New Federal Incentives Coming for Biofuels

Later this year, when lawmakers finish dealing a new hand in the energy legislation game, the biofuel industry will clearly come up with the aces.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

July 5, 2007

The comprehensive energy legislation Democratic congressional leaders envisioned earlier this year is dead, done in by fighting within the party's ranks. But one way or another, the biofuel industry is likely to come out of this congressional session singing hosannas. Odds are lawmakers will OK a slimmed-down version of an energy bill, including more goodies for biofuels by early fall. But even if that fails, an extension of current tax credits for the industry will be wrapped into tax legislation that becomes law by year end. Those tax credits are now due to expire in 2010.

Look for lawmakers to greatly expand biofuel production incentives, stipulating a new Renewable Fuel Standard (RFS) of 35 billion gallons -- roughly 20% of the estimated U.S. motor vehicle fuels market -- by 2022. Just two years ago, lawmakers embraced a standard requiring only 7.5 billion gallons of ethanol or biodiesel be used in U.S. vehicles by 2012.

In increasing the RFS, Congress will bet big that technological breakthroughs will allow much of the required renewable fuels to be something other than corn-based ethanol. To help jump-start that process, coming legislation is likely to include an additional 50¢-a-gallon federal tax credit for cellulosic ethanol, made from switchgrass, sawdust, farm waste or other lignin sources. The credit will be on top of the current 51¢-a-gallon credit for all ethanol.

In addition, a new $1.10-a-gallon tax credit for biobutanol made from cellulosic sources will also get the nod. The biobutanol credit would sunset along with its cousins -- credits for biodiesel and ethanol.

Other alternative energies also headed for approval by lawmakers: A two-year extension from 2008 to 2010 of various tax credits to build commercial wind, solar and fuel cells for sale to electric utilities. And a juicier tax incentive for solar air and water heating systems, with the probable elimination of the current $2000 cap on credits for solar air or water heaters. In addition, both the solar energy credit and credits for the purchase of a hybrid vehicle can offset the alternative minimum tax.

Lawmakers are also enthusiastic about toughening up minimum auto fuel standards, raising them to an average for all vehicles of 35 miles per gallon (MPG). Current standards require a corporate fleet average of 27.5 miles per gallon for passenger cars and 22.2 MPG for light trucks, SUVs and minivans.

More-contentious proposals for energy legislation will die on the vine. Plans for extra-rich tax credits are out for spurring the development of motor fuels made from coal and greatly accelerating the expansion of wind power, nuclear and hydroelectric facilities. Ditto, a federal requirement that electric utilities buy a portion of their power from companies that make electricity using wind, solar or biomass-conversion generators. And lawmakers simply aren't ready to deal with regulating carbon dioxide, emitted by electricity-generating plants, steel mills and other heavy industry.

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