An unexpected tax bill for imported palm oil biodiesel
On December 18, 2016, the U.S. Congress passed a slew of renewable energy tax extenders, including a two-year extension of the Biodiesel Mixture Excise Tax Credit and the Second Generation Producer Tax Credit. The first tax credit awards $1.00 per gallon of biomass-based diesel (BBD; biodiesel or renewable diesel) blended into diesel, and the second tax credit awards $1.01 per gallon of cellulosic or algal biofuel to producers. This is good news for biofuel producers, but in the past we’ve argued that the biodiesel tax credit is unnecessary, and that the second generation biofuel tax credit needs to be overhauled in order to be effective. Interestingly, one provision we advocated for second generation biofuel, that the tax credit be refundable in order to benefit early producers with no tax liability, is offered to biodiesel blenders, but still not to second generation biofuel producers, offering a rather unnecessary leg up to the already established first generation industry.
There’s another implication of the biodiesel tax credit that is becoming increasingly worrisome. It’s not only domestically produced biomass-based diesel that can claim the tax credit; imported BBD is eligible as well. Most of this is likely canola- and soy- based BBD from Canada and Argentina, but an increasing amount appears to be BBD made from palm oil. The figure below shows annual imports of BBD from countries that likely use palm as a feedstock, according to import data reported at the company level. Biofuel production from palm oil is an area of concern because this feedstock has been linked to unsustainable deforestation and peat drainage in Indonesia and Malaysia that release vast amounts of greenhouse gas emissions. Between 2011 and 2013, some of the imports shown in the chart below were from Singapore, the Netherlands, and Finland, all countries with Neste Oil facilities that produce BBD that is likely at least partially from palm feedstock. Since 2014, the imports shown here have been exclusively brought in from Indonesia by Wilmar, a major palm oil company.
You may ask yourself why the U.S. is importing so much palm BBD when EPA has indicated this pathway is not likely to be approved under the Renewable Fuel Standard due to its high greenhouse gas emissions. The answer is that biofuel facilities in the U.S. and abroad that already existed or were under construction at the time the original RFS2 final rule was released in 2010 are grandfathered into the policy. Therefore, these facilities qualify under the “renewable fuel” category of the RFS, regardless of their lifecycle greenhouse gas emissions. There may be enough grandfathered capacity to fulfill a significant portion of the RFS with palm BBD; just two grandfathered Neste renewable diesel facilities in Finland and Singapore that are registered under the RFS could theoretically deliver and generate palm-derived Renewable Identification Numbers (RINs) for as much as 372 million gallons per year (equivalent to 632 million RINs).
Why are we seeing this jump in palm BBD imports starting in 2013, when these facilities have clearly been in existence since 2010? Biodiesel and renewable diesel are usually more expensive to produce compared to diesel in the U.S. and therefore can’t survive without policy incentives. The biodiesel tax credit has been in effect on and off since 2005, but it appears this alone wasn’t enough to drive significant imports of palm BBD. The likely answer is that 2013 is the year when renewable fuel RIN (D6) prices jumped from less than 10 cents per RIN to more than 60 cents per RIN due to pressure from the blendwall. Biodiesel and renewable diesel earn 1.5 and 1.7 RINs per gallon, respectively, so the current value of RINs is on the same order as the biodiesel tax credit. As EPA is maintaining pressure on the blendwall by mandating renewable fuel volumes beyond the amount of ethanol that can be consumed in regular gasoline (E10, 10% ethanol), renewable fuel RIN prices are likely to remain fairly high for the foreseeable future, continuing to incentivize palm BBD imports.
In fact, EPA expects a continued increase up to 400 million gallons in the total amount of non-advanced, grandfathered BBD used under the RFS in 2016 according to their final rule for 2014-2016 volumes released in November 2015. Note that this volume includes expected grandfathered, non-advanced soy biodiesel and other feedstocks besides palm. Interestingly, just 6 months earlier, in May 2015, EPA’s proposal for this rule included a forecast of only 250 million gallons of non-advanced, grandfathered BBD. One possible reason for this change in expectations is that by November, it had become clear that the biodiesel tax credit extension was likely to pass.
Palm biodiesel imports can now expect to continue reaping the benefits of two incentives originally intended to promote clean domestic energy. U.S. taxpayers are paying the bill – and, given that Malaysia and Indonesia are still far from taking control of their peat drainage and deforestation issues, the environment may be paying the price.