Changes to U.S. Tax Policy Could Boost Investment in Advanced Biofuels

A white paper published by the International Council on Clean Transportation (ICCT) identified four specific changes to the United States tax code that could scale up investment in second-generation biofuels to accelerate its commercialization.

Second-generation biofuels are made from non-food sources which include cellulosic (grasses and woodchips) and algal biomass.

The paper, authored by researchers from Castalia Strategic Advisors, Johns Hopkins University and ICCT, presents the analysis of share prices of seven cellulosic and algal biofuel producers using an investment assessment tool known as capital assets pricing model (CAPM). The analysis shows that prospective investors in this sector would require a 15 percent expected annual rate of return, which is a barrier to investment at a critical juncture in the development of the cellulosic biofuels industry in the U.S.

The white paper proposes the following changes to an existing federal tax incentive for second-generation biofuels in order to mitigate the elevated risk of investing in this industry:

1. Extend the existing second generation biofuel producer tax credit until 1 billion cellulosic Renewable Identification Numbers (RINs) have been generated; at this point, support will no longer be needed.

2. Allow companies eligible for the second-generation biofuel producer tax credit to opt instead for the business energy investment tax credit, worth 30 percent of expenditures on new property used in the production of second-generation biofuel or in new or retrofitted facilities. The construction phase is when biofuel companies need financial certainty to attract investors.

3. Allowing eligible biofuel producers to opt for a grant in lieu of tax credit enabling them to use this support in the early stages, as they may not have tax liability against which to claim the credit for several years after construction begins.

4. Harmonizing definitions of eligible pathways between this tax credit and the Renewable Fuel Standard 2 (RFS2).