Biodiesel wins $1/gallon subsidy in U.S. Senate energy bill

Diesel Fuel News, Feb 18, 2002 by Jack Peckham

Crop-based biodiesel from soybeans, cotton-seed or any "virgin" agricultural feedstock (not waste oil) would qualify for a $1/gallon subsidy as part of the U.S. Senate energy legislation now pending on the Senate floor.

The provision passed U.S. Senate Finance Committee last week and now becomes part of the broader Senate energy bill that includes "biofuel" mandates for ethanol or biodiesel in motor fuels (see Diesel Fuel News 12/10/2001, p1).

The biodiesel subsidy initially would last for three years. But based on the history of the never-ending ethanol subsidy (arguably more "renewable" than the claimed energy benefit) and the considerable muscle of the farm lobby, it's quite possible that biodiesel subsidies could be extended when the 2005 expiration deadline approaches.

The related Senate biofuel mandate bill means that 2 billion gallons of ethanol or biodiesel must be blended into gasoline or diesel next year. The minimum would gradually increase to 5 billion gallons by 2012, thereafter converting to a mandatory-minimum percentage equivalent to the bio-fuel share in 2012.

Since ethanol already enjoys a hefty 53 cent/gallon subsidy in the U.S. and a well-developed distribution/production infrastructure, it's likely that ethanol will grab the biggest initial piece of "biofuel" mandate.

However, the new biodiesel subsidy -- a 1 cent/gallon tax break on every 1% of biodiesel blend, up to 20% biodiesel -- effectively gives biodiesel producers a $1/gallon tax subsidy on the biodiesel portion of the blend, about twice that of the ethanol tax break, biodiesel makers calculate.

But even with this considerable break, it's not guaranteed that biodiesel would therefore become about as cheap (or cheaper) as ordinary diesel, two leading U.S. biodiesel producers told Diesel Fuel News. This means it's uncertain whether biodiesel can be assured of grabbing a much bigger piece of the "biofuel" mandates from ethanol, or out-compete other "alternative" fuels in mandated fleet markets (such as the so-called "EPAct" U.S. fleets that must buy vehicles capable of running on such fuels).

Reason: Biodiesel production costs (ex-tax, ex-transport) today usually exceed $2/gallon (unless reduced by the temporary USDA Commodity Credit Corporation feedstock credits for biofuels producers) due to the relatively higher costs of feedstock oils, plus processing costs. So a $1/gallon break would still leave biodiesel costs higher than wholesale diesel today -- assuming the separate CCC feedstock credit (worth over $1.20/gallon last year, see Diesel Fuel News 1/21/2002, p6) expires as expected next year.

What's more, wholesale diesel prices, like wholesale soy-oil or other vegetable oil prices, are quite volatile and don't necessarily move in tandem. Diesel prices have to be relatively high, and vegetable oil prices quite low, to make biodiesel more attractive. This isn't guaranteed, even with the Senate tax break.

If for example diesel prices were to jump much higher than today's low-50 cent per gallon spot market range, while vegetable oil prices remain depressed or fall further, then it's possible that biodiesel blends (including the tax break) could sometimes be as cheap or cheaper than ordinary diesel, at least in areas where biodiesel distribution costs aren't a big cost factor.

But if past is precedent, then it's likely that even tax-subsidized biodiesel usually will still be somewhat more expensive than ordinary diesel fuel, except perhaps for certain short-term or special instances, explains Gene Gebolys, of biodiesel supplier World Energy Alternatives (Chelsea, Mass.).

Reason: Any sudden demand spike for biodiesel due to a temporary relative cost advantage would consequently push up the price for biodiesel. Thus the diesel/biodiesel market spread would naturally equilibrate in fairly short order.

What's more, most customers today won't buy biodiesel merely because its cost is about the same as ordinary diesel, Gebolys said. Rather, other reasons are key drivers: lower exhaust emissions, better fuel lubricity, customer desires to support domestic fuel production, regional sympathies about biofuels or additional state/local tax incentives or purchase mandates.

`Striking Distance' of Diesel

The new Senate tax break likely would put biodiesel "in striking distance" of average petroleum diesel prices and thus reduce the cost hurdle for fleets that would like to buy the product anyway, especially if the price isn't much different, Gebolys explained.

That includes fleets facing federal alternative-fuel mandates ("EPAct" mandates) and other fleets with high sensitivity, to diesel emissions. The break also should boost biodiesel prospects as a lubricity agent for the upcoming ultra-low-sulfur diesel (ULSD) mandate that hits North America in mid-2006, since biodiesel has been shown as an effective fuel lubricant -- although chemical lubricity agents today are much cheaper.

On the other hand, trying to get the U.S. government to force rapid growth of biodiesel could backfire, according to biodiesel producer Joe Loveshe of Columbus Foods, Chicago. If the net result of big biodiesel mandates and subsidies only triggers higher crop prices, then that eventually would lead to higher vegetable oil prices, putting biodiesel producers back to square one: unable to compete on price with petroleum diesel, he said.