They still get their subsidy. On top of that, they qualify for all kinds of small business tax breaks and grants. Yet they are worried about a company that is going to produce a fraction of the biofuel in the U.S. This is about nothing more than protectionism of special interests. It isn’t at all about the renewable fuels industry. They just don’t want the competition.
“This country has not built a new petroleum refinery in more than 30 years, and large oil companies use that to defend their prices and profits,” Jobe said. “Meanwhile, the biodiesel industry has been investing in the nation’s refining capacity with every plant that goes up.
Good grief, man. If your goal was to destroy your credibility, you are doing a great job. While there have been no new refineries built in the past 30 years, refining capacity has increased enormously. The increase in just the past 10 years has been 1.8 million barrels per day. This is around 28 billion gallons per year, as compared to the total biodiesel production of less than 1 billion gallons. So, I wonder if Mr. Jobe might like to rethink his argument that biodiesel production is expanding while oil companies are sitting around on their hands.
The petroleum industry as a whole has worked in partnership with the biodiesel industry. Many segments of the petroleum industry, especially on the distribution side, have embraced biodiesel and supported its growth,” he said.
Translation: Oil companies that buy our biodiesel for blending into conventional diesel are working with us. Those who have decided to produce their own biodiesel don’t embrace it, and don’t support its growth.
Public opinion research shows 82% of Americans support a federal tax incentive for biodiesel. They view energy security as the number one reason to support the growth of biodiesel, but also cite health, environmental and economic benefits. “I strongly doubt the American public would feel the same sentiment for another oil company subsidy,” said Mid-Atlantic Biodiesel’s Marty Ross.
Ah, who would have guessed they would try to fan the flames of hatred against oil companies? I never saw that coming. Again, it is the competition they fear. This is not an “oil company subsidy.” It is a subsidy that anyone can get. It is a biofuels subsidy. If you favor promotion of biofuels by tax incentives, then what difference does it make who is getting the credit? Unless of course the real issue isn’t promotion of biofuels.
I have said it before, and I will say it again: Oil companies are not just going to sit around and die while alternative energy companies take over. As it makes economic sense, they will start to produce biofuels. Here is a case – with the credit factored in – that did make sense. I think the reaction of the biodiesel lobby is probably not the last time you will see them (or the ethanol lobby) react negatively as oil companies continue to produce biofuels.