Page 36 - Oil and Energy-February 2013

36 • OIL&ENERGY
Biofuel
WE STARTED THE NEW YEAR WITH CONGRESS
wrangling over the budget and, finally,
passing legislation to avoid the so-called
“fiscal cliff.” As we all know, that would
have triggered automatic tax increases and
spending cuts that would have kicked in
for 2013.
We were told there would be deep
budget cuts, and that some government
programs would have to be eliminated.
So it was a little surprising to see most of
the clean energy tax credits were revived.
Among them, lawmakers reinstated the $1
biodiesel blender tax incentive, retroactive
for 2012 through the end of 2013.
With a price tag of over $2 billion,
you may be wondering how the tax credit
will benefit our economy. You really have
to be familiar with EPA’s Renewable Fuel
Standard (RFS), and its relationship with
Brazilian ethanol to get a better picture.
RFS MANDATES
The RFS sets annual minimum volumes
in four categories of biofuels: cellulosic,
biomass-based diesel, undifferentiated
advanced, and renewables.
The 2013 RFS is expected to require the
blending of a minimum of 2.75 billion gal-
lons from the advanced biofuels category.
From that total, at least 1.28 billion gallons
has to be biodiesel.
The balance of gallons requirement is
referred to as undifferentiated biofuel. This
requirement can be met by blending either
biodiesel, cellulosic ethanol (which is still
not available), or Brazilian ethanol.
Biodiesel is the first and only EPA-
designated advanced biofuel that is
produced on a commercial scale across
the U.S. That means the EPA has deter-
mined that burning biodiesel reduces
greenhouse gas (GHG) emissions by more
than 50 percent when compared with
petroleum diesel.
Brazilian (anhydrous) ethanol is pro-
duced from sugarcane, and its lower green-
house gas rating qualifies it as an advanced
biofuel according to RFS.
Our domestic ethanol made from corn
has a less favorable greenhouse gas reduction
rating. It only qualifies as a renewable biofuel,
and therefore, cannot be used to fulfill the
advanced biofuel mandate. In fact, the RFS
does not mandate volumes of corn ethanol
in renewables. Rather, it mandates minimum
volumes of renewables. Cornethanol happens
to be the cheapest alternative for fulfilling
that component of the mandate.
IMPORTING BRAZILIAN ETHANOL
Often misrepresented, Brazilian ethanol
is not cheaper than our domestically
produced corn ethanol. Actually, they’re
both priced about the same, but freight
adds about 20 cents to the cost of Brazilian
imports, making it more expensive.
The U.S. and Brazil produce about 90
percent of all the ethanol in the world, so it
makes sense that virtually all of our ethanol
imports come from Brazil. The U.S. started
importing Brazilian ethanol back in 2006 to
replace MTBE as an oxygenate in gasoline.
THE BLENDER’S CREDIT
The revived $1 per gallon biodiesel
tax credit could flip how obligated par-
ties choose to comply with the 2013 RFS.
Currently, blending Brazilian ethanol with
gasoline is the cheapest blending alternative
for obligated parties to meet their advanced
biofuels requirement.
For obligated parties, meeting the
requirements is a simple economic decision.
It costs less to blend Brazilian ethanol with
gasoline than it costs to blend domestic
biodiesel with diesel fuel. The tax credit
narrows the difference in price between the
blends, but biodiesel is still about 25 cents
more expensive.
Obligated parties were expected to
import about 830 million gallons this year
to meet the RFS requirement. If so, that
essentially limits domestic biodiesel produc-
tion to 1.28 billion gallons, and domestic
ethanol to 13.17 billion gallons (assuming
700 million gallons of export).
The tax credit could help swing the eco-
nomic advantage toward domestic biodiesel
away from Brazilian ethanol in meeting the
undifferentiated biofuels component of the
RFS.
In 2013, Brazilian imports could dra-
matically decrease, biodiesel production
could increase up to 1.83 billion gallons,
and domestic ethanol production could
reach 14 billion gallons.
RETURN ON INVESTMENT
A recent study commissioned by the
National Biodiesel Board (NBB) found that
the biodiesel industry would support some
112,078 jobs nationally with the tax credit in
place in 2013, versus 81,977 jobs without it.
Additionally, the return of the tax incentive
is projected to increase household income
by some $1.6 billion while supporting an
additional $3.1 billion in GDP.
IS THIS A GOOD DEAL?
Maybe not. The jobs part sounds great,
but even with the dollar credit there’s no
guarantee that the industry will get the
biodiesel prices where they need to be.
Brazilian ethanol prices could drop too.
Similar to the corn price increases
attributed to domestic ethanol produc-
tion, higher soybean yields needed for the
increase in biodiesel production will most
likely trigger rising prices for vegetable oil
and many other food products.
With all of the things this country
needs, I have to agree with folks who say
this is crazy. RFS volumes are mandated, so
why offer the tax credit?
Blenders Tax Credit Is Good
for Jobs, But the Cost Is High
By Ed Burke, Dennis K. Burke Inc.