Closing down $24 billion biofuels tax credit loophole: a good idea (here’s why)

In Washington, the Health Care Bill passed the US House of Representatives and included — as part of a 42-page “manager’s amendment”, a provision striking a biofuel tax credit used by pulp and paper firms that could have been worth up to $24 billion. According to a report in FOX News, “That’s desperately needed revenue to help offset the cost of the health plan.”

The complete manager’s amendment – which is NOT seen in the bill as available on Thomas.gov — is available for download here. The biofuels provisions begin with Section 555, “the Second Generation Biofuels Producer Credit” on page 14 of the text.

There has been some confusion about the provision in the industry — understandable, because “elimination of a biofuel tax credit” sounds like bad news. However, the House text is actually favorable.

First, the bill as passed amends the term “qualified feedstock” for the $1.01 per gallon cellulosic ethanol producer credit to mean “i. any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis, and ii. any cultivate algae, cyanobacteria or lemna.”

This goes a long ways towards making the biofuels tax credits feedstock neutral, and specifically is favorable to producers of microcrops such as lemna (e.g. Petroalgae) and cyanobacteria (e.g. Biolight Harvesting, Inventure Chemicals), which had previously not received recognition.

Second, the tax credit that was shut down was a credit recognizing black liquor — a byproduct of pulp and paper manufacturing — as a biofuel, rather than a biofuel feedstock. The current structure of the credit permitted pulp and paper mills to claim a 50 cent gallon payout per gallon of black liquor that was burned in boilers to make steam for power generation — a practice for many years in the industry, rather than a new practice. The manufacturers were able to claim between $6 billion and $7 billion in payouts in the most recent fiscal year, according to Digest sources.

Under the new provision — named nicknamed “Son of Black Liquor,”  pulp and paper manufacturers could have claimed the $1.01 cellulosic biofuels producer credit, and claims could have ballooned to $24 billion according to Chris Van Hollen (D-MD), the bill’s sponsor. The way was cleared by a June IRS ruling which was published last month. This, despite the fact that black liquor is not used as a transportation fuel.

However, companies that utilize black liquor as a feedstock for an advanced biofuels process — thereby using black liquor as a feedstock rather than a fuel, will still qualify for the credit, under the US House provision. Black liquor gasification is a technology hotly pursued by the Swedish government and a collection of Swedish forestry companies (including Kappa Kraftliner, SCA, Sveaskog), the Swedish Energy Agency, the research foundation Mistra, and several institutions including Luleå University of Technology , Umeå University, Chalmers University of Technology, STFI, and Swedish Corrosion Institute.

Black liquor gasification is now at pilot scale and heading rapidly towards commercialization in the next few years.

More on the issue, here, in a good recap for riisinfo.

A copy of the IRS memo from June is here.

A copy of a release from the Senate Committee of Finance discussing their intent to close the black liquor loophole is here.

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