Grow it Here, Make it Here

Biofuels Digest
02/21/2012

Media Contact: Jim Lane

Sen. Debbie Stabenow expands her “Grow it Here, Make it Here” bio-based manufacturing initiative with 2012 Farm Bill proposals; meanwhile, the Digest looks at tax policy ideas to jump-start sector growth.

In Michigan, US Senator Debbie Stabenow expanded her “Grow it Here, Make it Here” initiative into a $5 billion proposal designed to dramatically expand bio-based manufacturing and job creation, funded through what she described as reductions in subsidization of the oil industry.

Among provisions in her proposal:

• a 30 percent tax credit for manufacturers that install equipment to produce bio-based products.
• Increasing the labeling opportunities for bio-based products
* An expansion in access to the USDA Biorefinery Loan Guarantee program to include companies focused on bio-based products
* Added focus on bio-based product commercialization in the US government’s biomass R&D efforts

In describing her funding offset, designed to ensure that the provisions are deficit neutral, Stabenow said the time had come to transfer supports given to the oil industry to newer job-creating industries.

“I think we’ve spent almost 100 years subsidizing oil companies.,” Stabenow told MLive.com, “They’re doing well, it’s a mature industry, and I think re-prioritizing to move funding over to a program that will create jobs for us in the type of decision we need to make.”

The $1.25 trillion bio-based economy

In 2011, Stabenow took over the chairmanship of the Senate Agriculture Committee, and convened a committee hearing that highlighted the use of bio-based materials in car parts, cleaning products, soaps, insulation, plastics, foam goods, and fabrics, highlighting what the Senator described as a $1.25 trillion bio-based economy that leveraged the US technology advantage in agriculture to revive US manufacturing, stimulate US job creation, reduce trade deficits and dependence on imported oil.

Stabenow observed at the time that bio-based products represent 4% of the market for the plastic and chemical industries, and highlighted USDA research that put the potential market share of bio-based plastic and chemical products in excess of 20% by 2025 with adequate federal policy support, and would result in 100,000 additional US jobs.

“Farm Bill energy initiatives promote innovation by entrepreneurs and businesses small and large,” Senator Stabenow said. “Secretary Vilsack and I got a chance to see this first-hand last August at the Pure Michigan 400 NASCAR race, where all of the cars are powered using American-made biofuels. But the energy title isn’t just about the next generation of biofuels. The most popular initiative is the Rural Energy for America Program, which helps producers reduce their energy costs through renewable or efficiency measures. This has saved businesses money and created or saved more than 14,000 rural jobs.”

U.S. Department of Agriculture Secretary Tom Vilsack also spoke to the strengths of the economic potential of farm energy programs and their impact on rural communities.

“The U.S. has the potential to produce more than a billion dry tons of biomass each year for the energy industry by mid-century, without impacting other farm and forestry products,” Secretary Vilsack said. “That would be enough to displace approximately 30 percent of our country’s present petroleum consumption. … Because biofuels, biomass, wind and solar rely primarily on farm, ranch, and forest lands, the potential for renewable energy development resides predominantly in our Nation’s rural regions. Certainly, renewable energy is an important source of jobs and economic growth in rural communities across the country.”

Reaction from BIO

BIO President & CEO Jim Greenwood said, “Building a biobased economy in the United States will generate good jobs in manufacturing, agricultural production and forestry, transportation and distribution, and construction. Biomanufacturing opportunities can help revitalize traditional manufacturing regions, such as Michigan, and rural areas, creating a healthy, sustainable biobased economy. The biobased product industry already employs more than 50,000 people in the United States and can generate tens of thousands more in the next five years.

“Renewed economic growth and security depends on producing affordable domestic alternatives to all of the products that come from foreign oil. Senator Stabenow’s Grow It Here, Make It Here initiative will help bio-based manufacturers access vital capital, strengthen market opportunities for biobased products, and spur commercialization of agricultural and industrial biotech innovations. Technology neutral support for all biobased products, renewable chemicals, and biofuels such as this initiative will help build a robust biobased economy.”

Agriculture Secretary Vilsack: Streamlining and flexibility

In an appearance before the Agriculture Committee, Secretary Vilsack observed:

“Agriculture is a critical driver of our economy, helping support one in 12 American jobs. Last year, exports of American agricultural goods reached a new record, helping drive record farm income and supporting more than 1 million jobs. Despite this job growth, rural communities are still facing significant challenges, including outmigration, lower incomes, higher poverty rates and access to capital.

“In addition to renewable energy, the production of bioproducts – using agricultural materials to create polymers, chemicals and consumer products – is a growing opportunity for rural economies. A bioproducts sector marries two of the most important economic engines for rural America: agriculture and manufacturing. Today, there are more than 3,100 companies across the country producing more than 25,000 bio-based products.”

“As you consider the next farm bill, I would like to suggest you consider two key themes: streamlining and flexibility. Over the course of many years, this committee and Congress have provided USDA with more than 40 programs in rural development, many of which have overlapping authorities and goals. Together, I hope we can look at streamlining USDA’s grant and loan authority to reduce the number of programs. In particular, I would like to suggest more flexibility to support regional development. While we have looked to our current authorities for every opportunity to partner with communities that are working regionally, more could be done. In the budget released this week, we repeated our call to target resources for projects or communities that are part of a regional strategy.”

The Digest’s Take

Stabenow is right, and Vilsack too. Biorefineries and other manufacturers can create a massive range of domestically-manufactured products, are already doing so, and acceleration of the transition from fossil-based to bio-based is in the national interest and is deserving of federal support.

Of course, these are opportunities that are important to all countries, especially those who are highly dependent on imported oil, and we encourage the Congress and Administration to consider the role that the Foreign Agriculture Service can play in fostering the transfer of US technology to US allies and friendly developing nations – good for US technologies, good for nation rich in bio-based feedstock and committed to democracy and stability around the world.

Stability through flexibility

But Secretary Vilsack’s theme of flexibility is vitally important in the financial side of fostering new industries. Providing fixed subsidies are costly, inefficient and unpopular – and unneeded in good times. Loan guarantees are a valuable tool, but they open the government and bio-based industry to harsh criticism when markets turn upside down and projects fail. In the case of Solyndra, the loan guarantee failed bacuse the company failed, and the company failed because its economics turned upside down when the costs of materials soared and the market prices for solar technologies plunged, simultaneously.

It is not dissimilar to the 2008-09 crisis in first generation ethanol, when feedstock prices for corn reached $8 per bushel, and then fuel prices collapsed.

In the oil industry, it is called the crack spread – the differential between the price of feedstock and the market price of the products produced. In bio-based industry it is called the crush spread – the differential between the price of the underlying feedstock crop and the price of the bio-based products in the marketplace.

The issue, in the transition from fossil-based to bio-based, is the differential between the crack spread and the crush spread. When oil margins are high and bio margins are low, bio-based products get crushed in the marketplace. It goes the other way, too – for instance, when in 2005-07 ethanol production was wildly profitable because corn was cheap and fuel prices remained high.

Risk, volatility and opening new markets

If there is one area of focus that would ensure the steady conversion to domestic manufacturing, and domestic jobs, through transition to the bio-based economy – it is in the reduction of market volatility. The market risk (and the policy risk, in the lack of long-term policy to address the problems of volatility), is what chills the financing of bio-based industry at scale.

A simple, flexible tax provision could change all this. US income taxes are progressive – those doing well, pay more, those less well off pay less. Yet fuel taxes are fixed. Why not make them progressive?

When markets create crush spread conditions that favor bio-based industry – such as in the 2005-07 ethanol boom market, why can’t bio-based industries pay a higher tax rate? When market conditions are unfavorable, why can’t fuel taxes be lower, or even reverse into tax credits?

Over time, as bio-based industry gains stability, technological advancement, and oil continues to become more volatile and expensive, the long-term tax outlook would be stronger. The nation would earn more, in the long-run, from fostering a strong industry that can pay higher rates in the favorable conditions that are generally expected over the long-term. Meanwhile, while industry is at small-scale, and that long-term advantage for bio-based over fossil-based has not yet fully emerged, the industry would benefit from a tax advantage.

Essentially, this is the goal of government policies that provide tax credits and incentives – only, because they provide fixed subsidies and fixed timelines, they inevitably are too much or too little, laying too long or for not long enough. Flexibility could take the agony out of energy tax policy, and simply make the fuel taxes progressive, and make the wealthy pay their fair share – only in this case, wealthy companies with strong, established technologies.

Tax futures as a stability vehicle

Now, one of the difficulties of these systems is that the costs become uncertain – no one could say for sure how long the credits would run and cost, because no one can accurately predict future oil prices, and hence the advantage that bio-based production would have over fossil-based fuels and products.

So, another possibility is to provide time-denominated tax futures. Now, what are those? Well, let’s say that the crush spread for a given advanced biofuels company in 2014 is insufficiently advantaged over oil prices, because oil prices have unexpectedly dipped. In today’s set-up, that biorefinery would have to shut down production – creating a repayment crisis for the company’s construction debt, and possible bankruptcy, and a loan guarantee crisis if the company had received one. Bad news all around.

In our proposal, the company would receive, say, a tax credit that would cover that shortfall – enabling the company to continue production, pay its loans, and keep its workers employed. The difference between the credit and its normal tax rate would become a note, repayable by 2029, bearing interest at the government inter bank rate (today 0.25%). The company would retire the note by paying, in essence, higher taxes during good times. The US government would recoup all the expected tax dollars, plus interest. The company would have a mechanism to assure its lenders, communities and employees of business continuity. Over time, as bio-based came stronger and fossil-based became weaker (i.e. oil prices rose higher and higher), the program would be used less and less.

Let markets work in picking technology winners

Now keep in mind, this is not a credit for the difference between a company’s production price and market price – it addresses feedstock volatility, period. If a company’s process is only yielding , say, 50 gallons per ton of biomass, instead of a hoped for 100 gallons per ton, that is technology risk, and companies that fall short can and should be crushed in the marketplace. A progressive tax credit, or tax futures, should not be a license to print money – but rather, an opportunity to make money in reasonable market conditions.

The government could easily lay off these obligations, by selling them in the open market, in convertible form. For example, let’s say that Company A racked up $10 million in future tax obligations in the form of notes payable in 2029. The government might sell those for, say, $9 million, in the open market to outside investors, who would acquire not only the debt but also conversion rights into equity. Provisions like these would protect the government from holding excessive amounts of debt, and ensuring that there is pressure on the board of directors (facing dilution) to repay their obligations as fast as possible.

Betting on good old American know-how, or Brazilian, or Indian, or Chinese and so on

Sure, it’s a bet on bio-based, and good old American know-how and a bet that domestic manufacturing will win in the long term. But it’s a bet that national governments should be comfortable in making – in essence, it is the country backing itself to win in the long-term.

And its a mechanism that can be used in Brazil, India, China, Australia or the EU just as easily as in the United States. And that might bring on a better world, faster, and cheaper. Bring it on.

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