Thanks for the Cheap Diesel – Yours Truly, Europe

There are plenty of reason to dislike the tangled array of subsidies and mandates woven through the market for alternative fuels in the U.S., and here’s another one from the Christian Science Monitor‘s Mark Clayton:

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.

Sometimes? I think we need to get Mark a copy of Tim Carney‘s modern classic, The Big Ripoff. So how exactly does this subsidy scam work? Mr. Clayton explains after the jump.

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.

Then, the vessel receives from a dockside diesel supplier a “splash” of US petroleum diesel. It doesn’t take much to turn it into a diesel-biodiesel blend that is eligible for US subsidies.

If the ship holds roughly 9 million gallons, it takes only about 9,000 gallons of traditional diesel (0.1 percent of the total) to make the entire load eligible for the blenders tax credit.

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.

So American taxpayers are now paying millions of dollars a year so that European drivers can fill up with cheap diesel. Brilliant work, Congress.

Thanks to Crasher Xaqfixx for the link.