Monday, September 15, 2008

Biodiesel Tax Credit Extension

The biodiesel tax credit is set to expire 12/31/08. Without an extension, the biodiesel industry will be dealt another devestating blow. Congress needs to extend the credit ASAP. Here is CBA's letter to the House stressing the importance of passing an extension before the end of the year.

Testimony of Eric M. Bowen
Chairman of the California Biodiesel Alliance
Submitted to the U.S. House Committee on Small Business
September 12, 2008

Chairwoman Velazquez, Ranking Member Chabot and Members of the Committee, I thank you for the opportunity to submit testimony today on behalf of the California Biodiesel Alliance (CBA) about the importance of the biodiesel tax incentive to the many small businesses that comprise the U.S. biofuels industry.

About the CBA: The California Biodiesel Alliance (CBA) is a non-profit corporation dedicated to promoting biodiesel in California. CBA was founded in 2006 by California biodiesel pioneers and industry leaders and represents the biodiesel industry in government relations in California and Washington, D.C. We believe that biodiesel can be a significant contributor to improving local air quality, reducing California’s dependence on foreign oil and reducing greenhouse gas emissions.

Economic & Environmental Benefits of Biodiesel to California: The economic impact to California from biodiesel development can be substantial. California is the largest state with a population of 36.6 million (12.2% of US population) and home to one of the world’s largest economies with a Gross State Product of >$1.5 trillion. California is also the largest consumer of fuel in the United States, using over 10 percent of the nation’s fuel. California is the home to 13 biodiesel plants that are either in operation or under construction. The direct, indirect, and induced increase in annual economic activity to California from a thriving biodiesel industry would be significant.

In 2007 alone, the U.S. biodiesel industry contributed over $4.1 billion to the nation’s Gross Domestic Product (GDP) and supported 21,803 jobs. In addition, economic modeling suggests that a vibrant biodiesel industry will positively impact the U.S. economy in multiple ways. America’s biodiesel industry will add $26 billion to the U.S. economy between 2007 and 2012, assuming biodiesel growth reaches 1 billion gallons of annual production by 2012. Biodiesel production will create a projected 38,856 new jobs in all sectors of the economy and additional tax revenues from biodiesel production will more than pay for the federal tax incentives provided to the industry. Equally as important, it will keep billions of dollars in America that would otherwise be spent on foreign oil. As such, there is a compelling public policy argument to be made to justify increased biodiesel production and use in U.S. (and California), and the biodiesel tax incentive is an integral part of a sound public policy framework that will allow biodiesel to play a constructive role as part of the nation’s overall energy strategy.

California Biodiesel Market: In California, demand for petroleum based transportation fuels exceeds 20 billion gallons/year. Diesel demand accounts for roughly 20% of this amount, or 4 billion gallons/year. According to the California Energy Commission, demand for diesel in California is expected to increase at a rate of 2.8% annually, outpacing the growth in demand for gasoline at 0.7%/year. According to the Energy Information Administration, transportation fuels in California account for 73.5% of total petroleum consumption as compared to 62.9% nationally. State-wide adoption of a 5% blend of biodiesel (B5), the ASTM D 975 petroleum diesel equivalent, California could support a market of over 200 million gallons/year today.

Small Business Impact: Nationally, the biodiesel tax incentive has helped increase the production and use of biodiesel from 25 million gallons in 2004 to 500 million gallons in 2007. It has established the industry as we know it, providing the stability necessary for new research and development into the next generation of fuels and fuel sources. If the biodiesel tax incentive was to lapse, biodiesel production in California would halt and the development of new production and distribution facilities would be curtailed or lost. This would have a devastating impact on the numerous small businesses that comprise all facets of the industry and jeopardize their long-term viability. Additionally, it would send negative signals to the private investment community that continues to play a crucial role in supporting the small businesses that comprise California’s biodiesel industry. This would severely disrupt the development of the State’s biodiesel industry which, in turn, would impede the State’s ability to comply with its own aggressive regulatory goals. If California’s fledgling biodiesel industry is hampered by a lapse in the tax incentive it would cripple the substantial in-state development activities and creating ripple effect that will be felt across the entire U.S. and renewable fuels industry.

Environmental Impacts: California, a proven leader in the advancement of environmental regulations that become standard practice throughout the U.S., is currently developing their Low Carbon Fuel Standard (LCFS) which will achieve significant carbon and GHG emission reductions. Biodiesel is expected to play an integral role in achieving these goals but the economic fallout from a lapse in the tax credit will have a direct effect on California’s ability to meet its own environmental targets.

In California, 42% of the GHG emissions are from transportation fuels and petroleum based diesel is the leading cause of emissions related respiratory illnesses. Biodiesel provides a simple and highly effective solution to these problems. The adoption of biodiesel as an alternative fuel requires minimal efforts and changes in existing infrastructure.

Biodiesel is an environmentally safe fuel, and is the most viable transportation fuel when measuring its carbon footprint, life cycle and energy balance. The USDA/DoE lifecycle study shows a 78% reduction in lifecycle CO2 for B100. The use of 200 million gallons of biodiesel in California would reduce current life cycle greenhouse gas emissions by 3.2 billion pounds, the equivalent of removing 280,000 passenger vehicles from our roads.

Biodiesel’s emissions significantly outperform petroleum based diesel. Research conducted in the U.S. shows biodiesel emissions have decreased levels of all target polycyclic aromatic hydrocarbons (PAH) and nitrited PAH compounds, as compared to petroleum diesel exhaust. These compounds have been identified as potential cancer causing compounds.

Biodiesel is the only alternative fuel to voluntarily perform EPA Tier I and Tier II testing to quantify emission characteristics and health effects. That study found that B20 (20% biodiesel blended with 80% petroleum diesel) provided significant reductions in the total hydrocarbons; carbon monoxide; and total particulate matter. Typically, emissions of nitrogen oxides are either slightly reduced or slightly increased depending on the duty cycle of the engine and testing methods used. Research also documents the fact that the ozone forming potential of the hydrocarbon emissions of pure biodiesel is nearly 50% less than that of petroleum fuel. Pure biodiesel typically does not contain sulfur and therefore reduces sulfur dioxide exhaust from diesel engines to virtually zero.

Energy Strategy: Together, biodiesel & California are critical to any responsible energy strategy that seeks to reduce dependence on foreign petroleum. Through the increased production and use of renewable transportation fuels such as biodiesel, California could have a significant role in the reduction of the United State’s dependency on foreign oil. California serves as the major petroleum import hub on the West Coast supplying much of the Western U.S. via Nevada, Arizona, and Oregon. California is home to 21 petroleum refineries that account for roughly 12% of U.S. refining capacity, exceeding 2 billion barrels/day, importing 36% of its refining capacity from foreign sources.

The goal of California AB 1007 (State Alternative Fuels Plan) is to reduce petroleum consumption and GHG emissions through the increased use and in-state production of biofuels. California can readily produce significant volumes of biodiesel from waste sources such as recycled cooking oils (yellow & brown grease), animal fats, and other biomass-based waste sources via traditional and developing technologies. Furthermore, the opportunity for agricultural development of dedicated energy crops such as Camelina, Jatropha, and Algae is very promising. These next generation energy crops also have numerous sustainable benefits – high oil yields, can be grown on marginal lands, require minimal inputs such as water and fertilizer, and do not compete with existing agricultural systems. With the use of B5 (5% biodiesel blended with 95% petroleum diesel), the ASTM D 975 petroleum diesel equivalent, California could support a market of over 200 million gallons/year and displace more than 8 million barrels of foreign oil. In addition, biodiesel is an extremely efficient fuel that creates 3.5 units of energy for every unit of fuel that is required to produce the fuel. For these reasons, the use of biodiesel can greatly contribute to domestic energy security.

Failing to Extend the Tax Incentive Unjustly Penalizes California: A comprehensive and fair energy policy requires tax incentives that do not reward one area of the country while penalizing another. We applaud support for all biofuels, including incentives for ethanol, but respectfully point out that at this time, crops best suited for production of biofuels are also well suited to be grown in California. As you are aware, the federal Farm Bill that passed this session included tax incentives for ethanol, thus providing strong support for agriculture and the biofuels produced in the Midwest and Farm Belt region of our country. If the biodiesel tax credit is not extended, small businesses in California that comprise the State’s biodiesel industry will be placed in an unequal and unfair position relative to our fellow citizens to the North and East who can produce biofuels from more water-intensive crops such as corn and soybeans.

It is important to note that the CBA strongly advocates for an energy strategy that benefits the entire country, and not one particular region. We believe a balanced and fair energy policy should be ecology neutral and reward each region for its contribution to our domestic energy supply. Tax law should be even-handed, and provide incentives that benefit the ability to produce biofuels from all of our nation’s diverse ecologies. Federal policy also must be cognizant of a region’s energy needs and ability to deliver its “homegrown” fuel. Biodiesel can be produced on California’s marginal lands, and can be made readily available to consumers if the Congress provides the essential tax incentives necessary for its development.

Extension of the Biodiesel Tax Incentive Is A National Priority: The biodiesel tax incentive is set to expire on December 31, 2008. Expiration of the incentive would have a catastrophic impact on the U.S. biodiesel industry, and the CBA urges Congress to approve and the President to sign an extension of the incentive before the end of the year.

The biodiesel blenders excise tax is structured in a manner that helps make biodiesel price competitive with conventional diesel fuel. If the tax incentive is allowed to expire at the end of the year, the price of biodiesel will be significantly higher than petroleum diesel, thus significantly reducing demand and making it nearly impossible for biodiesel plants to produce fuel at a profit. Thus, it is safe to assume that if the biodiesel tax incentive lapses, biodiesel production in California and the U.S. will halt or at a minimum be severely curtailed, and the energy security, environmental, and job creation benefits that the nation realizes from biodiesel production will be lost.

I would note that both the Baucus/Reid and McConnell/Grassley energy and tax extenders packages that have been unveiled in the Senate contain similar biodiesel provisions as those contained in H.R. 6049. For the sake of the biodiesel industry and the sake of America’s need to achieve energy independence, the CBA urges Congress to extend the biodiesel tax incentive prior to adjournment. A lapse in the incentive will be a devastating setback to an industry that has the capacity to make a positive contribution in breaking our dependence on foreign oil.

Again, Chairwoman Velazquez, Ranking Member Chabot and Members of the Committee, I sincerely appreciate the opportunity to submit testimony, and would be more than happy to answer any questions you may have.

/s/ Eric M. Bowen

Eric M. Bowen
Chairman, California Biodiesel Alliance
President & CEO Tellurian Biodiesel, Inc.