Tax Credits Are a Valuable Tool in the Biofuels Policy Toolbox

January 7, 2013 |

ericksonBy Brent Erickson, Executive Vice President, BIO Industrial & Environmental Section

It is not often I disagree or take issue with Biofuels Digest; however, the recent article and analysis on cellulosic tax credits left out some key points. There are a number of policy tools to help the biofuels industry compete with entrenched incumbents and foreign petroleum. The Renewable Fuels Standard (RFS) is certainly the most important policy tool but others do also provide support for advanced biofuels technology commercialization efforts.

When Congress recently extended tax credits for advanced biofuel production and advanced biorefinery construction, industry trade groups cheered. Investors in biodiesel, algae and cellulosic biofuels also took note, demonstrating the value of even a short-term extension of the credit and the benefit of leveling the playing field for new technologies.

These tax credits do help drive private investment in new technologies and a longer-term extension made available to additional biobased technologies – such as renewable chemicals – would pay strong dividends for future economic growth.

There are a wide variety of players in this space, with varying degrees of financial wherewithal. But in general, financing for large-scale projects – especially for construction of first-of-a-kind advanced biorefineries – remains challenging in the current economic environment. Individual advanced biofuel companies are deploying different project development and capital financing strategies to overcome the challenges.

So while the tax credit may not be attractive on the debt equity balance sheet, as the Digest suggested, it can be crucial in other ways.

Production tax credits similar to that for advanced biofuel are currently also offered to incumbent fossil energy companies along with other renewable energy companies. In fact, Congress extended many of these tax credits in the same bill – for instance, a per gallon credit for propane and natural gas that are used as transportation fuels. In addition, the oil industry receives significant tax related subsidies along the oil supply chain.

Advanced biofuel developers – and for that matter, renewable chemical developers – must compete for investment dollars with other liquid fuel technologies and they’d be at a disadvantage without the tax credit extension.

Likewise, the United States must compete with other nations in offering investment incentives, if it wants U.S. companies to develop these home grown technologies here in the United States. The European Union, Canada, Brazil, China and Japan all have highly competitive tax incentives for biobased products and in fact are attracting construction of new facilities – and associated jobs. The Brazilian government incentivizes ethanol production, which qualifies for the advanced pool within the Renewable Fuel Standard. So, arguably the U.S. production tax credit helps level the playing field for domestic producers.

Another often-overlooked point is that the production tax credit can also be transferred to the entity that actually puts the fuel in the tank of the end user. It adds value to advanced biofuels for integrated petroleum refiners, balancing the cost of compliance with the RFS.

From the start, Congress recognized that a diverse portfolio of programs would be necessary to bring a wide variety of companies into the advanced biofuel space. A long-term extension of the tax credit would definitely provide certainty for the largest number of these companies, and we’ll continue to work toward that goal.

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