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Back To Diesel Products>US Biodiesel: The Never-ending Subsidy Story

By Russ Finley

February 3, 2010

In 2004 the US Congress created a $1 per gallon blenders' tax credit for biodiesel that was slated to expire in 2006. But in 2005 it extended the tax credit through the end of 2008 and, before that year was up, extended it again, through 2009.

Predictably, last autumn, legislation was introduced to extend the tax credit for yet another year, through 2010. The bill passed the US House of Representatives but stalled in the Senate. Consequently, since 1 January 2010, a number of biodiesel operators, unable to find buyers for their product at a cost price, have suspended operations.

Currently, the US biodiesel industry is estimated to be operating at only 15 percent of its rated capacity. That percentage would undoubtedly be even smaller if it were not for the subsidies and tax exemptions still provided by a number of states, and for the various government mandates (state as well as federal), that continue to force the blending of biodiesel into the nation's fuel supply regardless of cost. Because taxpayers cannot opt out of buying a blended fuel, mandates allow blenders to pass on at least some of their costs to consumers, creating a de facto subsidy via a captive, artificial market.

The Energy Independence and Security Act of 2007, which created a specific mandate for biodiesel, left open a glaring loophole - ironically, one that Congress was in no hurry to close. Although (as its title attests) this act was passed ostensibly to reduce American dependence on foreign oil, it did not disallow the export of subsidized biofuels.

American producers of biodiesel were quick to capitalize on this loophole and were soon exporting a majority of their product to Europe, where it fetches a higher price than in the United States, thanks to the partial exempting of biodiesel from fuel taxes in many countries, and the edge that the dollar-per-gallon blending credit gave US producers over their European rivals. This practice was ended in March 2009, when the European Commission imposed anti-dumping and countervailing duties on imports of US biodiesel.

The US biodiesel policy is a prime example of how government subsidies and mandates can turn a rational market into a nonsensical, confused, unpredictable, spiral of waste, all at the expense of taxpayers and investors. And when I say investors, I'm not just referring to venture capitalists who fully understand and accept the risks. I live in Seattle. At the height of the biodiesel craze, the City of Seattle Employee's Retirement Fund invested $10 million in the largest biodiesel refinery on the West Coast, which shortly thereafter stopped production when its operating capital ran out. Thanks in large part to local State government purchases to meet previously legislated mandate deadlines, the plant started producing biodiesel again in 2009 for a brief period until an untimely explosion shut the refinery down ... again.

The investment in this industry, and the attendant loss to the economy by its failure, would have been small to non-existent without the government attempting to pick winners for its consumer-citizens. Competing within the rules set by government is what markets do best. Government is analogous to a referee on a football field. Referees exist for a reason, and it isn't to decide who gets to win.

The industry is, not surprisingly, lobbying to re-instate the blenders' credit, arguing that it invested in good faith that government support would continue. Did they not know exactly when the tax credit was slated to end? Were they not gambling as entrepreneurs in assuming that it would be continued?

Many insiders are predicting that legislation to extend the biodiesel tax credit will eventually be passed, and made retroactive to any biodiesel sold since the beginning of the year. That might make sense if there were any real prospect for biodiesel made from the chemical transformation of virgin vegetable oils becoming economically viable without subsidies. There isn't.

The technology for making biodiesel is already mature; its production costs, more than 70% of which are determined by feedstock costs, are unlikely to decline. Volatility in the markets for vegetable oils and petroleum products may mean that, for brief periods, biodiesel may become competitive with diesel. But biodiesel producers compete with food processors for the same feedstocks, and as demand for them increases so does the price. The prices of vegetable oils are also closely linked to the price of fossil fuels, thanks to modern agriculture's dependence on them for everything from pesticides and fertilizers to transport and processing. In the summer of 2008, when food riots were occurring around the globe, biodiesel made from soy oil was selling for $6 per gallon in Seattle while regular diesel was selling for $4.

High prices for petroleum fuels are, in any case, making more of a dent in fuel consumption and greenhouse gases than biodiesel ever did, helping encourage conservation and the development of new, energy-saving technologies in transport.

Congress should resist calls to extend the life of the blenders' credit, and let this never-ending story come to an end.

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