Renewable diesel is defined broadly by the IRS.

The IRS settled a feud, played out over the past year in a string of letters to the government, between oil refiners who wanted a broad definition of “renewable diesel” and more traditional biodiesel producers who feared being muscled out of the market by the oil majors.

The IRS said what the oil refiners produce qualifies as renewable diesel.

At stake are tax subsidies of $1 a gallon.

The United States encourages “biodiesel” to be mixed with diesel fuel by awarding anyone doing such blending tax credits of $1 for each gallon of biodiesel used in the mixture. Biodiesel is a fuel or fuel additive made from plant oil or animal fat. An example is fuel made from used restaurant cooking oil or from imported palm oil. In cases where the biodiesel is sold straight for use in automobiles and trucks, without mixing, as a pure fuel called B100, tax credits are given to the retail service station owner.

The tax credits expire at the end of 2008. They are expected to be extended in some form by Congress.

The Energy Policy Act in August 2005 expanded the definition of biodiesel to include “renewable diesel,” defined basically as fuel made from “biomass” using a thermal depolymerization process. Biomass is anything that was once living. An example is poultry remnants or corn stalks. Oil, natural gas and coal do not qualify as suitable raw materials.

However, the additional subsidy has been mired in controversy over what Congress meant by renewable diesel. Congress said to qualify for a subsidy, renewable diesel must be produced using a thermal depolymerization process as described in one of two testing manuals published by the American Society for Testing and Materials — D975 and D396. Oil refiners have been urging the Treasury Department to define “thermal depolymerization process” expansively. They argue that by mixing biomass and oil as raw inputs, renewable diesel is produced as a component of the diesel fuel turned out by the refinery. Traditional biodiesel producers argue that mixing together biomass and petroleum feedstocks in a single process is not what Congress had in mind.

The IRS settled the controversy on April 2. It said oil refiners should be able to claim tax credits. The IRS position is in Notice 2007-37.

The agency also said that anyone producing renewable diesel will be considered a “blender” — and, therefore, be entitled to tax credits — if he or she mixes at least one gallon of diesel fuel with each 999 gallons of renewable diesel. This is the same rule that applies to traditional biodiesel producers.

Keith Martin