Biofuel boondoggle: US subsidy aids Europe's drivers

European manufacturers are worried about all US biodiesel imports – not just the splash-and-dash variety – because the subsidized fuel is flooding their markets, cutting into their domestic biodiesel business and lowering prices.

"We want really to get a fair trade and want this unfair subsidy to stop," says Mr. Garofalo in a phone interview. "The US products get subsidies in the US, and in Europe, a double subsidy."

The industry is calling for trade sanctions against the US.

So rich is the US subsidy, however, and awash in biodiesel is the European market at present, that a third form of imported biodiesel is now reportedly hitting European shores – at US taxpayer expense. European biodiesel producers themselves are shipping fuel to US ports to get the US blenders credit and then bringing it back to Europe for sale, according to British press accounts.

But US biodiesel manufacturers and Congress may not be in a hurry to close the loophole, some insiders say. That's because the blenders credit not only benefits splash-and-dash traders, it gives US producers of soybean-based biodiesel a distinct export advantage, industry insiders say.

"The US biodiesel producers talk out of one side of their mouth and then the other, because some of their members are clearly benefiting from this credit," says one veteran industry expert, who asked not to be named because such comments could harm his business prospects. "It's their own members importing a lot of that palm oil and biodiesel."

Indeed, congressional staffers say a legislative solution is snagged at present.

"There are trade issues involved in solving this problem," says a committee aide who asked not to be named because of the issue's political sensitivity. "The tax people want to go after it, but the trade people say you can't and I don't know precisely why that is."

Mr. Jobe, however, says his US biodiesel trade association remains committed to stopping abuse of the blenders credit loophole "to the extent that it is occurring."

So far, the amounts involved look relatively modest. Although there is no official IRS tally of how much US taxpayers have spent on this program, the US Department of Agriculture does track exports of US vegetable and animal oils, a category that is mostly biodiesel, experts say. In one year, those exports quadrupled – from about 9 million gallons in 2005 to 36 million gallons last year. If biodiesel accounted for 80 percent of the total, analysts calculate that taxpayers would have paid out about $30 million in 2006.

This increase is corroborated by the European Biodiesel Board, which has tracked 50-plus shipments from the US to Europe totaling about 60 million gallons in the first four months of this year. Most of those shipments originated in Houston; Savannah, Ga.; or New Orleans and arrived in the ports of Rotterdam, Netherlands; Bilbao, Spain; or Hamburg, Germany, Garofalo says.

Ultimately, this rise of US exports points to a larger American problem: a serious imbalance between domestic biodiesel production capacity and demand, some experts say.

Although biodiesel sales in the US soared to 250 million gallons last year – more than triple the level in 2005 – domestic biodiesel plants are still operating at just half their capacity, industry analysts say. That's because the industry, spurred in part by the blenders credit, has been on a tear building new plants. Another 1 billion gallons of capacity is expected to come on line this year.

Renewable-fuel standards that mandate biodiesel blending may one day boost US domestic demand. Until then, the US industry seems set to depend more on exports – and the blenders tax credit, industry experts say.

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