Soy Lobby Sees $1.50/Gallon Biodiesel Mandate Subsidy

Diesel Fuel News, April 30, 2001 by Jack Peckham

American Soybean Association (ASA) last week told Congress that it wants a hefty tax subsidy for biodiesel that would be mandatorily blended into petroleum diesel.

Under the proposal, all diesel would have to contain 2% biodiesel, which could come from soybean oil. But the entire 98% diesel/2% biodiesel blend would get a 3 cent/gallon reduction from the federal diesel excise tax.

The net effect is a $1 .50/gallon subsidy for every neat biodiesel gallon going into the final diesel/biodiesel blend, as explained to Diesel Fuel News by ASA Executive Committee member Ron Heck, who earlier testified before a U.S. House agriculture subcommittee meeting.

Given current U.S. Department of Agriculture Commodity Credit Corporation (CCC) subsidies for soybean-based biodiesel (see Diesel Fuel News 2/19/2001, p2), that would just about wipe out 100% of the producer cost of soy-based biodiesel. That's because some soy-based biodiesel producers today are quoting neat-biodiesel costs around $1.40 to $1.75/gallon with the CCC subsidy, not including freight or taxes.

Without the CCC subsidy, soy-based biodiesel producer cost is over $2/gallon, Heck told us. The CCC program is only temporary, so the new excise tax subsidy eventually would put soy biodiesel producer cost at about 50 c/gallon for the neat biodiesel portion of the blend, Heck explained.

The proposed $1.50/gallon excise tax subsidy is about three times the size of the 53 c/gallon subsidy given ethanol producers for their portion of the ethanol going into 10% ethanol/90% gasoline blends. Gasohol gets a 5.3 c/gallon tax break on the entire blend, which gives ethanol producers an effective 53 cent/gallon subsidy on their portion of the blend.

"If 100 million gallons of biodiesel were used under this program, it would be blended at 2% per gallon into 5 billion gallons of diesel fuel," Heck explained in his congressional testimony.

"At a [biodiesel blend excise tax exemption] cost of 3 cents/gallon, the cost of the program [to taxpayers] would be $150 million."

Since the U.S. diesel market is approaching 40 billion gallons/year, rather than 5 billion gallons in the ASA example, the actual cost to taxpayers eventually could be up to eight times ASA's estimate: about $1.2 billion/year, not $150 million.

If however soybean prices rise because of new demand for soybean oil for biodiesel, then it could become possible to reduce current soybean marketing loan program costs from another CCC soybean subsidy program, he said. These CCC loan program savings would be passed back to the Highway Trust Fund to compensate for the biodiesel excise tax break, under the ASA proposal.

"Using a conservative 13 cents per bushel impact on [soybean] price, the cost savings on this year's estimated 3 billion bushel soybean crop would be $390 million," Heck calculated. "As a result, the [biodiesel tax break] proposal will save more than two dollars for each dollar it costs."

Left out of this calculation is the possibility of biodiesel mandates stimulating more soybean production or imports, which potentially could push soybean prices back toward today's market prices. Waste-fat-based biodiesel production also could have some impact on the cost calculation, although recycled soy frying oil also winds up as biodiesel.