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Does Conoco Deserve a Subsidy to Produce Biofuels?

ConocoPhillips ended its long-idling animal fat-to-diesel fuel project with Tyson Foods on Wednesday because federal tax credits slashed in half last fall have yet to be restored by lawmakers.

The question is whether Conoco, the second-largest U.S. oil refiner, should have ever qualified for the $1-per-gallon tax credit? For that matter, does Big Oil deserve subsidies for producing biofuels?

The controversy, which pits the biodiesel industry against oil companies, centers one of the tax credits within the Energy Policy Act of 2005 designed to make renewable diesel more affordable to produce. The IRS, with some direction from the White House, later clarified the language and the $1-per-gallon tax credit was extended to companies using existing methods that involve vegetable oil and animal fats.

That meant Conoco, which had already been producing renewable diesel since December 2006 in Ireland, qualified for the tax credit on "green diesel" produced in the U.S. Conoco planned on investing $100 million into the project and argued that without the incentive it would be too cost-prohibitive.

For an excellent description on the differences between biodiesel, green diesel and diesel go to Robert Rapier's Renewable Diesel Primer on his blog, R-Squared Energy. He also talks about this very issue involving Conoco. The National Biodiesel Board came out strongly against Conoco's qualification for the tax credit, arguing the measure would hamper the biodiesel industry and hand millions of dollars over the Big Oil. It also said the incentives were meant to promote new plants, not to subsidize existing petroleum refining facilites. That argument isn't entirely fair.

I mean, come on, it's not subsidizing the refinement of oil. It's a subsidy given to companies that produce renewable diesel. Some of those companies are newly established biodiesel producers, others are established oil refiners developing a new product called renewable diesel.

So, where should the tax incentives and federal funding stop and begin? If a major company decides to invest millions into the development of biofuels including green diesel should it have access to the same incentives as other companies?

The biodiesel industry is already facing a number of other challenges, so I understand its protectionist reaction. And many cringe at the idea of helping out a massive industry that makes lots of money producing and refining oil.

But consider this:

Big Oil gets lambasted for avoiding investment in biofuels and other alternative fuel sources. But the same industry is attacked for accessing tax credits meant to encourage that very kind of investment.

If the priority of the government is to become energy independent then tax incentives -- meant to encourage development of alternative fuels -- must be issued to all companies willing to take on the endeavor.

Even if that means bringing Big Oil on board.

See BNET's coverage of the biofuels industry:

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