What are the Odds?

By Steve Kopperud, Policy Directions, Inc.

On December 31st at midnight, while most will be marking the advent of 2012, the so-called federal incentives for alternative fuels will expire. Ethanol, biodiesel, renewable diesel, all advanced biofuels, and the alternative fuel mixture tax credits – all those tax credits Congress, in its wisdom, decided would accelerate the nation’s weaning off diesel – will disappear.

They’ll disappear, but only if Congress doesn’t act to renew them in some shape or form, and the politics of deficit reduction, spending cuts, and big versus small are influencing how Congress views these incentives.

Let’s start with the given: The corn-based ethanol blender’s tax credit is no more. The Senate has voted pretty overwhelmingly to eliminate the credit for the 30 year old industry, and even its staunchest defenders have walked away from the fight. If the blender’s credit disappears, then the tariff on imported ethanol disappears as well. Savings to the government: $5 billion to $6 billion. More about the savings later.

As for the biodiesel/renewable diesel blender’s credits, the future is a bit murkier. There continues to be talk within both the Senate Finance Committee and the House Ways and Means Committee – those panels that crafted the original tax breaks as part of their tax-writing responsibility – of a tax reform package that may be part of the Joint Special Committee on Deficit Reduction, also known as the super committee, that would include extensions for both alternative fuels, but nothing is in concrete as of this writing.

Further, biodiesel interests have repackaged their “ask.” No longer is a simple extension of the blender’s tax credit the goal. The industry is seeking a conversion of that credit from a federal credit/payment that goes to the diesel refiner to do what the federal government mandates it do – namely, follow the requirements of the Renewable Fuels Standard (RFS) to use alternative fuels in their diesel mixtures – into a producer’s credit, federal largesse to benefit both large and small biodiesel and renewable diesel producers. This shift is seen as publicly friendlier to an industry populated with small producers and farmer-owned cooperative refineries. The conversion is coupled with a five-year extension so industry need not return every year with hat in hand.

However, the super committee needs spending cuts, not increases, and no matter who receives the tax credit, it still means the government is writing a check, so the retention of the biodiesel/renewable diesel tax credits becomes a heavier lift. Working to mitigate the animas directed toward the ethanol tax package is the general perception that biodiesel is a young industry, populated by smaller companies; however, the oilseed feedstock side of the biodiesel formula risks being viewed through the same lens as corn-based ethanol, meaning the use of a food/feed crop to make alternative fuel is not a good thing.

A further complication in both the budget cutting battles and the on-going debate over the need and benefit of federal alternative fuel incentives is a growing political mindset that such federal supports actually work to hold back the fledgling industries they purport to want to see grow. Representative Mike Pompeo (R-KS) introduced in early November the Energy Freed and Economic Prosperity Act, or House of Representatives (HR) bill 3308, a bill to end all targeted tax credits for alternative fuels. The rationale is that federal tax credits create winners and losers by interfering with market competition, create complacency among innovators, stifle independent investment, and place the future of these new technologies squarely in the hands of politicians and bureaucrats. Acknowledging removal of the tax credits would amount to a tax, so Pompeo would replace the tax credits with a permanent reduction in corporate tax rates. The alternative fuels industry, predictably led by the ethanol companies, has publicly trashed the Pompeo bill.

Adding another aspect to the biofuels debate is increasing criticism of the RFS as market distorting and arbitrary in its mandates. In an effort to mitigate upward market pressure on corn prices and a downward push on supplies, Representative Bob Goodlatte (R-VA), joined by Representative Jim Costa (D-CA), introduced HR 3097, a bill to require the secretary of energy to consult twice a year with the secretary of agriculture, and if the corn stocks-to-use ratio drops below certain levels, then the RFS must also be reduced by a set schedule. Given the current stocks percentage, the RFS would be cut by more than 50 percent under the Goodlatte-Costa approach. Goodlatte also introduced a bill – HR 3098 – to kill off the RFS altogether.

Re-enter the ethanol industry, never an entity to surrender easily. In exchange for giving up the blender’s tax credit, the ethanol boys and girls want that $5 billion to $6 billion in estimated savings shifted to federal loan guarantees and credits for infrastructure spending, specifically pipelines, flex fuel pumps, and direction to Detroit, MI, that the overwhelming majority of its cars and trucks must be flex-fuel vehicles by 2015. A chunk of this demand was met when Senator Dianne Feinstein (D-CA), who sought to kill the ethanol tax program outright, cut a deal last summer with Senators Amy Klobuchar (D-MN) and John Thune (R-SD) to kill the tax credits, but shift a portion of the savings to infrastructure investment.

The second half of this ethanol-led effort is a renewed push for what’s called an open fuel standard. Representative John Shimkus (R-IL) introduced a House bill last spring, followed by a similar but not identical bill from Senator Maria Cantwell (D-WA) this fall. One of the ethanol industry magazines described the standard this way: “. . . [the] proposed legislation would require increasing levels of new vehicles manufactured or sold in the U.S. be flex-fuel capable, or able to run on mixtures of E85, methanol or other alcohols or liquid fuels.” This bill is being touted as a consumer choice piece of legislation.

All of this is the expected political hoopla surrounding alternative fuels, particularly in this deficit reduction season. Most of it won’t see the light of day, but it complicates the debate. And as the super committee goes looking for programs to cut, and as those who are working to defend programs of whatever stripe against those cuts ramp up their finger pointing, tax credits for alternative fuels are at risk.

However, all things being equal, the ethanol action will remain separate from the tax treatment of other biofuels. It is likely the biodiesel/renewable diesel, small producer, and alternative fuel mixture tax credits will get extended, but it’s unclear whether the political will exists to wholesale shift the credit from the oil and gas industry to the alternative fuel producer.

As I write this, there are 17 days until November 23, and 47 days until December 23. The first date is significant because it’s the super committee’s deadline for completing legislation to cut at least $1.5 trillion out of the budget over the next decade – and the call to take those cuts to $4 trillion is getting louder. The second date is the deadline for Congress to act on the super committee’s legislative package. If there’s no deal by November 23 – meaning the super committee fails – then $1.2 trillion in across-the-board cuts kick in. The Internal Revenue Service, Department of Energy, and U.S. Department of Agriculture are not protected from those cuts.

Should the committee fail, my best guess is that absent a separate tax package – unlikely at this time – January 1, 2012, will dawn without federal tax support for alternative fuels.

December 2011 RENDER | back