Study calls for changes to cellulosic tax incentives

By Erin Voegele | December 23, 2013

A new study published by the International Council on Clean Transportation and researchers from John Hopkins University determined that making minor changes in existing federal tax incentives for cellulosic biofuels could help unlock much needed investment.

The authors of the report note that the nature of the biofuels industry depends on scaling up innovative technologies, which can make it difficult to attract investment. The study also points out shares in most second-generation biofuel companies have fluctuated more than the stock market as a whole since 2010, which may discourage some investors.

“The elevated risk seen in second-generation biofuel companies is one dimension that very likely contributes to unsteady and insouciant investment and the poor financial health of the industry. A direct implication of this analysis is that additional policy measures are needed to reduce risk and build confidence in second-generation biofuel companies in the early stages of commercialization,” said the authors in the report.

Although renewable fuel standard (RFS) provides a guaranteed market for cellulosic fuels, on its own it hasn’t been enough to spur needed investment. The producer tax credit also provides incentive for cellulosic biofuel production, but can only be claimed once a plant is producing fuel and is only valuable to companies that have tax liabilities. In addition, production tax credit has historically been renewed only on a short-term basis and is currently set to expire at the end of the year. According to the report, investors see little benefit in an expiring credit with that faces high uncertainty of renewal. The study also points out that the RFS and tax credit have inconsistent definitions for biofuels.

“The incentives aren’t working to mitigate the investment risk,” said the ICCT’s Stephanie Searle, one of the report’s coauthors. “But if they were more like the incentives created to encourage investment in renewable electricity, they could.”

Within the report, the authors stress that making three specific changes to the production tax credit would allow it to reduce investment risk. First, companies should be able to take the credit as an investment tax credit. Second, companies should be able to opt to take the investment credit in the form of a direct grant. Third, the investment credit should be refundable and transferable. They also specify that the credit should be extended on a long-term basis, expiring only when a certain production threshold has been reached. The extension would provide investors with certainty that advanced biofuel companies would benefit from the policy as anticipated.

A full copy of the report is available on the ICCT website