Small refiner ULSD tax breaks, biodiesel subsidy, alt-fuels breaks in U.S. House, senate energy bills

Diesel Fuel News, April 14, 2003 by Jack Peckham

The full U.S. House and the U.S. Senate Finance Committee just approved bills granting tax breaks to a wide variety of energy producers, including "small" refiner deductions for producing ultra-low sulfur diesel (ULSD) and separate breaks for ethanol, biodiesel and other "alternative fuels."

Following earlier action by House Ways & Means Committee, the full U.S. House late last week passed an omnibus energy bill (H.R. 6) including the various tax breaks. The Senate is expected to take up similar legislation soon, but faces a major battle over a House-passed provision to allow oil drilling in Arctic National Wildlife Refuge (ANWR).

Under the House energy bill and the Senate Finance Committee bill, a relative handful of "small refiners" would be able to expense the first 75% of capital costs for producing U.S. EPA's highway ULSD (up to 15-ppm sulfur) and up to 5 cents/gallon for the other 25% of capital costs.

Both bills define "small" refiners as those with up to 1,500 employees "engaged in the refinery operations of the business" and average (annualized) daily runs of up to 205,000 barrels. This is broader than the standard U.S. government definition of "small" which normally includes all employees, not just refinery employees. Farm co-op refiners also qualify.

The 75% expensing and 5 cents/gallon credit provisions max-out for refiners producing up to 155,000 b/d, then decline proportionally for the next 50,000 barrels (up to 205,000 b/d) qualifying for partial credit.

The tax breaks cover costs of "new process operation units or the dismantling and reconstruction of existing process units to be used in the production of low-sulfur diesel fuel, associated adjacent or offsite equipment (including tankage, catalyst and power supply), engineering, construction period interest and sitework."

The estimated cost to the U.S. Treasury between 2003-2013 would be about $72 million, with the greatest costs expected in 2008-2009.

Other key energy tax bill provisions:

The House bill (but not the Senate bill) would exempt the water portion of diesel-water emulsions from the 24.3 cents/gallon federal diesel fuel excise tax, effectively imposing a 19.7 c/gal. rate on EPA-registered emulsions of "at least 14%" water content.

Railroads and inland barges would (starting next year) be exempted from a 4.3 c/gal. diesel tax that went to the highway trust fund, for which these industries receive no benefit.

Buyers of "advanced lean-burn technology" light vehicles that meet EPA Tier 2/Bin-5 before 2007 could get fuel-efficiency tax credits. Since ULSD won't be widely available before mid-2006, this seems to block clean-diesel credits, with perhaps the possibility of some fleet applications using "early" ULSD.

Senate Finance (but not the House) approved a $1/gallon "agri-biodiesel" subsidy for oilseed/animal fat-based biodiesel (1 cent/gallon for each percent up to 20% biodiesel blend) and half that rate for recycled waste fats/oils-based biodiesel. The credit can be taken either as an income tax or excise tax credit if "agri-based" but only as an income credit for "recycled" biodiesel.

* 'Renewable' = Perpetual Breaks

The biodiesel credit provision supposedly would expire Jan. 1, 2006. But given the track record of the ag lobby getting repeated extensions for ethanol-gasoline tax subsidies and blending mandates, perpetuity seems more likely.

* Sellers of "alt-fuels" including compressed natural gas (CNG), LP-Gas, hydrogen and 85% ethanol/methanol could claim a tax credit of 20 cents/gallon of gasoline equivalent next year, 30 cents/gallon equivalent in 2005 and 40 c/gal. in 2006, under the Senate bill.

* House energy bill would allow refiners to earn renewable fuel credits for selling biodiesel fuel, as offsets to any shortfalls in the "renewable fuels standard" that forces refiners to sell 5 billion gallons of ethanol-in-gasoline blend in coming years.

* Fuel-cell cars and hydrogen infrastructure would get $1.5 billion in subsidies under this House Energy bill, as requested by President George Bush.

* Up to 25% of $210 million authorized for "clean school bus" acquisitions could go for buses equipped with diesel particulate filters (DPFs) running on ULSD. Alt-fuels would get the other 75%.

* In House energy bill, U.S. EPA must establish a grants program for clean-diesel school bus retrofits (1991 or later model year) running on ULSD. It authorizes (but doesn't appropriate) $90 million in 2004, $100 million in 2005 and $110 million in 2006 for retrofits.

* Up to 25% of another $200 million authorized for "advanced vehicle" grants in the "Clean Cities" program (including public transport, delivery vehicles, light vehicles) could include DPF/ULSD-equipped vehicles.

* Railroads could get up to $25 million next year, $30 million in 2005 and $35 million in 2006 for advanced technology research on low emissions/high efficiency locomotives. The same provision is included in both House and Senate Finance energy bills.

* Fleets that cut mobile-source emissions might be able to expand emissions credit trading with stationary sources. The House energy bill will require EPA to evaluate recent emissions-trading programs and figure out ways to make these work best.