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Biofuel credit leads to ‘splash and dash’

Sarah Gardner May 21, 2008

Biofuel credit leads to ‘splash and dash’

Sarah Gardner May 21, 2008


KAI RYSSDAL: As big oil was getting raked over the coals by the Senate Judiciary Committee today the House was voting to renew billions of dollars in tax breaks for clean energy, like solar and wind. The bill also includes a specific credit for biodiesel. Supporters are pushing the plant-based alternative fuel as a cleaner way to wean us off petroleum products. But Sarah Gardner reports from the Marketplace Sustainability Desk, there’s a loophole that’s giving the biodiesel subsidy a bad rap.

SARAH GARDNER: Congress passed the biodiesel tax credit in 2004 to encourage U.S. production and consumption of this alternative fuel. Biodiesel is usually sold as a blend, say, 20 percent modified soybean oil, 80 percent conventional diesel. The U.S. currently subsidizes biodiesel to the tune of $1 a gallon. Trouble is, Congress had no idea how far some would go, literally, in order to claim that biodiesel credit.

JOHN SHADEGG: I said, “You got to be kidding me. That can’t be accurate.”

That’s House Republican John Shadegg of Arizona. He’s talking about his initial reaction when he found out about the so-called “Splash and Dash” scam.

It’s a perfectly legal practice, but critics say it exploits the biofuels subsidy and rips off American taxpayers.

Here’s how it can work: A tanker with a shipload of, say, Malaysian biodiesel, stops at an American port. The foreign-made fuel is then blended or “splashed” with a token percentage of U.S. diesel and “dashes” off again.

RICK KMENT: The way the law is now, all of that product is able to qualify for the blender’s credit.

Biofuels analyst Rick Kment says the tanker usually “dashes” off to Europe, currently the world’s biggest market for biodiesel. There the fuel is ultimately sold to European drivers, often at a lower price, because it’s benefited from an American subsidy.

Congressman John Shadegg:

SHADEGG: As soon as American taxpayers realize that they are paying out hundreds of millions of dollars to lower the price of diesel outside the United States, I think they’re going to say that’s outrageous.

Also outrageous, perhaps, is the increase in greenhouse gas emissions from all this shipping, say critics. According to European officials, a few European companies are even shipping their own biodiesel, destined for their own domestic markets, to the U.S. first. That way they take advantage of the subsidy. It’s called the “U-boat” trade because the ships make such quick stops in U.S. ports.

Congress is struggling to shut down the loophole.

Manning Ferraci speaks for the American biodiesel industry:

Manning Ferraci: What the bill that the House will consider does is say fuel produced outside the United States, for use outside the United States, does not qualify for the biodiesel tax incentive. That would effectively shut down a splash-and-dash transaction.

Some splash-and-dash critics, like Congressman Shadegg, want to go further. He wants to limit the subsidy to biodiesel consumed in the U.S. That would hurt American biodiesel exporters, of course. But Shadegg says Europe’s already furious over U.S. biofuel subsidies. Producers there say the U.S. subsidies are driving some of them out of business.

I’m Sarah Gardner for Marketplace.

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