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Biofuel boondoggle: US subsidy aids Europe's drivers

A maneuver called 'splash and dash' cost US taxpayers perhaps $30 million last year, but the charges are rising fast.

By Staff writer / June 8, 2007

Fast-rising worries over global warming have created a biofuel boondoggle.

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Called "splash and dash," "touch and go," or an unfair trade practice, it features biofuels traders who exploit a US tax credit, European drivers who get cheaper diesel fuel, and American taxpayers, who are footing the bill.

It also illustrates a cautionary tale of how government incentives, no matter how well-intentioned, can sometimes be subverted into windfalls for the few.

"You have US taxpayers providing a very nice tax incentive, and they're not receiving any energy-security benefit or added fuel to the marketplace or benefits to US development in return," says Joe Jobe, chief executive officer of the National Biodiesel Board, which represents US biodiesel producers.

So far, the subsidies involved are relatively small – conservatively estimated at $30 million last year – but they're rising fast. And while efforts to close the loophole are under way in Congress, they're complicated by competing interests.

Created under the 2004 American Jobs Act, the "blenders tax credit" was supposed to boost US production of biodiesel by encouraging US diesel marketers to blend regular petroleum diesel with fuel made from soybeans or other agricultural products. It succeeded, perhaps too well.

Attracted by the $1-per-gallon subsidy, US diesel-fuel marketers mixed away, setting off a nationwide boom in biodiesel refinery building. But no one anticipated splash-and-dash.

The maneuver begins with a shipload of biodiesel from, say, Malaysia, which pulls into a US port like Houston, says John Baize, an industry consultant in Falls Church, Va. Unlike domestic diesel-biodiesel blends, which typically contain from 1 to 10 percent of biodiesel, the Malaysian fuel starts off as 100 percent biodiesel, typically made from palm oil.

Then, the vessel receives from a dockside diesel supplier a "splash" of US petroleum diesel. It doesn't take much to turn it into a diesel-biodiesel blend that is eligible for US subsidies.

If the ship holds roughly 9 million gallons, it takes only about 9,000 gallons of traditional diesel (0.1 percent of the total) to make the entire load eligible for the blenders tax credit.

The US importer of the load applies to the Internal Revenue Service for the credit – a dollar for each of the 9 million biodiesel gallons, Mr. Baize calculates. The next day the tanker can set sail – dash – for Europe. There, the US importer resells the biodiesel, taking advantage of European fuel-tax credits that, in effect, keep biodiesel prices above US prices.

"Splash-and-dash is something Congress never intended," says Baize. "It's bad for taxpayers and it ought to be fixed now."

Signs of splash-and-dash began to show up last fall. But efforts to fix the problem only began taking shape in Congress this spring after European biodiesel manufacturers complained in March about the subsidized imports and the US biodiesel industry also complained a month later.

"This [splash-and-dash] is something our people are aware of and that's on their radar screen," says a staff aide on the House Ways and Means Committee, who requested anonymity because he was not authorized to speak to the press. "It's one of the issues that's driving closer scrutiny."

European officials are also unhappy about the practice. Such "touch and go" maneuvers could quickly become a much larger problem, warned Raffaello Garofalo, secretary general of the European Biodiesel Board, in a March 19 letter to the European Trade Commissioner.