Biodiesel Backfire
When the government created an incentive to make biodiesel fuel competitive with petroleum diesel, markets responded. A $1-per-gallon tax credit to blend biofuel (based from vegetable or animal fat) with diesel was established in 2004.
According to the U.S. Departments of Agriculture and Commerce, over the next five years, U.S. production of biodiesel rose from less than 100 million gallons to more than 600 million gallons. Over the same period, industry made investments in infrastructure to raise production capacity from 250 million gallons in 2004 to more than 2.5 billion gallons in 2008.
The regulation, known as the Volumetric Ethanol Excise Tax Credit or “Blender Tax Credit,” initially applied to all biodiesel produced or consumed anywhere. It then became profitable for exporters to “splash” just one gallon of conventional diesel into each 1,000 gallons of biodiesel before shipping — or “dashing” — tankers to foreign markets.
The “splash and dash” phenomenon led to growth in U.S. biodiesel exports from 5 million gallons in 2004 to 677 million gallons in 2008. U.S. biodiesel imports grew from 4 million gallons in 2004 to 315 million gallons during the same time.
Meanwhile, more legislation has reversed the outlook for the biodiesel market, and presented challenges to the government achieving targets for its increasing use.
The “splash and dash” loophole ended for exporters to the U.S. in the Emergency Economic Stabilization Act of 2008. However, U.S. blended biodiesel that is blended and then exported remains eligible for the tax credit.
But in an apparent tit-for-tat, in March 2009, the European Union imposed anti-dumping tariffs and anti-subsidy duties on imports of biodiesel from the U.S.
The Renewable Fuel Standard Program, established as part of The Energy Policy Act of 2005, requires that 0.5 billion gallons of biodiesel be blended into U.S.-consumed diesel fuel this year, rising to 1 billion gallons in 2012. The EPA, however, has no regulatory mechanism for implementing this requirement, save for allowing this year’s targeted numbers to rollover into a combined 2009/2010 target, a strategy that sounds a bit like hoping for the best.
Because of the serious challenges facing the U.S. biodiesel market this year, the EIA says it will monitor biodiesel imports and exports, stocks, stock changes and consumption in its various reports more closely.
Published Wednesday, April 29th, 2009 at 7:00 am and filed under Industry News.