After latest blow, a biodiesel tax credit may be months away

DANVILLE – What happens in Washington does affect Main Street, especially Danville's.

Without a tax incentive that expired at the end of 2009, production at the Blackhawk Biodiesel plant, north of Main Street in central Danville, began to slow down. Unless the subsidy is renewed soon, plant managers fear, 30 local jobs could be lost.

Last week, language to renew the subsidy was removed from Senate legislation, adding to the uncertainty that has plagued biodiesel producers since the first of the year.

"The industry is holding on by a thread," said Michael Frohlich of the National Biodiesel Board.

The $1-per-gallon tax incentive, which goes to biodiesel buyers, expired Dec. 31 when Congress failed to renew it. Without the incentive, biodiesel is not as competitively priced as petroleum diesel, so buyers have stopped buying and production has slowed.

The industry was hopeful last week when the tax credit was included in a jobs bill. But last Thursday, Senate Majority Leader Harry Reid, D-Nevada, removed it.

Alicia Clancy, spokeswoman for Renewable Energy Group, a co-owner in the Blackhawk facility, said it's unknown when the incentive might be included in another piece of legislation.

"So we are left once again waiting to find out the fate of our industry, which is very unfortunate considering these are green jobs at stake," she said.

Frohlich said no one in Washington has spoken out against the biodiesel tax credit, which was not the only tax incentive struck from the legislation last week. Frohlich said Reid indicated he wants to address those issues in a later bill.

"Obviously, it was very upsetting news," Frohlich said. "This was a strong bipartisan bill that clearly would have gone through."

Christina Angarola, spokeswoman for Sen. Dick Durbin, D-Ill., said the biodiesel tax credit and other items, such as unemployment insurance and food stamps, might be put in separate legislation in coming weeks or months. Such a bill might gain bipartisan support. She said Durbin is in favor of renewing the biodiesel tax credit.

David Swenson, associate scientist and economist at Iowa State University, said the biodiesel tax credit could be getting caught up in political horse trading, but pragmatism is playing a part as well. Lawmakers, he said, are wary of the growing federal deficit. With all the other programs that must be funded, renewal of the biodiesel tax credit isn't ranking as a high priority.

"Irrespective of the subsidies, the prospects for growth in the industry are bleak right now, and so bleak that they require high subsidies and mandates just to rationalize existing capital investment," he said. "That's hard to maintain, and that's a political loser."

Biodiesel is much more environmentally beneficial than ethanol, but the capacity to produce meaningful levels of biodiesel is very limited for a variety of reasons – the most important being value, he said. Soybean oil is one of the major raw materials used to produce biodiesel, and Swenson said soybean oil is worth more as a food product than as a source of fuel.

"Soybeans are just too darn good to be used for fuel. They have uses for so many other things," said Swenson, who added that when food is pitted against fuel, food always wins.

According to the USDA Economic Research Service, soybean oil represents 71.3 percent of U.S. fats and oils consumption, significantly outpacing all other types of edible oils combined.

And according to the United Soybean Board, soybean oil has many food applications, including salad and cooking oil, baking and frying fats and margarine. In 2007-08, 49 percent of soybean oil was used for salad and cooking oils, 27 percent for baking and frying fats, 14 percent for biodiesel production and 5 percent for margarine, and other edible products used 5 percent.

Swenson said it's not that there are anti-biodiesel forces aligning, it's just that biodiesel is competing with other valuable uses of soybeans. So biodiesel requires a tremendous subsidy to get it close to making a profit, he said.

"It's exceedingly expensive from the public-policy side and requires a high level of subsidy, and we just can't flat produce that much," he said.

Swenson said of the economists he follows, none predict a growth scenario in the biodiesel industry without continued mandated consumption and massive subsidies.

Although the subsidy remains in question right now, the industry will get a boost from mandated consumption in July when changes to the nation's Renewable Fuel Standard, which is set by the United States Environmental Protection Agency, require increased production goals for biodiesel.

Frohlich said that will be a great shot in the arm, but it doesn't take effect until July, and plants can't hang on that long.

Clancy said the Danville plant has been fortunate to have a limited amount of demand that's kept it producing at a reduced rate, but employees there, like all REG workers, have taken pay cuts.

"And we've been able to keep that facility running enough to keep the staff on board, but the longer the wait, the harder that process," she said.

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