Reduced Investment Risk Could Support Cellulosic Biofuels

December 20, 2013. A set of minor changes to existing federal tax incentives could help unlock badly needed investment in cellulosic biofuels, removing an impediment that has handicapped a key element of U.S. renewable fuels policy, according to a new study by the International Council on Clean Transportation (ICCT) and researchers from Johns Hopkins University.

So-called second-generation biofuels—made from cellulosic feedstocks such as crop residues, wood, and grass, as well as algae—promise greater reductions in greenhouse gas emissions than other renewable fuels while evading the food-vs.-fuel problem. The U.S. Renewable Fuel Standard (RFS2) calls for production of cellulosic biofuels to grow from in 2010 to 16 billion gallons in 2022, nearly half the total volume of biofuels mandated under that standard.

But commercial production of these biofuels has lagged expectations, falling far short of the RFS mandate each year. And one of the major challenges to commercialization has been inadequate access to investment capital.

That difficulty in attracting investment is attributable in part to the nature of the industry, which depends on scaling up innovative production technologies. The ICCT study also notes that shares in the majority of second-generation biofuels producers have fluctuated more than the stock market as a whole since 2010, which may discourage some investors.

Existing federal policies intended to support development of a second-generation biofuel industry do not directly address that particular problem. The RFS provides a guaranteed market for cellulosic fuels but this on its own has not been enough to spur investment. There is a producer tax credit available for cellulosic fuels, but it can only be claimed after a biofuel plant enters production, not during construction, and is only valuable to companies that already have tax liabilities. In any case, the credit is scheduled to expire at the end of 2013. “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.”

The study authors note that three specific changes to the production tax credit would allow it to directly target the problem of reducing investment risk: allow eligible companies to opt instead for an investment tax credit; allow them to additionally opt to take the investment credit in the form of a direct grant; or make the investment credit refundable and transferable. Similar tax incentives were created for renewable electricity investors under the 2009 economic stimulus package.

In addition, the study notes that putting the production tax credit in place until a threshold volume of biofuels has been produced, instead of letting it depend on periodic temporary renewals by Congress, would provide an added degree of certainty for investors.

“The Energy Independence and Security Act was designed to promote innovative technology, displace petroleum consumption, and spur long-term reduction of carbon emissions from the transport sector,” said Searle. “Changing existing tax incentives to better complement the Renewable Fuel Standard in the ways we describe in this paper would bring us closer to that aim.”

Some of the study’s recommendations mirror a proposal released yesterday by Senator Baucus to transition the existing biofuel tax credits to a single clean fuels tax credit that would be proportional to carbon reductions. Similar to the ICCT’s recommendation to extend the second-generation credit, the Baucus proposal would provide long-term certainty to investors and would be available as either a production or investment tax credit. However, the transition outlined in the Baucus proposal would not take full effect until 2017.

Download the study at www.theicct.org/addressing-investment-risk-biofuels.

See related article “EPA puts brakes on ethanol.”

More in Home