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Image Source: Solazyme.

It hasn't received much national attention, but Iowa is set to pass a bill that would create the nation's first tax credit for renewable chemical production, not unlike the national mandates that exist for renewable fuels manufacturers. It makes perfect sense for the state: Iowa is an agricultural powerhouse that can reliably supply endless streams of cheap sugars to renewable chemical platforms. In the same way petrochemical manufacturers "upgrade" petroleum derivatives to higher value chemicals, industrial biotech companies can "upgrade" low-cost sugar to higher value chemicals; in many cases the exact same chemicals sourced from petroleum. The Corn Belt is America's version of Brazil's sugarcane fields.

On paper, the bill looks to be a catalyst for renewable oils manufacturer Solazyme (NASDAQ: SZYM), which produces a range of renewable chemicals at a leased facility in Clinton, Iowa. But while the introduction of a renewable chemical tax credit is a great start, Iowa's bill lacks flexibility and falls well short in providing meaningful support for spurring biobased chemicals production.

Iowa Senate Bill SF 350
The proposed Renewable Chemical Production Tax Credit Program should be passed into law before the end of the year and, as currently written, would be retroactive to Jan. 1, 2015. That means Solazyme would gain an unexpected revenue stream from production at Clinton this year, although it would be nearly negligible. Consider the important details of the proposed program and how it would affect Solazyme:

Tax Credit Program Rule

How It Affects Solazyme

Fuels, human food, and animal feed are excluded.

That excludes renewable fuels, AlgaVia food ingredients, and any potential animal feed co-products. Encapso drilling lubricants and other intermediates are eligible.

Eligible renewable chemicals must contain at least 50% biobased content.

Industrial biotech companies produce chemicals with 100% biobased content. This could affect other compounds where renewable chemicals are only part of the end product, such as those in the recent deal with BASF, but Solazyme's supply should qualify without many exceptions aside from above exclusions.

Tax credit awards $110.23 per metric ton of renewable chemical, regardless of chemical.

The tax credit would help to lower Clinton's production costs. If current production costs are $3,000 per metric ton the tax credit would reimburse Solazyme nearly 4% of its expenses.

Businesses in operation (in Iowa) for five years or less can receive a maximum tax credit of $1 million per year. All others can receive a maximum tax credit of $500,000.

This is the real bummer. Solazyme would only be eligible to receive tax credits on just 9,100 MT of eligible production for the next few years, which would drop to 4,550 MT after the company's five-year anniversary in Iowa. Clinton has an annual nameplate capacity of 20,000 MT.

Iowa will allocate no more than $15 million to the program in a single fiscal year.

Given the limits listed above this has little relevance to Solazyme. But it means that only the first 136,000 MT of renewable chemicals production in the state is eligible for tax credits.

Source: Iowa Senate Bill SF 350.

Again, this is a good start, but it simply isn't enough. While it's understandable why renewable fuels are excluded from the program (they have their own tax credit programs), there should be more flexibility for human food ingredients and animal feed. Novel production systems and products -- such as Solazyme's AlgaVia portfolio, or industrial biotech companies looking to make more sustainable fish feed -- should be eligible for tax credits, too, whereas "standard" food products and vegetable oils should be excluded.

Similarly, the monetary limits are understandable since Iowa, a single state, has to support the entire program. There also may not be 136,000 MT of eligible renewable chemicals production at the moment, which means the state could increase limits as the industry expands.

These limitations demonstrate why a renewable chemicals production tax credit is needed at a national level. A quick look at how Uncle Sam created the world's leading renewable fuels industries shows a glimmer of hope.

Looking to the Renewable Fuel Standard
In 2005, the United States passed the first edition of the Renewable Fuel Standard, or RFS, which required specific volumes of renewable fuels to be blended into the national ground-based transportation supply of petroleum-derived fuels. Importantly, the RFS also allowed renewable fuel manufacturers to collect tax credits in an attempt to support the nascent industry in its early years of life. The program isn't perfect and first-generation blendstocks such as ethanol and biodiesel aren't the best fuels we could make, but there's no debating the mandate was a wild success.

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Source: Energy Information Administration, chart created by author.

You can zoom out even further to get an appreciation for just how quickly the nation became the world's leading ethanol producer -- all thanks to tax credits and crops improved with biotechnology.

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Source: Energy Information Administration, chart created by author.

A national renewable chemicals tax credit would help to spur the domestic industrial biotech sector -- and attract international manufacturing companies to the Corn Belt -- to produce everyday chemicals through more sustainable, climate-friendlier practices.

What does it mean for investors?
While Solazyme will benefit from Iowa's Renewable Chemical Production Tax Credit Program should it become law, the company's current production levels and product mix wouldn't allow it reap the full $1 million it's eligible for in 2015. It could affect the company's near-term strategy in 2016, however, since there could be production cost advantages to manufacturing Encapso at Clinton instead of at a larger facility in Brazil. But Solazyme will mostly miss out on the program -- and you can blame Iowa for that.

For now, this is an interesting potential mini-catalyst for Solazyme (I see no reason why the bill will not become law this year), although I will remain on the sidelines until production costs begin to fall and product demand picks up. The Renewable Fuel Standard provides a glimpse into what the United States could do to spur renewable chemical production in the long term. Hopefully that is sooner rather than later.

Maxx Chatsko has no position in any stocks mentioned. The Motley Fool owns and recommends Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.