Domestic Fuel

The biodiesel industry needs the tax credit now more than ever.

Last year, many producers believed they’d survive without the tax credit on the expectation that the biodiesel RIN would pick up enough of the slack.

However, in the wake of two RIN fraud scandals, oil companies have ceased purchasing RINs generated by all but the largest producers. For the majority of the industry (both by the number of firms and by their aggregate capacity), it has become very difficult to sell any biodiesel at all. In the typical case, where biodiesel is sold and then blended by a distributor, the RINs are separated and sold by the blender, creating a discount that makes current-generation biodiesel cost-competitive with regular diesel. However, if a blender can’t sell RINs generated by a given producer, it becomes uneconomical to continue to buy their fuel.

To emphasize, the problem is not specific to small producers. I trade RINs, and most producers in the 15-25mmgy range are being turned away as well. By my count, 142 of the 186 producers now in operation have 20mmgy capacity or less, comprising 28.3% of the industry’s total capacity (791mmgy/2.81bgy), and probably closer to half of its total output, since the largest plants still tend to run well short of their name plate (in 2011, REG sold 150mmg with 212mmgy capacity, RBF sold 65mmg with 180mmgy capacity, etc.), whereas small and medium plant owners generally have a harder time financing capacity beyond what they can currently utilize.

If nothing changes, within the next few months, biodiesel plants across the country will begin to close up shop.

The NBB and EPA are pushing for new RIN auditing platforms, and a half-dozen have sprung up in response. What is not yet fully realized, however, is that the oil companies are not interested in processing additional diligence information. They’re going to stick with producers big enough to sue in the event a batch of RINs turns out to be bad.

The EPA’s “caveat emptor” stance on RIN fraud is difficult to understand. It would be sensible to expect oil companies to produce their own auditing/enforcement mechanisms *only if* RINs were part of their core business.

On the contrary, obligated parties resent having to purchase RINs in the first place, and so they’re certainly not going to invest more money than they have to in meeting compliance mandates, especially when the consequence of inaction is the elimination of a competing industry. All analogies to bond markets and ratings agencies, therefore, are fundamentally misguided.

Moreover, private auditors will always be insufficient unless the EPA also creates a mechanism for them to bar suspected counterfeiters from the program. Neither Clean Green nor Absolute Fuels had any presence in the physical biodiesel market, which is the first thing traders look to when we’re assessing a prospective generator. However, there’s all the difference in the world between not being able to fool most buyers in the market and not being able to fool *any* buyers in the market.

What the market really needs is a commitment from the EPA to prosecute suspected fraud in a timely fashion. This would make the RIN market insurable (at a cost, say, of 1-3% of total price per transaction). Right now, the EPA allows itself 7 years to bring a RIN fraud case to trial (assessing up to $37,500/day in fines in the meantime), and no insurer wants to take on such an amorphous source of risk, though several have been asked in recent months.

In the meantime, the return of the biodiesel tax credit would help sustain the industry through this rough patch. In addition, the IRS is much better suited to anti-fraud enforcement than the EPA.

Random visits by IRS biodiesel experts were (unfortunately) the best market-wide check against RIN fraud while the tax credit existed. They’re better-funded, and lost tax revenue provides the agency an incentive to act quickly.

At $8mm/year, the biodiesel industry could have 80 full-time IRS investigators doing double-duty for the RFS program, since most of what’s required is the same. While that may sound like a lot to you and me, in 2011 the industry as a whole added an estimated $345mm to tax receipts at the federal level alone, and so $8mm/year is far less than the $100mm/year or more in revenue our government stands to lose if small and medium biodiesel producers go extinct.

[...] amendment offered by Sen. Debbie Stabenow (D-MI) failed on a tie vote of 49-49, since 60 votes were needed for passage. The amendment would [...]

[...] amendment offering by Sen. Debbie Stabenow (D-MI) unsuccessful on a tie opinion of 49-49, given 60 votes were indispensable for passage. The [...]

[...] related to biodiesel and advanced ethanol tax incentives failed to make it in the final bill. An amendment offered by Sen. Debbie Stabenow (D-MI) and another by Senator Pat Roberts (R-KS) would have extended the $1 per gallon biodiesel [...]