Rewarding Greener Biofuels

A long-time sustainable agriculture advocate proposes a producer tax credit tied to performance.
By Susanne Retka Schill | December 09, 2009
Loni Kemp has a vision for rewarding better biofuels that won recognition in the Farm Foundation's "30-Year Challenge: Agriculture's Strategic Role in Feeding and Fueling a Growing World." The long-established think tank for agricultural policy sought papers proposing new policy strategies. Kemp won the recognition in the climate change category for her well-developed proposal for a Greener Biofuels Tax Credit to replace existing blender tax credits by shifting the subsidies towards performance-based tax credits to biofuel producers who are improving their environmental and greenhouse gas footprints.

Kemp knows the impact ethanol has had on farm communities. She lives in rural southeastern Minnesota a few miles away from a farmer-owned corn ethanol plant. Permeable ground formations in the area make water aquifers susceptible to leached contaminants, which has motivated her to work on water quality policy. For more than 20 years Kemp has worked with the Sustainable Ag Coalition, a policy-oriented union of environmental groups and groups advocating sustainable agriculture and rural development, among which are the Minnesota Project and the Center for Rural Affairs. The current USDA Conservation Stewardship Program carries the fingerprints of the coalition, which has steadily worked to improve environmental and conservation provisions in the Farm Bill.

The CSP also provides an important tool for Kemp's proposal. "We now have a measurement tool that provides a really good model on how you score the outcomes of conservation practices," she explains. Developed for the 2008 Conservation Stewardship Program, the Soil and Water Evaluation Tool is based on site-specific soils, climate and crops, calculating an environmental performance score for a specific farm, incorporating soil and water quality measurements. Kemp says the evaluation tool could possibly be used as is, or be streamlined to apply to biofuels feedstocks. She points out the CSP program is well accepted, receiving three times the number of applications in the last sign-up period than the program could accept.

In the Greener Biofuels Tax Credit proposal, assuming the total tax credit were $1 per gallon, up to 50 cents of it would be allocated to biofuel feedstocks based on their environmental performance. The other half of the tax credit would be based on GHG reduction performance and tied to the structure created by the U.S. EPA to implement the renewable fuel standard (RFS). "What I love about this idea is it would serve as a foundation for incremental change," Kemp says. "Farmers could improve their performance and be rewarded for it; ethanol plants could improve their scores. It's a policy that encourages everyone to improve their practices—and not a hammer. And, we're not picking winners."

Current biofuels subsidies reward corn ethanol and soy biodiesel for their societal benefits, including national energy security, jobs and rural economic development, improved air quality and superior life-cycle greenhouse gas (GHG) performance compared to gasoline. "Yet actual delivery of those benefits has been vigorously debated," Kemp wrote in her proposal. "What is missing from current tax policy is a requirement for actual performance in delivering expected environment and climate benefits."

The Greener Biofuels Tax Credit proposal says it would:
>Be technology neutral and apply to all biomass-based fuels and all feedstocks
>Be performance based, rewarding better environmental performance with higher tax credit payments
>Protect the environment by rewarding lifecycle carbon emission reductions beyond those required by the RFS
>Be streamlined, using workable reporting systems for farmers, biofuel refiners and the Internal Revenue Service
>Be budget neutral, using savings from phasing out current production tax credits to fund the new, greener biofuels tax credit.

Kemp suggests the tax credit be applied to biofuels according to their energy content, with 76,000 Btu—the energy content of one gallon of ethanol—serving as the base. Existing corn ethanol and soy biodiesel producers would be eligible as long as they employ advanced processes, such as using renewable energy and using feedstocks from farmers who are building soil quality and minimizing polluted runoff. Next generation biofuels could earn even more if they vastly reduce GHG emissions and rely on perennial feedstocks that require little land disturbance or fertilization.

One of the biggest hurdles, Kemp admits, will be to convince people that such a system wouldn't be a bureaucratic nightmare of paperwork. "We're going to have to show people that the logistics of this aren't going to be a big headache," she says. "There is a simple performance tool, third-party verification that takes less than a half hour to complete, and the score would be attached to renewable identification numbers (RINs). All the IRS will need is to get the score for the RINs."

The half of the tax credit based on carbon performance would be paid in direct proportion to reductions in GHG emissions, based on the EPA's calculations of lifecycle GHG emissions in the RFS. The refinery's choice of feedstocks, technology and management of direct emissions would determine its life-cycle emissions. A zero-carbon biofuel (a 100 percent reduction compared to fossil fuel) would be eligible for the full carbon tax credit of 50 cents per gallon.

The half of the greener tax credit rewarding refineries that buy more sustainable feedstocks would potentially reward the farmers growing the biofuel crops. "It is critical that the industry not be motivated solely by the lowest price feedstocks, forcing growers to cut corners and ignore conservation opportunities," the proposal says. "A performance-based tax policy would telegraph incentives to minimize tillage, fertilizer and pesticide use, erosion and runoff." Kemp envisions a system where farmers sit down with Natural Resource Conservation Service personnel once a year to calculate their performance scores. The biofuel producer would then collect the certificates of scores accompanying feedstock deliveries, and compute an average. She suggests there be a minimum environmental stewardship threshold, disallowing such practices as land conversion of intact ecosystems such as forests, wetlands and prairies. One of her recommendations that will no doubt be controversial is that feedstocks produced using irrigation should not qualify. Other eligibility requirements she recommends deal with crop residue being removed at sustainable levels and farms meeting USDA Conservation Compliance requirements.

Reforming Credits to Save Them
While biofuels producers may dismiss her proposal as unnecessary change, Kemp suggests it could be a way to refocus biofuel subsidies, essentially saving them in the face of increasing criticism. All the current biofuel tax credits have sunset clauses, she points out, and will be up for debate in the next couple of years. "There's a lot of feeling that we don't need these tax credits because they duplicate the RFS."

While Kemp drafted the winning Farm Foundation policy proposal, she developed the concepts in conversations with Nathanael Greene at the Natural Resources Defense Council and Jeremy Martin with the Union of Concerned Scientists. Martin, who is a senior scientist in the clean vehicles group, provided input on the GHG reduction sections of the EPA's rule to implement the second stage of the renewable fuel standard using RINs as the instrument to report to the IRS. The details of how it might work will depend upon how EPA incorporates GHG reduction targets in the implementation of RFS2, he says. "Everyone has a sense of what we want from our biofuels program, which is to reduce oil use and reduce GHG emissions," he adds. "Here's a proposal to reform tax credits and make them work." Martin cites a U.S. Government Accountability Office report released in August that found ethanol tax credits are redundant to the RFS. "They don't increase the volume of ethanol sold and don't raise the price of corn," Martin reports. "[The ethanol tax credits] cost $4 billion a year and they're not delivering any extra biofuels and not creating extra GHG benefits." Martin also points out the cellulosic ethanol tax credit has problems as well, with the paper industry getting tax credits worth millions for black liquor production used to fuel boilers. "No transportation fuel has been created and it's something they've been doing all along, so nothing is new," he says.

Radically reforming the biofuels tax credit will be no small challenge. Greene has presented the concept to small groups of ethanol industry leaders. The response was polite listening, which Greene considers a pretty open response. "They didn't throw me out," he says with a chuckle. The overall logic of the proposal was grasped quickly, and the questions zeroed in on the details, he says. "Some of the obvious and important questions are: how will it be implemented and what does it mean economically for all the different players? Is there enough money to encourage and pay for the improved technologies at the biorefinery and the improved practices in the field that would be needed to get the higher scores?" Greene adds that he's hoping someone trusted by the industry will examine the Greener Biofuels Tax Credit's possible impact. "I'm not convinced the NRDC would be a credible messenger on that sort of economics study," he adds. In the meantime, NRDC has begun looking for a Congressional sponsor for a bill.

The timetable is actually very tight, with ethanol tax credits expiring at the end of 2010. One-year extensions have been done in the past and may occur again, with Congress being pressured to complete legislation on health care reform, banking regulation and climate change policies. EP

Susanne Retka Schill is an assistant editor at BBI International. Reach her at sretkaschill@bbiinternational.com or (701) 738-4922.