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Biodiesel Tax Measure Could Have A Long Life, as Ethanol Grants Show By SHAILAGH MURRAY Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- What if you could turn a plentiful plant into a fuel that powers trucks, buses and tractors, doesn't pollute the air and creates an exhaust that smells like french fries? Well, it already exists: It is called biodiesel. Produced mainly from soybeans, some people call it a miracle fuel. Europeans have been using it for years, but its cost -- as much as three times more than regular diesel fuel -- makes it too pricey for most U.S. drivers. The federal government may be about to change that. With the support of farm-state senators, biodiesel backers have secured a special tax break in a pending Senate energy bill that in effect would eliminate the price gap. The tax break is just temporary, the industry insists; three years is enough. "This will help get us to the point where we can stand on our own," says Joe Jobe, executive director of the National Biodiesel Board, the industry-trade association. Right, says a sarcastic Bill Frenzel, formerly a senior Republican on both the House budget and tax committees. "I'll bet they'll be heartbroken if it ever gets extended." Mr. Frenzel has seen it many times before: Costly, long-lived federal subsidies often start small and temporary. "It sounds better and looks cheaper," says Mr. Frenzel, now at the Brookings Institution, a Washington think tank. "That's just the way the game is played." Take ethanol, the corn-based fuel that soaks up subsidies -- and can make or break presidential bids in the early caucuses of corn-growing Iowa. Like biodiesel, this fuel additive also started as a sure thing in need of only a temporary boost from Washington. That was 25 years ago. In a Senate floor debate on Oct. 27, 1977, former Republican Sen. Charles Percy of Illinois, another corn state, predicted that when the tax break expired in 1984, ethanol would be "cost-competitive with gasoline, and preferential treatment will no longer be necessary." Extended several times, the ethanol tax break now is set to expire at the end of 2007 -- though few expect it will. Since 1979, according to the General Accounting Office, the investigative arm of Congress, various ethanol incentives have cost taxpayers as much as $15 billion. Today, ethanol is the third-largest use of U.S. corn, topping cereals and sweeteners. One sure sign that something big is afoot with biodiesel is Archer-Daniels-Midland Co.'s enthusiasm for it. ADM, which dominates the U.S. ethanol market and processes more corn and soybeans than any other company in the world, said recently that it is considering building a biodiesel plant in Minnesota. That state, one of the country's top soybean producers, this year became the first to pass a law mandating that biodiesel be added to most diesel fuels. Biodiesel stands to be "one of the most important things ... to positively affect our margins in our industry," Paul Mulhollem, head of ADM's grain, oilseed-processing and cocoa business, told investment analysts in November. Securing an exemption from the federal excise tax on motor fuels is a crucial beginning. The most common form of biodiesel sold today blends 20% biodiesel with 80% conventional diesel. It costs between five cents and 20 cents more a gallon than straight diesel. The pending legislation would reduce by one cent the 24.4 cents-a-gallon federal excise tax for each 1% of biodiesel in a blend, up to a maximum of 20 cents. That would eliminate the price gap for the 20% biodiesel mix. The biodiesel tax break in the Senate's energy bill would expire on Dec. 31, 2005. By then, production will have increased enough to reduce costs, the fuel's supporters say. Both biodiesel and ethanol would benefit from other provisions in the energy bill. A mandate that a certain share of motor fuel come from renewable sources, such as corn and soybeans, could triple the ethanol market, and benefit biodiesel as well. Meanwhile, the fledgling biodiesel industry has a wish list for future bills, including both tax credits for small producers -- who fear big companies will muscle them aside -- and incentives for converting soybean-oil factories to biodiesel plants. "If there's an obstacle, we've got to challenge that obstacle," says Sen. Blanche Lincoln, a Democrat from soybean-producing Arkansas. Rudolf Diesel, the German engineer who designed the engine named for him, envisioned that it would run on vegetable oils. Europeans have made biodiesel for years from rapeseed, also known as canola, and its use has spread there with the help of government incentives. The oil is combined with alcohol; when the resulting glycerin separates, what remains resembles diesel fuel -- except it is biodegradable and nontoxic. Soybean growers have moved cautiously to avoid ethanol producers' initial problems with quality, storage and regulations. They have spent $30 million to clear environmental hurdles before bringing the fuel to market. In 1999, biodiesel sales were only 500,000 gallons; the following year, they were five million. Last year, between 10 million and 15 million gallons were sold. It was about a year ago that biodiesel fans saw their opening in Washington. The new president wanted an energy bill. Gas prices were spiking. The budget was in surplus. "If you're not big and you're not powerful, you wait for opportunities to come along that seem to fit," says John Campbell, a lobbyist who works for Ag Processing Inc., a Nebraska farmer-owned cooperative that makes biodiesel. In 2001, farmers planted a record 75.2 million acres of soybeans but are burdened by about 250 million surplus bushels, government estimates show. Though a strong export, U.S. soybeans face competition from South America. Soybean-oil prices are soft. Biodiesel, growers hope, could spark a surge in demand. With that in mind, lobbyist Campbell called home-state Sen. Chuck Hagel, a Republican who serves on the Energy Committee. With the big energy bill under way, biodiesel and ethanol lobbyists wanted to shift jurisdiction over the renewable-fuels issue to the energy panel from the environment committee. "This allowed Republicans to embrace a renewable-fuels standard on the basis of national security," says Mr. Campbell, noting that the energy-bill debate focused on reducing U.S. dependence on foreign oil. Sen. Hagel calls the renewable-fuels standard "an environmental issue, yes, but an energy issue first and foremost." He and Sen. Charles Grassley, an Iowa soybean farmer who is the top Republican on the Finance Committee, worked to convince colleagues. Mr. Grassley sent lobbyists to see Sen. Tim Hutchinson of Arkansas, a Republican in a tough re-election race. His help for biodiesel would score points with homestate soybean farmers, and it was Mr. Hutchinson who introduced an excise-tax exemption proposal last June. The industry has gotten 16 biodiesel-related bills introduced in Congress; the farm bill now headed to President Bush for signing would provide $1 million a year in biodiesel "education funds." The soybean and biodiesel industries don't have political-action committees to make campaign contributions. "In Washington, you either have a PAC or you have people," says Mr. Campbell. "When I go to town, I have my farmer hat on." But individual companies do contribute. ADM is a major contributor to both parties. Mr. Campbell's Ag Processing has a small PAC, and has given $4,000 each to Sens. Hagel and Tim Johnson of South Dakota, a leading Democratic sponsor of biodiesel. It helps the cause of biodiesel, and ethanol, that supportive farm-state lawmakers are prominent in the Senate -- not least is Majority Leader Tom Daschle of South Dakota and the tax-writing Finance Committee's chairman, Max Baucus of Montana. Those with presidential ambitions lend support, including onetime ethanol skeptic Joseph Lieberman, the Connecticut Democrat. "That's what happens when you start spending a lot of time in Iowa," quips Mr. Grassley, in reference to his state's first-in-the-nation presidential caucus. The House passed its energy bill last year, before the industry began its push. But biodiesel backers are confident a biodiesel provision will emerge as part of the compromise energy bill that is being negotiated in a House-Senate conference committee. GOP House Speaker Dennis Hastert is from Illinois, the top ethanol producer and ADM's home. While biodiesel backers try to copy ethanol's success, they also want to avoid charges that a tax break would amount to corporate welfare, as ethanol critics have called that product's breaks. In the Senate energy debate, New York Democrat Chuck Schumer at one point asked farm-state colleagues, "Are you on the side of working families, or on the side of Archer-Daniels-Midland?" The biodiesel board's Mr. Jobe insists "We made a very, very conscious decision to be different" from ethanol. For one thing, soybean farmers -- who stand to reap huge benefits from a biodiesel boom -- support an energy-bill provision that would offset the cost of the excise-tax exemption by lowering farm subsidies for soybeans, as soybean prices rise. They also want to avoid the path they see corn farmers following, which they say has made the corn industry overly focused on maintaining ethanol supports. Nebraska farmer Bart Ruth, president of the American Soybean Association, says corn growers "devote more time to it than other things, things that down the road might have just as important an impact on the commodity." But for now, soybean and corn companies are united in lobbying for goodies in the farm and energy bills. That suits the farmers: Many of them grow corn one year, and soybeans the next. Write to Shailagh Murray at [EMAIL PROTECTED] Updated May 9, 2002 Steve Spence Subscribe to the Renewable Energy Newsletter: http://www.webconx.com/subscribe.htm Renewable Energy Pages - http://www.webconx.dns2go.com/ Human powered devices, equipment, and transport - http://www.webconx.dns2go.com/2000/humanpower.htm [EMAIL PROTECTED] --- To change your subscription to the Renewable Energy Online Newsletter, visit: http://mail.webconx.com:8181/guest/RemoteListSummary/wcxenergy_text ---------------------- http://www.webconx.com [EMAIL PROTECTED] ------------------------ Yahoo! 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