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Biodiesel Boom to Bust

Biodiesel doesn’t get the attention of ethanol or its bashing in the media. At an EPA hearing in Washington, D.C., last December, environmentalists were still using old data to incorrectly claim that ethanol takes more energy to make than it produces. Biodiesel remains fashionable, with the aging country music icon Willie Nelson still promoting it. It’s undeniably green, reducing greenhouse gas emissions by up to 86% compared with petroleum diesel, according to the EPA.

Maybe biodiesel’s lower profile is due to ethanol’s bigger market – about 13 billion gallons of production in 2013, using 35% of the U.S. corn crop for the fuel and distillers’ grains. Biodiesel last year grew to 1.8 billion gallons and used about 14% of the soybean oil from the U.S. crop – a smaller share partly because about half of the fuel is also made from animal fats, used French fry grease, and even cooking oils washed down the drain, separated by sewage treatment plants and sold as brown grease.

Bigger EPA casualty

Make no mistake, EPA’s announcement last fall that it plans to pull back on mandates for blending biofuels will hit biodiesel much harder than corn ethanol. Economists expect corn ethanol to stall out at roughly last year’s level (instead of expanding to 14.4 billion gallons, as the 2007 energy law envisioned). Biodiesel, however, could crash. University of Illinois economist Scott Irwin and the National Biodiesel Board (who sometimes disagree on outlook for the fuel) both estimate that production will fall to about 1 billion gallons this year if EPA doesn’t increase its blending mandates in the final rule for 2014.

EPA’s proposed rule for meeting the Renewable Fuel Standard (RFS) has the effect of cutting the ethanol mandate by 6% and biodiesel by 50%, says Joe Jobe, CEO of the National Biodiesel Board.

At first glance, it appears that the EPA merely froze the mandate for biodiesel at last year’s 1.28 billion gallons for two more years. 

However, as oil companies hit the so-called blend wall for 10% ethanol, they can get credit for more blending by using biodiesel to meet part of the mandate for advanced biofuels (those with at least a 50% reduction in greenhouse gases vs. petroleum). “Biodiesel doesn’t have a blend wall,” Jobe says.   

Since 2010, when blending for the advanced category started, targets have been exceeded with biodiesel.

“Not a lot of people know that or realize that, but it’s a tremendous success story for the RFS,” Jobe says. 

That’s one of the reasons the industry was able to sell more than the 1.28 billion-gallon biodiesel mandate last year. Biodiesel is just part of the advanced category, but as cellulosic ethanol has fallen short of the original goals, biodiesel can fill in for more of the advanced category. 

That advanced category is a big part of the drastic reduction EPA proposes from the 2007 law’s goal of 18.15 billion gallons of total 2014 biofuel use. EPA wanted to cut the 2014 mandate, for corn ethanol and advanced, to 15.2 billion gallons for 2014. 

Tax credit rush

The other reason biodiesel did well last year was that blenders were rushing to cash in on the $1-per-gallon tax credit for biodiesel that expired in 2013, says economist Irwin.

“With certainty, you “With certainty, you could get the tax credit on it,” he says. Congress might restore the tax credit again this year, but that isn’t certain.

“We saw the exact same thing happen in 2011,” Irwin says. The tax credit, which has to be renewed each year under current law, expired at the end of 2011. Blenders chose to use more that year, leading to lower production in 2012. 

It was the combination of the RFS and tax credit that drove the business. “Even with the $1 tax credit, blenders were still losing money on every gallon of biodiesel they blended,” he says. Last year, biodiesel sold for $4.50 a gallon or more, while diesel was about $3, more than a $1 difference. 

“Left to the market, zero gallons of biodiesel would be produced in the U.S.,” Irwin says.

Benefits of a mistake

Jobe and others in the industry don’t disagree that federal support is still needed. “There are markets without any public policy support where biodiesel would be used,” Jobe says.

City bus fleets used biodiesel long before the RFS, and B100 (100% biodiesel) is used in underground mines. Those are small niches, though, compared to recent breakthroughs for biodiesel. Love’s truck stops are selling B20;  B5 is shipped through pipelines. 

“The industry is coming off the best year in its history,” says Gary Haer, vice president for sales and marketing at the Renewable Energy Group, the nation’s largest maker of biodiesel based in Ames, Iowa. 

Haer, who is also a director of the National Biodiesel Board, says the industry still needs support. “We’re still a very young industry. Our industry has only been around about 10 years. 

“What’s proposed by EPA is a huge step back for the biodiesel industry and for agriculture and the livestock sector,” he says.

“When we’re consuming soybean oil, we are contributing to the value of the soybean crush, and that means that soybean meal is cheaper,” he explains. That cheaper meal also helps lower meat costs for consumers. Then, when the livestock is processed, “we buy the animal fat and we give value there,” he says.

Biodiesel also does benefit everyone as a fuel that cuts greenhouse gas emissions.

“There needs to be some recognition of that. All energy molecules are not the same,” Haer says. “There’s no free lunch here. We’re going to pay for air quality in some form or another.”

Jobe adds that the oil industry has had tax breaks for a century. When the first RFS was established for ethanol only in a 2005 energy law, oil got exemptions from the clean air and clean water acts for fracking, a technology developed by the government. For details, Google the Halliburton Loophole.

Haer is optimistic that the tax credit will be restored and that EPA will revise RFS cuts. Its first 2014 proposal had many errors, including assumptions that biodiesel doesn’t work in cold climates like Minnesota. EPA allowed the Biodiesel Board to submit more than 400 pages of comments on its rule.

Biodiesel has powerful friends. Iowa Senator Charles Grassley, top Republican on the Finance Committee, and Senator Maria Cantwell (D-WA) are pushing to restore the tax credit – for three years, not just one.

“Continuing incentives for biodiesel and other green energy sources support jobs, help the environment, and increase energy independence,” Grassley says.

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