Biofuel Subsidies: What UCO Collectors Need to Know

Biofuel subsidies are playing a growing role in the used cooking oil (UCO) industry and used cooking oil collectors need to pay attention. There are four main types of subsidies, and they all have a big impact on how much you get paid for the used cooking oil you collect:

The California Low Carbon Fuel Standard (LCFS) credit

Federal IRS Blenders Tax Credit

Federal EPA Renewable Identification Numbers (RINs)

State-by-State Incentives

Increasingly, the agencies that administer these programs are requiring that the “point of origin” of the material be identified, documented, and tracked through the supply chain. This is done for two reasons: to determine the carbon intensity—the amount of greenhouse gases emitted in the production of fuel — of the feedstock, and to identify fraudulent feedstock from companies seeking to claim credits that they do not qualify for.

Claiming credits that a company doesn’t qualify for is a crime called mis-labeling. The buyer doesn’t just lose credits but also must pay hefty fines, both of which mean that they’ll have less money to pay you for your oil.

Buyers are beginning to consider their suppliers as “recordkeeping liabilities.” If you can document the origin of every gallon of your oil, your buyers will be confident that they’re not taking on any risk by working with you and be willing to pay you top-dollar. Fail to produce those records and you’ll get low-balled or even lose your buyers.

Carbon Intensity, Tax Incentives, and the Renewable Fuel Industry

The Federal Government (via the EPA or the IRS) and the state of California CARB (California Air Resources Board) allow biodiesel producers to acquire various credits which are then traded and serve as a financial incentive, or requirement, to produce, distribute and use environmentally friendly fuel. More credits  for the biofuel producer means more money not just for the biofuel producer but also for the broker and even the UCO collector.

As long as everyone in the chain — biodiesel producer, broker/trader, and UCO collector — can document the legal sourcing and processing of every gallon of oil, each step of the way, these credits can raise profits for everyone. But in the event of an audit, if one party can’t produce the necessary documentation, everyone loses.

Simple right? Conceptually yes. But with multiple overlapping programs, the devil is in the details. Let’s look at the world of biodiesel credits.

The World of Biodiesel Credits

Biodiesel credits come from both state and federal legislation. Here are the most important:

1. CARB LCFS Credit (LCFS)

What it is: CARB (California Air Resources Board) created the Low Carbon Fuel Standard (LCFS) in order to develop the alternative fuels markets, reduce greenhouse gas emissions and to reduce the Carbon Intensity (CI) of transportation fuel in California. Each LCFS credit represents one metric ton of carbon dioxide reduced. 

Does CARB Verification only apply to California UCO Collections?: No. Because a substantial amount of the UCO collected nationwide is moved into the California market as either feedstock or biofuel, the CARB verification regulations apply to the material collected in all states in most cases. When fuel or feedstock is shipped into the California market, it then receives LCFS subsidies, and is then bound by the LCFS supply tracking regulations.

How it works: Credits are generated by regulated parties (RPs) bringing in/producing/consuming fuel that has a low Carbon Intensity (CI) such as biodiesel. 

Carbon Intensity is measured by the lifecycle analysis methodology which measures all greenhouse gas emissions created in the production, distribution, and consumption of a fuel. It is calculated across the entire pathway of the creation of the fuel. For example, this could start with the collection of waste vegetable oil and follow every step in the process of turning it into biodiesel fuel. Since UCO is a waste product, all of the energy that went into its production (farming, harvesting, pressing, processing, bottling, transport to the restaurant) is applied to its first intended use: cooking. Once it is used for cooking, it gains a new life as the lowest possible CI. Consequently, UCO is the MOST subsidized oil that enters the American biofuel system.

Why it Matters to UCO Collectors: If a producer can’t sell his product — made in part from your used cooking oil — into California because it won’t pass CARB verification, they’ll either pay you less for it, or won’t buy it from you at all. In order to pass a California LCFS related audit, you need detailed records. Failure of CARB verification could result in fines, loss of credits, and a permanent stain on a collector’s reputation.

It matters to UCO collectors because it allows the biodiesel producer to pay more for source verified Low-CI feedstocks. Selling a Low-CI feedstock without records, is like selling a car without a title and smoke coming out the tailpipe. It’s risky to the buyer and is not worth as much. The tools to collect that data are of the utmost importance.

2. Biodiesel Blender’s Tax Credit (BTC)

What it is: Commonly referred to as the biodiesel tax credit, this is a $1.00 per gallon tax credit applied to biodiesel and renewable diesel at the point where it is first blended with petroleum diesel. It was originally created in the American Jobs Creation Act of 2004 and has been amended several times and extended through 2022. The goal of the BTC is to incentivize the blending and distribution of bio-based blends of fuel. Efforts are being made to extend it to 2025.

Why it Matters to UCO Collectors: The BTC isn’t the biggest credit, but it is the most stable. It’s always $1 per gallon, no matter the volume of oil. A $1 per gallon revenue boost to producers allows them to bid up the price of feedstock, and according to an analysis done by Reither in the 2010s, about 1/3 (33 cents) of the BTC dollar passes through to the producer.

3. Renewable Fuel Standard (RFS) Program

What it is: Congress created the Renewable Fuel Standard (RFS) program to reduce greenhouse gases and expand the nation’s renewable fuel sector. The program regulates oil refiners as well as gasoline and diesel importers and requires transportation fuel sold in the U.S. to meet minimum standards of volumes of renewable fuel. 

How it works: A company receives RIN credits based on the amount of renewable fuel it produces. More renewable fuel means more RIN credits. Petroleum fuel producers must attain a certain number of RIN credits relative to their fuel production annually to remain in compliance with the EPA’s standards. Failure to meet the requirement leads to a substantial fine for the company.

However, since the goal is not to reduce one specific company’s output but to create an industry-wide reduction of greenhouse gases, obligated parties can meet their renewable volume obligations (RVOs) in one of two ways. First, of course, they can make sure they themselves actually produce and sell the required amount of renewable biofuels. But, if they can’t meet the requirement they have another option. They can purchase RINs from companies that obtained MORE RINs than they needed. 

Why it Matters for UCO Collectors: A large market in the sale and trading of RINs exists. The producer you sell to wants those RIN credits, either to avoid a fine or to sell to other companies for increased profits. While RINs do not require point-source verification of feedstock, they do exclude certain (mostly foreign) oils from the program, and as a result it is helpful to have records proving that your material is, in fact, used cooking oil, and not fraudulently mis-labeled non-qualifying material.

4. State By State Incentives

While California’s state laws may be some of the most influential in the business, many other states offer their own tax credits and incentives to encourage use of renewable fuels. Detailed documentation is key to complying with all of them.

What do these credits amount to for a UCO collector?

The complexity of these credits makes it impossible to determine exactly how much each one affects the price that a UCO collector receives for a gallon of grease. Kristof Reiter, owner of Reiter Trading, an oil and grease broker, was quoted in an interview as stating, “It is impossible to state with certainty but, all in, I would estimate that about 1/3^rd of the subsidy value makes its way down to the collector in the form of a higher price paid for their commodity.  Essentially, the system of federal and state credits supports the market price of feedstock by at least a dollar per gallon, or roughly 25% presently. And this doesn’t even take into account the overall price support that biofuels supply to the agriculture complex as a whole.” 

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