Treasury ruling expands renewable-fuel tax break

As lawmakers pieced together a massive energy bill in 2005, then-House Majority Whip Roy Blunt (R-Mo.) added language to support a fledgling renewable-energy industry that produces diesel fuel from animal wastes.

Among the targeted beneficiaries was a plant in Carthage, Mo., in Blunt’s district, that makes renewable diesel from turkey offal. The total cost to the government was projected to be around $46 million.

A Treasury Department ruling this month, however, interprets the tax break more broadly than Blunt intended. The new interpretation could allow oil companies such as ConocoPhillips to claim the tax credit by adding animal fat or vegetable oil to their traditional diesel refining process.

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The decision likely raises significantly the cost of the government of the break, and sets up a lobbying battle between renewable-fuels producers backed by agriculture interests and traditional oil refiners that are moving to take a bigger stake in the still nascent renewable-fuel industry.

Underlying the dispute is the growing political popularity of renewable fuels, which could increase both the market and federal government financial support for “greener” processes. The White House and Congress seem intent on boosting their production to supplement gasoline.

President Bush has called for cutting gasoline usage by 20 percent in the next 10 years. A Senate bill would require renewable-fuel production to increase to 8.5 billion gallons by 2008. About 5.3 billion gallons of corn-based ethanol are expected to be produced this year, along with 250 million gallons of biodiesel fuel, principally from soybean and canola oils.

One of the main beneficiaries of the Treasury ruling is oil giant ConocoPhillips, which has announced plans to join with Tyson Foods to use animal fat to help make renewable diesel during its normal refining process.

Conoco’s lawyers, Hunton & Williams, argued to the Treasury Department that processes like the one planned with Tyson should be eligible for the tax break. Treasury, after consulting with the Energy Department, agreed.

The National Biodiesel Board, which represents smaller biodiesel plants that use soybean and canola oil to make biodiesel fuel, objects to the Treasury ruling, and now is lobbying supporters on Capitol Hill in hopes of having the original congressional intent clarified.

The tax credit is retroactive to Jan. 1, 2006, but expires at the end of next year.

Scott Hughes, a lobbyist for the biodiesel board, said the Treasury ruling could undermine the biodiesel industry, which benefits from a separate $1-a-gallon tax break.

Hughes said the two breaks would be “tied to the hip.” Given constraints such as pay-as-you-go budget rules, more money going to oil companies could mean less going to the biodiesel producers that the board represents.

According to a Wall Street Journal story, ConocoPhillips and Tyson plan to produce 175 million gallons of renewable diesel fuel.

“The potential volumes are just massive,” Hughes said.

In a letter to Treasury Secretary Henry Paulson last September, Blunt acknowledged he was the sponsor of the tax break. Sources said the language was added during the conference committee as members tried to hammer out the remaining details of a massive energy bill years in the making.

“Interpretations that would allow credits to large unintended producers for fuel processed would require a substantial legislative policy change that far exceeds current law and could be very expensive in terms of potential revenue loss,” Blunt wrote.

His office declined to comment further.

Charlie Drevna, a lobbyist at the National Petrochemical and Refiners Association, said oil companies should be eligible for the tax break because the process they employ will still lower dependence on foreign oil.

He said the break should not simply be an entitlement program for the agriculture industry.