Local Ownership of BioFuel Plants Key to Rural Development

As discussed previously on Cenlamar, Mike Strain (R-Covington) introduced HB 25 to provide a tax credit for the production of renewable fuels in Louisiana. We argued that Strain’s bill does not go far enough to ensure the environmental sustainability of agricultural feedstocks. Farmers in Louisiana grow a number of crops that can be converted into biofuels, such as sugarcane and woody biomass for ethanol and soybean oil for biodiesel. There are many differences between ethanol and biodiesel. As you may have guessed, ethanol can be used as a substitute for gasoline and biodiesel works in ordinary diesel engines (in fact, Rudolf Diesel invented the diesel engine to run on peanut oil). According to Strain,

the credit would be 20 cents per gallon for biodiesel, ethanol, and alternate renewable fuel, and 30 cents per gallon for ethanol produced from cellulose. All must be produced in a qualifying Louisiana biofuel facility. The credit applies to the first 25 million gallons of ethanol produced from cellulose each taxable year, not to exceed $7.5 million of credit per facility per taxable year. The credit for biodiesel, ethanol, and alternate renewable fuel cannot exceed $5 million per facility per taxable…. In order for a facility to qualify, Louisiana farmers must have at least a 20 percent ownership interest and must use at least 50 percent Louisiana-grown feedstocks to produce ethanol.

The bill was heard in the Ways and Means Committee on May 16. The bill was deferred, however, due to testimony from a local biodiesel producer, Darrell Dubroc.

Daryl Dubuque [sic], who owns the only exclusive bio-diesel company in Louisiana, which is located near Alexandria, opposed the bill. He said he favors the concept, but this bill was too restrictive. He told the committee the bill requires that 50 percent of the feedstock must come from Louisiana, which does not produce enough feedstock to comply with this mandate.

Though it may be true that Louisiana does not currently produce enough biomass specifically marketed as biofuel feedstock (soybean oil in the case of Allegro), there is little reason that the state could not meet the demand with less traditional feedstocks. Mr. Dubroc’s words suggest that his company imports more than half of its feedstock from out of state, and would not qualify for the credit. It’s also plausible that as the only major player in the Louisiana biodiesel game, Allegro opposes the bill to discourage competition. As you may remember, two percent of Louisiana fuel volume must come from renewable sources six months after 10 million gallons of alternative fuels are annually produced in the state, as long as the cost of biofuel additives would not raise the price of fuel at the pump.

Darrell Dubroc is the President and COO of Allegro Biodiesel. He and the company’s Executive VP of Business Development worked for Cleco before starting the Pollock biorefinery a couple of years ago. The company was named Vanguard Synfuels before
being bought out by Diametrics Medical for $28 million, which brought in a new CEO. Diametrics previously specialized in medical instrumentation, and moved base from Minnesota to Los Angeles.

The current rush to produce biofuels in Louisiana is a good thing, provided these out of state companies and the government do their part to protect the environment. On the other hand, Louisiana will squander one of its best opportunities in decades if it does not also consider the ownership structure of these biofuel ventures. Louisiana is developing a biofuel industry that will send most of its financial benefits to the pockets of shareholders outside of our state. As Jim Kleinschmit points out in Biofueling Rural Development: Making the Case for Linking Biofuel Production to Rural Revitalization (.pdf),

These positive and needed outcomes, however, are not assured in the creation of a biomass economy. Depending on which feedstocks, production systems and ownership approaches are proposed and ultimately adopted, these multiple benefits may or may not result. Production systems that are large in scale and owned primarily by outside investors would limit the rural development potential. And if the focus is only on production and yield, the environmental benefits could actually become threats, as excessive biomass collection could increase erosion, reduce diversity and wildlife habitat, denigrate soil quality and even increase monocultural production—all to the ultimate detriment of the rural resource base and economy.

As the Director of the Rural Communities Program at the Institute for Agriculture and Trade Policy in Minneapolis, Kleinschmit argues that not only should non-grain biomass (such as sugarcane byproduct, wood chips, and municipal waste) be used for biofuel production, but also that cooperative or locally-owned business structures are key to retaining profits and developing rural economies. Biomass produced from inedible sources—preferable for a host of environmental and economic reasons—do not store well, meaning that for them to be viable feedstock they must be refined into biofuel close to where they are harvested. Without specifications for local ownership and rural development, corporate influx and absenteeism that focuses on biofuel cash crops like corn is likely to result. In spite of lip-service from our politicians on all levels, our farmers will become nothing more than low-cost feedstock suppliers.

Recent studies have shown that while there is some economy of scale in larger systems, this tops out at a relatively modest level—around 40 million gallons a year for corn ethanol, a base level of production for the current industry. On the other hand, recent studies have shown that the benefits of smaller, locally owned refineries for communities is much higher, including a one-time boost of about $142 million to the local economy; creation of about 40 full-time jobs; and an increase in annual direct spending in the community of around $56 million. And spending of dividends by community investors has been found to contribute significantly more to the local economy—an average of an additional 821 jobs, an increase of $37 million in household income, and over $60 million more in Gross State Product—than what a community gains through local siting of an absentee-owned plant.

In a cooperative business model, farmers that grow biofuel feedstock could pool resources to build an appropriately sized biorefinery and keep profits in the local economy.

Minnesota state policies created in the 1990s gave farmers assistance in starting up refineries through a loan program and provided incentives to in-state ethanol production for the first 15 million gallons of ethanol produced each year. This approach helped grow the biofuels sector so that today, more than three-quarters of current ethanol production facilities in the state are majority farmer-owned.

Why must Louisiana settle with a mere twenty percent ownership stake to receive financial incentives? Due to their relative lobbying power, corporations will win out over the interests of our rural farmers. Fortunately, a crucial role can be played by local governments more responsive to the potential for rural development.

County, township and village governments, which are closest to the biofuel economy, in some ways may play the most critical role in promoting biofuel-based rural development. Through their roles in determining zoning, local tax packages, infrastructure development and uses of community-property, commissioners, town planners and other local elected officials can assure that community needs and assets are considered when determining which developments receive local governmental support.

Jim Kleinschmit closes with the following recommendations for policymakers:

• Prioritize Rural Development Considerations in Biofuel Incentives

• Help with Start-up Capital Education and Technical Assistance

• Make Public Research Public

• Make Biofuels a part of Conservation Programs

• Ensure that Biomass Feedstocks are Sustainable Over the Long Term

For more information, please read Decentralized Power in Local and Regional Plans (also called Distributed Generation or Relocalization), and papers on making ethanol production work for rural communities (David Morris, Vice President of the Institute for Local Self-Reliance).

This image was taken from the BIOconversion blog.