It is a real shame that our tax code does not automatically update itself as the economy changes and our knowledge of the tax code’s impact on commerce evolves. Instead, politicians belatedly fix problems only when there is overwhelming pressure to do so, and they do not always get these updates right. The current iteration of biodiesel tax credit is a prime exemplar of something that needs to be updated but could very well be done in a way that makes it worse if we are not careful.
The goal of the $1 a gallon tax credit is to encourage the market for biodiesel fuel, which shows great potential as a clean domestic energy source that would reduce CO2 emissions while also increasing the income of U.S. farmers in a more beneficial way than our myriad price supports.
The tax credit goes not to the producer of the biodiesel (which is typically soybean oil in the U.S.) but to the entity that blends the biodiesel with a traditional fuel, which is for now pretty much the way it has to be consumed.
The blender receives the credit no matter where the biodiesel was produced, and therein lies the problem. The blenders quickly realized that it didn’t matter where they bought their biodiesel from and they began seeking out lower-priced foreign biodiesel, rendered less expensive in no small part because of generous subsidies provided by their own governments.
As a result, in 2016 an estimated $800 million of the biodiesel tax credit will effectively go to foreign producers. This is an unfortunate outcome–when the money goes to farmers abroad it does nothing to help develop the domestic biodiesel industry and fails to benefit U.S. farmers at all. No one who conceived of the credit would have seen this outcome as being desirable.
Just killing the biodiesel subsidy might be a preferred solution for conservatives who object to the plethora of subsidies that go to the various forms of renewable fuels in the U.S. But the clear intent of Congress was (and remains) to take an “all of the above” approach to encouraging the development of new forms of energy, and it is a strategy that has worked well. Two decades of tax breaks and research investments helped to develop the technology and techniques used in fracking, which has helped boost domestic oil and natural gas production to all-time highs and rendered OPEC impotent to affect global oil prices. Investment in wind energy research, along with improvements in our energy grid, have made it competitive with other fuel sources these days. The same is true–or nearly so–for solar energy production as well.
The simple way to fix the problem with the blender’s credit would be to simply change it to a producer credit. Most of our current energy tax credits are done this way and it would be straightforward to disallow foreign producers from receiving these credits, just as is done with the existing producers credits.
Biofuels have the potential to become another cost-effective (and environmentally friendly) fuel source in the near future, and in some respects the future is already here: the International Energy Agency announced last month that the productive capacity of renewable energy now exceeds that of coal. However, to hasten that future and ensure we allocate our scarce energy tax incentives wisely we should take care that those incentives go to U.S. producers.