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Clean Up on Aisle Six! Tax Reform and an Opportunity for Better Biofuels

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There are folks who will tell you that as American citizens, we have a solemn responsibility to complain about taxes. And ideological bluster aside, they have a point: our tax code is a complete mess. The latest attempt at taking a legislative mop to this mess comes from the Senate Finance Committee, led by Chairman Baucus (D-MT) and Ranking Member Hatch (R-UT). These two members recently outlined a proposal to “wipe the slate clean” and start tax policy over from scratch. This means eliminating virtually all existing deductions, credits, and expenditures. The two Senators have asked their Senate colleagues to let them know what sort of taxes and incentives should be included in this new tax structure and plan to introduce a bill this fall.

Helping clear a path for clean energy

So, what does tax reform have to do with transportation policy? Potentially a lot. Tax reform has been a strong driver of both wind and solar energy, and can also help drive the production of biofuels made from non-food – or cellulosic – sources. These fuels made from fast-growing grasses, agricultural waste, and even municipal garbage can achieve as much as a 90 percent reduction in lifecycle greenhouse gases (meaning from seed to tailpipe) compared to gasoline. This industry also creates jobs across the country, reduces oil use, and can help prevent fertilizer runoff from polluting our waterways.

Commercial-scale cellulosic biofuel facilities are about to come online across the country, but a couple tweaks to the tax code could provide a big boost to this industry and ensure that the cellulosic biofuel industry will continue to mature.

Cellulosic biomass availability

Nearly 680 million tons of non-food biomass could be made available for fuel and electricity on an annual basis by 2030. That is enough for 54 billion gallons of fuel or enough electricity to meet one-fifth of nationwide demand.

Even better than a Kickstarter campaign

First up is a cellulosic biofuel investment tax credit. Lack of investment in cellulosic facilities is one of the roadblocks between us and a Half the Oil future, so this credit would provide cellulosic biofuel developers a tax credit based on the initial investment in the project that would be distributed once the developer began producing biofuel.

Anchoring a tax credit to the upfront costs of building a commercial-scale facility would give investors confidence in the certainty of the credit and would help unlock the benefits of biofuel produced from our vast untapped biomass resources rather than food crops, which would not be eligible for this tax incentive. Solar, for example, received a credit worth 30 percent of the initial investment, which helped the solar industry reduce the cost of the technology and become cost competitive.

renewable_energy_investment_chart3

Investment tax credits for the solar industry helped reduce the cost of solar technology and could do the same for better biofuels. Source: Center for American Progress

But don’t forget to reward performance

The second is a production tax credit (PTC) tied to the lifecycle greenhouse gas score of a biofuel. Past tax incentives for food-based biofuels were bad policy for two reasons, first they supported an industry that fails to deliver meaningful environmental benefits and drives up food prices and second, they paid oil companies to comply with mandates under a different policy.

Our proposal is smarter — paying only for benefits that go beyond the requirements of other policy, and basing the tax incentives on performance. In other words, the greater the greenhouse gas reduction relative to gasoline you achieve, the bigger the credit.

The Renewable Fuel Standard alone does not incentivize the production of biofuels that achieve more than a 60 percent reduction in greenhouse gases compared to gasoline. If you are a biofuel producer and make a biofuel from cellulosic material that achieves this 60 percent score, your fuel qualifies as cellulosic biofuel. You’re all set. You could maybe get to 70 or 80 percent through installing the most efficient technology, but there’s no financial reason to make those investments. However, if you received a tax credit that was tied to the lifecycle greenhouse gas score, meaning if you scored 70 percent you got a bigger credit than if you scored 60 percent, then there would be an appropriate incentive to go above and beyond the 60 percent threshold.

Research suggests that in some cases fuels could be produced that would achieve a 90 percent reduction in greenhouse gas emissions compared to gasoline. Fuels like these are one part of our plan to reduce projected U.S. oil use in half in 20 years, and could collectively eliminate 164 million metric tons of greenhouse gas per year. That’s as much as the annual emissions from the electricity used by more than 24 million of today’s homes.

I understand if you’re skeptical of Congress’ ability to keep the lights on, let alone overhaul the tax code for the first time in a quarter century. But this remains an opportunity to realize the benefits of supporting oil saving solutions by building on the success of wind and solar and ensure cellulosic biofuels become part of our Half the Oil future.

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About the author: Josh Goldman is a policy analyst and leads legislative and regulatory campaigns to help develop and advance policies that reduce U.S. oil use. See Josh's full bio.

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