Grainnet

What's in a Name? If it's Thermal Depolymerization, a Lot

by Lynn Grooms

On April 18, the Committee on Energy and Commerce's Subcommittee on Energy and Air Quality heard testimony from the National Biodiesel Board (NBB) on biodiesel’s impact on energy security and other benefits.

During the hearing, NBB Director of Government Affairs Scott Hughes told the subcommittee that two federal policy measures, in particular, have been effective in stimulating biodiesel’s increased production and use.

One is the Bioenergy Program, which stimulates crop use for energy production.

The other is the biodiesel blenders tax credit, which passed in the JOBS Act of 2004.

That incentive has been the primary stimulant for the dramatic increase in new plants, jobs and local investment in biodiesel, Hughes said.

But, Hughes said that the biodiesel industry also is subject to unintended consequences of public policy.

“Amidst all of the positive news and investment going on today, there is one potential threat that we all fear could, in a few short years, severely undermine the economic benefits from a growing biodiesel industry,” Hughes said.

IRS Notice 2007-37

Hughes was referring to the Internal Revenue Service (IRS) recently issuing its interpretation of the Energy Policy Act’s Renewable Diesel Tax Credit provision.

The IRS ruling makes “workable” the “renewable diesel” tax credit by defining ‘thermal depolymerization’ under a very broad reading to allow large integrated oil companies and chemical processors to claim a $1/gallon tax incentive as part of the traditional refining process using existing petroleum refineries and new chemical processing units with virgin, raw vegetable oils, animal fats and non-virgin recycled restaurant greases.

Mark Riedy, partner, Andrews Kurth LLP, Washington, D.C., a founder and original general counsel of the Renewable Fuels Association and a founder and currently general counsel of the American Council on Renewable Energy (ACORE), recently explained at the Infocast Biodiesel Finance & Investment Summit in Minneapolis, what severe impact IRS Notice 2007-37 (March 2, 2007, published April 3, 2007) could have on the biodiesel industry.

Broad Definition of Thermal Depolymerization

“The Notice, under its new broad definition of ‘thermal depolymerization,’ enables refiners to bypass biodiesel manufacturers and, thus, purchase virgin and non-virgin biomass-based feedstock directly from feedstock producers and then introduce such feedstock directly into a refinery’s hydrotreating units to create essentially the same product as biodiesel,” Riedy said.

“However, the renewable diesel product, unlike biodiesel, has a cetane number of nearly 100 and is entirely pipeline fungible. Therefore, at least on paper, renewable diesel would be a potentially superior product versus biodiesel.”

Biodiesel has many benefits above and beyond the new definition of renewable diesel, the NBB said.

The term ‘thermal depolymerization’ had gone undefined until the Treasury Department recently said that “in consultation with the Department of Energy,” it would apply a broad definition:

Thermal depolymerization is a process for the reduction of complex organic materials through the use of pressure and heat to decompose long-chain polymers of hydrogen, oxygen and carbon into short-chain hydrocarbons with a maximum length of around 18 carbon atoms.

A process may qualify as thermal depolymerization even if catalysts are used in the process.

Riedy noted that it is “highly unusual” for the IRS to seek any other agency’s guidance, let alone to make a point to admit expressly the consultation with another agency to justify the definition of an undefined term under a tax statute.

The IRS, Riedy said, clearly understood the gravity of this new definition it created.

The thermal depolymerization (TDP) process, as originally defined as a last minute addition to the Energy Policy Act of 2004, can be used to turn virgin biomass feedstocks (vegetable oils, animal fats and certain plant materials) and non-virgin biomass feedstocks (restaurant greases and other recycled materials), as well as hazardous wastes, plastics and food wastes (e.g., 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,” said Joe Jobe, NBB’s CEO in a news release on the issue.

About eight oil refiners and chemical companies heavily lobbied the government to expand the TDP provision.

According to Riedy, about half of the group included European chemical firms using the Fischer Tropsch process to produce fuel by converting coal and natural gas into liquids and seeking to build such processing units in the United States.

They would use the same virgin and non-virgin biomass-based feedstocks to become alternative/renewable fuels to also seemingly qualify for the renewable diesel tax credit, Riedy added.

Riedy said that it was no coincidence that on April 16, soon after the IRS notice was published, ConocoPhillips and Tyson Foods Inc. announced their plan to collaborate on producing renewable diesel from various pork, poultry and beef animal fats.

The companies expect significant production of renewable diesel in 2007, with an additional ramp up to as much as 175 million gallons per year by the end of 2008.

The 2008 production number proposed by the ConocoPhillips-Tyson joint venture represents more than 50% of the current U.S. biodiesel production of just over 250 million gallons per year, Riedy said.

However, some say that the oil company’s estimates could be understated.

While refineries may have to invest money into segregating fuels and installing new hydrotreating systems, they may not consider it too high a price to pay for getting rid of an up and coming competitor (e.g., the biodiesel industry), Riedy said.

In his testimony before the subcommittee, NBB’s Hughes argued that renewable diesel does not offer many of the benefits that biodiesel does, such as adding to refining capacity, improving certain performance characteristics, reducing emissions (like particulate matter), and adding jobs to the economy.

Hughes added that renewable diesel has not gone through 15 years of research and regulatory process, such as completing health effects testing and achieving an ASTM standard (ASTM D-6751).

Yet it will receive the same tax incentive as biodiesel, and the expanded definition of renewable diesel will increase the profits of large oil companies while stunting the growth of the promising biodiesel industry.

“This policy, if continued, could negate the economic gains realized by a vibrant biodiesel industry, as well as stymie investment into the industry” which has provided the U.S. some its most recent expansion in ‘refining capacity’ through the construction of new plants, Hughes said.

According to Riedy, the existing tax incentive law for renewable diesel does not distinguish between virgin and non virgin feedstock, which provides producers a $1/gallon tax credit versus the express distinction made by Congress between agribiodiesel (made from virgin feedstock) and biodiesel (made from non virgin feedstock).

The latter receives just a $.50/gallon tax credit while agribiodiesel receives the $1/gallon tax credit.

As a result, refiners and chemical processors will be motivated, or “incented,” by the U.S. tax laws, to pay feedstock producers a higher price in competition with biodiesel manufacturers for the same feedstock, Riedy said.

This would particularly be the case for non-virgin feedstocks which produce a higher tax incentive for renewable diesel than for biodiesel producers.

With the significant profits and storage capacity of the refining and chemical industries, they conceivably could purchase years’ worth of feedstock in advance, store it and leave the biodiesel industry with few feedstock alternatives,” Riedy added.

“The refiners also then would control the product they otherwise would have had to purchase from the biofuels industry to meet their new and expensive RFS obligations (as of the October 10, 2007 issuance of the new RFS rules by the U.S. Environmental Protection Agency) and, thus, would meet those obligations outright,” Riedy said.

Renewable diesel is eligible for a higher credit in the RFS than either ethanol or biodiesel. Renewable diesel will get 1.7 credits to ethanol’s 1 and biodiesel’s 1.5.

What’s more, chemical processing companies that use Fischer-Tropsch processes may qualify for the renewable diesel tax credit, Riedy said.

Knock-out Punch “The oil industry has tried for more than 30 years to eliminate the ethanol industry and has failed to do so,” Riedy said.

“However, in one fell swoop, the IRS has served up the knock-out punch to undercut severely, if not to kill, the biodiesel industry in the United States.

“The biodiesel industry basically has two alternatives—either sue the IRS on the Notice based upon a variety of legal theories, or seek a federal legislative fix, with the latter being the best alternative to balance the playing field between the renewable diesel and biodiesel industries.

"We need a full and varied menu of renewable fuels—ethanol, biodiesel, renewable diesel, etc.—playing on a level regulatory field.”

“This is bad energy policy, bad agricultural policy and bad fiscal policy,” NBB’s Jobe said.

He added that the NBB does not oppose oil companies making renewable diesel, but said that the American taxpayer should not be paying them to do so through a tax loophole.

“If Congress lets this stand, our government will be handing over U.S. taxpayer money to some of the richest companies in the world, and it will not provide many of the benefits that the biodiesel tax incentive has given back to America.”

“During the interim of either a positive legislative fix or if Congress does not balance these industries, investors and financiers for biodiesel will stand on the sidelines and not move forward with U.S. biodiesel developers,” Riedy said.

“Moreover, with respect to existing biodiesel plants, jobs will be lost, investments will be harmed and loans will be unpaid—not a healthy result, or what was originally intended with the implementation of this tax incentive legislation.”

Lynn Grooms, Grooms Communications, Mt. Horeb, WI, is an independent agricultural journalist.