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The Wheels Come Off the Biodiesel Wagon

Domestic Biodiesel Production Plummets

One of my Top 10 Energy Stories of 2009 involved the actions taken by the EU against U.S. biodiesel producers. U.S. tax dollars had been generously subsidizing biodiesel that was being exported out of the U.S. European producers couldn’t compete against the subsidized imports, so the EU effectively cut off the imports by imposing five-year tariffs on U.S. biodiesel.

This was a big blow to U.S. biodiesel producers, and was one of the factors leading to a disastrous 2009 for U.S. biodiesel production. How disastrous was 2009? Per the National Biodiesel Board (NBB), here are the statistics from the past 6 years of biodiesel production:

2004: 25 million gallons

2005: 75 million gallons

2006: 250 million gallons

2007: 450 million gallons

2008: 700 million gallons

2009: 300-350 million gallons (estimate)

The NBB also reports that domestic biodiesel capacity is now operating at only 15%. There have been a number of stories in the past few days covering these developments:

Bad start to 2010 after ‘rough year’ for entire biofuel industry

A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.

A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.

Politics and Energy Policy

I have often complained about the chaos that political leaders cause with inconsistency on energy policy. I will get into the wisdom of this biodiesel tax credit in a moment, but government policy makers need to send clear, long-term signals so energy producers can plan. This has long been a problem for planning energy projects. Wind and solar developers have lived with this uncertainty for years. It seemed like at the end of every year, there was a tax credit that may or may not be extended. The uncertainty often froze project developers, and created unnecessary delays.

The same has long been true in the oil and gas industry. One of the reasons that it has been difficult to get a gas pipeline built in Alaska was government refusal to commit to long-term tax rates. Imagine that you are contemplating spending $26 billion on a gas pipeline, but the government can’t tell you what your tax rate is going to be. If my state income tax doubles, I can move to another state. But it isn’t like you can pick that pipeline up and move it, so it is important that you know that the government can’t double the tax rate in the event of a budget shortfall.

A different kind of government interference – a tendency to attempt to pick technology winners – resulted in cancellation of what I believe was a promising 2nd generation renewable diesel process. I documented the saga in several posts, but the gist was that because an oil company was involved – my former employer ConocoPhillips – Congress voted to specifically deny the biodiesel tax credit for a process that was both more efficient and more cost-effective than conventional biodiesel production.

By killing the credit, COP was placed at a $42/bbl disadvantage relative to biodiesel producers who received the credit, and thus COP decided to cancel the project. I documented that sorry saga here. I also explained the differences between ‘green diesel’ and biodiesel here.

Where to Now?

So where to go from here? We now have a classic dilemma created by the government. Through government fiat, an industry was created. Investments were made and infrastructure was put in place. The problem is that the particular industry that sprang up had little hope of ever really competing without the subsidy. The reasons are alluded to in the link above:

“By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit,” Francis said. “We won’t be producing any without the tax credit.”

I have long believed that there is no future for 1st generation biodiesel. I wrote in an August 2007 essay: “I have said it before, and I reiterate: Biodiesel’s days are numbered.” Note that the year after I wrote that the U.S. biodiesel industry had their best year ever. But the handwriting was on the wall for very fundamental reasons, and the prediction I made in 2007 is playing out now.

There are multiple problems that will make it difficult for biodiesel to ever compete without subsidies. In a nutshell the key problem is that the feedstock costs are linked to fossil fuel prices. The feedstock is generally a vegetable oil and methanol – an alcohol typically produced from natural gas. A second big problem is that biodiesel is an inferior fuel to hydrocarbon diesel (especially in cold weather). Further, the by-product of the biodiesel process is glycerin, which has limited value (especially at the volumes produced when biodiesel production is ramped up).

But this story is worse than simply a fuel that can’t compete. As evidenced by the opposition of the NBB to the extension of the tax credit for COP’s 2nd generation process, 1st generation biodiesel isn’t even a bridge to 2nd generation biodiesel – it is a barrier. Not only is biodiesel chemically different, but 1st generation producers have pulled out the stops to protect themselves against 2nd generation competition. So now we have a 1st generation industry that was already in trouble even with the subsidies that it was receiving, and a 2nd generation industry that could have been much further along were it not for 1st generation interference (which was aided by Congress).

If instead of picking technology winners, Congress had simply raised fossil fuel taxes, we wouldn’t be in this dilemma. With the high level of embedded fossil fuels, biodiesel would have been unable to compete and an industry with no future would not have been created by the government. Green diesel, on the other hand, would start to look a lot better because of the lower level of fossil fuel inputs (particularly for gasification), and we might find plants starting up to produce green diesel from both hydrocracking vegetable oils (the COP process I described) and gasification of biomass (e.g., the Choren process).

What I expect to happen is that Congress will eventually extend the credit, and it will be applied retroactively. But there are no guarantees, so producers are once again left with uncertainty. What should happen – in my opinion – is announcement of a phaseout schedule. I wouldn’t simply eliminate the tax credit cold turkey. That would be a blow to producers who invested on good faith that government support would be continued. But they also need to receive a message that this tax credit will be phased out over the next 3-5 years. At that point, prospective investors will be fairly warned that projects whose economics hinge on continued government subsidies are to be avoided.

This, by the way, is the sort of metric I try to apply to projects. I am looking for projects that can be viable without government support and can operate with low/no fossil fuel inputs. The first item means that governments have much less ability to wreck my project by withholding support, and the latter means that the project should become more attractive in the higher oil price environment that I expect.

That doesn’t mean that initial government support isn’t often helpful, but unless the underlying economics are sound then government support is a crutch I will never be able to throw away. In my opinion this is the case for most U.S. biodiesel producers, which helps explain why industry capacity is presently at 15%.

Disclosures

I want to make two very clear disclosures. First is that as noted, I worked for ConocoPhillips, and I was very pleased at the efforts we were making to commercialize green diesel. The fact that the government caused the project to be aborted by favoring one technology over another was a bitter pill to swallow. Again, I favor projects that are viable without government subsidies, but in this particular case the competing projects did get the subsidies.

Second, as I announced previously I now work for the company that owns the majority of Choren. I came to work for this company because I believe gasification has a long-term future, and I had written favorable articles long before this job opportunity arose. I have, however, had some suggest potential bias toward green diesel because of my link to Choren. What I say to those who might feel that way is the bias toward green diesel was because of my assessment of the technology. That is what led to my link to Choren, not vice-versa.

January 4, 2010 Posted by | ConocoPhillips, energy policy, green diesel, politics, renewable diesel, subsidies | Comments Off on The Wheels Come Off the Biodiesel Wagon

About That $72 Billion Subsidy

I am going to be pretty busy for the next few days, and probably won’t be able to put anything new up until at least mid-week. Until then, over the past few days there have been a lot of headlines about a recently released study from the Environmental Law Institute. The study concluded that over the past seven years, fossil fuels have benefited from some $72 billion in subsidies. Their headline was innocent enough:

U.S. Tax Breaks Subsidize Foreign Oil Production

(Washington, DC) — The largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production, according to research to be released on Friday by the Environmental Law Institute in partnership with the Woodrow Wilson International Center for Scholars. The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.

The research demonstrates that the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases over sources that would decrease our climate footprint.

Let me be perfectly clear here. I am very opposed to policies that subsidize our usage of fossil fuels. But I am also opposed to painting with very broad brushes. In the case of the oil subsidies, three things stand out. First, the taxes the oil companies paid over that time period are about an order of magnitude higher than those so-called subsidies. Second, many of these so-called subsidies would merely be called tax deductions in any other industry. Finally, many of the so-called subsidies didn’t even go to Big Oil.

One of my diligent readers took the time to actually read the study, and broke it down:

I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items – I didn’t read the fine print. I thought it would be useful to see just what was being subsidized rather than blurting out “BIG OIL Subsidy!!” I found it useful to consider 10 categories of fossil fuel subsidies.

1) 22%, or $15 billion of the $68 billion listed, was allocated to the Foreign Tax Credit you referenced. Not $72 billion.

2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, if without it most of these projects would have not been undertaken. [RR: As I have argued before, it makes sense to subsidize things that are deemed important, but otherwise uneconomic].

3) 11% went to various accounting conventions, particularly treatment of intangible costs.

4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there’s no free lunch. A higher take might mean lower bids or less development.

5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.

6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.

7) 8% went to an accounting rule benefiting independent producers, not Big Oil.

8) 5% went to the coal industry.

9) 1% went to incentives for clean fuels.

10) 1% went to a variety of small miscellaneous programs.

So, of these

– Numbers 1 and 3 may have room for revenue take ($22 bn);

– Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;

– Number 2 would clearly have a negative impact on US production ($16 bn);

– Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)

– The rest are not really benefiting the oil industry very much.

I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that don’t benefit the large mutlinationals much at all.

Again, let me make it clear that I oppose true fossil fuel subsidies. In fact, I support “antisubsidies” – higher taxes – for fossil fuels in order to incentivize conservation and promote renewables (and again, I think it can be done in a revenue-neutral manner). But I do think the discussion should be intellectually honest, and we shouldn’t lump money destined for research into carbon sequestration into all-encompassing “oil subsidies.”

September 21, 2009 Posted by | carbon tax, gas tax, oil companies, subsidies | 47 Comments

Tariff Turnabout

This is a timely story, coming on the heels of the previous story on the tariffs the U.S. applies to Brazilian ethanol:

European tariffs stun U.S. biodiesel industry

The U.S. biodiesel industry will suffer from new trade barriers that threaten to end its lucrative export business to Europe, and in Texas the measure could be devastating.

Last week, the European Commission said U.S. biodiesel exporters will now have to pay additional anti-dumping tariffs of up to 29 percent, and anti-subsidy duties of up to 41 percent. The tariffs are temporary for the next six months, but the commission will decide by this summer whether to extend them for five years.

The tariffs came after complaints last year that U.S. biodiesel producers were collecting both U.S. and European subsidies and then selling huge quantities of fuel in Europe at prices that undercut domestic producers.

European officials estimated that 80 percent of U.S. biodiesel production was exported in 2008.

I would suspect that people who might have a problem with their tax dollars subsidizing Brazilian ethanol would also have a problem with their tax dollars subsidizing European biodiesel users. If I am not mistaken, ethanol that is exported loses most of the U.S. tax advantages, hence the incentive is to use it at home. Apparently the biodiesel industry is set up differently with respect to the tax credits.

Credit to KingofKaty for the find.

March 23, 2009 Posted by | biodiesel, Europe, subsidies, tariffs | 35 Comments

Taxes versus Subsidies

The RAND Corporation, a nonprofit research organization, has just issued a report comparing the effectiveness of fossil-fuel taxes versus renewable energy subsidies for increasing the usage of renewable energy:

Impacts on U.S. Energy Expenditures and Greenhouse-Gas Emissions of Increasing Renewable-Energy Use

From their concluding remarks:

Our analysis also indicated that increasing to 25 percent the share of renewables can significantly reduce CO2 emissions. However, the incremental increase in energy cost per unit of CO2 reduction varies widely depending on circumstances, reaching very high levels unless there is very substantial cost-reducing innovation in expanding renewables. Fossil-fuel prices that are higher than the baseline levels assumed in this analysis would induce greater use of renewable energy and thus reduce the incremental cost of achieving 25 percent renewable energy (thereby also lessening the need for setting this as a policy target). High fossil-fuel prices also improve the economics of other alternatives that can reduce GHG emissions and improve energy security, such as energy efficiency and unconventional energy sources.

The latest issue of Subsidy Watch also weighed in:

Rand Institute study favours fossil-fuel tax over renewable energy subsidies

A fossil-fuel tax would increase the cost of fossil fuels, making renewable energies more competitive; subsidies would lower renewable-fuel prices, allowing renewable energies to better compete with fossil fuels; while the revenue-neutral tax-and-subsidy mechanism splits the difference, using a fossil-fuel tax to fund renewable-energy subsidies.

Michael Toman, the study’s lead researcher, told a meeting of congressional staff on Capitol Hill that a fossil-fuel tax would encourage conservation, while also raising revenues which could be returned to the consumers to help offset higher fuel costs. In contrast, renewable energy subsidies shield consumers from real prices, giving them little incentive to conserve. Subsidies would also lead to an increase in government expenditures.

Their conclusion is the same as my oft-stated position: It makes more sense to raise fossil fuel taxes than to subsidize specific biofuels. The reason, as I have argued, is that subsidies attempt to pick technology winners. Taxes simply increase the cost of unsustainable fossil fuels and encourage competitors. In this manner, competitors can compete on a level playing field. A carbon tax should also minimize the kinds of political games we have seen where subsidies are denied for one biofuel and allowed for another.

Maybe the solution is not a biofuel at all. Maybe it is PHEVs powered by solar thermal electricity. But all alternatives are not treated the same with the current subsidy system we have in place.

August 5, 2008 Posted by | carbon tax, energy policy, gas tax, subsidies | 15 Comments

A Vicious Circle

What a vicious chain of events our politicians have set into motion. It just continues to worsen.

It started out innocently enough. Oil prices were climbing. Our energy production was shifting to an ever greater extent to countries that are hostile to the U.S.

So, Step 1 is to propose a solution:

1. Subsidize ethanol production to encourage biofuels and enhance energy security.

However, subsidies didn’t do the trick. It was still too expensive to produce ethanol. People still chose gasoline derived from hostile sources over more expensive ethanol. What we really needed was Step 2.

2. Let’s mandate ethanol usage.

At the point that the subsidy turns into a mandate, things change. Now, the fuel doesn’t have to be economically priced. It is going into the fuel supply regardless of the price. And this kicks off a massive expansion of ethanol capacity.

But soon we notice that too many people are building ethanol plants. This is causing a glut of ethanol, and putting downward pressure on the price of ethanol. On the other side, it is raising the price of corn. This lowers the margins for ethanol producers, and some producers start to go bankrupt. Projects are delayed or cancelled. The solution? Proceed to Step 3 (which was entirely predictable):

3. We need to raise the mandate for ethanol usage.

Unfortunately this leads to more of the problems that arose from the original mandate. Corn prices go even higher. Land prices continue to climb. Land is shifted to corn production, forcing commodity prices up in other areas. Very few segments of the population are experiencing true benefits.

The primary beneficiaries are commercial corn (and other commodity) farmers who purchased their land several years prior to the mandate. They are truly experiencing a windfall from these policies, and thus will fight the hardest to continue down this ill-advised road.

Secondary beneficiaries are lobbyists who defend the practice, as well as those who are willing to write papers (commissioned by the National Corn Growers Association) that downplay the consequences (or even better, point the finger in another direction).

The ethanol producer is hurt each time the overbuilding cycle occurs. They are starting to realize that the energy business is often low margin (and cyclical), and not as lucrative as they once thought. Maybe the solution is to increase the mandate again? 😉

The cattle rancher (like my Dad) and pig and poultry farmers get hurt from higher feed prices that cut into already razor-thin (or negative) margins.

The person trying to buy farmland is hurt by land prices that have exploded as a result of the mandates (unless they inherit family land).

The environment suffers as the mandated corn production means more herbicide, pesticide, and fertilizer usage, some of which ends up in our waterways.

The person who eats is hurt because higher commodity prices ripple through their food budgets, already stretched because of increasing energy costs.

So what’s the solution to this mess that has been made? I think it is simple, really. We all need to become either corn lobbyists or corn farmers. That way we all get rich and can afford to pay the financial consequences of spiralling inflation resulting from these mandates. (I suppose we will need to be subsidized for our farm purchase, since farms have gotten pretty expensive).

As for the impact on the environment? We can simply commission a study to show that there is in fact no impact on the environment. Ah, the aquifers. I forgot about those. Looks like I will need to commission another study.

Problem solved.

March 10, 2008 Posted by | corn prices, environment, ethanol subsidies, food prices, mandates, subsidies | 342 Comments

Cellulosic Ethanol is Dead

Cellulosic Ethanol is Dead! Long Live Biomass Gasification!

My thunder has been stolen. I have been kicking around a post in my head for the past couple of weeks. I just haven’t had time to get around to it, with the move and all. But this has been nagging away at me for a long time. My thinking goes something like this.

Cellulosic ethanol, and by that I mean cellulosic ethanol in the traditional mold of what Iogen has been working on for years – will never be commercially viable. How can I be so sure? For one, I have covered the logistical challenges here and here. These are not going away, and are serious barriers to commercialization. In brief, the cellulose content of biomass is accompanied by a lot of lignin, inorganics, etc. that won’t get converted in a standard fermentation process. But you still have to haul all of this biomass to the plant, convert the cellulose (and get a low concentration of ethanol for your efforts), and then get rid of a sopping wet mess of waste biomass. Sure, it can be burned – if you spend a lot of energy drying it first. Because of the very nature of the process, I don’t believe this challenge will be solved. (I know, I know. I just have to BELIEVE….)

A recent report – brought to my attention by this story in Gristmill (and e-mailed to me by 4 different readers) – says the same thing (and stole my thunder!):

Crop-Based Biofuel Production under Acreage Constraints and Uncertainty

Here are some excerpts of comments by Tom Philpott at Gristmill:

A quiet consensus seems to be forming among people you’d think would know the facts on the ground: cellulosic ethanol, touted as five years away from viability for decades now, may never be viable.

Now we get a new study (PDF) from a trio of ag economists at Iowa State University. For the record, the authors are conventional ag scholars firmly entrenched within the corporate-dominated research world described so well by Nancy Scola in her recent “Monsanto U.” post.

So it’s surprising to see these mainstream economists deliver such a dismal forecast for cellulosic ethanol.

They start by calculating that without the latest round of goodies — i.e., the fat “Renewable Fuel Standard” of the 2007 Energy Act — cellulosic ethanol (and biodiesel, too) would have withered away. In that scenario, corn ethanol would keep ramping up from the current level of about 7 billion gallons, pushed by high oil prices and the $0.51/gallon tax credit that’s existed for years.

The authors seriously doubt the cellulosic target can even come close to being met. They reckon that the mandate can inspire “rational” farmers and investors to churn out 4.5 billion gallons of cellulosic ethanol by 2022 — but there’s a catch. In order to reach even that level, the government will have to significantly jack up the tax credit awarded to mixers — from the current 51 cents to $1.55.

Also some excerpts directly from the report:

Competition for land ensures that providing an incentive to just one crop will increase equilibrium prices of all. Also, at pre-EISA subsidy levels, neither biodiesel nor switchgrass ethanol is commercially viable in the long run. In order for switchgrass ethanol to be commercially viable, it must receive a differential subsidy over that awarded to corn-based ethanol.

Since switchgrass competes for the same acres as corn, and corn-based ethanol is less expensive to produce, corn-based ethanol will always have a comparative advantage over switchgrass ethanol in the absence of a differential subsidy.

Corn and soybeans compete for the same acreage, so when energy prices are such that corn-based ethanol is stimulated, then the price of soybeans must also increase if the farmer is to continue to allocate some land to soybeans.

We calculate the subsidies required to stimulate biofuel production to the levels required by the EISA RFS. We find that subsidy levels are needed in the range of $0.22 to $0.78 per gallon for corn ethanol, $1.97 to $2.90 per gallon for biodiesel, and $1.55 to $2.11 for cellulosic ethanol.

I can hear the ethanol and corn lobbyists scrambling for a response that involves a character assassination.

What Will Work

However, there are a couple of variations on this that I think will be viable. One is a gasification process. A number of people have taken to calling this process cellulosic ethanol, which to me is unfortunate and confusing. I have explained the differences in Cellulosic Ethanol versus Biomass Gasification. Long story short, cellulosic ethanol processes convert cellulose in a wet process. Biomass gasification converts all organic components in a thermal process. The yield for biomass gasification will be much higher, and the waste products much lower.

The other variation that I think will work is this project I have been working on for a while, but still haven’t been given the green light to talk about. Hopefully soon.

March 7, 2008 Posted by | biomass gasification, cellulose, cellulosic ethanol, ethanol subsidies, subsidies | 243 Comments

Are Subsidies to Oil Companies Ever Justified?

Should We Ever Subsidize an Oil Company?

“Of course not!” might be the immediate reaction of most people. But doesn’t it depend on the objectives you are trying to achieve or the behaviors you wish to influence? Are there no cases in which it would be warranted? What if the end result was a reduction in our fossil fuel consumption?

I think most people would like to see us move away from fossil fuels. But fossil fuels are money-makers for the oil companies, and the cheapest option (strictly in terms of dollars at the pump) for consumers. So how do we wean off of fossil fuels?

Reducing Fossil Fuel Usage

There are really two options. By far the most efficient would be to raise taxes on fossil fuels. I am an American, but have lived in Europe before, and I am back here now. In my opinion Europeans have been far wiser about their policies on fossil fuels than we have been in the U.S. They made them expensive. Does that mean everyone then lives in poverty because they can’t afford gasoline? Far from it. People have adapted. They are attracted to fuel efficient vehicles. They live in smaller houses, closer to their jobs. They embrace mass transit. These are all behaviors that the U.S. has discouraged by keeping fossil fuel taxes low. So, we are energy gluttons, and we maintain this gluttonous habit by ensuring that both major political parties think twice before raising our gas taxes.

Higher fossil fuel taxes would help level the playing field for alternative fuels. Not only does this avoid the potential mistake of trying to forecast and subsidize particular technology winners, but it also discourages alternatives that have high fossil fuel inputs. This is important, because we are now subsidizing some “alternative” options that are essentially 90% recycled fossil fuel. Taxing fossil fuels would strongly penalize those alternatives with high fossil fuel inputs.

However, I think it is unlikely that our political leaders have the will to tackle the tax option. So then we are left with the alternative of subsidizing alternative energy and hoping that one or more sustainable options are developed as a result. We have tried this experiment with corn ethanol for 30 years now. It has been heavily subsidized since the late 1970’s, and today it is still not a viable option without mandates or subsidies. (I know that there are those who truly believe that grain ethanol could survive without the subsidies. I think what we would see is that the industry would collapse like a row of dominoes, which is why the subsidy remains in place).

Renewable Diesel

One option that I have always felt had serious potential as a sustainable option is renewable diesel. Not only is the EROEI of the biodiesel production process superior to that of grain ethanol, but a diesel engine is also much more efficient than a spark-ignition engine (which is where our ethanol supply ends up). And like ethanol, we also subsidize renewable diesel. And there aren’t all that many objections to subsidizing biodiesel; that is until an oil company wants to make it.

Biodiesel, which is strictly defined as alkyl esters made from the transesterification of vegetable oils or animal fats, receives a $1/gallon production subsidy. Biodiesel is produced by reacting the vegetable oil or animal fat with (typically) methanol (which is usually produced from fossil fuels) and a strong caustic. The products are biodiesel and a glycerol by-product that can be difficult to dispose of (it is often simply incinerated). There is also a wastewater discharge, containing “free fatty acids that have a high biochemical oxygen demand, or BOD, that can remove oxygen from water bodies and harm aquatic life.” None of the by-products, however, are classified as hazardous waste.

There are two other forms of renewable, or “green diesel” that aren’t strictly defined as biodiesel. One is obtained via a gasification and subsequent Fischer-Tropsch reaction of biomass. Choren, for instance, uses this process to make their SunDiesel product. The other form involves thermal processes in which animal fats or vegetable oils are heated and sometimes reacted with hydrogen to transform the oils into a diesel product. Such processes for making diesel have been referred to as second-generation biofuel technology. And these second-generation technologies have one big advantage over the first-generation technologies: They can be blended up to 100% with conventional diesel in any weather. The cold weather limitations of alkyl ester biodiesel are well-known.

There was some uncertainty about whether new green diesel technologies met the definition of biodiesel and therefore qualified for the subsidy. So Missouri Representative Roy Blunt, to help a company in his district – Changing World Technologies (CWT) – inserted a provision to make sure that so-called thermal depolymerization processes also received the subsidy. In addition, he helped CWT secure a $5 million grant. While this is money that in hindsight was probably thrown down a black hole because of grossly exaggerated claims on the part of CWT (See my essay TDP: The Next Big Thing), it did set a precedent for expanding the biodiesel subsidy to include processes other than strict alkyl ester biodiesel. In general, I would think that funding second-generation technologies is as important as funding first-generation technologies.

The First-Generation Recipients Scream Foul

On April 16th, 2007 ConocoPhillips and Tyson Foods announced a collaborative effort to produce green diesel via one of the second-generation technologies. But the National Biodiesel Board, a lobby for the first-generation biodiesel producers, cried foul and issued an incredibly hypocritical news release, which I have dissected:

The Biodiesel Lobby Cries Foul

Their argument was that it was not fair to give an oil company – already making billions in profits – incentives for producing biofuels. They also complained that the White House was directly lobbied on this matter. This issue is discussed at:

ConocoPhillips, Tyson Lobbied White House on Tax Rule

The persistent theme of the article is that the credit was expanded on behalf of ConocoPhillips and Tyson Foods. But it appears to me that a clarification was requested before millions of dollars had been invested in this process. From the EPA’s Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Requirements for 2006 , issued December 30, 2005 we find the following definition of biodiesel:

Biodiesel means a diesel fuel substitute produced from nonpetroleum renewable resources that meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act. It includes biodiesel derived from animal wastes (including poultry fats and poultry wastes) and other waste materials, or biodiesel derived from municipal solid waste and sludges and oils derived from wastewater and the treatment of wastewater.

That definition is certainly not process-specific, but I can understand the desire to get clarification on the rules before the project was announced. The sticking point could be that someone could argue that “biodiesel” has traditionally been the term for the ester product. But the key phrase to me looks like “diesel fuel substitute produced from nonpetroleum renewable resources.” After all, what are we actually trying to achieve with these subsidies? Isn’t the point to encourage movement away from fossil fuels and toward biofuels? Shall we start picking technology winners by funding one renewable “diesel fuel substitute” while denying funding to another?

But some didn’t see it that way at all. What they saw was that an oil company was going to get the same subsidy that biodiesel producers received, and they are quite happy to cut off their nose to spite their face:

Democrats Target Tax Break for ConocoPhillips, Tyson

April 20 (Bloomberg) — Democrats in Congress plan to reverse an Internal Revenue Service ruling that allowed ConocoPhillips and Tyson Foods Inc. to benefit from a tax break for producing alternative energy.

If adopted, the legislation would threaten a joint venture announced this week by ConocoPhillips and Tyson to produce diesel fuel from animal fat. Lawmakers said that the tax credit was intended to benefit new technologies using animal carcasses and other food waste and that the companies pressured Bush administration officials to redefine it.

I almost hate to point out that this is new technology. This particular process came along much later than both traditional biodiesel manufacture and the CWT process that didn’t actually work as advertised yet still got $5 million.

As Jim Mulva pointed out, the project is not profitable without the tax credit and would not go forward otherwise:

ConocoPhillips spokesman Bill Graham said today that remarks by company Chief Executive Officer Jim Mulva earlier in the week sum up the company’s position on the tax cuts. Mulva said that ConocoPhillips and Tyson wouldn’t proceed with the venture if they didn’t qualify for the tax credit, worth $1 per gallon of renewable diesel produced.

“It’s not profitable without the $1 tax credit,” Mulva said April 16 at a news conference in Houston. “It’s very important and significant in going forward at this point in time.”

A Tyson spokesman also weighed in:

Gary Mickelson, a Tyson spokesman, said today that the company hadn’t seen any legislation.

“Denying the tax credit will only serve to limit the expansion and availability of alternative fuels and also damage the ability of livestock farmers and ranchers to participate in the renewable energy business,” Mickelson said in an e-mail, citing support for the IRS ruling by the National Cattlemen’s Beef Association, National Pork Producers Council, National Chicken Council and Texas Cattle Feeders Association.

The article also pointed out the it wasn’t only the biodiesel lobby that was unhappy:

It also angered the American Soybean Association, which fears refiners may begin shipping in less-expensive foreign palm oil to replace U.S. soy oil at the government’s expense.

This is a ridiculous argument, because nothing is stopping conventional biodiesel producers from doing that right now. Of course this sort of protectionism is nothing new in the renewable energy field, as we do the same thing with corn ethanol. We subsidize it, and then penalize much more sustainable Brazilian ethanol with a $0.54/gallon tariff. Except in this case, we are going to discourage the development of an alternative within the U.S. because it will benefit a U.S. oil company.

An article in the Houston Chronicle discussed the economics in a bit more detail:

Jeff Webster, general manager of Tyson’s Renewable Energy Division, noted that the cost of using animal fat as a feedstock is about $2 a gallon, or about $84 a barrel.

That compares with crude oil futures running above $63 a barrel on the New York Mercantile Exchange.

The $1-per-gallon tax credit, however, would bring the feedstock cost for animal fat down to about $1 a gallon, or $42 a barrel.

“In general, the feedstock cost is the big driver of your overall costs, as much as 75 percent of your cost structure,” Webster said.

Asked about the effort to change the interpretation, ConocoPhillips spokesman Bill Graham noted: “With any repeal, you’re changing the economics for the manufacturing of the renewable diesel.

“If it is repealed and maintained for other forms of alternative energy, then what you’re doing is picking and choosing between alternative energies. And we don’t think that’s sound public policy.”

Objections

Most objections that I have seen are generally along the lines of “Why on earth would I want my tax dollars going to a company making billions of dollars a year? They don’t need any subsidies.

Of course that is correct. They don’t need subsidies to continue business as usual. In fact, all that would happen if you removed the so-called indirect subsidies is that we would pay more for gasoline. There would be some demand destruction as a result, so perhaps there would be some impact to the oil companies, but for the most part it would be business as usual.

And there’s the rub. If you want to take that position: “They don’t need my tax money“, then don’t expect them to do things that you think they should do. As someone else wrote to me “It is in their best interest to move into biofuels.” But you see, as far as they are concerned it is not. What is being asked here is for them to enter into a guaranteed money-losing commercial venture. That is a lot different than just funding R&D research, which is being done regardless.

You saw the API conference call transcript. The oil industry, rightly or wrongly, believes that their business will be oil for quite some time. So that leaves two possibilities.

First, what if they are wrong? Well, if they are wrong and they are discouraged from moving into next-generation fuels, then you and I will suffer. It will be peak with no parachute. We will have wasted quite an opportunity to nudge them in the direction of diversifying the fuel supply.

So, what if they are right and there is plenty of oil and gas? Well, they will continue to make oil and gas, consumers will continue to buy it, oil companies will continue to profit, and greenhouse gas emissions will continue to rise. And they will not change their behavior because the status quo is making money, and the shareholders are happy.

So the way I see it, we need to encourage a move away from fossil fuels even if we have to give oil companies the same incentives that we give everyone else. Who will be hurt if we don’t is you and me.

Conclusions

This case is very frustrating to me. It highlights the problems that we are going to have in encouraging oil companies to move toward alternative energy. What is the purpose of these subsidies? Isn’t it to make the alternatives competitive with fossil fuels? So then why should we expect oil companies to expand R&D on alternative fuels if they are going to sell these fuels at a loss? Remember, the current biodiesel producers aren’t losing their $1/gallon tax credit. Farmer Marty Ross, mentioned in The Biodiesel Lobby Cries Foul, is still going to receive his $5.5 million a year in subsidies. Furthermore, he qualifies for various grants and low-interest loans to give him an additional benefit. But biodiesel producers want both a subsidy and a monopoly, and their position endangers us all by discouraging the development of next-generation alternatives.

Oil companies are still answerable to their shareholders. They can’t be expected to invest big dollars into product development if they believe they are going to sell the product at a loss. These credits should be open to anyone willing to make the necessary investments. Would you rather see the money flow to the Middle East? Do you want the next generation of fuels to be coal-based, or derived from shale oil? Because this is what will happen if we make it more difficult for oil companies to become involved in alternative fuels. Ask yourself the following questions:

1. Will technologies like this reduce our dependence on foreign oil? Yes.
2. Will this encourage a renewable diesel technology that does not commercially exist? Yes
3. Will this help diversify our fuel supply? Yes.
4. Does this produce a fuel with superior performance characteristics? Yes

That would seem like a slam-dunk. Yet there is one more question to answer, and because of that answer some are willing to forego quite an opportunity to nudge oil companies in a sustainable direction:

5. Will an oil company benefit, just as any other company could benefit? Yes.

I have personally lobbied my company to become more involved in alternative energy, and this attempt to rescind the credit is very upsetting to me. I have skin in the game here, and I want to encourage my company to move into alternative fuels. But rescinding the credit will be a disincentive because I know what the economics look like for these biofuels.

Disclaimer

Of course I do work for “an” oil company. I can’t say which one, although it is relatively easy to figure out with Google. I tell you this because I don’t want there to be any misunderstandings. However, I can’t come right out and name my company, because I am not sanctioned to speak for them. Their position and my position don’t always mesh, so it is important to keep my personal opinions separate from official company statements.

I was conflicted about whether to write this essay, because I don’t want it to look like I am putting my self-interests ahead of good energy policy. And I wouldn’t even touch this one, but I think this is a very important, precedent-setting issue that has major implications on the direction of our energy policy. I asked and received feedback from TOD editors and contributors, and the feedback that I did receive suggested that I should go ahead and post it.

April 23, 2007 Posted by | biodiesel, biofuels, ConocoPhillips, green diesel, oil companies, subsidies, Tyson Foods | 57 Comments

Are Subsidies to Oil Companies Ever Justified?

Should We Ever Subsidize an Oil Company?

“Of course not!” might be the immediate reaction of most people. But doesn’t it depend on the objectives you are trying to achieve or the behaviors you wish to influence? Are there no cases in which it would be warranted? What if the end result was a reduction in our fossil fuel consumption?

I think most people would like to see us move away from fossil fuels. But fossil fuels are money-makers for the oil companies, and the cheapest option (strictly in terms of dollars at the pump) for consumers. So how do we wean off of fossil fuels?

Reducing Fossil Fuel Usage

There are really two options. By far the most efficient would be to raise taxes on fossil fuels. I am an American, but have lived in Europe before, and I am back here now. In my opinion Europeans have been far wiser about their policies on fossil fuels than we have been in the U.S. They made them expensive. Does that mean everyone then lives in poverty because they can’t afford gasoline? Far from it. People have adapted. They are attracted to fuel efficient vehicles. They live in smaller houses, closer to their jobs. They embrace mass transit. These are all behaviors that the U.S. has discouraged by keeping fossil fuel taxes low. So, we are energy gluttons, and we maintain this gluttonous habit by ensuring that both major political parties think twice before raising our gas taxes.

Higher fossil fuel taxes would help level the playing field for alternative fuels. Not only does this avoid the potential mistake of trying to forecast and subsidize particular technology winners, but it also discourages alternatives that have high fossil fuel inputs. This is important, because we are now subsidizing some “alternative” options that are essentially 90% recycled fossil fuel. Taxing fossil fuels would strongly penalize those alternatives with high fossil fuel inputs.

However, I think it is unlikely that our political leaders have the will to tackle the tax option. So then we are left with the alternative of subsidizing alternative energy and hoping that one or more sustainable options are developed as a result. We have tried this experiment with corn ethanol for 30 years now. It has been heavily subsidized since the late 1970’s, and today it is still not a viable option without mandates or subsidies. (I know that there are those who truly believe that grain ethanol could survive without the subsidies. I think what we would see is that the industry would collapse like a row of dominoes, which is why the subsidy remains in place).

Renewable Diesel

One option that I have always felt had serious potential as a sustainable option is renewable diesel. Not only is the EROEI of the biodiesel production process superior to that of grain ethanol, but a diesel engine is also much more efficient than a spark-ignition engine (which is where our ethanol supply ends up). And like ethanol, we also subsidize renewable diesel. And there aren’t all that many objections to subsidizing biodiesel; that is until an oil company wants to make it.

Biodiesel, which is strictly defined as alkyl esters made from the transesterification of vegetable oils or animal fats, receives a $1/gallon production subsidy. Biodiesel is produced by reacting the vegetable oil or animal fat with (typically) methanol (which is usually produced from fossil fuels) and a strong caustic. The products are biodiesel and a glycerol by-product that can be difficult to dispose of (it is often simply incinerated). There is also a wastewater discharge, containing “free fatty acids that have a high biochemical oxygen demand, or BOD, that can remove oxygen from water bodies and harm aquatic life.” None of the by-products, however, are classified as hazardous waste.

There are two other forms of renewable, or “green diesel” that aren’t strictly defined as biodiesel. One is obtained via a gasification and subsequent Fischer-Tropsch reaction of biomass. Choren, for instance, uses this process to make their SunDiesel product. The other form involves thermal processes in which animal fats or vegetable oils are heated and sometimes reacted with hydrogen to transform the oils into a diesel product. Such processes for making diesel have been referred to as second-generation biofuel technology. And these second-generation technologies have one big advantage over the first-generation technologies: They can be blended up to 100% with conventional diesel in any weather. The cold weather limitations of alkyl ester biodiesel are well-known.

There was some uncertainty about whether new green diesel technologies met the definition of biodiesel and therefore qualified for the subsidy. So Missouri Representative Roy Blunt, to help a company in his district – Changing World Technologies (CWT) – inserted a provision to make sure that so-called thermal depolymerization processes also received the subsidy. In addition, he helped CWT secure a $5 million grant. While this is money that in hindsight was probably thrown down a black hole because of grossly exaggerated claims on the part of CWT (See my essay TDP: The Next Big Thing), it did set a precedent for expanding the biodiesel subsidy to include processes other than strict alkyl ester biodiesel. In general, I would think that funding second-generation technologies is as important as funding first-generation technologies.

The First-Generation Recipients Scream Foul

On April 16th, 2007 ConocoPhillips and Tyson Foods announced a collaborative effort to produce green diesel via one of the second-generation technologies. But the National Biodiesel Board, a lobby for the first-generation biodiesel producers, cried foul and issued an incredibly hypocritical news release, which I have dissected:

The Biodiesel Lobby Cries Foul

Their argument was that it was not fair to give an oil company – already making billions in profits – incentives for producing biofuels. They also complained that the White House was directly lobbied on this matter. This issue is discussed at:

ConocoPhillips, Tyson Lobbied White House on Tax Rule

The persistent theme of the article is that the credit was expanded on behalf of ConocoPhillips and Tyson Foods. But it appears to me that a clarification was requested before millions of dollars had been invested in this process. From the EPA’s Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Requirements for 2006 , issued December 30, 2005 we find the following definition of biodiesel:

Biodiesel means a diesel fuel substitute produced from nonpetroleum renewable resources that meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act. It includes biodiesel derived from animal wastes (including poultry fats and poultry wastes) and other waste materials, or biodiesel derived from municipal solid waste and sludges and oils derived from wastewater and the treatment of wastewater.

That definition is certainly not process-specific, but I can understand the desire to get clarification on the rules before the project was announced. The sticking point could be that someone could argue that “biodiesel” has traditionally been the term for the ester product. But the key phrase to me looks like “diesel fuel substitute produced from nonpetroleum renewable resources.” After all, what are we actually trying to achieve with these subsidies? Isn’t the point to encourage movement away from fossil fuels and toward biofuels? Shall we start picking technology winners by funding one renewable “diesel fuel substitute” while denying funding to another?

But some didn’t see it that way at all. What they saw was that an oil company was going to get the same subsidy that biodiesel producers received, and they are quite happy to cut off their nose to spite their face:

Democrats Target Tax Break for ConocoPhillips, Tyson

April 20 (Bloomberg) — Democrats in Congress plan to reverse an Internal Revenue Service ruling that allowed ConocoPhillips and Tyson Foods Inc. to benefit from a tax break for producing alternative energy.

If adopted, the legislation would threaten a joint venture announced this week by ConocoPhillips and Tyson to produce diesel fuel from animal fat. Lawmakers said that the tax credit was intended to benefit new technologies using animal carcasses and other food waste and that the companies pressured Bush administration officials to redefine it.

I almost hate to point out that this is new technology. This particular process came along much later than both traditional biodiesel manufacture and the CWT process that didn’t actually work as advertised yet still got $5 million.

As Jim Mulva pointed out, the project is not profitable without the tax credit and would not go forward otherwise:

ConocoPhillips spokesman Bill Graham said today that remarks by company Chief Executive Officer Jim Mulva earlier in the week sum up the company’s position on the tax cuts. Mulva said that ConocoPhillips and Tyson wouldn’t proceed with the venture if they didn’t qualify for the tax credit, worth $1 per gallon of renewable diesel produced.

“It’s not profitable without the $1 tax credit,” Mulva said April 16 at a news conference in Houston. “It’s very important and significant in going forward at this point in time.”

A Tyson spokesman also weighed in:

Gary Mickelson, a Tyson spokesman, said today that the company hadn’t seen any legislation.

“Denying the tax credit will only serve to limit the expansion and availability of alternative fuels and also damage the ability of livestock farmers and ranchers to participate in the renewable energy business,” Mickelson said in an e-mail, citing support for the IRS ruling by the National Cattlemen’s Beef Association, National Pork Producers Council, National Chicken Council and Texas Cattle Feeders Association.

The article also pointed out the it wasn’t only the biodiesel lobby that was unhappy:

It also angered the American Soybean Association, which fears refiners may begin shipping in less-expensive foreign palm oil to replace U.S. soy oil at the government’s expense.

This is a ridiculous argument, because nothing is stopping conventional biodiesel producers from doing that right now. Of course this sort of protectionism is nothing new in the renewable energy field, as we do the same thing with corn ethanol. We subsidize it, and then penalize much more sustainable Brazilian ethanol with a $0.54/gallon tariff. Except in this case, we are going to discourage the development of an alternative within the U.S. because it will benefit a U.S. oil company.

An article in the Houston Chronicle discussed the economics in a bit more detail:

Jeff Webster, general manager of Tyson’s Renewable Energy Division, noted that the cost of using animal fat as a feedstock is about $2 a gallon, or about $84 a barrel.

That compares with crude oil futures running above $63 a barrel on the New York Mercantile Exchange.

The $1-per-gallon tax credit, however, would bring the feedstock cost for animal fat down to about $1 a gallon, or $42 a barrel.

“In general, the feedstock cost is the big driver of your overall costs, as much as 75 percent of your cost structure,” Webster said.

Asked about the effort to change the interpretation, ConocoPhillips spokesman Bill Graham noted: “With any repeal, you’re changing the economics for the manufacturing of the renewable diesel.

“If it is repealed and maintained for other forms of alternative energy, then what you’re doing is picking and choosing between alternative energies. And we don’t think that’s sound public policy.”

Objections

Most objections that I have seen are generally along the lines of “Why on earth would I want my tax dollars going to a company making billions of dollars a year? They don’t need any subsidies.

Of course that is correct. They don’t need subsidies to continue business as usual. In fact, all that would happen if you removed the so-called indirect subsidies is that we would pay more for gasoline. There would be some demand destruction as a result, so perhaps there would be some impact to the oil companies, but for the most part it would be business as usual.

And there’s the rub. If you want to take that position: “They don’t need my tax money“, then don’t expect them to do things that you think they should do. As someone else wrote to me “It is in their best interest to move into biofuels.” But you see, as far as they are concerned it is not. What is being asked here is for them to enter into a guaranteed money-losing commercial venture. That is a lot different than just funding R&D research, which is being done regardless.

You saw the API conference call transcript. The oil industry, rightly or wrongly, believes that their business will be oil for quite some time. So that leaves two possibilities.

First, what if they are wrong? Well, if they are wrong and they are discouraged from moving into next-generation fuels, then you and I will suffer. It will be peak with no parachute. We will have wasted quite an opportunity to nudge them in the direction of diversifying the fuel supply.

So, what if they are right and there is plenty of oil and gas? Well, they will continue to make oil and gas, consumers will continue to buy it, oil companies will continue to profit, and greenhouse gas emissions will continue to rise. And they will not change their behavior because the status quo is making money, and the shareholders are happy.

So the way I see it, we need to encourage a move away from fossil fuels even if we have to give oil companies the same incentives that we give everyone else. Who will be hurt if we don’t is you and me.

Conclusions

This case is very frustrating to me. It highlights the problems that we are going to have in encouraging oil companies to move toward alternative energy. What is the purpose of these subsidies? Isn’t it to make the alternatives competitive with fossil fuels? So then why should we expect oil companies to expand R&D on alternative fuels if they are going to sell these fuels at a loss? Remember, the current biodiesel producers aren’t losing their $1/gallon tax credit. Farmer Marty Ross, mentioned in The Biodiesel Lobby Cries Foul, is still going to receive his $5.5 million a year in subsidies. Furthermore, he qualifies for various grants and low-interest loans to give him an additional benefit. But biodiesel producers want both a subsidy and a monopoly, and their position endangers us all by discouraging the development of next-generation alternatives.

Oil companies are still answerable to their shareholders. They can’t be expected to invest big dollars into product development if they believe they are going to sell the product at a loss. These credits should be open to anyone willing to make the necessary investments. Would you rather see the money flow to the Middle East? Do you want the next generation of fuels to be coal-based, or derived from shale oil? Because this is what will happen if we make it more difficult for oil companies to become involved in alternative fuels. Ask yourself the following questions:

1. Will technologies like this reduce our dependence on foreign oil? Yes.
2. Will this encourage a renewable diesel technology that does not commercially exist? Yes
3. Will this help diversify our fuel supply? Yes.
4. Does this produce a fuel with superior performance characteristics? Yes

That would seem like a slam-dunk. Yet there is one more question to answer, and because of that answer some are willing to forego quite an opportunity to nudge oil companies in a sustainable direction:

5. Will an oil company benefit, just as any other company could benefit? Yes.

I have personally lobbied my company to become more involved in alternative energy, and this attempt to rescind the credit is very upsetting to me. I have skin in the game here, and I want to encourage my company to move into alternative fuels. But rescinding the credit will be a disincentive because I know what the economics look like for these biofuels.

Disclaimer

Of course I do work for “an” oil company. I can’t say which one, although it is relatively easy to figure out with Google. I tell you this because I don’t want there to be any misunderstandings. However, I can’t come right out and name my company, because I am not sanctioned to speak for them. Their position and my position don’t always mesh, so it is important to keep my personal opinions separate from official company statements.

I was conflicted about whether to write this essay, because I don’t want it to look like I am putting my self-interests ahead of good energy policy. And I wouldn’t even touch this one, but I think this is a very important, precedent-setting issue that has major implications on the direction of our energy policy. I asked and received feedback from TOD editors and contributors, and the feedback that I did receive suggested that I should go ahead and post it.

April 23, 2007 Posted by | biodiesel, biofuels, ConocoPhillips, green diesel, oil companies, subsidies, Tyson Foods | 29 Comments

The Biodiesel Lobby Cries Foul

Let me be clear that I strongly support biodiesel. It has a better energy return than does corn ethanol, and diesel engines are far more efficient than gasoline engines. Each gallon of biodiesel displaces far more fossil fuel than a gallon of ethanol. Therefore, I am much more in favor of biodiesel production than I am of corn ethanol production. I am also not opposed to subsidies directed at giving alternative fuels a boost. (However, in order to avoid picking technology winners, I think a better system would be to boost carbon taxes on fossil fuels. That would mean all alternatives competed on equal footing).

So, I was quite pleased to read the announcement yesterday of the collaboration between Tyson Foods and ConocoPhillips to produce biodiesel from animal fats (technically, the term used is “green diesel” to differentiate it from the product made from reacting vegetable oil with methanol and caustic. This is defined as biodiesel).

ConocoPhillips, Tyson Team on Diesel Fuel Project From Animal Fat

Source: Associated Press

HOUSTON–Oil major ConocoPhillips and Tyson Foods Inc., the world’s largest meat producer, said they are teaming up to produce and market diesel fuel for U.S. vehicles using beef, pork and poultry fat.

The companies said Monday they have collaborated over the past year on ways to combine Tyson’s expertise in protein chemistry and production with ConocoPhillips’ processing and marketing knowledge to introduce a renewable diesel fuel with lower carbon emissions than conventional fuels.

ConocoPhillips said it planned to spend about $100 million over several years to produce the fuel, Chairman and Chief Executive Jim Mulva said at a news conference. It hopes to introduce the fuel at gas stations in the U.S. Midwest in the fourth quarter of this year.

The oil company and Tyson, based in Springdale, Arkansas, said the finished product will be renewable diesel fuel mixtures that meet all federal standards for ultra-low-sulfur diesel. They expect to ramp up production over the next couple of years to as much as 175 million gallons (662.4 million liters) a year – which Mulva said would amount to about 3 percent of ConocoPhillips’ total U.S. diesel production.

But the biodiesel lobby has cried foul, saying that it isn’t fair that an oil company is going to receive the $1/gallon tax credit that was designed to help the biodiesel industry. This raises the question: Is the credit designed to promote alternative fuels, or is it designed to only help certain biodiesel producers? The National Biodiesel Board seems to take the latter position. In a press release issued yesterday, they bemoaned the fact that an oil company could get the same credit that they have enjoyed:

IRS Ruling Could Leave Promising Biodiesel Industry on a “Bridge to Nowhere”

It was with an extreme sense of irony that I read this press release, because it brought to mind many of the arguments people have used against alternative energy subsidies in general. Let’s look at some excerpts from the press release:

JEFFERSON CITY, Mo. – When he first decided to open a biodiesel plant, Delaware farmer Marty Ross knew that it wouldn’t be easy. But he believed in biodiesel’s potential for both providing energy security and adding value to the Delaware soybean crop. Seven years later, his Clayton, Del. plant is in production, and beginning to enjoy some hard-earned success. The plant has the capacity to produce 5.5 million gallons of biodiesel a year, and Ross has plans to expand that as demand increases.

So, at a $1/gallon subsidy, Delaware farmer Marty Ross stands to pull in $5.5 million a year in just subsidies. But competition is on the horizon:

However, a dark cloud now hangs over his business and threatens to dampen the benefits that the biodiesel industry brings to all Americans. “There’s no question that the government has encouraged our plant and others like us through grant programs and a federal tax incentive for biodiesel,” said Ross, president and founder of Mid-Atlantic Biodiesel. “Now, we feel like we are about to be stranded on a bridge to nowhere.”

Yes, in fact it did not escape the attention of certain oil producers that there was a credit available for biofuels production. This credit, in my opinion, is designed to promote the use of biofuels, not to favor certain producers. Mr. Ross also has received (as he notes) funds from grant programs and probably low-interest small business loans designed to help the small producers.

Ross and many others in the biodiesel industry are under threat by some large integrated oil companies, who have aggressively pursued access to a federal tax incentive that was designed to stimulate an emerging technology. Special interests have successfully lobbied the U.S. Department of Treasury to exploit a loophole in a renewable diesel tax credit law for their own benefit.

This is where my irony meter pegged out. The biodiesel and ethanol lobbies successfully lobbied for these tax credits in the first place. If your interest is truly in promoting biofuels, then why shouldn’t anyone willing to invest in the necessary infrastructure be eligible for the credit? Again, there are plenty of other incentives that the small producer receives on top of this credit.

“Certain powerful oil companies have managed to get the government to expand the definition of a separate provision that was added into the biodiesel tax credit law late in the legislative process,” said Joe Jobe, CEO of the National Biodiesel Board (NBB). “It’s our belief that this credit was developed to help a specific emerging technology, and not to further subsidize existing petroleum refineries.”

The provision in question allows fuel made from a specific process called thermal de-polymerization (TDP) to qualify for the same dollar-per-gallon incentive that was created for biodiesel produced from agricultural resources. The TDP process is a new technology to turn hazardous wastes, plastics, and food wastes like poultry offal and carcasses into a boiler fuel. Congress never had a chance to debate the provision, but it passed, along with the biodiesel tax incentive extension, in the 2005 Energy Policy Act.

This provision was inserted by Missouri congressman Roy Blunt to help the CWT plant in his state. This was in fact an emerging technology to turn waste animal fats into “green diesel.” Now that an oil company plans to do the same thing, it is interesting to see the special interests line up in opposition. That really tells me that they aren’t so much interested in promoting biofuels, as they are in promoting a certain flavor of biodiesel. They are interested in protecting their special interests.

Here is a bit more on the Roy Blunt angle from a Bloomberg article.

ConocoPhillips, Tyson Lobbied White House on Tax Rule

ConocoPhillips and Tyson Foods Inc. successfully lobbied the White House and other Bush administration officials to expand a tax break originally intended to help a plant in a top House Republican’s district.

The provision’s sponsor, Missouri Representative Roy Blunt, said he had wanted to provide a credit for diesel fuel produced with new technologies using animal carcasses and other food waste. Under rules issued by the Internal Revenue Service on April 2, the credit can now also be claimed by companies that use existing methods involving vegetable oil and animal fats.

The tax credit was “hijacked,” said Brian Appel, chief executive officer of West Hempstead, New York-based Changing World Technologies, the privately held company that owns the plant in Carthage, Missouri, that Blunt was attempting to help when he inserted the provision into an energy bill in 2005.

Jumping now back to the National Biodiesel Board press release:

Now the Internal Revenue Service (IRS) has ruled in the oil companies’ favor to expand the TDP definition to include the conventional petroleum refining process. Those companies want to add raw vegetable oils and fats at their existing oil refineries and qualify for the credit.

That is simply a false claim. You don’t just dump vegetable oil into the refinery. This is a hydrogenation process. It will require the installation of new equipment. Hydrotreaters are not cheap, and you also have to have a source of hydrogen. That may require investing in incremental hydrogen capacity, also not cheap. This will almost certainly be more expensive to produce than biodiesel produced conventionally, and this is not something that would make economic sense without the credit. So, do you favor biofuels or not? If so, you should have no problem with someone taking advantage of the incentive when without it the project would not have made economic sense.

They then list a number of reasons that oil companies should not be allowed to receive the credit. Listed among the reasons are these gems:

It will be an unanticipated drain on the U.S. Treasury.

It will be a fraction of the current amount paid to biodiesel producers, and an order of magnitude (or two) lower than the amount paid in ethanol subsidies.

It sends dangerous signals to other countries to engage in unsustainable agriculture practices to quickly meet the rising demand for raw vegetable oil.

I am not even sure what that is supposed to mean. How is a credit for animal-fat derived diesel sending dangerous signals? Wouldn’t the current biodiesel subsidy – based on vegetable oil – be more likely to send those signals?

Rather than helping our country achieve energy independence, this rule goes in the exact opposite direction…discouraging development of the renewable fuels industry.

Wow, talk about your hyperbole. Here we have an incentive for a company producing diesel from a renewable alternative source via an alternative method, and this is going to discourage the development of the renewable fuels industry? Give me a break! Nothing has been taken away from the current renewable fuels industry. They still get their subsidy. On top of that, they qualify for all kinds of small business tax breaks and grants. Yet they are worried about a company that is going to produce a fraction of the biofuel in the U.S. This is about nothing more than protectionism of special interests. It isn’t at all about the renewable fuels industry. They just don’t want the competition.

“This country has not built a new petroleum refinery in more than 30 years, and large oil companies use that to defend their prices and profits,” Jobe said. “Meanwhile, the biodiesel industry has been investing in the nation’s refining capacity with every plant that goes up.

Good grief, man. If your goal was to destroy your credibility, you are doing a great job. While there have been no new refineries built in the past 30 years, refining capacity has increased enormously. The increase in just the past 10 years has been 1.8 million barrels per day. This is around 28 billion gallons per year, as compared to the total biodiesel production of less than 1 billion gallons. So, I wonder if Mr. Jobe might like to rethink his argument that biodiesel production is expanding while oil companies are sitting around on their hands.

The petroleum industry as a whole has worked in partnership with the biodiesel industry. Many segments of the petroleum industry, especially on the distribution side, have embraced biodiesel and supported its growth,” he said.

Translation: Oil companies that buy our biodiesel for blending into conventional diesel are working with us. Those who have decided to produce their own biodiesel don’t embrace it, and don’t support its growth.

Public opinion research shows 82% of Americans support a federal tax incentive for biodiesel. They view energy security as the number one reason to support the growth of biodiesel, but also cite health, environmental and economic benefits. “I strongly doubt the American public would feel the same sentiment for another oil company subsidy,” said Mid-Atlantic Biodiesel’s Marty Ross.

Ah, who would have guessed they would try to fan the flames of hatred against oil companies? I never saw that coming. Again, it is the competition they fear. This is not an “oil company subsidy.” It is a subsidy that anyone can get. It is a biofuels subsidy. If you favor promotion of biofuels by tax incentives, then what difference does it make who is getting the credit? Unless of course the real issue isn’t promotion of biofuels.

I have said it before, and I will say it again: Oil companies are not just going to sit around and die while alternative energy companies take over. As it makes economic sense, they will start to produce biofuels. Here is a case – with the credit factored in – that did make sense. I think the reaction of the biodiesel lobby is probably not the last time you will see them (or the ethanol lobby) react negatively as oil companies continue to produce biofuels.

April 18, 2007 Posted by | biodiesel, biofuels, ConocoPhillips, green diesel, subsidies, Tyson Foods | 144 Comments

The Biodiesel Lobby Cries Foul

Let me be clear that I strongly support biodiesel. It has a better energy return than does corn ethanol, and diesel engines are far more efficient than gasoline engines. Each gallon of biodiesel displaces far more fossil fuel than a gallon of ethanol. Therefore, I am much more in favor of biodiesel production than I am of corn ethanol production. I am also not opposed to subsidies directed at giving alternative fuels a boost. (However, in order to avoid picking technology winners, I think a better system would be to boost carbon taxes on fossil fuels. That would mean all alternatives competed on equal footing).

So, I was quite pleased to read the announcement yesterday of the collaboration between Tyson Foods and ConocoPhillips to produce biodiesel from animal fats (technically, the term used is “green diesel” to differentiate it from the product made from reacting vegetable oil with methanol and caustic. This is defined as biodiesel).

ConocoPhillips, Tyson Team on Diesel Fuel Project From Animal Fat

Source: Associated Press

HOUSTON–Oil major ConocoPhillips and Tyson Foods Inc., the world’s largest meat producer, said they are teaming up to produce and market diesel fuel for U.S. vehicles using beef, pork and poultry fat.

The companies said Monday they have collaborated over the past year on ways to combine Tyson’s expertise in protein chemistry and production with ConocoPhillips’ processing and marketing knowledge to introduce a renewable diesel fuel with lower carbon emissions than conventional fuels.

ConocoPhillips said it planned to spend about $100 million over several years to produce the fuel, Chairman and Chief Executive Jim Mulva said at a news conference. It hopes to introduce the fuel at gas stations in the U.S. Midwest in the fourth quarter of this year.

The oil company and Tyson, based in Springdale, Arkansas, said the finished product will be renewable diesel fuel mixtures that meet all federal standards for ultra-low-sulfur diesel. They expect to ramp up production over the next couple of years to as much as 175 million gallons (662.4 million liters) a year – which Mulva said would amount to about 3 percent of ConocoPhillips’ total U.S. diesel production.

But the biodiesel lobby has cried foul, saying that it isn’t fair that an oil company is going to receive the $1/gallon tax credit that was designed to help the biodiesel industry. This raises the question: Is the credit designed to promote alternative fuels, or is it designed to only help certain biodiesel producers? The National Biodiesel Board seems to take the latter position. In a press release issued yesterday, they bemoaned the fact that an oil company could get the same credit that they have enjoyed:

IRS Ruling Could Leave Promising Biodiesel Industry on a “Bridge to Nowhere”

It was with an extreme sense of irony that I read this press release, because it brought to mind many of the arguments people have used against alternative energy subsidies in general. Let’s look at some excerpts from the press release:

JEFFERSON CITY, Mo. – When he first decided to open a biodiesel plant, Delaware farmer Marty Ross knew that it wouldn’t be easy. But he believed in biodiesel’s potential for both providing energy security and adding value to the Delaware soybean crop. Seven years later, his Clayton, Del. plant is in production, and beginning to enjoy some hard-earned success. The plant has the capacity to produce 5.5 million gallons of biodiesel a year, and Ross has plans to expand that as demand increases.

So, at a $1/gallon subsidy, Delaware farmer Marty Ross stands to pull in $5.5 million a year in just subsidies. But competition is on the horizon:

However, a dark cloud now hangs over his business and threatens to dampen the benefits that the biodiesel industry brings to all Americans. “There’s no question that the government has encouraged our plant and others like us through grant programs and a federal tax incentive for biodiesel,” said Ross, president and founder of Mid-Atlantic Biodiesel. “Now, we feel like we are about to be stranded on a bridge to nowhere.”

Yes, in fact it did not escape the attention of certain oil producers that there was a credit available for biofuels production. This credit, in my opinion, is designed to promote the use of biofuels, not to favor certain producers. Mr. Ross also has received (as he notes) funds from grant programs and probably low-interest small business loans designed to help the small producers.

Ross and many others in the biodiesel industry are under threat by some large integrated oil companies, who have aggressively pursued access to a federal tax incentive that was designed to stimulate an emerging technology. Special interests have successfully lobbied the U.S. Department of Treasury to exploit a loophole in a renewable diesel tax credit law for their own benefit.

This is where my irony meter pegged out. The biodiesel and ethanol lobbies successfully lobbied for these tax credits in the first place. If your interest is truly in promoting biofuels, then why shouldn’t anyone willing to invest in the necessary infrastructure be eligible for the credit? Again, there are plenty of other incentives that the small producer receives on top of this credit.

“Certain powerful oil companies have managed to get the government to expand the definition of a separate provision that was added into the biodiesel tax credit law late in the legislative process,” said Joe Jobe, CEO of the National Biodiesel Board (NBB). “It’s our belief that this credit was developed to help a specific emerging technology, and not to further subsidize existing petroleum refineries.”

The provision in question allows fuel made from a specific process called thermal de-polymerization (TDP) to qualify for the same dollar-per-gallon incentive that was created for biodiesel produced from agricultural resources. The TDP process is a new technology to turn hazardous wastes, plastics, and food wastes like poultry offal and carcasses into a boiler fuel. Congress never had a chance to debate the provision, but it passed, along with the biodiesel tax incentive extension, in the 2005 Energy Policy Act.

This provision was inserted by Missouri congressman Roy Blunt to help the CWT plant in his state. This was in fact an emerging technology to turn waste animal fats into “green diesel.” Now that an oil company plans to do the same thing, it is interesting to see the special interests line up in opposition. That really tells me that they aren’t so much interested in promoting biofuels, as they are in promoting a certain flavor of biodiesel. They are interested in protecting their special interests.

Here is a bit more on the Roy Blunt angle from a Bloomberg article.

ConocoPhillips, Tyson Lobbied White House on Tax Rule

ConocoPhillips and Tyson Foods Inc. successfully lobbied the White House and other Bush administration officials to expand a tax break originally intended to help a plant in a top House Republican’s district.

The provision’s sponsor, Missouri Representative Roy Blunt, said he had wanted to provide a credit for diesel fuel produced with new technologies using animal carcasses and other food waste. Under rules issued by the Internal Revenue Service on April 2, the credit can now also be claimed by companies that use existing methods involving vegetable oil and animal fats.

The tax credit was “hijacked,” said Brian Appel, chief executive officer of West Hempstead, New York-based Changing World Technologies, the privately held company that owns the plant in Carthage, Missouri, that Blunt was attempting to help when he inserted the provision into an energy bill in 2005.

Jumping now back to the National Biodiesel Board press release:

Now the Internal Revenue Service (IRS) has ruled in the oil companies’ favor to expand the TDP definition to include the conventional petroleum refining process. Those companies want to add raw vegetable oils and fats at their existing oil refineries and qualify for the credit.

That is simply a false claim. You don’t just dump vegetable oil into the refinery. This is a hydrogenation process. It will require the installation of new equipment. Hydrotreaters are not cheap, and you also have to have a source of hydrogen. That may require investing in incremental hydrogen capacity, also not cheap. This will almost certainly be more expensive to produce than biodiesel produced conventionally, and this is not something that would make economic sense without the credit. So, do you favor biofuels or not? If so, you should have no problem with someone taking advantage of the incentive when without it the project would not have made economic sense.

They then list a number of reasons that oil companies should not be allowed to receive the credit. Listed among the reasons are these gems:

It will be an unanticipated drain on the U.S. Treasury.

It will be a fraction of the current amount paid to biodiesel producers, and an order of magnitude (or two) lower than the amount paid in ethanol subsidies.

It sends dangerous signals to other countries to engage in unsustainable agriculture practices to quickly meet the rising demand for raw vegetable oil.

I am not even sure what that is supposed to mean. How is a credit for animal-fat derived diesel sending dangerous signals? Wouldn’t the current biodiesel subsidy – based on vegetable oil – be more likely to send those signals?

Rather than helping our country achieve energy independence, this rule goes in the exact opposite direction…discouraging development of the renewable fuels industry.

Wow, talk about your hyperbole. Here we have an incentive for a company producing diesel from a renewable alternative source via an alternative method, and this is going to discourage the development of the renewable fuels industry? Give me a break! Nothing has been taken away from the current renewable fuels industry. They still get their subsidy. On top of that, they qualify for all kinds of small business tax breaks and grants. Yet they are worried about a company that is going to produce a fraction of the biofuel in the U.S. This is about nothing more than protectionism of special interests. It isn’t at all about the renewable fuels industry. They just don’t want the competition.

“This country has not built a new petroleum refinery in more than 30 years, and large oil companies use that to defend their prices and profits,” Jobe said. “Meanwhile, the biodiesel industry has been investing in the nation’s refining capacity with every plant that goes up.

Good grief, man. If your goal was to destroy your credibility, you are doing a great job. While there have been no new refineries built in the past 30 years, refining capacity has increased enormously. The increase in just the past 10 years has been 1.8 million barrels per day. This is around 28 billion gallons per year, as compared to the total biodiesel production of less than 1 billion gallons. So, I wonder if Mr. Jobe might like to rethink his argument that biodiesel production is expanding while oil companies are sitting around on their hands.

The petroleum industry as a whole has worked in partnership with the biodiesel industry. Many segments of the petroleum industry, especially on the distribution side, have embraced biodiesel and supported its growth,” he said.

Translation: Oil companies that buy our biodiesel for blending into conventional diesel are working with us. Those who have decided to produce their own biodiesel don’t embrace it, and don’t support its growth.

Public opinion research shows 82% of Americans support a federal tax incentive for biodiesel. They view energy security as the number one reason to support the growth of biodiesel, but also cite health, environmental and economic benefits. “I strongly doubt the American public would feel the same sentiment for another oil company subsidy,” said Mid-Atlantic Biodiesel’s Marty Ross.

Ah, who would have guessed they would try to fan the flames of hatred against oil companies? I never saw that coming. Again, it is the competition they fear. This is not an “oil company subsidy.” It is a subsidy that anyone can get. It is a biofuels subsidy. If you favor promotion of biofuels by tax incentives, then what difference does it make who is getting the credit? Unless of course the real issue isn’t promotion of biofuels.

I have said it before, and I will say it again: Oil companies are not just going to sit around and die while alternative energy companies take over. As it makes economic sense, they will start to produce biofuels. Here is a case – with the credit factored in – that did make sense. I think the reaction of the biodiesel lobby is probably not the last time you will see them (or the ethanol lobby) react negatively as oil companies continue to produce biofuels.

April 18, 2007 Posted by | biodiesel, biofuels, ConocoPhillips, green diesel, subsidies, Tyson Foods | 72 Comments