A provision meant to encourage the production and use of biodiesel included a loophole that is causing trade friction with Europe and consternation in the United States. However, Congress may be moving toward closing the loophole once and for all.
It's called "splash and dash." In 2004, Congress passed a provision providing a tax credit for biodiesel that is blended with regular diesel fuel. This provision was to expire in 2006, but was extended to 2008 as part of the Energy Policy Act of 2005. The federal excise tax credit amounted to a 1 cent per percent of biodiesel blended with petroleum diesel. B2 would receive a 2-cent credit while B99 would get a 99-cent credit. This credit is applied to biodiesel blends exported to other countries as well as to the fuel consumed in the United States.
European Union (EU) countries started to notice biodiesel being imported as a B99.9 blend. That is, about 1,000 gallons of petroleum diesel were added to every million gallons of biodiesel. That small "splash" of petroleum diesel, if added to a tanker of biodiesel from, for example, Malaysia, in a U.S. port, would qualify the entire shipment for the U.S. tax credit. After getting the credit, the tanker could continue to Europe-the "dash"-and receive European fuel tax credits. In effect, the fuel would be subsidized once by U.S. taxpayers and again by the Europeans.
The European Biodiesel Board (EBB) made an official complaint in March to Peter Mandelson, commissioner of trade for the European Commission asking that action be taken against B99 import. The complaint stated that B99 imports had reached 30,000 metric tons a month in January 2007. "In most EU countries, EBB member companies are experiencing dumping competition from B99 blends which are offered in the market as pure biodiesel with a substantial discount in some cases going from 100 to 150 euros per [metric ton]," the complaint reads. "The competition is price setting and is progressively disrupting the margins of EU biodiesel producers, putting out of business many EU biodiesel producers who are already confronting important market difficulties because of the late implementation of EU biofuels legislations in many EU countries and subsequent industrial overcapacities."
One company, World Energy Alternatives LLC, is reported to have been shipping more than 1 million gallons of biodiesel per month to Europe since February.
A report by the U.S. Department of Agriculture's Foreign Agricultural Service (FAS) cited information from the German Biofuels Industry Association claiming that in Germany, B99 blends from the United States were being offered for sale at €53.25 per 100 liters ($2.78 a gallon) while the German cost of production for biodiesel was €64 per 100 liters ($3.34 a gallon).
As a result, the EBB forecast that growth in the European biodiesel industry would stagnate in the coming years after seeing annual growth of between 30 percent and 65 percent for the past five years. There are 185 biodiesel plants operating in the European Union and 58 plants are under construction. In 2007, capacity for biodiesel production in Europe is expected to reach 10.2 million metric tons.
The FAS report cited the case of Campa AG, one of the top 10 biodiesel producers in Germany. The company stopped producing biodiesel in its existing 45 MMgy plant in Oschsenfurt. Campa also put plans for construction of a 60 MMgy plant in Straubling on hold, and will only build an oil extraction facility on the site. "Campa managers cite the competition of imported B99 as the major driver behind this decision," the report states. "At a market price for rapeseed oil at 600 euros per metric ton, it is more profitable to export the rapeseed oil to the U.S. and import biodiesel, which benefits from the U.S. blenders credit, than producing biodiesel from rapeseed oil in their own plant."
Closing the Loophole
It seems likely that the splash and dash loophole will be at least partially closed by Congress in the near future. The Energy Bill now before Congress would close the loophole by requiring that biodiesel be produced and consumed in the United States in order to qualify for the tax credit. The bill was passed by the House of Representatives in August and is under consideration by the Senate.
Section 888; subsection 5 (A) of the version of the Energy Bill adopted by the House of Representatives reads: "No biodiesel credit shall be determined under this section with respect to any biodiesel unless such biodiesel is produced in the United States for consumption in the United States or is entered into the United States for consumption in the United States."
Succeeding sections strip the credit for biodiesel blends not meant for consumption in the United States and for biodiesel specifically destined for export. There is an exception prohibition on exports for small "agri-biodiesel" producers as determined by the secretary of agriculture. The exemption is limited to biodiesel produced in the United States.
The National Biodiesel Board (NBB) supports these provisions in the Energy Bill, says Manning Feraci, the board's director of governmental affairs. "When it comes to splash and dash we want to shut it down," he says. "You can't justify it from an energy policy perspective. You can't justify it from a tax policy perspective. It's not a practice that the NBB supports or endorses. We want to work with Congress to stop that practice. It clearly wasn't the intent [of the original legislation]. Being able to export to markets is a different matter."
As Congress headed into its August recess, the Energy Bill was being considered by the Senate. The primary mark up of the bill is taking place in the Energy Committee. However, the tax provisions of the bill are being considered in the Finance Committee. According to Feraci, the Finance Committee's version of the tax portion of the bill failed to get the necessary votes needed so work on the bill will continue when Congress reconvenes. "They are kind of in a holding pattern on the tax title of the bill, which is where [splash and dash] is being dealt with," he says. "What happens-and this is Senate procedure, which is always a very fun topic-is that while the bill was on the floor the Senate marked up and passed out of committee an energy tax bill. That bill was offered as an amendment. Under Senate rules an amendment has to get 60 votes for cloture, basically to stop debate and come to a final vote on the tax title. When they offered the amendment, it came up short."
While Feraci thinks some sort of energy legislation will pass the Senate, he isn't sure what it will look like or how it will get there. "What the Senate is going to do with [the Energy Bill] I don't think has been decided yet," he says. "They could take up the House bill and strike out the enacting clause and try and do a tax amendment to it or they could just send it to the conference committee without a tax title and basically just adopt the Finance Committees version of the tax title. I wish I could tell you exactly how it was going to transpire. I just don't think that decision has been made yet."
The most far-reaching aspect of the legislation could be a provision in the House bill that would make the revocation of the excise tax credits retroactive to the implementation of the 2004 legislation. That is, all the companies who received the tax credit for biodiesel bound for export will have to pay back the credits they received. The version produced by the Senate Finance Committee would only end the credit for future exports.
The NBB, along with other renewable energy organizations, is pressing the Senate to adopt the energy tax provisions because along with splash and dash prohibition, the title would also include provisions such as an extension of the biodiesel tax credit beyond 2008. "This bill as a whole is very important," Feraci says. "We think the chances of it getting done in a timely manner are better if the Senate is able to adopt this amendment. It's kind of up in the air now in terms of how or when or if that is going to happen."
Jerry W. Kram is a Biodiesel Magazine
staff writer. He can be reached at jkram@bbibiofuels.com or (701) 746-8385.