The long-awaited Energy Bill now working its way through Congress finally offers a big break for ethanol and biodiesel: a level playing field. An excise tax exemption and a renewable fuels standard are the champions doing the leveling.

If tougher issues such as drilling in Alaska and electricity deregulation don't derail the Energy Bill, the outlook for ethanol and biodiesel is positive.

“For the last 100 years the terrain has been stacked in one direction,” says Monte Shaw, communications director for the Renewable Fuels Association (RFA). “Petroleum products probably receive more subsidies on an annual basis than any other form of energy in the U.S.”

Studies have calculated the “true” cost of a gallon of gasoline at $3-5 with the tax preferences and military support for petroleum figured in. But, that figure doesn't account for environmental costs, Shaw adds.

“We just can't compete with petroleum based products without support,” says Krysta Harden, the American Soybean Association's (ASA) Washington representative. “Ethanol has had a tax incentive for 20 years and it's not competitive without it. Biodiesel is no different.”

Shaw says things would be different if the petroleum industry hadn't been getting tax help for the last 100 years, too.

“Ethanol would be the bargain of the century with no tax incentive if you passed along the real price of gasoline based on the amount of money we spend to get it to the consumer, the cost to make sure that we can get it here through military support and the different tax codes and environmental costs,” says Shaw.

Champions of biofuels see the Energy Bill as a way to level the playing field and give ethanol and biodiesel a fair foothold in a stacked market.

The House passed its version of the Energy Bill, H.R. 6, in April. The Senate has cleared several provisions of its Energy Bill, S. 14, but hasn't passed the full bill off the floor. Once the Senate bill passes, the two houses will go into conference committee to settle the differences. Only then can the Energy Bill be sent to the President to be signed into law.

Stakeholders are hopeful that the Energy Bill will be in conference committee early this fall and pass before this year's session's targeted completion date of Oct. 3.

The Renewable Fuels Standard (RFS) is included in the House and Senate bills. Both bills call for the elimination of the oxygenate requirement and a 5 billion gal./year RFS. There are two main differences in the bills. The use of the gasoline additive Methyl-Tertiary Butyl Ester (MTBE) is banned in the Senate version but not in the House bill. The other major difference is when the 5 billion gal./year use of renewable fuels is reached.

“The House has a slightly higher standard the first year, in '05 at 2.7, but it does not reach the 5 billion gal./year level until 2015,” says Shaw. “The Senate bill starts at 2.6 in '05 but ramps up much quicker to get to the 5 billion gallon annual mark by the year 2012.”

The Senate passed the RFS June 4, 68-28. The reason the RFS passed so decisively was because stakeholders previously hammered out a win-win agreement. The petroleum industry gains flexibility by eliminating the oxygenate requirement, the ag industry gets a guaranteed market for renewable fuels and environmentalists see a benefit to air quality.

The RFS is written to allow biodiesel to qualify as a choice for meeting the mandate, but most blenders will likely use ethanol, which is less expensive, says ASA's Harden.

The RFS not only mandates an increasing use of biofuels, but encourages growth in other areas as well.

“One of the things we've been hearing is that we need a tax cut and an economic stimulus package. If we get an RFS, the standard is going to give farmers the ability to put up plants and build dry mills in rural America, and it's going to provide jobs and stimulate the economy,” says Mark Palmer, the National Corn Grower's Association's (NCGA) director of public policy. “I think the RFS is the economic stimulus package for rural America.”

Proponents of the RFS haven't left it to chance. It's also been passed as a stand-alone bill. If the Energy Bill looks like it's going to die in committee like it did last year, supporters say they will look to move the bill on its own or attach it to other legislation that's moving at the time.

Biofuels advocates have credited farmer support in moving this issue to the forefront and keeping it there.

“Our growers have done an awesome job getting out the grassroots and working this issue to and through the halls of Congress,” says NGGA's Palmer. “It's important that we stick with it, stay on message and keep moving the ball. We keep scoring touchdowns but the game's not over yet. We're probably only midway through the third quarter.”

An amendment that's expected to be added to S. 14 before it passes off the floor is the Energy Tax Incentives Act, S. 597, which was passed in mid-April by the Senate Finance Committee 18-2. It contains an excise tax exemption for biodiesel and a fix for the current exemption on ethanol.

The federal excise tax on a gallon of gasoline is 18.4¢. The tax is only 13.2¢ for a gallon blended with 10% ethanol. Currently the Highway Trust Fund, which pays for the building and repair of the U.S. transportation infrastructure, receives 5.2¢ less because of that exemption. The fix consists of keeping the full 18.4¢ in the Highway Trust Fund and takes the additional 5.2¢ out of the general fund.

“In terms of ethanol, there's really no difference,” says RFA's Shaw. “If you're a gasoline blender there's not a lot of difference. But in terms of protecting and enhancing and adding revenues to the highway trust fund, there's a very big difference — more than $1 billion a year,”

Biodiesel is pinning its hopes on a similar excise tax exemption.

“If we are cost competitive I think biodiesel has other attributes that can help us be the first choice, but when it comes down to cost, right now we're a more expensive option,” says Harden. “We've got to get our tax bill. If we don't, all of this sounds good and makes you feel good, but it doesn't sell any biodiesel.”

The biodiesel excise tax exemption is patterned closely after the ethanol exemption. It will also come out of the general fund. Currently, the federal excise tax on diesel fuel is 24.4¢/gal. The biodiesel excise tax incentive would provide a 1¢/gal. credit for each percentage point of biodiesel blended into petroleum diesel. The excise tax on B2 would be 22.4¢/gal. and B20 would be 4.4¢/gal.

Biofuel Fixes

A couple of bills contain adjustments to existing legislation to make them more user friendly.

S. 597 contains a fix to the Small Ethanol Producer's Credit. The provision already allows small producers to receive an income tax credit of 10¢/gal. on the first 15 million gallons of production. The fix changes the definition of a small producer by doubling their allowable output — up to 60 million gallons — and allows farmer-owned co-ops to fully participate.

“Through a technical quirk in how the bill was originally written, farmer-owned co-ops have not been able to take full advantage of this incentive,” says Monte Shaw from the Renewable Fuels Association. “This would clear up that problem and allow farmer co-ops to participate fully in the program, just like any other small ethanol producer.”

A proposed amendment to the Energy Policy Act is also on the table. The act currently requires the purchase of alternative fuel vehicles by those fleets governed by it — mostly federal, state and public utility fleets — but limits biodiesel purchases to 50% of the requirement. The change would remove the 50% cap set in 1998 and allow biodiesel to be a choice for an entire fleet.

“The act offers an exception to biodiesel because it's the only alternative fuel where you don't need a special vehicle,” says Joe Jobe, director of the National Biodiesel Board. “Many fleet administrators like biodiesel as the preferred option because it's the easiest and most cost-effective means of compliance.”