BIOMASS HUB

For a while, amidst the snows of Washington and excitement around the Obama Administration’s biofuels announcement last week, it seemed the biodiesel industry was going to get key tax credits back.  But as the snow melts, it appears that those hopes have been dashed.

On Thursday, Senatars Baucus (D-MT) and Grassley (R-IA) introduced a jobs bill that appeared to be heading to the floor as early as next week.  It would have given the biodiesel industry back crucial $1 tax breaks and eliminated a “black liquor” tax loophole that credited paper mills for the byproduct of wood pulping.

But within hours of the bill’s introduction by Baucus, Senate Majority Leader Harry Reid (D-NV) decided to rewrite the bill after Democrats complained of too many concessions to Republicans, essentially overruling the powerful Senate Finance Committee Chairman and dropping the key tax credits.

The tax credits, which at $1-per-gallon are the lifeblood of the burgeoning industry, are designed to encourage the domestic production and use of biodiesel by making the fuel price competitive with petroleum diesel fuel.  The subsidy is structured so that the value of the incentive is reflected in the market price of the fuel.  Since the tax credits expired at the end of 2009, the U.S. biodiesel industry has essentially shut down despite showing promising growth over the last several years.  Biodiesel has many advantages over other biofuels, and in some cases, may qualify as an “Advanced Biofuel” for purposes of the EPA’s recently updated RFS2.

According to the Senate Finance committee, the bill would have also raised an estimated $24 billon over a decade by preventing paper companies from claiming a lucrative renewable fuels credit, the so-called “black liquor” loophole.

From the Finance Committee summary:

Cellulosic Biofuels Loophole. The provision would modify the $1.01 per gallon cellulosic biofuel producer credit to exclude fuels with significant water, sediment, or ash content, such as black liquor.  The provision would exclude from the definition of cellulosic biofuel any fuels that (1) are more than four percent (according to weight) water and sediment in any combination, or (2) have an ash content of more than one percent (according to weight).  The provision would be effective for fuel sold or used after date of enactment. This proposal is estimated to raise $24 billion over ten years.

Given the vital role the biodiesel tax credit plays in U.S. energy policy — not-to-mention the recently revamped biofuels agenda — it is still very much on the table.  The House approved legislation in December 2009 to extend the credit, but the Senate has since been bogged down by health care.  Reid’s decision appears to be one to streamline the voting on key jobs legislation for the hurting economy, not to kill biodiesel credits permanently.

Image: Flickr/Sara Hassan