Profits tied to uncertainty over tax credit renewal — study
Source: Marc Heller, E&E reporter • Posted: Tuesday, August 2, 2016
That’s one conclusion of an analysis by economists at the University of Illinois, who said uncertainty about congressional action leads to big price spikes for biodiesel. This year, fuel blenders seem more confident a renewal is coming, so prices aren’t shooting up as fast, they said.
“The U.S. biodiesel production industry has a distinct ‘feast or famine’ pattern in terms of profitability,” wrote University of Illinois economist Scott Irwin on the university’s farmdoc website last week. The cycle has been closely tied to expiration of the tax credit, offering clues about where markets are headed in the months ahead, he said.
At issue is the $1-per-gallon tax credit that expires at the end of this year. It’s part of a package of tax credits and deductions commonly called tax extenders, which aren’t permanent features in the tax code. Congress typically renews most of them temporarily, but in some years the tax extenders have expired first and been renewed retroactively.
This year, the industry seems to be counting on the biodiesel credit not to expire, Irwin said. That is reflected in diesel prices that have climbed only about 50 cents per gallon, rather than the $1 or $1.25 per gallon that occurred in prior cycles.
Biodiesel companies saw solid profits of more than $1 per gallon in 2011 and 2013, followed by losses in 2014 and 2015, Irwin said. Profits have been modest this year, around 18 cents per gallon, he said.
Typically, Irwin said, blenders who believe the tax credit may expire will bid up prices to a level roughly equivalent to the credit. Biodiesel is included in the federal renewable fuel standard, meaning companies have to supply it, tax credit or not.
“If blenders now believe there is a high probability that the credit will be extended as in the past, then the incentives for bidding up the price of biodiesel are lessened,” Irwin wrote.
Industry groups say that they believe Congress will renew the credit, and that the only point of uncertainty is whether lawmakers revise it to become a production credit. That would focus the benefit on domestic producers, while shutting out importers who can claim the current credit.
The credit remains critical to biodiesel, said Ben Evans, director of public affairs for the National Biodiesel Board, an industry group. That’s not unusual among energy sources, he said. “Every energy industry has had tax incentives.”
Even if the tax credit were to disappear, the renewable fuel standard and state alternative fuel mandates would keep plenty of biodiesel on the market, said Glen Kedzie, vice president for environmental affairs and assistant general counsel at the American Trucking Associations, an advocacy group for the trucking industry.
“All these different things are keeping the needle registered kind of high right now,” Kedzie said.