Somewhere in Germany, a trucker is thanking you. A biofuel executive is cursing you. You probably don’'t know it, but you paid $1 for each gallon of the Brazilian biodiesel fuel blend the trucker is using. The fuel-maker is upset because your generous contribution is driving down the price at which he can sell his product.
For their elation and disgust, for your impoverishment, and probably for some harm to the environment as well, you can blame the United States Congress. This all results from yet another misguided attempt to manipulate economic behavior through the tax code.
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The problem began when Sen. Chuck Grassley (R., Iowa), the friend of farmers, inserted the so-called “Blenders’ Credit” into the Jobs Act of 2004. The idea was to increase biofuels production and consumption in the U.S., as biofuels were thought to be environmentally friendly and a viable alternative to fossil fuels. The credit provides $1 for each gallon of biodiesel that is mixed with regular diesel in the United States. The provision has not dramatically increased domestic consumption, but it has increased production and exports to Europe’s thriving and subsidized diesel markets.
Under World Trade Organization rules, the U.S. government cannot extend the credit only to American companies or to fuels produced in America. Thus, foreign companies are eligible whenever they bring their biodiesel stateside for mixing. But the limited American market for the fuel has given birth to an unintended consequence known as “Splash and Dash.”
Rep. John Shadegg (R., Ariz.) demonstrated the concept’s simplicity last week by referring to
an article that received little attention when it was published last year. It works like this: A foreign tanker carrying 9 million gallons of biodiesel from Brazil or Malaysia sails to an American port. While it waits, 9,000 gallons of American diesel is added — that’s right, a .1 percent blend — so as to earn the blender a $9 million tax credit. The tanker heads to Europe, where diesel cars are far more common and biodiesel is further subsidized.
In some cases, tankers have reportedly made round trips from Europe to the U.S. simply to collect the subsidy. Thus we “import” and “export” the same fuel from and to the same country.
“Just think of it,” said Shadegg. “If I produce biodiesel anywhere in the world where the cost of shipping it to the United States before shipping it to the end consumer is less than a dollar a gallon, then I’m going to take advantage of this subsidy.”
It is difficult to track the exact cost of Splash and Dash to the U.S. Treasury, but the tax credit's absurd distortion of the market is impossible to miss. According to numbers from U.S. International Trade Commission and the Census Bureau, the United States exported 5.4 million more gallons of biodiesel in January than it produced domestically. This was the first month this has ever happened, and the gap will grow by leaps and bounds in each month of this year, according to industry estimates. In the month of December, America will export twice as much biodiesel as the 27 million gallons we are expected to produce. Based on the 2008 projections, we will re-export at least 51 percent of the 412 million biodiesel gallons we import this year — but possibly much closer to 100 percent. The total subsidy for all exported biodiesel for 2007 and 2008 combined could approach $900 million.
