BD Zones and BDO Zones: Weaponizing Biomass to Support a Bio-Fueled Economic Recovery

May 21, 2020

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by Jordan Solomon (Ecostrat Inc./Biofuels Digest) The US has over a billion tons of biomass which can be used as a key lever to drive economic recovery. USDA estimates that 3.4 million jobs and nearly $660 billion of economic benefits would be created by using biomass to manufacture alternative fuels, renewable chemicals, bio-based products and sustainable aviation fuels. BD Zones and BDO Zones are shovel-ready, actionable initiatives that unlock billions of dollars of institutional investment into communities where there is a surplus of biomass and where employment and bioeconomy development can be closely linked. READ MORE

Key Points

The US has over a billion tons of biomass which can be used as a key lever to drive economic recovery.
USDA estimates that 4 million jobs and nearly $660 billion of economic benefits would be created by using biomass to manufacture alternative fuels, renewable chemicals, bio-based products and sustainable aviation fuels.
BD Zones and BDO Zones are shovel-ready, actionable initiatives that unlock billions of dollars of institutional investment into communities where there is a surplus of biomass and where employment and bioeconomy development can be closely linked.
BD Zones are areas where biomass feedstock readiness can be certified as “high availability and low risk”. There are thousands of these areas around the country. State economic development organizations are already set up to leverage BD Zones to de-risk project development and drive investment.
BDO Zones are BD Zones that overlap with existing federal Opportunity Zones and can therefore qualify for powerful OZone tax incentives. BDO Zones have supercharged potential for bioeconomy development and related employment.
A relatively minor clarification of OZone Guidance would unlock billions of development dollars for bioeconomy manufacturing plants that are built in BDO Zones.

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It’s our biomass: our wood fiber, our wheat straw, our corn stover, our food waste—even our MSW.

And when we deploy this largely untapped asset to manufacture alternative fuels, renewable chemicals, bio-based products and sustainable aviation fuels, it becomes a job creation engine, supports energy independence, and drives economic stability– particularly in rural America.

In order to win this war, we need to weaponize this enormous asset to fuel the recovery.

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USDOE values direct impacts at 1.1 million jobs and $259 billion. USDA estimates direct and indirect economic benefits using conservative multipliers at 3.4 million jobs and nearly $660 billion.

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Bioeconomy Development (BD) Zones and Bioeconomy Development Opportunity (BDO) Zones are two complimentary initiatives that can do this, and do it fast.

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(T)hey do this using validated standards, established economic development approaches and by leveraging one of the largest federal tax incentives in US history: Opportunity Zones.

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The only barriers to putting these initiatives to work is government red-tape and a plan to execute.

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Step 1: Designate BD Zones

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Certified Industrial Site-Readiness Programs.[i] Most states have them because they work. Site Certification is one of the most effective tools state economic development professionals use to create a competitive advantage in successfully locating significant manufacturing operations. We do not have this kind of tool for the development of bioeconomy projects — but we should.

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we need to designate geographic zones across the country that are ideal for bio-project development; areas where feedstock readiness can be certified as “high availability and low risk”. We call these Bioeconomy Development Zones. BD Zones will be certified according to three main criteria:

Large surpluses of biomass;[ii]
Low-risk supply chains to deliver it;
Suitable infrastructure to support bio-plant operation.

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Government should set the certification requirements for BD Zones using existing standards that pertain to feedstock risk and quickly set up a task force to approve nominations as ‘certified BD Zones’.

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The Framework for Biomass Supply Chain Risk (BSCR) Standards is a standardized transparent protocol developed over the past 4 years ....

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It enables the quantification and risk rating of over 126 Feedstock Risk Indicators developed specifically to de-risk investment for the capital markets and can easily be modified to rate high level feedstock risk for BD Zones.

Certification of BD Zones could be carried out by an independent Biomass Rating Agency ....

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Step 2: Clarify OZone Guidance and Designate BDO Zones

The Opportunity Zone Program is an untapped engine for making the bio-economy a key component of the economic recovery. By combining the benefits of BD Zones with tax incentives, we can create supercharged potential for bioeconomy development, related employment and economic recovery.

There are 8,764 OZones located in distressed communities across the country. Not all Opportunity Zones overlap with BD Zones, but those that do could easily be eligible for existing OZone tax incentives. Where there is overlap, there is opportunity. We call these overlapping regions Bioeconomy Development Opportunity Zones or simply, BDO Zones ....

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The latest round of revised OZone Guidance issued by Treasury and the IRS made clear that green energy projects can qualify for OZone tax treatment.[vi] Already, there has been over $46 billion invested in 209 Qualified Opportunity Funds (QOFs) with 16 QOFs designated for clean energy- primarily solar. But there are no QOFs yet for investment into the bio-sectors.

The reason is that Ozone Guidance still does not make clear to bio-investors and developers that investment in OZones will definitely qualify for Ozone tax incentives. For the bioeconomy to be a major pillar of the economic recovery, this needs to change.

We believe that a relatively minor clarification to the OZone Guidance that spells out how bio-projects located in OZones could qualify for OZone tax incentives would unlock billions of development dollars for bioeconomy development in BDO Zones.

Clarifications to OZone guidance are made by US Treasury and the IRS under IRC 1400Z-2. New OZone guidance must take into account the characteristics of bio-economy projects. For example, biomass supply chains are typically 50 – 75 miles from the plant: BD Zones typically cover an area that stretches 7,800 – 17,600 square miles or more. If an advanced biofuel plant locates inside an OZone and derives most its revenue within the OZone, but creates a significant portion of its jobs outside the OZone, will it qualify for OZone tax incentives? New guidance from Treasury must be issued to make the answer clear—and the answer needs to be ‘yes’.

This guidance clarification would enable bio-development within BDO Zones to tap the three separate yet related tax inducements[vii] under the OZone program:

Temporary deferral of taxes on previously earned capital gains.Existing assets with accumulated capital gains are eligible for investment in Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or at such time as the asset is disposed of
Basis step-up of previously earned capital gains invested.For capital gains placed in Opportunity Funds for at least 5 years, investors’ basis on the original investment increases by 10 percent. If invested for at least 7 years, investors’ basis on the original investment increases by 15 percent.
Permanent exclusion of taxable income on new gains.For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds.

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However, the relatively small pool of investors with tax liabilities to offset pales in comparison to the enormous size of the pool of investors with capital gains to offset. What’s more, these investors may be willing to accept lower pre-tax economic return, since the potential for a tax-free exit will enhance the after-tax return considerably. Capital invested in BDO Zones therefore not only reduces transaction costs, but also expands the investor base for bioenergy projects.[viii]

For a growing bio-economy, equity investment is key. For equity investors or venture firms, which tend to make many small, risky bets with the hope that a few will be blockbusters, investing in BDO Zones can carry unbelievable gains.

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At its base, then, the OZone program functions as a flexible, market-driven model that harnesses the power of financial intermediaries such as private equity firms, banks, investment banks and venture capitalists, thereby minimizing the dangerous and high-risk role for the government in selecting and capitalizing projects.

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3 Recommendations to Government

Form a Bio-Economy Recovery Task Force comprised of USDA Rural Development and Agriculture Research Service (ARS), State Economic Development, Los Alamos and Idaho National Labs, Ecostrat, capital market investors and industry organizations to recommend initiatives that decrease barriers to investment in the bio-economy and to accelerate bio-based job creation, especially in rural areas.
Allocate recovery funds to programs that directly and indirectly support bioeconomy job creation. Part of these funds should be used to set up guidelines with state economic development agencies to designate BD Zones, and help stand up a new US Biomass Ratings Agency to use the Standards for Biomass Supply Chain Risk to certify ‘investment-ready’ BD Zones and BDO Zones across the country.
Cut through the red-tape and approach US Treasury to clarify OZone Guidance to make clear that bioeconomy investment qualifies for OZone tax treatment.

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[i] https://siteselection.com/issues/2012/may/sas-shovel-ready-sites.cfm;

https://www.miplace.org/redevelopment-ready-sites/

https://www.iowaeconomicdevelopment.com/business/certifiedsites

[ii] Likely, a minimum of 100,000 BDMT surplus per yr within a 2-hour drive-time distance of any point of the BD zone.

[iii] www.ecostrat.com/standards/participants

[iv] www.ecostrat.com/standards

[v] Certain locally underused categories or species could be designated such as hardwood or poplar.

[vi] https://www.greenbiz.com/article/opportunity-zones-could-provide-major-boost-clean-energy-sustainable-development

[vii] https://on360.ca/policy-papers/opportunity-zones-an-opportunity-for-ontario/#_ftn11

[viii] https://www.jdsupra.com/legalnews/investments-in-renewable-and-22066/

Other References

Bioeconomy Research Associates, US Economic Impact of Advanced Biofuels Production: Perspectives to 2030. [Online]. Bioeconomy Research Associates (2009). Available at:

https://www.bio.org/sites/default/files/legacy/bioorg/docs/EconomicImpactAdvancedBiofuels.pdf

https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

Research Report No. ERR‐159, 53 pp USDA (2013). Available at: http://www.ers.usda.gov/publications/err‐economic‐research‐report/err159.aspx#.UugtsRAo5pg

DigestConnect #10 - Bioeconomy Development Zones -- We are joined by Jordan Solomon of EcoStrat, Scott Chabina of Chabina Energy Partners, Max Vernier, of Live Oak Bank, Kate Lewis of USDA BioPreferred, Mark Riedy of Kilpatrick Townsend and Tom Hicks of The Mabus Group as we look at a supercharged potential for bioeconomy development, employment and recovery. WATCH VIDEO

BD Zones and BDO Zones: The Digest’s 2020 Multi-Slide Guide to Weaponizing Biomass for a Bio-fueled Recovery (Biofuels Digest)