Energy Tax Incentives Act of 2005

On Aug. 8, President George Bush signed into law the Energy Policy Act of 2005, H.R. 6 (complete text online at http://thomas.loc.gov) as passed by the House and Senate. This is good news for agriculture and canola, which is an excellent feedstock for biodiesel production (see related article on North Dakota Biodiesel Inc.). The main titles for agriculture include Title II on renewable energy, Title IX on research and development (subtitles C & D), Title XIII on energy policy tax incentives (subtitle D), and Title XV on ethanol and motor fuels (subtitle A). Summaries of the latter two are as follows:

Energy Policy Tax Incentives

Title XIII extends Biodiesel VEETC Tax Credit through Dec. 31, 2008; modifies the Small Ethanol Producer Credit to 60 million gallons; creates Alternative Fuels Installation Fuel Refueling Property; and establishes a new Small Agri-Biodiesel Producer Credit that:

• Extends excise tax provisions and income tax credit for agri-biodiesel and biodiesel and creates a similar incentive for “renewable diesel.” The bill extends the income tax credit, excise tax credit, and payment provisions through Dec. 31, 2008. It also creates a new and similar income tax credit for renewable diesel, however, there is no credit for small producers of renewable diesel.

• Modifies and enhances the Small Ethanol Producer Credit and creates a new Small Agri-Biodiesel Producer Credit (60 million gallons). The size limitation on the production capacity for small ethanol producers increases from 30 million to 60 million gallons. The bill creates a new credit for small agri-biodiesel producer credit of 10 cents per gallon for up to 15 million gallons of agri-biodiesel produced by producers with annual capacity not exceeding 60 million gallons. This is effective for taxable years after date of enactment and sunsets Dec. 31, 2008.

• Gives credit for installing alternative fuel refueling property. The provision permits taxpayers to claim a 30 percent credit for the cost of installing clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. Clean fuels have at least 85 percent of their volume consisting of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas or hydrogen and any mixture of diesel fuel and biodiesel containing at least 20 percent biodiesel. The provision is effective for property placed in service Dec. 31, 2005 and before Jan. 1, 2010. Code section 179A (the current deduction) is repealed after Dec. 31, 2005.

Ethanol and Motor Fuel Provisions

Title XV will include a national renewable fuel standard (RFS) slated for 7.5 billion gallons of biodiesel and ethanol by 2012, beginning with 4 billion gallons in 2006. The House bill was 5 billion gallons by 2012; the Senate was 8 billion gallons by 2012 (see Figure 1). Additionally, the RFS has embraced a 12-month credit-trading program.

Figure 1. Renewable Fuel Standard

Year Billions of
Gallons
2006
4.0
2007 4.7
2008 5.4
2009 6.1
2010 6.8
2011 7.4
2012 7.5

Moving these pieces, particularly the RFS, through the regulatory process will be the next big challenge for the biodiesel industry. The energy bill defers to the Environmental Protection Agency (EPA) to define credit for the treatment of biodiesel. The RFS and related regulations to be promulgated by the EPA should generate an appropriate amount of treatment credit. But the biodiesel industry will advocate the credit to be set at a value of greater than 1.5.

The RFS is a first for the biodiesel industry. Coupled with the extension of the tax incentive through 2008 and the aforementioned issues, the biodiesel sector is on its