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Are Subsidies for Bioenergy Necessary?

By Kolby Hoagland | August 02, 2013

When subsidies are discussed in the media there is often a negative connotation behind their assessment. Politicians face constant scrutiny for approving “government handouts” that are alleged to be unnecessary and wasteful. The bioenergy sector has numerous subsidies that it utilizes to better compete with the fossil fuel sector, which have a far longer run as mature industries and also receive considerable subsidies of their own.

Today’s DataPoints looks at what happens when a subsidy is removed, reinstated… removed again, and reinstated again and that might give us insight into their need for the healthy growth of our industry. Over the last four years, the biodiesel industry has experienced an intermittently implamented $1 dollar per gallon blender’s tax credit from the federal government to that is meant to spark growth. In spite of the on again/ off again incentive, the biodiesel industry remains relatively healthy, even eclipsing the one billion gallons per year production mandate set by the EPA. The chart below shows monthly biodiesel production in the U.S. from Jan of 2009 to May of this year with the periods that the blender's credit was allowed lapse. After the credit was first allowed to lapse in 2010, production decreased considerably and remained low. During the second lapse in 2012, production was up and down even reaching production milestones. There is not a clear trend on whether the subsidy is necessary from this simple analysis.

To better understand the production swings and how much they were caused by the expiration of the subsidy, I reached out to Ron Kotrba from Biodiesel Magazine. Ron explained that 2010 was a complex time for biodiesel markets not only because of the lapse in the credit. The delayed implementation of RFS2, which did not occur until mid-2010, and the 2009 enactment of import tariffs by the EU caused further disruption to U.S. production beyond the loss of the federal credit during 2010. The reaction by producers to the loss of the credit in 2012 further supports the notion that the credit alone does not kill or keep the industry alive. During this second lapse of the credit in 2012, biodiesel production rose to record setting heights, peaking at 100 million gallons in May, a monthly level only reached three times previously. Production levels in 2010 and 2012, while the credit had lapsed, were not similar enough to draw illuminate conclusions of the potential need for the credit to keep the biodiesel industry alive.

There is little doubt that the biodiesel blender’s $1 per gallon tax credit and other bioenergy subsidies spur production. Yet, whether the subsidy is needed for the survival of the industry is far more complex in its answer given the numerous influences on energy markets. However, if we look to the fossil fuel sector to help us anwer whether subsidies for bioenergy are necessary, the answer is inherently ‘yes,’ subsidies should be a permanent part of the funding structure for the long-term health and growth of the bioenergy industry.

 

Biodiesel Prodcution vs Subsidies v3

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