Biodiesel makers get subsidy as they sell fuel abroad Biodiesel tax break backfires

U.S. producers reap federal subsidy while selling most of the fuel overseas

Federal subsidies to the U.S. biodiesel industry were supposed to help wean the nation from foreign oil, and a new law in 2009 will bolster the effort, but the money has fueled a controversial side business.

Domestic producers of the renewable fuel have been selling huge quantities of biodiesel in Europe and in other foreign markets, where prices are often better, and then receiving a $1-per-gallon tax credit from Uncle Sam.

Biodiesel, made in the U.S. mostly from soybean oil or recycled cooking oil from restaurants, is blended at low levels with petroleum diesel to reduce emissions and reliance on fossil fuels.

Today, American exports of biodiesel represent more than half of domestic output.

Biodiesel's $1-per-gallon subsidy, known as the "blender's tax credit," is available to U.S. companies that blend biodiesel with petroleum diesel and was intended to boost biodiesel production and encourage diesel marketers to buy the fuel.

Exports have helped some biodiesel companies survive a difficult period in recent years, when high costs and a weak U.S. market forced firms to close plants.

But exporting has been criticized as an abuse of a federal subsidy that was presented to the American public as a down payment on a future in which the U.S. would rely less on fossil fuels.

"This is a government boondoggle financed by the taxpayers," said Tom Elam, an agricultural economist with FarmEcon in Carmel, Ind., who estimates biodiesel exports could be costing American taxpayers several hundred million dollars a year.

Texas has more installed biodiesel production capacity than any other state, and several companies along the Houston Ship Channel participate in the export business.

Industry cites benefits

The industry defends exports as a temporary but important practice that has created thousands of "green" jobs and helped build a domestic infrastructure to make the fuel.

In 2009, a new energy law will require blending of 500 million gallons of biodiesel into the nation's fuel supply, growing to 1 billion gallons by 2012.

"It is reasonable to assume that the vast majority of U.S. production will be needed to meet domestic use requirements," said Manning Feraci, vice president of federal affairs at the National Biodiesel Board, a trade group based in Jefferson City, Mo.

For now, however, the business of exporting the renewable fuel is still going strong.

Through August, the nation's biodiesel exports hit 511 million gallons, with most of that going to European Union nations and small quantities heading to Mexico and Canada, according to Census Bureau data tracked by the U.S. Department of Agriculture.

That's 85 percent of the estimated 600 million gallons that American biodiesel producers will make this year—and that's only for the first eight months.

In 2007, the U.S. exported 291 million gallons of biodiesel, and domestic producers made 490 million gallons, government figures show.

Critics say the data highlight how little oversight there is over biofuels programs despite huge federal spending on them.

"It's probably an indicator that our renewable energy strategy in the United States needs to be revisited," said Texas Agriculture Commissioner Todd Staples, whose office oversees state biofuel initiatives.

But while the biodiesel industry acknowledges the fuel is going overseas, it contends government figures are not reliable and may overstate the issue.

Federal biodiesel export figures actually reflect exports of refined U.S. vegetable and animal oils, which mostly means biodiesel.

Current export data also do not draw a distinction between domestically produced biodiesel and foreign-produced biodiesel that passes through U.S. ports.

Through August, the U.S. had imported 232 million gallons of biodiesel, Census figures show.

Yet even if all the foreign fuel were included in the 511 million gallon export figure, domestic producers would still be sending about half their output abroad.

Like ethanol, biodiesel has been touted as a homegrown way to help reduce U.S. dependence on oil, cut tailpipe emissions and aid American farmers. Ethanol, which is blended with gasoline, also is subsidized, but almost all of it is consumed domestically.

The $1-per-gallon biodiesel tax credit was created under the 2004 American Jobs Act. The tax credit had been set to expire at the end of 2008, but recently received an extension for another year.

Vegetable oil costs

Today, the domestic biodiesel industry has more than 2 billion gallons of installed production capacity from more than 170 plants in 40 states.

Texas has 686 million gallons of production capacity in 31 plants. More than half of that capacity is located along the Houston Ship Channel, said Jess Hewitt, president of the Biodiesel Coalition of Texas.

But many U.S. plants shut down temporarily this year after soaring vegetable oil prices made production too costly. Some of those that kept working relied on exports to stay afloat.

John Kellogg, spokesman for World Energy, a Boston-based biofuel marketing firm that exports biodiesel out of the Ship Channel, said he sees no conflict with sending U.S. subsidized fuel overseas.

"Support from the federal government in the form of a tax credit is appropriate to allow biodiesel to become a global business and a global competitor," he said.

brett.clanton@chron.com