Hearings and Business Meetings
June 19, 2006
SD-366 Energy Committee Hearing Room 02:30 PM
Mr. Joe Jobe
CEO, National Biodiesel Board
Senate Committee on Energy and Natural Resources
“State of the Biofuels Industry”
June 19, 2006
Testimony of Joe Jobe, Chief Executive Officer, National Biodiesel Board
Good morning Mr. Chairman, Ranking Member Bingaman, and committee members. It is a pleasure to be here today. We appreciate the committee holding this hearing and providing the opportunity to examine this important issue.
My name is Joe Jobe, Chief Executive Officer, of the National Biodiesel Board (NBB). The NBB is the national not-for-profit trade association representing the commercial biodiesel industry as the coordinating body for research and development in the US.
The announced purpose of this hearing is to consider the implementation of the Renewable Fuel Standard (RFS) and future potential of biofuels. Biofuels, particularly biodiesel and ethanol, are currently experiencing tremendous growth. I would like to focus my comments this morning on the factors that have contributed to that growth for biodiesel, why this growth is important to America, and what must be done to keep it on its current path of success.
Biodiesel is a diesel fuel replacement that is made from agricultural fats and oils and meets a specific commercial fuel definition and specification. Soybeans are the primary oilseed crop grown in the United States, and soybean oil makes up about half of the raw material available to make biodiesel. The other half consists of all other vegetable oils and animal fats. Biodiesel is made by reacting the fat or vegetable oil with an alcohol to remove the glycerin in order to meet specifications set forth by the American Society of Testing and Materials (ASTM). Biodiesel is one of the best-tested alternative fuels in the country and the only alternative fuel to meet all of the testing requirements of the 1990 amendments to the Clean Air Act. Biodiesel exhibits certain premium diesel characteristics. It contains oxygen so it burns cleaner, it reduces smoke and smell, and increases cetane and lubricity, two important operational characteristics.
Beginning this month, Ultra Low Sulfur Diesel Fuel (ULSD) will begin phase-in for on-road diesel fuel. Most ULSD will require a lubricity additive in order to meet lubricity specifications. Just 2% biodiesel can provide sufficient lubrication properties to any diesel fuel. In fact, Stanadyne Automotive, the largest fuel injection manufacturer in the United States has stated that adding 2% biodiesel to all ULSD is a superior solution to the lubricity problem with ULSD. It is anticipated that a significant amount of biodiesel will be used in ULSD as a renewable lubricity additive.
Biodiesel production and sales have grown from an estimated 25 million gallons in 2004, to an expected 150 million gallons in 2006. Likewise, investment in biodiesel production has grown from 22 biodiesel plants in 2004 to more than 65 biodiesel plants currently. There are over 50 more plants currently under construction.
The high price of fuel is one of the factors contributing to increased biodiesel use. However, there are three main federal policy measures that have been extraordinarily effective in stimulating biodiesel’s increased production and use. Because of these three policy measures, biodiesel is beginning to make a small but significant impact on our nation’s energy supply. These three measures are all working extraordinarily well, but are soon scheduled to expire, and must be continued in order to keep the growth in biodiesel going strong. Although biodiesel is showing signs of success, the industry is still in its infancy, and is where ethanol was in 1982.
First, the biodiesel blender’s tax credit was part of the restructured Volumetric Ethanol Excise Tax credit or “VEETC” legislation, enacted as part of the JOBS Act of 2004. The new blender’s tax credit for biodiesel went into effect in January of 2005. It functions similarly to the ethanol tax credit, and it has been extraordinarily effective in incentivizing the blending of biodiesel into the nation’s diesel fuel supply. It has been the primary stimulant in 2005 for the dramatic increase in new plants and jobs in biodiesel, bringing economic opportunity to both rural and urban areas.
Senators Grassley and Baucus have introduced the Alternative Energy Extender Act, S. 2401. This act includes the extension of the biodiesel blender’s tax credit through 2010. It is likely that the need for this program will go beyond 2010, and it is critical that this tax credit, which has been so effective for biodiesel, not be allowed to expire.
The second policy measure that has been very effective in energizing biodiesel’s growth is the Bioenergy Program. The program was initiated by the USDA in 2000 to stimulate the use of crop surpluses for energy needs. It was extended as part of the 2002 Farm Bill. However, the program is set to expire in July of this year. This program provides a production incentive which has been highly effective in the growth of the biodiesel industry. A 2005 OMB Program Assessment Rating Tool or “PART” evaluation reported that the program did an excellent job of stimulating biodiesel growth, and indicated that the program could continue to be effective for the emerging biodiesel industry. The report stated, “Increases in the production of biodiesel indicate a rise in the supply of domestically produced renewable fuels. It’s also an indicator of the viability of the biodiesel industry and its expanded consumption of agricultural commodities.”
According to Centrec Consulting Group, if an extended 2007 Bioenergy Program for biodiesel increased soy-based biodiesel production by a very modest 40 million gallons it would be expected to increase soybean prices up to $0.07 per bushel. Based on a 3.0 billion bushel crop and given the fact that low prices are projected to result in farm program payments, this increase in biodiesel demand could reduce soybean farm program outlays by up to $210 million. This would more than offset the cost of extending the Bioenergy Program for biodiesel for FY-2007. Extension of this program for biodiesel has many positives. It will be good for farmers, good for biodiesel, and can be a net positive for the US Treasury. I ask that you please consider doing what you can to extend this important program which is scheduled to expire in July of this year.
The third program that has greatly contributed to biodiesel’s success is the USDA’s Biodiesel Fuel Education Program. This program was a part of the energy title of the 2002 Farm Bill. The program provides educational funding to support increased fuel quality measures, increased acceptance of biodiesel by engine and equipment manufacturers, petroleum partners, users, and the general public. The USDA has done a superb job in implementing this program and it has been a key ingredient to biodiesel’s recent growth. A recent survey done to benchmark the program’s progress showed that the public’s awareness of biodiesel rose from 27 percent in August 2004 to 41 percent in December of 2005. To impact the American public’s awareness that significantly on any given issue is remarkable. In addition to greater awareness from the general public, market research shows familiarity among trucking executives increased from 27 in 2004 to 53 in 2005. Also of note:
• Four-in-five consumers continue to support a tax incentive that would make biodiesel cost-competitive with regular diesel fuel.
• 88 percent of environmental group leaders and 84 percent of health organization leaders support biodiesel as a transitional fuel, because biodiesel can make an immediate impact on reducing emissions until zero emissions technology is developed.
While the program has been highly effective, the biodiesel industry is still immature, and faces enormous challenges. Continued education is needed. I ask that you please look for ways to expand and extend this program beyond 2007.
To summarize the three federal policy measures that have been very effective in the development of the biodiesel industry and should be continued:
1) Extension of the biodiesel blender’s tax credit;
2) Extension of a Bioenergy Program for biodiesel;
3) Extension and expansion of the biodiesel fuel education program.
In addition to these three primary policy measures, there is one more program that must be mentioned. The Energy Policy Act of 2005 authorized funding for engine testing with biodiesel blends. The program was proposed by this committee and passed by Congress to help fund testing of new advanced diesel technology with biodiesel blends. Recently, a letter of support for this program was sent to the Senate Energy and Water Appropriations subcommittee. The letter was signed by eight major diesel engine and auto makers and the Engine Manufacturer’s Association. The letter outlined the fact that recent regulatory changes are requiring that diesel engines be redesigned in order to meet stricter emissions targets. These redesigned engines will need to be tested with biodiesel blends if biodiesel is to play a role in future diesel technology.
Soybean farmers have committed $2.4 million dollars to help address these engine testing needs. Likewise, engine and equipment companies have also committed significant resources. It is imperative that funding for this program is appropriated, so that biodiesel blends can be included in the testing of the new engines while the engines are being tested and certified with ultra low sulfur diesel fuel, and while leveraged funding is available. We ask that you support funding of this program.
According to the findings of LECG, an economic analyst group, continued “expansion of the biodiesel industry will provide significant economic benefits in terms of additional gross output and Gross Domestic Product, household income, new jobs, and tax revenue for government at all levels.” The report assumed the extension and implementation of the four major federal policy initiatives mentioned in this testimony, and projected growth in the biodiesel industry through 2015 and the impacts of that growth. The report concluded that more than $810 million would be invested in biodiesel refineries and that the ongoing operation of those facilities would result in an increase of more than $40 billion of gross output to the US economy. It will result in the creation of more than 25,000 permanent jobs by 2015. The report further concluded that the increased economic activity would result in increased income to American households, and additional tax revenue at all levels of government. Finally, the report concluded that as a result of the displacement of imported crude oil, more than $13 billion will remain in the American economy instead of being sent abroad to finance oil imports.
During the 2006 State of the Union speech, President Bush outlined his Advanced Energy Initiative, which stated the goal of reducing petroleum imports from the Middle East by 75 percent by the year 2025. Biodiesel and ethanol can be the first tools used to begin reaching that goal, because they are liquid renewable fuels that are available right now, ready for blending into our existing fuel supply and used in our existing vehicles. As an illustration of how biodiesel can play a role in that effort, please note that Iraq is the second largest provider of crude oil into the United States from the Persian Gulf region. Of the crude that comes from Iraq, approximately 1.85 billion gallons of diesel fuel is refined for the US market. If long-term, America were to replace just 5 percent of its 37 billion gallons of on-road diesel fuel with biodiesel, it would equal 1.85 billion gallons – the same amount of diesel fuel that we get from Iraq.
In addition to the significant benefits that biodiesel offers to increase our domestic refining capacity and overall energy supply, biodiesel offers enormous benefits to our agricultural sector. Biodiesel does much more than just utilize surplus agricultural commodities; it adds multiple layers of value to agricultural economics. There have been five major comprehensive economic studies evaluating biodiesel in the last four years. All of these studies, using different economic models, had similar conclusions: that increased utilization of fats and oils for biodiesel increases the value that farmers receive for their crops, while making protein meal less expensive as a feed for our domestic livestock producers and more competitive in international protein markets for food and feed. Not only does this allow farmers to more profitably supply global food markets, it may have the effect of increasing agricultural processing in the United States. Additional biodiesel production further increases domestic chemical processing from renewable by-products.
Finally, I would like to point out that during this period of growth and expansion of the biodiesel industry, fuel quality has become a paramount priority of industry stakeholders. Based on the experience of the introduction and expansion of the ethanol industry in the 1980s, the biodiesel industry has tried to anticipate fuel quality issues and address them. In 2000 the NBB established the National Biodiesel Accreditation Commission or NBAC which developed BQ-9000, the industry’s voluntary quality assurance program. This program accredits biodiesel producers or certifies biodiesel marketers based on quality assurance in the production and handling of fuel. BQ-9000 was modeled after other industry quality assurance programs such as ISO-9000, and will serve as a mark of quality to enable customers and distributors to better insure quality in their purchasing.
ASTM is the recognized standard-setting body for fuels and additives in the United States. ASTM has adopted a specification for biodiesel, ASTM D 6751. When biodiesel that meets its specification is blended into on-spec diesel fuel, and is handled according to proper fuel management techniques, the result is a high quality fuel. Quality biodiesel blends have been shown to perform well in virtually any unmodified diesel engine. However, use of any fuel that does not meet its quality specifications could cause performance problems or equipment damage, and this includes biodiesel.
The National Biodiesel Board believes strongly that rigorous adherence to D 6751 is important in order to protect consumers from unknowingly purchasing substandard fuel, in order to maintain the integrity of the nation’s fuel supply, and in order to protect the reputation of biodiesel as a high quality, high performance fuel. Several federal and state government agencies are responsible for the regulation and enforcement of fuel quality in the United States. Rigorous enforcement of fuel quality and compliance measure are very important, especially during this period of rapid industry expansion.
Mr. Chairman, members, we appreciate the opportunity to come before you today on this most critical issue. On behalf of the biodiesel industry, I want to thank you for all of the support you have given not only to the biodiesel industry, but the development of the biofuels industry overall. We look forward to continue working with you in this important endeavor. I would be happy to answer any questions you may have.