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Australia • Belgium • Canada • Ecuador • Indonesia • Kenya • New Zealand • Papua New Guinea Peru • United Arab Emirates • United Kingdom • United States • Operations in 70 countries ECONOMIC IMPACT OF REMOVING THE BIODIESEL TAX CREDIT FOR 2010
AND IMPLEMENTATION OF RFS2 TARGETS THROUGH 2015

Prepared for the National Biodiesel Board

John M. Urbanchuk
Technical Director
June 8 , 2011 Revised

The lapse of the biodiesel tax credit in December 2009 had a significant negative impact on th e biodiesel industry as well a s the overall economy in 2010. The retroactive
reinstatement and extension of the tax incentive through December 31, 2011, combined with expanded use of biodiesel consistent with the Advanced Biofuels targets provided for under the federal Renewable Fuels Standard ( RFS2 ), will support additional jobs in all sectors of the economy, increase value added output measured by GDP, and generate additional ho usehold income for all Am ericans

.
Impact of Removing the Biodiesel Tax Credit for 2010

Since its enactment in 2004, the unique structure of the $1.00 per gallon biodiesel tax incentive has played an important role in the fuels marketplace. Specifically, the
incentive’s structure as a blenders excise tax credit allows the credit’s value to be reflected in the market price of the fuel, thus making biodiesel price competitive with petroleum diesel fuel and reducing fuel costs for consumers.

The lapse of the biodiesel tax incentive on December 31, 2009 resulted in a sharp 42 percent drop in biodiesel production for all of 2010. The limited 2010 U.S. biod iesel production was primarily in response to individual state blending requirements and2

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incentives , and d espite the regulatory impl ementation of the RFS2 target for B iomass

- based
Diesel in July, 2010
, U.S. biodiesel production fell 42 percent to 315 million gallons. 1 The decline in biodiesel production is illustrated in Figure 1. An examination the data presented in Figure 1 point s out two interesting events: First, biodiesel produc ers increased output just prior
to the lapse of the tax credit in December, 2009 to meet the market’s demand for less expensive fuel in the upcoming year. Second, biodiesel production expanded substant ially in
the first four months of 2011 following reinstitution of the credit in December 2010.

As a direct consequence of th e 42 percent decline in biodiesel output in 2010, biodiesel producers sharply cut operating rates, idl ed capacity and reduced purchases of feedstocks and other inputs needed to produce biodiesel. The biodiesel industry spent an estimated $1.1 billion to produce 315 million gallons of biodiesel in 2010, 32 percent less than the $1.6 billion spent to produc e 545 million gallons in 2009.

1 Biodiesel production estimated from monthly methyl ester production published by the Census Bureau in Current Industrial R eport M311K

- Fats and Oils: Production, Consumption, and Stocks Source: Census Bureau Current Industrial Reports M311K3

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Since the expenditures for raw materials and other inputs to manufacture biodiesel represents the purchase of output of other industries, a decline in output reverberate s throughout the entire
economy. 2

As a direct consequ ence of the drop in biodiesel output, real GDP was reduced by $879 million (2009$) and household income was reduced by $485 million. 3 The lower level of economic activity also reduced the number of jobs in all sectors of the economy. The biodiesel industr y supported nearly 21,300 jobs in all sectors of the economy in 2009. The lapse of the biodiesel
tax credit in 2010, despite Congress’ eventual decision in December, 2010 to seamlessly extend
the credit
, led to the elimination of nearly 8,900 jobs througho ut the entire economy in 2010. The distribution of jobs by industry supported by biodiesel production in 2010 and change from 2009
is illustrated in Table 1.

Table 1

Jobs Supported by Biodiesel Production: 2010 versus 20 09

2009 2010 Change Agriculture 1 64 102

- 62 Construction 327 186

- 141 Manufacturing 1,664 958

- 706 Trans & Pub Utilities 1,853 1,054

- 799 Wholesale/Retail Trade 2,562 1,524

- 1,038 Services 14,279 8,332

- 5,947 Other Sectors 436 251

- 185 Total 21,284 12,407

- 8,877



### Economic Impact o f Meeting the RFS2 Biomass

- based Diesel Targets

As indicated earlier , the seamless extension of the biodiesel tax credit through December 31,
2011 was largely responsible for the 69 percent increase in biodiesel production in January
2011. The tax incenti ve is accompanied by minimum targets for B iomass

- based Diesel under
the Renewable Fuels Standard (RFS2), as provided for under the Energy Independence and Security Act (EISA) of 2007 . Under the RFS2 volume targets announced in November 2010,

2 Expenditur es for feedstock and energy were estimated using 2010 calendar year average prices sourced from USDA Economic Research Service, Agricultural M arketing Service, and the Energy Information Administration.
3 All dollar estimates and projections in this re port are expressed at constant 2009 prices.4

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the use of B iomass

- based Diesel is set at 800 million gallons for 2011 and 1 billion gallons for 2012. While the targets beyond 2012 have not been published, statute gives the Administrator of the Environmental Protection Agency (EPA), in consultation with the U.S. D epartment of Agriculture (USDA) and the Department of Energy (DoE), the authority to increase the Biomass

based Diesel beyond the minimum 1 billion gallon requirement. As the industry has both ample production capacity and available feedstock to exceed 1 billion gallons of annual qualifying domestic production we assume that from 2013 through 2015, the RFS2 Biomass

- based Diesel requirement is increased to 1.3 billion gallons in 2013; 1.6 billion gallons in 2014; and 1.9 billion gallons in 2015.



### Methodology

We estimate t he impact of the tax credit and RFS2 targets on biodiesel production and the
economy by applying expenditures by the relevant supplying industry to the appropriate final demand multipliers for value added o utput , earnings, and employment. To understand how the economy is affected by an industry such as biodiesel production i t is necessary to understand the way in which different sectors or industries in the economy are linked to each other. For example, in the renewable fuels production sector, the biodiesel industry buys , among its varied feedstocks, soybean oil from the oilseed processing industry , which
, in turn
, then buys soybeans5

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from the agriculture sector
, which purchase s crop production products and fert ilizers from the agricultural chemicals industry , which in turn purchase s from a range of other industries. These are referred to as backward linkages. Use by other sectors of natural gas a s an input, such as in manufacturing operations, is called a forw ard linkage. The natural gas production and transmission industries are linked through both forward and backward linkages to other
economic sector

.
The household sector is linked to all sectors as it provides the labor and management needed by each. In t urn, changes that affect the incomes of the household sector typically have more significant impacts compared to a change in the sales of other sectors. This is because households typically spend most of their income in both retail and service industries.

This study utilizes an economic model known as IMPLAN (Impact Analysis for Planning) to develop this understanding of the economy, including the sectors that support the biodiesel industry , the links between them, and the level of economic activity

. IMPL AN is a commonly used economic input

- output (I

- O) model. I

- O models are constructed based on the concept that all industries within an economy are linked together; the output of one industry becomes the input of another industry until all final goods and s ervices are produced. I

- O models can be used both to analyze the structure of the economy and to estimate the total economic impact of projects or policies. For this analysis, a model for the U.S. economy was constructed using
200 9 IMPLAN software and dat a (the most recent available) and used to estimate economic impacts of the biodiesel industry.

IMPLAN models provide three economic measures that describe the economy: value added ; income ; and employment.

 Value added is the total value of the goods and se rvices produced by businesses in the county and are generally referred to as GDP

. It is equivalent to the sum of labor income, taxes paid by the industry, and other property income or profit.

 Labor income is the sum of employee compensation (including a ll payroll and benefits )
and proprietor income (income for self

- employed work )

. In the case of this analysis,
demand for soybean oil to produce biodiesel supports farm income through higher crop receipts than would be the case without biodiesel production

. The impact of this higher6

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farm income is evaluated on a gross basis in this analysis. That is, the model does not
factor in the distributional effects on con sumers from higher soybean or soybean oil prices (i.e. reduced spending on non

- food goods and s ervices).

 Employment represents the annual average number of employees, whether full or part

time, of the businesses producing output. Income and employment represent the net economic benefits that accrue to the region as a result of increased economic out put.



### Result s Expansion of biodiesel production consistent with RFS2 targets will provide a stimulus to the economy in terms of expenditures for feedstocks and other inputs, goods and services required to produce biodiesel. According to the EPA, as of Mar ch, 2011, there is currently in excess of 2.12 billion gallon of Biomass

- based Diesel production capacity registered under the RFS2
program.

As illustrated in Figure 2, expenditures by the biodiesel industry to meet RFS 2 targets are expected to increase from $3.4 billion in 2011 to nearly $ 8.2 billion by 2015. As these expenditures circulate through the economy, they will generate valued added output (GDP) and household income, and support jobs in all sectors of the economy. The economic impacts of
meeti ng the RFS2 targets are summarized in Table 2.

Table 2 Economic Impacts of Meeting RFS2 Targets for Biomass

- based D iesel

Employment Income GDP (Jobs) (Mil 2009$) (Mil 2009$)
2009 21,284 $1,152.4 $2,085.3 2010 12,407 $667.4 $1,206.4 2011 31,227 $1,6 90.9 $3,059.8 2012 39,027 $2,113.4 $3,824.2 2013 50,725 $2,746.9 $4,970.6 2014 62,421 $3,380.4 $6,117.0 2015 74,118 $4,013.9 $7,263.37

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Employment

J obs are created from the economic activity supported by biodiesel production. When the direct, indirect and induced jobs supported by biodiesel production and the industries that support biodiesel such as agriculture ; feedstock collection and processing; fuel distribution; and technical support, the production of biodiesel to meet the RFS2 targets will sup port more than
7 4
, 0 00 jobs in all sectors of the economy by 2015. The employment impacts of meeting the RFS2 targets are summarized in Table 2

.

Income

E conomic activity and associated jobs produce income for all households

. The economic
activities created by me e ting the RFS2 targets would p lace nearly $ 1 4 billion in the pockets of
American household s b etween 2011 and 2015

.
Biodiesel represents a relatively small share of total diesel use and although domestic consumption will grow consistent with the RFS 2 targets, biodiesel share of total diesel use will remain small, increasing from an estimated 1.6 percent of diesel fuel use in 2011 to 3. 4 percent by 2015 4

. Continuation of the biodiesel tax credit has a meaningful impact on consumers when the RFS2 targ ets are met. Consumers are not expected to experience any significant increase in expenditures for biodiesel at a five percent blend if the biodiesel tax credit is extended. However, removing the tax credit will cost consumers an additional $6.6 billion f or diesel fuel
between 2012 and 2015

Value Added Output

The economic activity generated by the spending of biodiesel producers to meet the RFS2 targets will expand the size of the economy. As indicated earlier, this spending represents the purchase of ou tput of other industries. The circulation of these dollars throughout the economy is reflected in additional value added output measured by GDP. As show n in Table 2 , the biodiesel industry will support $3 billion (2009$) of GDP in the American economy in 2011. As production expands, this contribution will grow to $ 7. 3 billion by 2015.

4 Biodiesel share were calculated and estimated using RFS2 volumes and diesel use projected by EIA in the 2011 Annual Energy Outlook, Early Release Table 11.8

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Other benefits

The use of biodiesel has several significant additional benefits.

 First, as discussed above, the economic activity supported by the biodiesel indu s try will
ge nerate additional business for transportation companies that will, in turn, generate
additional revenue.

 Since biodiesel is a naturally low sulfur fuel and provides significant lubricity benefits, maintenance costs for users of biodiesel blends are likely to be lower than for petroleum
diesel fuel.

 Research published by the National Renewable Energy Laboratory (NREL) and accepted by EPA indicates that biodiesel blends have superior environmental performance benefits, including significant reductions in tota l hydrocarbons; particulate matter; carbon monoxide; cancer causing agents such as polycyclic aromatic hydrocarbons (PAH) and nitrated PAH compound s ; and lifecycle greenhouse gas (GHG) emissions, when compared to petroleum diesel baseline levels.

 The use of biodiesel reduces particular matter (PM) emissions by as much as 40 percent compared to petroleum diesel. According to the California Air Resources Board and American Lung Association
, particulate matter f rom diesel emissions c ontributes to 2,000 prema ture deaths in California and as many as 15,000 premature deaths
nationwide every year. 5 Reducing exposure to diesel emissions through the increased
use of biodiesel will have potentially significant implications for the health and welfare of
all American s as well as the economy through reduced health care expenditures and increased productivity. An assessment of public health implications of diesel emissions prepared by the West Coast Collaborative, a public interest group aimed at improving air quality reports that an EPA analysis estimate d that a voluntary diesel retrofit program aimed at reducing diesel emissions would create as much as $2 billion in health benefits

5 “Recent Research Findings: Health Effects of Particu late Matter and Ozone Air Pollution,” California Air Resources Board and American Lung Association, January 2004, h ttp://www.arb.ca.gov/research/health/fs/PM

- 03fs.pdf

.9

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from reduced health care expenditures associated with premature deaths, hospital visits
, and other costs. 6

 The use of biodiesel displaces petroleum based diesel fuel and improves U.S. energy security by reducing dependence on oil imports. According to the EIA the U.S. imported 62.6 percent of the crude oil required to refine finished petrol eum products in 2010. As shown in Table 3, meeting RFS2 targets for B iomass

- based D iesel will displace 151
million barrels of crude oil by 2015. This is the amount of crude oil required to produce the amount of No.2 diesel equivalent to 1.9 billion gallo ns of biodiesel.



### Table 3 Crude Oil Displacement by Biodiesel

No.2 Diesel Crude Oil B100 Equivalent Required (Mil gal) (Mil gal) (Mil bbl) 2009 545 500 44 2010 315 289 25 2011 800 734 64 2012 1,000 917 79 2013 1,300 1,193 103 2014 1,600 1,46 8 127 2015 1,900 1,743 151

 Expansion of the biodiesel industry will generate additional tax revenues for government at all levels from personal and corporate income taxes that increase in line with higher output

levels and increased income

. Meeting the RFS2 Biomass

- based Diesel targets as
described above can be expected to generate an estimated $ 345 million of additional tax revenue for the Federal government and $ 283 million of revenue for State and local governments this year. Expansion of the biodie sel industry will generate $8 73 million in revenue for the Federal Treasury and $7 18 million in State and local government revenues by 2015

.

6 “Public Health and Environmental Impacts of Diesel Emissions”. West Coast Collaborativ e. Available at http://www.westcoastcollaborative.org10

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### Conclusion
Elimination of the biodiesel tax credit for 2010 resulted in a 42 percent decline in biodiesel product ion that cost the economy nearly 8,900 jobs. However, the reinstitution of the tax credit combined with expanded biodiesel use targets under the RFS2 will stimulate the economy by supporting value

- added output (GDP), household income, and will support jobs in all sectors of the economy.

The increase of biodiesel production from 800 million gallons in 2011 to 1, 90 0 million gallons in 2015 will support $ 7. 3 billion of real GDP by 2015 ; support more than 74,000 jobs throughout the economy ; and generat e nearly $1.6 billion in federal, state and local government tax

revenues by 2015

.
Consumers also will benefit. Meeting the RFS2 B iomass

- based D iesel targets will put nearly $14 billion of income in the pockets of American households between 2001 and 2015. These impacts will continue to grow last as long as production continues and will increase as the industry expands. Removing the biodiesel tax credit at the end of 2011 would have a significant negative impact on consumers forcing them to spend an additional $6. 6 billion for diesel fuel
between 2012 and 2015

.