Category: Economics

As I was doing some research, I stumbled upon an amusing article about biofuel, incentives given to it and the unintended consequence. It is old but the lesson is for all of us to learn for all times.

Fast-rising worries over global warming have created a biofuel boondoggle.

Called “splash and dash,” “touch and go,” or an unfair trade practice, it features biofuels traders who exploit a US tax credit, European drivers who get cheaper diesel fuel, and American taxpayers, who are footing the bill.

It also illustrates a cautionary tale of how government incentives, no matter how well-intentioned, can sometimes be subverted into windfalls for the few.

“You have US taxpayers providing a very nice tax incentive, and they’re not receiving any energy-security benefit or added fuel to the marketplace or benefits to US development in return,” says Joe Jobe, chief executive officer of the National Biodiesel Board, which represents US biodiesel producers.

[…]

Created under the 2004 American Jobs Act, the “blenders tax credit” was supposed to boost US production of biodiesel by encouraging US diesel marketers to blend regular petroleum diesel with fuel made from soybeans or other agricultural products. It succeeded, perhaps too well.

Attracted by the $1-per-gallon subsidy, US diesel-fuel marketers mixed away, setting off a nationwide boom in biodiesel refinery building. But no one anticipated splash-and-dash.

The maneuver begins with a shipload of biodiesel from, say, Malaysia, which pulls into a US port like Houston, says John Baize, an industry consultant in Falls Church, Va. Unlike domestic diesel-biodiesel blends, which typically contain from 1 to 10 percent of biodiesel, the Malaysian fuel starts off as 100 percent biodiesel, typically made from palm oil.

[…]

The US importer of the load applies to the Internal Revenue Service for the credit — a dollar for each of the 9 million biodiesel gallons, Mr. Baize calculates. The next day the tanker can set sail — dash — for Europe. There, the US importer resells the biodiesel, taking advantage of European fuel-tax credits that, in effect, keep biodiesel prices above US prices.

[…]

European officials are also unhappy about the practice. Such “touch and go” maneuvers could quickly become a much larger problem, warned Raffaello Garofalo, secretary general of the European Biodiesel Board, in a March 19 letter to the European Trade Commissioner.

European manufacturers are worried about all US biodiesel imports — not just the splash-and-dash variety — because the subsidized fuel is flooding their markets, cutting into their domestic biodiesel business and lowering prices.

[…]

So rich is the US subsidy, however, and awash in biodiesel is the European market at present, that a third form of imported biodiesel is now reportedly hitting European shores — at US taxpayer expense. European biodiesel producers themselves are shipping fuel to US ports to get the US blenders credit and then bringing it back to Europe for sale, according to British press accounts.

But US biodiesel manufacturers and Congress may not be in a hurry to close the loophole, some insiders say. That’s because the blenders credit not only benefits splash-and-dash traders, it gives US producers of soybean-based biodiesel a distinct export advantage, industry insiders say.

[…]

Ultimately, this rise of US exports points to a larger American problem: a serious imbalance between domestic biodiesel production capacity and demand, some experts say. [Biofuel boondoggle: US subsidy aids Europe’s drivers. Mark Clayton. Christian Science Monitor. June 8 2007]