Statement of Lubrizol Corporation, Wickliffe, Ohio

The Lubrizol Corporation of Wickliffe, Ohio, hereby submits the following comments requesting a change in the Federal excise tax imposed on certain diesel fuel formulations. Such a change would provide equitable tax treatment for a more environmentally-sound fuel formulation.

I. Overview

Diesel fuel is the primary fuel used by trucks and buses. It is an efficient fuel, but one that emits air pollutants - nitrogen oxides ("NOx") and particulate matter ("PM"). The Federal excise tax on diesel fuel is 24.4 cents per gallon. To reduce tailpipe emissions of NOx and PM, some marketers are beginning to mix commercial, on-highway diesel fuel with a significant amount of water and a small amount of additive to produce water-diesel fuel emulsions.

Taxation of such emulsions at the diesel fuel rate places their users at a competitive disadvantage and discourages the use of this environmental-enhancing fuel. Congress should redress this inequity.

II. Water-Diesel Fuel Emulsions

A. Emulsions

Chemical engineers for years have been able to mix water and diesel fuel. However, creating a stable emulsion is difficult because the water and the diesel fuel never combine chemically: the two fluids separate, and the water sinks to the bottom. Recently, chemical additives have been developed that can maintain emulsions of water and diesel fuel for several months, even though the fluids do not combine.

Water-diesel fuel emulsions generally contain approximately 77 percent diesel fuel by weight, 3 percent additives and 20 percent water. ⁽¹⁾ The diesel fuel and the additive (80 percent by weight of the emulsion) are the energy-generating components of the fuel. Water provides no energy and, of course, cannot propel a vehicle. It is estimated that a gallon of a water-diesel fuel emulsion has about 80 percent of the energy content of a gallon of diesel fuel.

B. PuriNOx™ Water-Diesel Fuel Emulsions

Under one such technology, PuriNOx™, the water, diesel and a small amount of chemical additive are placed in a special unit that elongates the water molecules and breaks them into very small droplets. The chemical additive then attaches to the droplets. It prevents the water from coming in contact with any metal components of a vehicle's engine - avoiding corrosion, and it inhibits the droplets from coalescing and forming larger drops that would eventually settle out of the emulsion. Without further processing, the water droplets remain suspended in the diesel fuel. Adding water to diesel fuel has significant environmental benefits. It: (1) lowers the combustion temperature of the fuel, thereby reducing NOx emissions by up to 30 percent, and (2) delays combustion of the fuel, thereby reducing PM emissions by up to 50 percent.

The PuriNOx™ emulsion can be dispensed and burned in both old and new trucks and buses just as conventional diesel fuel. It does not require engine modification or complex maintenance of the fuel in storage.

III. Unfair Tax Treatment

A. Tax "Above the Terminal Rack"

The water displaces approximately 20 percent by weight of the fuel in a water-diesel fuel emulsion without supplying 20 percent of the energy value. Users of the lower-energy content water-diesel fuel emulsion must purchase more gallons to drive the same number of miles. Thus, if water-diesel fuel emulsions are taxed at the diesel rate of 24.4 cents per gallon, users would unfairly pay 20 percent more tax than users of conventional diesel fuel.

The Federal excise tax is dedicated to the Highway Trust Fund. A basic principle of highway taxes is that users of the highway system should be taxed in relation to their use of that system. Thus, the tax rate should be reduced on water-diesel emulsions by 20 percent to reflect their energy equivalence. Users of conventional diesel fuel and users of water-diesel fuel emulsions would then pay the same amount of tax to travel the same distance. There is ample precedent for such action. ⁽²⁾ In 1997, Congress reduced the tax rates on several special fuels including propane, liquefied natural gas, and methanol derived from natural gas, to reflect the energy content of those fuels relative to gasoline. Those fuels had been taxed at the same rate as gasoline, a fuel with which they compete. Users of those special fuels were also paying more tax to travel the same number of miles.

The principle that tax rates should be reduced on water-diesel fuel emulsions to reflect their energy equivalence also has been recognized abroad. There is special tax treatment for water-diesel fuel emulsions in the U.K., France, Switzerland, the Netherlands and Italy. The European Union has authorized its Member States to impose their Federal excise tax only on the percentage of the emulsion that is diesel fuel; the percentage that is water is exempt. This action is based on a recognition that the water component has no energy content. It also recognizes that the emulsion provides significant environmental benefits.

B. Tax "Below the Terminal Rack"

At times, petroleum distributors may wish to add water to diesel fuel and create a water-diesel fuel emulsion after the diesel fuel has been taxed at the terminal rack. Again, addition of the water adds no BTU content and does not propel the vehicle. Thus, there should be no difference in tax treatment regardless of whether the emulsion is created "above" or "below" the terminal rack because in either case the full amount of taxable diesel fuel will have been subject to taxation. "Above the rack," the tax should be set at a rate to reflect the emulsion's BTU content; "below the rack," there should be no additional tax imposed on the water. A new subsection 4041(a)(1)(D) could be added to clarify that "liquid other than gasoline," which is subject to tax under Section 4041(a)(1), does not include water added to diesel fuel to form an emulsion. Such an amendment would ensure consistent treatment throughout the Tax Code.

IV. Conclusion

Accordingly, the Congress should, consistent with its prior action on taxes for special fuels, make the following amendments:

For removals or sales "above the rack":

1. Reduce the tax rate by 20 percent (from 24.4 to 19.5 cents per gallon) to account for the 20 percent water content in water-diesel fuel emulsions by amending Section 4081(a)(2)(A); and

For sales "below the rack":

2. Add new subsection 4041(a)(1)(D) stating that the "liquid other than gasoline" that is subject to taxation under section 4041(a)(1) will not include any water added to diesel fuel after the diesel fuel has been taxed at the point of collection.

These proposals would thus eliminate an inequity within the Tax Code.

Thank you.

1. These quantities vary slightly in winter formulations designed to address cold weather operation.

2. See section 4041(a)(2) of the Internal Revenue Code of 1986, as amended by P.L. 105-34, § 907(a)(1) (reducing the rates of taxation on propane, liquified natural gas, and methanol derived from natural gas).