Unlocking growth in the biobased products sector is tied to the ability to unlock access to inexpensive sugar, derived from corn farming. The second element has to do with production credits. This has begun to emerge at the state level, particularly in the state of Minnesota which is leading the way. Early credits offset the capital to be raised with a ten year clause, which encouraged investment and redirected investment by reducing the cost of capital. This did not just produce a tax credit for companies producing the biobased product, but anyone who uses the product also enjoyed the tax credit in Minnesota.
Iowa has also identified biobased products as a targeted growth sector for the state, and have advocated for a biobased production credit to be established. Interviews suggest that a biorenewable chemical production tax credit would be fundamental to the ultimate location decision in or outside Iowa for new projects. Using income tax data alone, the payback period on $61M the state invested in the ethanol industry was just two years. If we use the larger 8% of all economic activity in all taxes (income, property sales, etc.), then the payback period was one year. Iowa has more deployed biomanufacturing capital assets than any other state and this has made it a highly appealing target for growth due to the proliferation of carbohydrates in the state.
To be truly successful, however, production tax credits should require labeling requirements to ensure that the product is certified as biobased, and educating consumers on what this mean. This can help stem the claims being made that are not supported by production that is truly biobased in nature.
But the ability to account for whether a product is biobased is not an easy task today. Think about the implication and complexity of forming a specific chemical, segregating it, and managing the supply chain to be able to make that claim. This is a significant accounting exercise. Now think about how this product is going to compete in a highly competitive commodity-world. That is the reality of what the biobased product market is facing today. It is clear that the only way that the biobased market will function is if it can be scaled to a large enough size, where economies of scale are working for the industry, not against it (like it is today). This does not require that it be the size of the petrochemical industry, but it cannot simply be a series of small plants scattered around a landscape. And many of the chemicals that are produced through fermentation that go into biobased products also happen to be competing in commodity markets. The implication is that producers need to think clearly about focusing on specialty markets, with products that have unique performance characteristics, based conversion of biobased commodity chemicals into specialized chemicals through chemical synthesis. And in this manner, specialty biobased chemicals can be produced at a total cost of production that is lower than the variable cost of production of petrochemically derived chemicals, which allows them to grow and compete. Without any credits.
Our interviews regarding production tax credits (PTC) also lead us to believe that short-term incentives are sorely needed. Several companies are moving overseas with US-developed biobased technologies to build new facilities, and the rationale for this is largely due to foreign incentives that are absence in the United States.
Given the intense international competition at this historic point, companies we interviewed are exploring all global options for expansion projects, which includes taking into account political leadership in support of market push and pull policies beyond a specific 1-year operating dollar value at this time.
As one executive we interviewed noted: “It is a commodity world. You can either come in as a commodity or cherry-pick the niches that others aren’t playing in. The market won’t change to accommodate biobased products – we have to accommodate the market. We have to understand the performance of molecules, and blend it with other ingredients to create unique blends, and target the right applications through innovation, and understand the commercial impacts and how to price it. We can maneuver better than the big commodity players, so we have to be able to do that using frigates, whereas they have aircraft carriers that are harder to maneuver….”
Investment in the sector remains strong. However, continued growth can be bolstered by development of a strong end user market as well as growth in production credits to help launch the sector.
 Brent Willett & Joe Hrdlicka, “The Case for a Renewable Biochemical Production Tax Credit”, Iowa Biotechnology Association, 2016.