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Biofuel Economics: How $700 Billion Bailout Will Affect Biofuels Industry - Part I

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Cole Gustafson, NDSU Biofuels Economist Cole Gustafson, NDSU Biofuels Economist
Accompanying the Emergency Economic Stabilization Act was a tax relief bill that extends and enhances a number of provisions benefitting the biofuels industry.

By Cole Gustafson, Biofuels Economist

NDSU Extension Service

Last week, President Bush signed into law the Emergency Economic Stabilization Act (EESA) of 2008. The bill provides $700 billion to Wall Street lenders affected by the home mortgage crisis. Accompanying the legislation was a tax relief bill that extends and enhances a number of provisions benefitting the biofuels industry.

The production tax credit for renewable energy is extended another year for wind and coal and two years for other sources. Included are new biomass facilities. Facilities that produce cellulosic biofuels are eligible to write off 50 percent of their original investment cost.The biodiesel production tax credit is extended through 2009. The credit is now available for any biodiesel, including “green” diesel, created from biomass. The bill also extends the alternative fuel tax credit for all fuels for 2009.

While most of these changes simply extend exisiting provisions another year, the new tax credit providing a 50 percent write-off of new cellulosic facilities is significant. The cellulosic biofuel industry is on the verge of becoming commercially viable in the next couple of years. Rising construction costs are an important constraint to commercialization. Due to their complexity and additional equipment requirements, cellulosic biofuel plants are nearly twice as expensive as corn ethanol plants ($4 compared with $2 per gallon of capacity). Many corn ethanol plants constructed prior to 2007 were built for less than $1 per gallon of capacity. Several pilot scale facilities are operational and construction of commercial scale plants are expected in the near future if test runs are positive.

The 2008 EESA also provides an important glimpse into growth of the U.S. carbon market. In past columns, I have stressed the importance of global warming, climate change, greenhouse gas emissions and carbon development in recent biofuels legislation. In addition, California, Florida and Massachusetts have passed state legislation lowering the carbon intensity of their liquid transportation fuels. It is quite likely that biofuels created with low carbon release processes will command a premium in the market place.

However, the economic value of carbon has been difficult to determine.The trading of carbon on the Chicago Climate Exchange has been somewhat thin. The federal government continues to discuss how national carbon values will be determined and controlled. One scheme being widely debated is “cap and trade.”

In the 2008 EESA, the legislation provides a $10 credit per ton for the first 75 million metric tons of carbon dioxide captured and transported from an industrial source for use in enhanced oil recovery and $20 credit per ton for carbon dioxide captured and transported from an industrial source for permanent storage in a geologic formation. Budget staff expects that more than $1.1 billion will be spent in the next decade.

With publication of these values in the legislation, we now have a guidepost for establishing carbon values in the future. The biofuels industry will have an important benchmark for valuing carbon when new investment budgets are constructed.

This article has described specific tax provisions in the 2008 EESA that directly affect the biofuels industry. However, what is the indirect impact of the legislation’s $700 billion cost? I will discuss that in my next column.


NDSU Agriculture Communication

Source:Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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