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May 26th, 2005

The National Biodiesel Board is WRONG

The NBB has its place in the biodiesel world. It helped get us a biodiesel standard, and it's helped make biodiesel legal and available. It is also a wonderful lobbying organization for big soy and big oil.

It is in that third capacity that the NBB is using its clout to try to extend the federal biodiesel tax incentive that was passed at the end of last year. See the letters they are circulating here:

Senate version
House version

The tax incentive may seem like a good thing, but it represents the latest, biggest hurdle to face small sustainability-oriented biodiesel distributors and producers. I am adamantly opposed to this tax incentive because of the damage it will inflict on this industry. How? Read carefully:

1) When it comes to B100 (100% biodiesel), it is pro-large corporation, anti-everything else. How? The B100 portion of the bill is an income tax credit.

-On fuel sold at a fuel pump, the credit is taken by the seller. Most folks don't know much about corporate structure, but I know a little. I can tell you with certainty that there are very few small businesses that are 'c' corporations. What are 'c' corporations? They are the kind that have a corporate income tax liability instead of an individual shareholder income tax liability. Partnerships, 's' corporations (the type that Yokayo is), and a number of other arrangements beneficial to small business owners do not work when it comes to income tax credits because the tax liability is spread out among a variety of owners. Income tax credits are also only beneficial to companies with very large tax liabilities.

-On fuel delivered into storage tanks, the credit is taken by the business buyer (residential delivery customers are left out of the equation). It is worth noting that many small distributors like Yokayo Biofuels rely on small, residential delivery customers as our bread and butter (similar to the propane delivery business model)- neither the seller nor the buyer receives anything in this situation!

The bottom line: The petroleum companies have been around longer, have more business accounts, are successful enough to have a large corporate tax liability and sell a heck of a lot more fuel at a public pump. When it comes to B100, they are able to take advantage of this incentive in many ways that small companies like mine cannot. (If who you get your biodiesel from doesn't bother you, then see #5, below)

2) What about the mixture credit? Unfortunately, the part of the tax incentive that is easy to apply right away, is not dependant on income tax liability, and is completely refundable, is only accessible if the fuel is a blend with petroleum. The actual bounds of the definition for 'biodiesel mixture' have not been revealed yet, but the real world result is that most former suppliers of B100 are now selling B99, B99.5, etc. In addition, a number of petroleum companies with no experience in high blends now see high blends as the biggest way to make money, and are selling B99 as well. Some of these new entries into the high-blend market are selling the fuel illegally, as is the case here in California, where they often don't have the required variance to sell blends over B20 (20% biodiesel).

3) Why the heck are both credits (income and mixture) $1.00 for "agri-biodiesel" and only .50 for biodiesel from other feedstocks? Let me be clear: "other feedstocks" are the most sustainable ones- recycled and "waste" product feedstocks, also known as "second use" feedstocks. They must conform with the same quality standard, so why are they discriminated against? It's not cold weather qualities- they wouldn't have included virgin (i.e., first-use) animal fat. Quite simply, sheer lobbying power, or lack of it. "Agri-biodiesel" is defined as being first-use biodiesel, so it is definitively less sustainable, with more embodied energy. Why shouldn't we focus on the most sustainable, least embodied energy feedstocks first? In 2004, an estimated 30-35 million gallons of biodiesel were sold in the U.S. To give you some perspective, an estimated 3 BILLION gallons of used restaurant fryer grease are created annually. That's plenty of feedstock to get us through the research period for higher yield uber-feedstocks like algae. Soybeans, by the way, are a very low oil yield crop, at only about 50 gallons per acre, yet well over 90% of the biodiesel sold in this country is soy biodiesel.

4) "But I can now get B99 at the pump for a price that's close to diesel prices- that rocks!" I can assure you, it will not rock for long. While petroleum companies, including the one in my town, are selling high biodiesel blends at prices lower than what they pay for the wholesale fuel (thanks to the incentive), this won't last. Wholesale prices have already gone up .30 in Northern California since the tax incentive went into effect. People in other parts of the country are seeing even bigger jumps. Why is this happening? Several reasons: 1) The market is still so much bigger than the supply, especially with all the new marketing that has come out of this incentive hoopla. The expectations game has been played in a manner than cannot do anything but drive prices back up. 2) The perfect feedstock for decentralization, which would bring down prices, is restaurant fryer oil, the one that was already not emphasized in the industry, and was blatantly discriminated against by the incentive. 3) It's a self-fulling prophecy. As certain retailers set prices very low, demand and expectations rise, and the prices will go back up. Soon, people will be paying the same high prices they did before, and a big fish up the chain will be making more money than they used to. Thus, the incentive is exposed as a simple windfall for the parties that I've mentioned. Remember: the real solution to high pricing is decentralized, regional production and distribution.

5) "So what- at least it helps get biodiesel out there, right?" Here we get to the matter of timing. While I hope I've already convinced you that a perhaps well-intentioned piece of legislation has some SERIOUS problems, the bottom line is that it helps the industry in the long run- well, at least it should if it has any value at all. Let's put everything else aside for a moment and examine the fundamental idea of any kind of biodiesel incentive. No matter what kind of structure the incentive would take, it would always benefit large, already successful, centralized-model corporations the most: my father's a CPA, and he is an authority on this. It is why he is against tax incentives and subsidies in general. Because of that fundamental aspect about incentives and subsidies, whenever a new industry incentive occurs, it has the potential to destroy the balance of power within that industry. Prior to this tax incentive, there were a few large corporations ("hubs" in a centralized source supply chain) selling wholesale biodiesel, a lot of regional small companies and co-ops selling high-blend or pure biodiesel, and a number of petroleum companies selling low blends. Very, very few petroleum companies and large corporations were selling high blends or pure biodiesel direct to the consumer. This made a level playing field of sorts for companies like mine. [Note: to read more about the level playing field and small companies, and what they mean to this industry, see Girl Mark's analysis, Local B100 And Why ‘Niche Markets’ Matter: A US Biodiesel Industry Primer]

Flash forward to where we are now- who is the biggest beneficiary of the tax incentives? Well, if you're a large, successful corporation with a sizable tax liability, you can sell soy B100 at a very low price because you can count on getting $1.00 back on every gallon. Some petroleum companies are already doing this. Not many, because you have to wait to file your income taxes to actually get the money back. Far more petroleum companies are now selling soy B99, confident that they don't have to wait long for that refund check to come back (excise taxes, as opposed to income taxes, are filed regularly). I already mentioned that in California, some of these companies are selling high blends illegally. But across the nation, most of these latecomers to the biodiesel party are selling something they know very little about. THIS WILL BITE OUR INDUSTRY'S REPUTATION IN THE ASS!

Here's the thing about small-scale, biodiesel-specific suppliers and producers. We make much more of an investment in the product and the relationship with the customer, and it means that we can't simply make our money off the tax incentive- such a strategy would compromise our ability to succeed, as well as our ideals. I like to tell people I deal more in education than product sales. We spend time with every customer. They sign a service agreement filled with warnings, suggestions, and disclaimers. They are given our "primer on biodiesel fuel." And they are always, without fail, told the three fundamental nuances of biodiesel: 1) fuel filter clogging, 2) rubber compatability issues, and 3) cold weather issues.

At Yokayo Biofuels, we spend a lot of time "holding peoples' hands". Such is the case in new industries. People appreciate it. We have seen a lot of biodiesel-related problems, we have solved them, and we pass on the information that we've learned. I have received off-spec fuel from nearly every large commercial biodiesel producer out there, and I have learned to police our own fuel. We have invested a lot of money in this effort. Compared to the Johnny-come-latelies of the industrie, this is our "unfair burden".

I worry about the folks who are buying their biodiesel at the local petroleum company, a few miles from my business. It's cheaper. They don't have to sign anything. They don't have to talk to anyone- they pay at the pump (cash isn't even accepted). They are not warned about anything. When their filters clog due to biodiesel's solvent effect, they will probably have their cars and trucks towed to the mechanic. The mechanic usually assumes something other than a clogged filter- this is not conjecture, I've seen it happen, and far too many times (with cold issues and rubber compatability issues as well- all of which, in a mature market, would be expected and easily taken care of). The mechanic may very well tell them not to ever run biodiesel again, after replacing their $3000 fuel pump (completely unnecessarily). I have heard many sob stories from uninformed people. Some of these people, customers of another company that didn't take the time to educate them, may call me once they've already poured a bunch of money into the "problem". Bummer- I won't be able to help them. I can only focus on my customers- otherwise, I wouldn't be able to do my job. Now we'll have disillusioned people and disillusioned mechanics, all being deceived, not by a poor quality fuel, but by a lack of education.

Now think of how the incentives will inspire new production to come online. A lot of production- it's being written about. I have a lot of experience with this too. To make biodiesel correctly, safely, and legally on a commercial scale is an amazing endeavor to embark upon. So amazing that most folks, even some of the biggest ones, take shortcuts. This can affect quality.

Which takes me back to my original point: Here we get to the matter of timing. Time for bold, red, underlined, italicized type, for those of you with short attention spans: WHY WOULD A TAX INCENTIVE OF THIS TYPE EVER HAPPEN BEFORE QUALITY CONTROL WAS IN PLACE???

My answer: a bunch of short-sighted idiots. Seriously. There is no government oversight of biodiesel quality at this moment. There is no industry third-party quality control program either. Everything is voluntary, even though we have a great quality standard (ASTM D 6751). Because of this simple fact, the industry has just shot itself in the foot. Here's what happened in a similar situation with the solar hot water industry in the 80s:

The solar hot water industry was essentially destroyed in early 1986 by two major events and one ongoing professional problem. The Reagan administration refused all industry appeals to taper the tax rebate from 40% to 10% over a five to ten year period. It ended January 1, 1986. In February 1986, oil prices plunged from $35 a barrel to $9 to $12 a barrel as OPEC collapsed. Gas prices dropped at the pump to less than $1.00 a gallon - the public's perception was that the energy crisis was over. A nagging professional problem was constant with stories of "suede-shoes barracudas" or "tin men" taking advantage of the tax credit and selling ridiculously bad designs at exorbitant prices to take advantage of tax credit schemes. A lot of the early systems suffered freeze damage, had components failures, or were poorly designed and installed - this was giving the whole industry a bad name. Active solar air collector space heating systems were sold during this time whose parasitic power for blowers, etc. used more energy than they saved. The air systems cost more to operate than they saved. Many solar contractors were poorly trained in roofing. Homes often had roof leaks because the installers had no concept of how to properly install a system on a roof. Good solar contractors, trying to build an industry and pioneering homeowners were guinea pigs during this time for a menagerie of "good, bad, and ugly" systems.

The similarities are incredible, although perhaps its a good thing that this time, petroleum prices probably won't go down- at least not much, and not for long. "Essentially destroyed." There you have it folks. To be sure, there are still some great companies selling solar hot water panels- locally, we sell biodiesel to some of them. But solar hot water panels are a no-brainer. They should be on every house right now. Except some short-sighted idiots didn't agree. They took the panels off the White House and left everyone out in the cold. Let's not let something similar happen again. End of sermon.