The tax incentive is crucial to continued growth of the U.S. biodiesel industry
WASHINGTON, DC (STL.News) Tuesday, the National Biodiesel Board (NBB) released a new report, “The Importance of the Biodiesel Tax Credit,” showing how the emerging biodiesel industry relies on the combined values of the tax credit and Renewable Fuel Standard (RFS) credits to compete with petroleum diesel in the current market. The report was written by John Urbanchuk, managing partner of ABF Economics.
Kurt Kovarik, NBB’s Vice President of Federal Affairs, comments, “The biodiesel industry’s growth has been steady and sustainable over the past 15 years, with support from the biodiesel tax incentive and the RFS. The industry supports more than 65,000 jobs across the United States and $17 billion in economic activity. But at the moment, the RFS — and the value of RINs — is being undermined by waivers and flatlined volumes. On top of that, the nearly two-year lapse of the tax credit is compounding economic uncertainty for U.S. producers, endangering jobs and economic opportunities in many states.
“Nine biodiesel plants have already slashed production or closed up, laying off workers in Georgia, Iowa, Michigan, Mississippi and Pennsylvania. Dozens more could be forced to do the same in the next few months due to the instability in federal policy. Congress needs to act now to restore the biodiesel tax incentive and help the industry reopen plants and rehire workers.”
Urbanchuk writes, “The current uncertainty surrounding reinstatement and retroactivity of the tax credit is a significant disincentive for the U.S. biodiesel industry (blenders and producers) and has constrained industry expansion. Absence of a tax credit and uncertainty is one major reason the industry is operating at only 70 percent of industry production capacity. The uncertainty is forcing some producers to shut down production.”
The report examines relative prices and values for biodiesel (B100) and petroleum-based ultra-low sulfur diesel (ULSD) from 2016 to the first quarter of 2019. Biodiesel and ULSD compete for market share within the same applications, the report explains. While biodiesel is higher priced compared to ULSD, it is profitable on average to produce because its value in meeting the RFS standards helps recoup its production cost.
“Over the past several years, while petroleum diesel prices increased, biomass biodiesel prices (B100, Upper Midwest) actually declined,” Urbanchuk writes. Higher capacity utilization rates and economies of scale are a few of the factors necessary to lower biodiesel production costs and achieve direct competitiveness.
The report’s data demonstrates that with relatively low petroleum diesel prices in 2016 and 2017, the biodiesel tax incentive helped biodiesel compete in the market, which allowed biodiesel producers to expand market share. As ULSD prices rose in 2018, biodiesel’s reduced production costs and RFS Renewable Identification Number (RIN) values allowed it to directly compete. That encouraged a continued expansion of domestic U.S. biodiesel production, as the market anticipated a renewal of the tax incentive.
In early 2019, however, falling oil prices and RIN values undercut the profitability of biodiesel.
Urbanchuk writes, “The issue for biodiesel producers is that the prices that determine ultimate profitability (feedstocks) and competitive environment in the fuel market (B100, ULSD, and RINs) are largely unpredictable. Absence of, and uncertainty regarding extension of the biodiesel tax credit significantly increases the risk biodiesel producers face.”
According to the report, the tax credit helps the typical biodiesel producer make up the remaining difference between the market price of B100 and ULSD. Blenders who market diesel fuel blends share the tax credit’s value — and risk of policy changes — with biodiesel producers, according to the report. But the biodiesel tax credit expired at the end of 2017, the report points out.
“This situation forces a biodiesel blender to reduce the transaction price of B100 (the price actually paid by the refiner) in order to remain competitive,” the report states. “Blenders have substantial market leverage to pass some or all of this “discount” back to the biodiesel producer, who has to take the transaction price into account when calculating his break-even and shutdown point.”
A copy of the report is available for PDF download.
Made from an increasingly diverse mix of resources such as recycled cooking oil, soybean oil and animal fats, biodiesel is a renewable, clean-burning diesel replacement that can be used in existing diesel engines without modification. It is the nation’s first domestically produced, commercially available advanced biofuel. NBB is the U.S. trade association representing the entire biodiesel value chain, including producers, feedstock suppliers, and fuel distributors, as well as the U.S. renewable diesel industry.