EcoNuz

The most important factor in determining the market viability of BD is the profitability of production.  The environmental benefits of BD have been known for years, but production of PD increased because of market factors, not direct environmental factors.  Even with the environmental benefits of BD known for years, production did not increase until legislation was enacted which made production profitable, even at prices higher than competing PD.

Of the factors involved in the retail price, the two most important factors have been the cost of producing plant oil as a source material, and the legislation surrounding BD.  The two are tightly coupled because the source material for producing the plant oils is directly affected by legislation that directly subsidizes agriculture.  On the opposite end of the BD product cycle are the tax credits given to biofuel producers, which directly reduce the retail price.  Legislation for mandated inclusion and emissions regulations allow for a higher sales price because of increased demand that cannot be met by pure PD.  Minnesota’s mandated B2 blend meant that PD producers were required to purchase BD for mixing, even if it did cost more.  The EPA federal regulations for ULSD for reducing SOx emissions led to PD producers blending with BD, which also increases the demand and the subsequent production.

Ramping up production requires additional plant oil, in turn requiring the purchase of source plant materials.  In the case of soy, the added demand can drive up market prices, resulting in higher costs.  Because soy is also a food crop, and is in demand for reasons other than BD production, soy prices can also increase independently of what is caused by BD production.  Increased costs without increased production requires retail prices to go up to preserve profitability.

In order for BD production to increase while still remaining profitable, source materials without external market demand can be used for plant oil.  Because there is not currently market demand and the marginal costs after up front capital investment are low, algae has the potential to be a major source of BD in the future.  Even though algae agriculture is cheap, the processing facilities  and production methods used to turn it into pure oil remain expensive.  To keep overall algae based BD production costs down, additional subsidies will be required, whether direct or indirect.

Legislation in the United States affects the production and sales of BD because it alters the market for the product in a number of ways, including cost reduction via direct subsidy and indirect subsidy via tax credit, mandated use, and increased cost for competing goods.  The following graph (Source: BD Conference) shows production output of BD in the US per year, in conjunction with the the introduction of legislation affecting the market.

The legislation included above affects the supply, demand, and price.  The 1998 alternative fuel use credit reduced the price to consume BD, but supply was relatively fixed until the USDA established the CCC Bioenergy Program in the 2000 and the reauthorization in the 2002 “Farm Bill.”  The Farm Bill made it cheaper for BD producers to purchase feedstock, which led to a cheaper and more competitive end product.

In 2002, Minnesota was the first state to mandate diesel sold in the state be a BD blend, at a minimum of 2% (B2) by 2005.  Mandating B2 sales increased the demand for BD in a fixed supply market, which raises prices.  Increased prices and increased demand provides incentives for producers because of the greater potential for profit.  Production increased from 15M gallons in 2002 to 25M gallons in 2004.  In 2004, the American Jobs Creation Act provided additional tax credits for BD production ($1 per gallon) and recycling fats and oils ($0.50 per gallon).

By drastically reducing the price at the pump, and pending mandated inclusion of BD, the market spiked to 75M gallons in 2005.  Because of a variety of market factors, soy based BD became price competitive with PD and production ramped up to 450M gallons in 200713 and most recently, 700M gallons in 2008. While not priced below PD, EPA requirements for Ultra-Low Sulfur Diesel increase the demand for BD because it is used as a fuel additive to compensate for loss of lubricity.

Included in legislation that provides for biofuel subsidies, are taxes on competing products, making them more expensive and less competitive in the market.  An example applicable to biofuels, although not BD, is that of ethanol in the United States.  Ethanol gasoline blends are subsidized via VEETC by the US government at a rate of $0.51 per gallon.  To directly pay for the subsidies provided at the pump for corn based ethanol, a $0.54 per gallon tariff is levied on sugarcane based ethanol imports from Brazil [H.R. 6137].  Not only does the subsidy directly reduce the price of corn based ethanol at the pump, it increases the price of sugarcane based ethanol, making domestic production of ethanol more cost competitive.