Propane Industry Prepares to Battle to Protect Its Tax Breaks

Two alternative-fuel tax credits that currently apply to propane are set to expire at the end of the year

Posted October 8, 2013 at 2:22pm

Propane lobbyists are gearing up for a hard sell on Capitol Hill for tax incentives they say would help make the fuel more readily accessible to vehicle fleet operators and homeowners who want to invest in energy-efficient technologies.

The industry joins other renewable energy and alternative-fuel advocates in appealing to lawmakers for special treatment in any comprehensive tax overhaul legislation. But what makes propane different from other gasoline proxies such as ethanol is that it’s a fossil fuel produced alongside the abundant supplies of natural gas flooding the U.S. energy marketplace.

Propane is produced from natural gas liquids or refined from crude oil and burns about as cleanly as natural gas. It costs about $1 less per gallon than conventional gasoline and can be used to power commercial fleets such as school buses and delivery trucks, as well as for home heating and cooking.

An alternative-fuel vehicle refueling infrastructure credit and an excise tax credit for alternative fuels — both of which currently apply to propane — are set to expire at the end of the year.

Besides achieving greater tax certainty — a common objective of stakeholders affected by the temporary nature of clean-energy tax benefits — propane proponents want to be considered on par with natural gas, both in the tax code and as a solution to curbing greenhouse gas emissions.

“When you think about natural gas, you should think about propane, too,” said Phil Squair, the National Propane Gas Association’s senior vice president for public and governmental affairs.

Total carbon emissions associated with burning propane have declined as the supply source for the fuel has shifted from crude oil to natural gas, according to a report by ICF International, which estimates that propane produced from natural gas creates 16 percent less greenhouse gas pollution than propane refined from oil. Propane has a similar — though slightly higher — carbon footprint to natural gas, but it does not contribute directly to the greenhouse effect because it breaks down rapidly in the atmosphere.

The domestic supply of propane has increased alongside growing natural gas production from shale formations and light crude oil extraction, according to the Energy Information Administration.

Total U.S. propane inventories grew by 1.6 million barrels during the last week of September to 67 million barrels, the EIA said in an Oct. 2 report. And the amount of domestically produced propane increased by about 9 percent between 2005 and 2011, according to ICF International.

Propane powered more than 143,000 vehicles in 2010, according to EIA statistics, but its share of the alternative-fuel vehicle market has declined in the past decade despite being the third-most-common engine fuel worldwide after gasoline and diesel. Consumer-grade propane consumption fell 24 percent between 2000 and 2010, according to American Petroleum Institute statistics.

Propane vehicles took off during the 1970s oil embargo, but their rate of adoption dropped along with oil prices in the succeeding decades, the propane association’s spokeswoman Mollie K. O’Dell.

As supplies have grown with the domestic shale gas boom, she said, it is now more economical to expand propane use to other engine technologies.

Propane industry lobbyists want to see their fuel applied to any technology using an internal combustion engine, including agricultural pumping, combined heat-and-power systems and commercial lawn mowing.

“Our goal in propane being viewed similar to natural gas is for consumers to know that propane can power the same applications that natural gas can,” O’Dell said.

ICF projects modest growth in demand for propane in the years ahead, largely because of market penetration of new propane engine technologies and propane-fueled vehicles. The consulting firm expects that spike to be tempered, though, by continued improvements to the energy efficiency of appliances and buildings.

Providing tax benefits for gasoline alternatives would help shift some of the market momentum toward fuels such as natural gas and propane that have dropped in price but require expensive technology to utilize, said ICF analyst Michael Sloan.

“Because it’s a very small market right now, there’s not a lot of infrastructure and a relatively limited number of vehicles available for both natural gas and propane, which means that the buyers are not really aware yet of what the economic advantages for the fuel for transportation could be,” he said.

Like most stakeholders eyeing the possible tax code overhaul, the propane association wants a multiyear extension of its benefits to give the industry the time and stability to take advantage of them, Squair said. That means propane boosters will be competing in the fight to extend tax breaks with lobbyists for other niche energy sources, while also trying to fend off efforts by free-market conservatives to eliminate energy tax incentives entirely.

It remains unclear whether a tax overhaul effort will crystallize in the next few months, but Oregon Democrat Ron Wyden, a Senate tax writer who serves as Energy and Natural Resources Committee chairman and has taken a keen interest in promoting alternatives to gasoline, has said the stop-and-start nature of many energy tax incentives must change.

“We’ve got to narrow the gap between energy sources that have a huge array of subsidies and those that are sort of on a temporary roller coaster, and that’ll be the position I’ll take,” Wyden said.