The federal biodiesel tax incentive of $1 per gallon (26 U.S.C. 40A), expires at the end of 2016. The credit was created by the American Jobs Creation Act of 2004 (P.L. 108-357) and has been renewed a number of times since then, most recently in December 2015 in the Consolidated Appropriations Act, 2016 (P.L. 114-113). On more than one occasion, the credit has been extended retroactively, as it was for 2015. The credit—and whether it should be repositioned to incentivize domestic production only—is of particular interest to many because in recent years biodiesel imports have increased at a faster rate than domestic production (see Table 1).

A number of bills before Congress would extend this tax credit. Among these are a pair of identical bills in the House and Senate—H.R. 5240 and S. 3188—that would extend the biodiesel tax credit for three years through 2019 at the existing level of $1 per gallon. Importantly, these bills would also alter the tax credit from its current configuration as a credit that is available to entities blending biodiesel with petroleum diesel (blenders' credit) to a credit that would be available only to U.S.-based producers of biodiesel (producers' credit). An earlier bill that also sought to replace the blenders' credit with a producers' credit (S. 1946) was reported out of the Senate Finance Committee in July 2015, but no further action was taken on it. Ultimately, the credit was retained as a blenders' credit and extended through 2016 as part of the FY2016 appropriations act as noted above.

Several other bills before Congress would also extend the biodiesel tax credit while maintaining it in its current form as an incentive to blenders of biodiesel. Among these, H.R. 5994, H.R. 6290, and H.R. 6359 would extend the credit for two years through 2018. H.R. 6358 would extend the biodiesel credit for one year through 2017.

Stakeholders' Perspectives on Altering the Biodiesel Tax Credit

Stakeholders all along the biodiesel market supply chain generally support extending the tax credit. However, the proposal to change it from a blenders' credit to a producers' credit has met with a mixed response among stakeholders. In general, biodiesel producers support the change, while blenders, marketers, retailers, and consumers oppose it.

For instance, the National Biodiesel Board (NBB), a trade association representing U.S. biodiesel producers, favors extending the credit and supports the proposed change to a producers' credit as a way of targeting the incentive to domestic production of biodiesel. NBB solicited support for reassigning the credit to U.S. biodiesel producers in a letter of October 26, 2016, to the chairman and ranking members of the Senate Finance Committee and House Ways and Means Committee. NBB asserted that Congress intended for the tax incentive to support domestic production of biodiesel, not to subsidize foreign biodiesel production. To this end, NBB further asserted that Argentine producers, which supply substantial quantities of biodiesel to the U.S. market, already benefit from favorable tax treatment at home, which provides them with a competitive advantage compared with U.S. biodiesel producers when the U.S. tax credit is added in. Finally, the letter contends that assigning the credit to biodiesel producers would bring back into production a portion of the domestic biodiesel production capacity that currently stands idle.

A number of other stakeholders that operate further along the biodiesel industry supply chain support the extension of the tax credit but oppose shifting it from a blenders' credit to a domestic producers' credit. In an April 2016 letter to the chairman and ranking member of the Senate Finance Committee, trade associations representing blenders, marketers, retailers, and users of diesel fuel in the United States expressed their support for extending the biodiesel tax credit and their opposition to altering it from a blenders' credit to a producers' credit. Signatories to the letter included the Advanced Biofuels Association, the American Trucking Association, the Petroleum Marketers Association of America (PMAA), the National Association of Convenience Stores, the National Association of Truck Stop Operators, and the Society of Independent Gasoline Marketers of America. The letter contends that shifting the tax credit to biodiesel producers would benefit these producers at the expense of fuel retailers and consumers. They assert that such a change would severely and negatively affect biodiesel blenders who have incurred significant costs in installing and maintaining equipment to dispense blended fuels and would result in increased costs for fuel users that would result in higher costs to consumers to offset associated higher shipping costs.

An additional concern about the effect that a shift to a producers' credit would have on consumers is articulated by PPMA. In a policy statement, PPMA asserts that the incentive would be retained by biodiesel producers rather than being passed along to marketers and consumers. The group argues that this outcome would conflict with the rationale for the tax credit, which it asserts is to encourage domestic consumption of biodiesel by making it competitive with conventional diesel. To this point, U.S. biodiesel producers counter that because the credit is a known dollar amount, it is currently divided between producers and blenders as part of the negotiation that takes place in coming to terms on supply contracts. As such, they argue that market forces would dictate that a producer-based credit would continue to be shared among market participants.