OLR Research Report

October 13, 2006




By: Paul Frisman, Principal Analyst

You asked a number of questions about biodiesel incentives. We answer your questions individually below. Biodiesel is a diesel fuel alternative, produced from virgin or used vegetable oils or animal fat. Please see OLR Report 2005-R-0904 for more information on state biodiesel subsidies for producers.

Q. What tax incentives do other states offer to biodiesel producers or distributors for use as fuel or home heating oil?

Among the states offering tax incentives to producers or distributors are Arkansas, Florida, Idaho, Indiana, Kentucky, Louisiana, Maine, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, and Washington. Examples of these incentives include the following:

Arkansas provides an income tax credit to biodiesel suppliers for up to 5% of the cost of facilities and equipment used in the wholesale or retail distribution of biodiesel (Arkansas Code 15-4-2803 and 15-4-2804).

Idaho offers a tax deduction to licensed motor fuel distributors for the number of gallons of agricultural products or animal fats, or the wastes of such products, contained in biodiesel fuel. The deduction may not exceed 10% of the special fuel which is or contains biodiesel. (Idaho Statutes 63-2407).

Indiana biodiesel producers are entitled to a production tax credit of $1 per gallon of biodiesel used to produce blended biodiesel (Senate Bill 353, 2006, and Indiana Code 6-3.1-27-8).

Louisiana exempts from state sales and uses taxes, through June 30, 2012 (1) certain property and equipment used to manufacture, produce or extract unblended biodiesel, and (2) unblended biodiesel used as a fuel by a registered manufacturer (Senate Bill 337 and Louisiana Revised Statutes 47:301).

A tax credit is available in Montana to businesses and individuals for up to 15% of the cost of storage and blending equipment used for blending biodiesel with petroleum diesel (House Bill 776, 2005, Montana Code Annotated 15-70-321 and 15-70-343).

Nebraska exempts from certain motor fuel tax laws motor fuels (1) sold to a biodiesel production facility, and (2) manufactured at a biodiesel facility (Nebraska Statutes 66-489 and 66-496).

North Dakota offers a five-year corporate income tax credit for equipment that enables a facility to sell diesel fuel containing at least 2% biodiesel by volume (North Dakota Century Code 57-38-30.6 and Senate Bill 2217, 2005).

Oklahoma allows a tax credit of $0.20 per gallon of biodiesel produced for tax years before January 1, 2012 (Oklahoma Statutes 68-2357.67).

South Carolina provides business or personal income tax credits of $.20 per gallon of biodiesel motor fuel produced mostly from soybean oil and sold, and $0.30 per gallon of biodiesel motor fuel a majority of which is produced from feedstock other than soybean oil and sold, up to a maximum of 3 million gallons per year per facility, for up to five years (House Bill 4810, 2006).

South Dakota provides a tax refund for contractors' excise taxes and sales or use taxes paid to expand an existing soybean processing facility if the expansion will be used to produce biodiesel (South Dakota Statutes 10-45B).

Until July 1, 2009, investments in buildings, equipment and labor used to manufacture biodiesel and biodiesel feedstock in Washington are eligible for the deferral of state and local sales and uses taxes (Revised Code of Washington 82.04.260, 82.12.955, 82.29A.135 and 84.36.635).

More comprehensive and detailed information about incentives for biodiesel producers, distributors, manufacturers and consumers is available at this U.S. Department of Energy website.

Many of the incentives for biodiesel distributors and manufacturers do not distinguish between biodiesel produced for use as motor vehicle fuel or as home heating oil. A computer search of the term “heating oil” on the Department of Energy website found only one reference to New Hampshire's Biodiesel Committee, which in 2005 released a report on the uses of biodiesel for home heating and transportation.

Number 2 heating oil, very similar to diesel fuel, is not widely used as a heating fuel outside the Northeast. A spokeswoman for the Clean Diesel Fuel Alliance (CDFA), whose members include the Alliance of Automobile Manufacturers, the American Petroleum Institute, the U.S. Environmental Protection Agency and the Department of Energy, says she is not aware of any state that now requires the use of biodiesel in heating oil.

Q. What grants do other states offer biodiesel manufacturers?

Among the states offering grants to biodiesel manufacturers are Arkansas, Delaware, Florida, Iowa, Kansas, Mississippi, Missouri, and Virginia.

Arkansas provides biodiesel production grants of up to $0.10 per gallon, up to 5 million gallons per producer per year, for up to five years (Arkansas Code 15-4-2803 and 15-4-2804)

Delaware provides grants of up to 25% of the project cost of biodiesel manufacturing facilities. No project may receive more than $300,000 (Senate Bill 44 and Delaware Code Title 29, Chapter 80, Subchapter II).

Florida provides matching grants for projects relating to renewable energy technologies (Senate Bill 888, 2006, and Florida Statutes 377.804).

Iowa has created an infrastructure program to provide financial assistance to wholesale biodiesel distributors, among others, appropriating more than $13 million for the program over three years (House File 2754, 2006).

Kansas offers $0.30 to qualified Kansas biodiesel producers for each gallon of biodiesel sold through July 1, 2016 (Senate Bill 388, 2006).

Mississippi make direct payments of $0.20 per gallon, up to 30 million gallons a year, to biodiesel producers for biodiesel produced for 10 years following the start of production (Mississippi Code 69-51-5).

The Missouri Qualified Biodiesel Producer Incentive Fund provides a monthly grant to qualified biodiesel producers if (1) at least 51% of the production facility is owned by agricultural producers who are state residents actively engaged in commercial agriculture, or (2) at least 80% of the feedstock originates in Missouri. The grant is $0.30 per gallon for the first 15 million gallons produced and $0.10 for the next 15 million gallons produced in a fiscal year (Missouri Revised Statutes 142.031 and House Bill 1270, 2006).

Virginia's Biofuels Production Fund provides grants to biodiesel producers of up to $0.10 per gallon of neat biofuels sold in the state between January 1, 2007 and January 1, 2017 (House Bill 680, 2006, and Virginia Code 45.1-393 and 45.1-394).

Q. How can Connecticut compete with these states in promoting a biodiesel industry?

Biodiesel: Food for Thought, Fuel for Connecticut's Future,” issued by the Connecticut Center for Economic Analysis in 2005, suggests several steps Connecticut can take to promote biodiesel use. School districts can use biodiesel in their school buses. The state can encourage farmers to plant soybeans on otherwise unproductive land; encourage research into more productive oil-producing plants; and use Connecticut-grown biodiesel as a heating oil reserve “to buffer…residents against supply shocks.”

The report also states that “the inclusion of biodiesel within the available tax credits, or the creation of new, independent tax incentives for biodiesel, would go a long way in affirming the use of this sustainable and environmentally friendly fuel source.”

Connecticut also could implement some of the incentives other states use to encourage the production, distribution or use of biodiesel.

In September, Gov. Rell announced an energy plan, that, among other things, would require the state motor vehicle fleet to use a 10% biofuel mixture beginning in 2012; require that commercial and residential heating oil contain a mix of 20% biofuels by 2020; provide low interest loans and grants to state farmers to produce biofuel feedstock crops; create an incentive program to promote the construction of biofuel production facilities; create low-interest forgivable loans for service stations to reduce or eliminate the costs of installing new alternative fuel pumps; and ban agreements that limit service station access to renewable fuels.

Q. What specific incentives do other states offer biodiesel consumers?

The Maryland Soybean Board offers a rebate to consumers for half the cost of biodiesel they purchase. The rebate also applies to the incremental cost of biodiesel blends and is issued for a minimum of $100 per rebate request.

A Montana state road tax reduction of 15%, compared to the tax on gasoline, is available to consumers for using biodiesel. (Montana Code Annotated 15-70-321 and 15-70-301).

New Jersey reimburses eligible local governments, state colleges and universities, school districts and governmental authorities for the incremental costs of using biodiesel instead of petroleum diesel.

North Dakota, Rhode Island, South Dakota and Texas are also among the states that exempt biodiesel from motor vehicle fuel taxes or excise taxes or charge lower taxes for the purchase of biodiesel.

Q. Does Connecticut offer alternative fuel tax exemptions or other incentives that include biodiesel? How has Connecticut encouraged the use of biodiesel?

PA 06-143 exempts from the petroleum products gross earnings tax the first sale in the state of a commercial heating oil blend containing at least 10% of an alternative fuel derived from agricultural produce, food waste, waste vegetable oil or municipal solid waste, including biodiesel.

The state also has taken several steps to promote the use of biodiesel. The Department of Public Utility Control has ruled that biodiesel is a renewable energy resource, and that electricity produced from it counts towards the state's renewable portfolio standard. This ruling potentially opens up a major market for biodiesel fuel. Eastern Connecticut State University is conducting a pilot project where biodiesel is being used for space heating. The University of Connecticut uses recycled cooking oil to power a shuttle bus. In addition, the state has entered into a $ 400,000 contract for biodiesel for Department of Transportation trucks for the period February 2005 through January 2007. Under the contract, municipalities and other political subdivisions of the state can buy biodiesel under the same terms as the state. In March 2003 the Department of Environmental Protection cosponsored a regional workshop on biodiesel fuels. Please see OLR Report 2005-R-0788 (attached) for more information.

Q. Which states promote the use of biodiesel for school buses, municipal vehicles, public transportation, private motor vehicles, or marine vessels?

California, Colorado, Illinois, Iowa, Kansas, New Mexico, New York, Tennessee, Virginia and Wisconsin are among the states promoting such use.

In California, public agencies and utilities are permitted to use biodiesel or biodiesel fuel blends in on-road vehicles, retrofitted vehicles and off-road diesel engines. (Senate Bill 975, 2005).

Colorado requires adoption of a policy by January 1, 2007 requiring all state-owned diesel vehicles and equipment to be fueled with a 20% biodiesel blend subject to the fuel's availability and its price being no more than $0.10 per gallon more than conventional diesel (Senate Bill 16, 2006, and Colorado Revised Statutes 24-30-1104).

Illinois requires diesel-powered vehicles owned or operated by the state, county or local governments; school districts; community colleges or public colleges or universities; and mass transit agencies to use a biodiesel blend of at least 2% when refueling at a bulk central fueling facility (House Bill 112, 2005, and 625 Illinois Compiled Statutes 5/12-705.1).

Iowa has created a biodiesel revolving fund that its transportation department must be use to buy biodiesel fuel for their vehicles. These vehicles will be identified by a brightly colored sticker (Iowa Code 307.20). In addition, all state agencies must ensure that all bulk diesel fuel procured contains at least 5% renewable content by 2007; 10% renewable content by 2008, and 20% renewable content by 2010. Agencies must ensure that diesel vehicles operate on biodiesel blends whenever they are available (Executive Order 41, 2005).

Kansas requires state-owned diesel vehicles to buy 2% biodiesel where available as long as it does not cost more than $0.10 per gallon more than petroleum diesel (Kansas Statutes 75-3744a).

By 2010, New Mexico requires all cabinet-level state agencies, public schools (K-12), and higher education institutions to take action towards obtaining 15% of their total transportation fuel requirements from renewable fuels, including biodiesel (Executive Order 2005-049, 2005).

In New York, the Clean Fueled Vehicles Council must detail how state agencies and authorities can buy, allocate, distribute and use biodiesel in their motor vehicle fleets. By 2007, at least 2% of the fuel used in the state fleet must be biodiesel; this percentage will continue to increase annually so that at least 10% of the fuel used in the state fleet will be biodiesel by 2012 (Executive Order 142, 2005).

Tennessee offers grants to county governments to install biodiesel infrastructure to provide biodiesel fuel for county and city- owned vehicles.

Virginia state agencies are requested to use biodiesel where feasible in their vehicle fleets. A report of each agency's progress is due on the first day of the General Assembly's 2007 session (House Joint Resolution 148, 2006).

Wisconsin provides aid to school districts that use biodiesel fuel in their school buses to cover the difference in cost between biodiesel and petroleum diesel (2005 Wisconsin Act 43).

Q. What are the permitting requirements for biodiesel manufacturing and distribution facilities in Connecticut?

There are no state permitting requirements specific to biodiesel facilities. However, the law requires (1) petroleum product dealers to register with the state Office of Policy and Management (CGS 16a-22c); (2) petroleum refineries to obtain a Department of Environmental Protection (DEP) wastewater discharge permit (CGS 22a-430b); and (3) motor vehicle fuel distributors that intend to sell fuel in Connecticut to register annually with the Department of Consumer Protection (CGS 14-327b).

In addition, DEP's Bob Kaliszewski says DEP also might regulate a refinery's air emissions if they exceed certain threshold levels, and its waste products, if the manufacturing process generates regulated waste or uses certain waste feedstocks.

The U.S. Environmental Protection Agency (EPA) requires biodiesel and other diesel and gasoline producers to register and also requires diesel producers to submit annual reporting forms.

Federal, state and local permits that apply to industries generally also would apply to biodiesel facilities. Additional information on state permits in general can be found on this Connecticut government portal website.

Q. Which states have legislation requiring biodiesel to be blended with petroleum diesel and in what amounts?

According to the American Petroleum Institute (API), Minnesota, Louisiana and Washington require diesel or biodiesel blends. Minnesota has a 2% biodiesel mandate that started last fall. Louisiana has a 2% requirement that will be triggered when there is sufficient in-state production capacity. Washington has a two-phase requirement: 2% starting November 30, 2008 and 5% once in-state feedstocks can supply 3% of the requirement.

Q. The Energy Policy Act of 2005 requires increased production of biodiesel and other low sulfur fuels. How are Massachusetts, New York, and Rhode Island promoting increased production of these fuels?

The Energy Policy Act of 2005, among other things, extends through 2008 a biodiesel tax credit for blenders and retailers. The credit is $1 per gallon for biodiesel made from agricultural products and $0.50 per gallon for biodiesel made from waste grease. The act also created a $0.10 per gallon biodiesel tax credit for biodiesel produced by companies whose production capacity is less than 60 million gallons a year. This tax credit is capped after the first 15 million gallons produced annually. The act also requires fuel refiners to increase the amount of biofuels in the nation's fuel supply to 7.5 billion gallons a year by 2012; and requires the use of renewable fuels in U.S. government vehicles capable of using it. More information about the act is available on this Department of Energy website.

The governors of Massachusetts, New York, and Rhode Island have each called for increased use of renewable resources.

Massachusetts. Gov. Romney announced in August 2006 a long-term energy plan that includes diversifying the state's energy supply and “leading the nation in developing advanced energy technologies.” Among other things, he called for the use of biofuels in state vehicles and buildings.

In February, 2005, the nonprofit Massachusetts Energy Consumers Alliance (Mass Energy), working with a grant from the U.S. Department of Energy, announced that certain oil heat consumers in the Boston area could heat their home with Bio-Heat, a blend of 10% refined soybean oil and 90% low sulfur heating oil. Mass Energy was also working to establish a similar program in Rhode Island. We have attached copies of the governor's press release and the Mass Energy announcement.

New York. In January, 2006, Governor Pataki announced a plan to reduce New York's dependence on imported energy. Among other things, it would eliminate state taxes on renewable motor vehicle fuel; create new renewable fuel stations across the state (see below); create a “state-of-the-art” alternative fuel vehicle research laboratory; and provide tax-free benefits for clean energy companies that create jobs.

In September, the New York State Energy Research and Development Authority (NYSERDA) announced the New York State Bio-Fuel Station Initiative, aimed at adding as many as 300 E85 (ethanol) and biodiesel service stations. Under the program, NYSERDA will provide $50,000 per site for new installations of biodiesel or E85 pumps and up to $25,000 to retrofit an existing facility to dispense E85 or biodiesel. NYSERDA, which estimates grants will cover about half the capital costs of each type of facility, said it expects $9 million in funding. We have attached copies of the governor's press release and NYSERDA's announcement.

Rhode Island. In September, Governor Carcieri called on the state to produced 20% of its energy from renewable resources by 2011. He had earlier set a renewable energy goal of 25% by 2025. The governor said he plans to meet the goal primarily through hydroelectric projects. One of those projects, at the Harris Mill dam in Coventry, R.I., will produce more than 10 million kilowatt-hours of electricity a year. It also will produce steam for heating and generate additional electricity with the use of biofuel derived from used cooking oil. Providence Business News also reports that about 12 companies have expressed interest in starting a biodiesel plant in Rhode Island. We have attached copies of the governor's statement and the news report.

Q. Do any states require diesel retail stations to offer both low sulfur (500 parts per million (ppm)) and ultra low sulfur (15 ppm) diesel mixed with biodiesel?

No. According to CDFA, no state requires service stations to offer diesel fuel for sale. CDFA says it is quite expensive to install an underground storage tank and pump – about $200,000 – a sum which could be prohibitively expensive for small stations selling relatively low volumes of fuel.  It says that mandating that all stations carry both ultra low sulfur and low sulfur diesel fuel, or a specific blend that could be difficult to obtain, could potentially result in station closures and put upward pressure on prices.

CDFA says service station owners can determine whether they will carry diesel and which type to sell. This means that under current law service stations don't have to sell diesel, but if they do, they can decide whether to sell ultra low sulfur diesel or low sulfur diesel fuel based on customer preferences and market conditions. Stations also can choose to sell both ultra low sulfur diesel and low sulfur diesel from separate tanks and pumps.