Ding, Dong, The Biodiesel Tax Credit’s Dead!

On January 1st, 2012, the Biodiesel $1 per gallon tax credit expired….and I for one am thrilled!

Have you ever heard the statement, “We’re from the government, and we’re here to help”?
It’s usually a sarcastic statement directed at a governments inability to really help out a cause and in most cases, it does more damage than good. In the case of the $1.00 per gallon Biodiesel blenders credit, I believe the statement fits extremely well.

Here’s why.
The credit didn’t fulfill it’s intended purpose.
That purpose being to subsidize the commercial production of Biodiesel in the United States for a given period of time. The specified time was indicated as the time needed for the commercial Biodiesel industry to get sufficiently strong enough to be able to one day compete with the diesel fuel market in the United States at a commercial level.

Folks. I got news for ya. It didn’t happen….and it isn’t GOING to happen!
“But why won’t it happen?” you say….Great question!

It didn’t happen and won’t happen because the oil suppliers (new & used feedstock suppliers) to the Biodiesel industry simply raised the rate of the feedstock per gallon by the amount of the credit & took all the money! That’s why!

So what do I mean?
Well, if you go & look at historical oil prices for new & used feedstocks used in the commercial Biodiesel industry, and you look right around the time the blenders credit was instituted, expired, and then was re-instituted, you can see the price of the feedstocks increase by–wait for it–EXACTLY the amount of the tax credit!

About three years ago I started watching the value of waste vegetable oil on the open market. Right about that time, Congress changed the Biodiesel blenders credit from $0.50/gallon to $1.00/gallon of Biodiesel produced from waste vegetable oil. Within six weeks of this change, I noticed that the value of waste vegetable oil had increased by almost EXACTLY $0.50/gallon! It was terribly uncanny! Thinking this had to be a fluke, I started talking to all the commercial Biodiesel plants I knew and other experts in the industry & got their opinion. They noticed the same thing and also thought it was strange!

For kicks & giggles, I dug even farther back looking at the value of new oil feedstocks prior to the blenders credit and then shortly after the credit. Guess what? The value of the new oil increased as well and by nearly the amount of the blenders tax credit (or $1/gal for new oil).

So, we have a tax credit that was created by Congress to jump start the commercial Biodiesel industry, but yet all it does is transfer the money from tax payers to the Biodiesel feedstock suppliers. Last time I checked, these guys (ADM, Cargill, etc) are doing quite well & really don’t need a credit to prop them up.

What’s even more interesting is that at the beginning of 2010, when the credit expired, within six weeks of the expiration date, new & used oil prices dropped by the amount of the tax credit. Almost to the penny! It was almost spooky to see how close the pricing was to the tax credit loss.

So, near the end of 2010, Congress re-instituted the tax credit. (I guess out of the goodness of their hearts–couldn’t have been due to all the lobbying done by the National Biodiesel Board–which is really the National Biodiesel Board of Soybean Farmers if ya ask me). Within 6 weeks of the credit being re instituted, guess what? New & used oil prices went up by the amount of the credit again.

In other words, the Biodiesel industry DOES NOT BENEFIT from this tax credit! The benefit is simply transferred from the Biodiesel producers directly to the oil providers by means of the price of the feedstock going up by the amount of the tax credit when it’s in place and dropping by the same amount when it expires. I guess those producers that grow or collect their own oil reap the benefit, but for the majority of the other producers out there that buy their feedstock, the benefit simply isn’t there.

So how does this effect homebrewers?
When the tax credit is in place, oil collection companies are able to get more per gallon for the oil they collect, clean and resell to Biodiesel plants. This means that they’re able to pay restaurants for the oil they collect. In some cases, I heard restaurants were being paid upwards of $2/gallon last year.

For your average Biodiesel homebrewer, this means having to compete against oil rendering companies who can pay big bucks to a restaurant because Joe Taxpayer is kicking in a $1.00 per gallon for every drop of oil they sell to a Biodiesel plant. This translates to oil becoming harder and harder to get at an economically viable price (again, because the “I’m from the government and I’m here to help” folks are artificially propping up the true value of oil through a tax credit that doesn’t really benefit the industry it was meant to benefit).

So, when the tax credit expired on Jan. 1, 2012, I personally jumped for joy! Why? Because in about six weeks we’ll probably see the value of waste vegetable oil start dropping back down to what it’s economically really worth. Which is basically the price right now minus about $1/gallon.

Basically, in about six weeks, oil providers aren’t going to be able to get the prices they were getting from Biodiesel plants because the Biodiesel plants aren’t being paid a $1/gal via the tax credit anymore. This will translate into the oil collection companies not being able to pay the restaurants as much for their oil (ie. I’m betting the price they pay will drop back down to zero, nada, zilch!), and the incentive to homebrewers to start collecting oil again will become financially viable again. In otherwords, hang in there folks. In about six to eight weeks, many renderers are going to quit paying the restaurants as much for their oil and you can compete for it again!

So what about RINS?
RINS, being essentially a carbon credit mandate forced on the petroleum industry by the EPA (“You MUST sell x gallons of alternative fuels per year or pay a fine!”) will still offset Biodiesel feedstock oil prices, that’s for certain. But, that offset won’t be coming out of your tax dollars anymore. Instead, it’s a cost which will be born by the petroleum industry.

Most of the experts I’ve spoken to have indicated that they expect RIN values to cover about 1/2 the loss of the tax credit (or $0.50/gallon increase in RIN value) over the next year, but it’s not 100% certain. The US EPA just created a provision in the RIN program (Known officially as RFS2–or the Renewable Fuel Standard) that allows Biodiesel produced from Canola in Canada and imported into the United States to qualify for RINS. The effect of that change has yet to be seen, but could impact RIN values quite a bit (ie. devaluing RINS). We’ll know better in a few months.

But for now, I’m still excited by the prospect of the $1.00 per gallon Blenders credit being expired with no real hope of it being reinstated anytime soon. Congress doesn’t seem to be in any mood to spend money these days and getting any legislation through the house that involves tax credits to the Biodiesel industry is doubtful to occur. So, enjoy this brief reprieve of government stupidity for the next few months.

Who knows, Congress may pull a miracle & give the commercial Biodiesel industry (a.k.a. new & used oil suppliers) their mad money again, but I really doubt that it’ll happen this year. And personally, I hope it doesn’t occur. It’s a credit that didn’t fulfill it’s purpose and instead, just made the folks that sell new & waste vegetable oil a lot richer (and made it harder for home brewers to get oil from restaurants).

Until it does get reinstated, it’s time to Celebrate and let the oil flow!

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5 comments on “Ding, Dong, The Biodiesel Tax Credit’s Dead!

  1. Great article, Nicely put, but that’s how it works in every market e.g. barrel of oil goes up in price gas and diesel go up in price. Feedstocks for any industry receive the trickle down of tax credits in a capitalist society where the markets set prices. Example Europe pays the same amount that we do for crude oil but their gas is 2 to 3 times more than ours, why? government incentives among other things. It will be interesting to see what happens especially with the Dried distiller grains corn oil showing a 15% market potential. I ‘m glad I’m currently working on waste water purification. anyway talk to you soon.
    Gary

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