Editorial: A biodiesel trade fight

May 11, 2009
The US has evoked trade retaliation from Europe with a program most Americans would be shocked to learn involved international commerce.

The US has evoked trade retaliation from Europe with a program most Americans would be shocked to learn involved international commerce. The affair shows how governmental meddling in energy markets yields perverse consequences. There will be other such lessons.

US taxpayers US subsidize biodiesel—a methyl ester made from agricultural materials—with a tax credit of $1/gal and mandates. They believe doing so supplements fuel supply and helps the environment. Those who bother to check the numbers probably derive satisfaction from reports that their country produced 700 million gal of biodiesel last year, tiny though that volume is relative to total diesel consumption.

But how many Americans know that their tax generosity has largely benefited biodiesel produced and used elsewhere?

Production surges

The Renewable Fuel Standards program established by the Energy Policy Act of 2005 mandated a volumetric biodiesel component in diesel sold in the US. The requirement is 500 million gal this year and will rise to 1 billion gal in 2012. The tax credit, mandate, and rising fuel prices made biodiesel production surge in the past 4 years. But something else happened at the same time, reports the Energy Information Administration.

“Much of the increase in production in 2007 and 2008 was not consumed within the US but was exported because of incentives provided by the biodiesel tax credit,” EIA said in an Apr. 22 report. That subsidy, called the blender tax credit (BTC), initially applied to all biodiesel blended with diesel, “regardless of where it was produced or consumed.” The loophole created a business called “splash-and-dash.” Practitioners could bring a cargo of biodiesel produced abroad to the US, add a small amount of US diesel to exploit the BTC, and export the blend.

The imported biodiesel came from Asia and Latin America, EIA reports. Annual volumes rose from 4 million gal in 2004 to 315 million gal in 2008. US exports of biodiesel meanwhile jumped from 5 million gal to 677 million gal, mostly to Europe.

Noting the unintended consequence of its market dalliance, Congress ended BTC eligibility for imported biodiesel when it passed the Emergency Economic Stabilization Act of 2008, which extended the subsidy through the end of this year. But biodiesel produced in the US and exported still receives the benefit.

Europe, where countries subsidize their own biodiesel businesses, is fighting back. In March, the European Commission imposed temporary countervailing duties on US biodiesel. “This decision was taken on the basis of clear evidence that unfair subsidization and dumping of US biodiesel has taken place and that this is harming otherwise competitive European industry with potentially dire long-term effects,” it said.

The temporary duties will be in effect for 4 months and can be followed by definitive duties, which normally last 5 years. An EC investigation found that US biodiesel accounted for 17% of the European market during April 2007-March 2008.

Deterioration of export economics slams a US biodiesel industry reeling from surges in the price of soybeans, the primary feedstock, followed by plunges in the price of diesel. The business is choking on overcapacity. Many producers have gone bankrupt. Biodiesel subsidies seem mainly to have helped operators savvy enough to spot arbitrage opportunities in US tax laws.

Energy businesses created and sustained by governments always turn out this way. Markets outmaneuver official expectations. Subsidized businesses enthusiastically overbuild capacity and need ever-increasing help. Energy targets go unmet. Opportunists find loopholes and make money. Taxpayers spend too much money on too little energy.

Increment of inefficiency

US biodiesel subsidization isn’t large in volume or dollar terms relative to the energy market or the federal budget. It is nevertheless an increment of inefficiency, one blob in a belly of fat swelling as the government gorges the economy on energy wholly dependent on taxpayers. Now it’s the cause of a trade battle.

The US and its trade partners should become accustomed to this kind of thing. Congress and the Executive Branch show no sign of recognizing the perverse results of their energy misjudgments. US taxpayers can expect energy disappointments and rising costs.