Bailout bill pulls plug on biodiesel "splash and dash"

WASHINGTON Fri Oct 3, 2008 2:17pm EDT

A woman holds a funnel as she waits to refill the fuel tank of a car fueled by biodiesel in Athens, August 27, 2008. REUTERS/Yiorgos Karahalis

A woman holds a funnel as she waits to refill the fuel tank of a car fueled by biodiesel in Athens, August 27, 2008.

Credit: Reuters/Yiorgos Karahalis

WASHINGTON (Reuters) - The lucrative "splash and dash" practice of collecting U.S. tax credits on imported biodiesel fuel that is sent to Europe would end under the financial rescue bill sent to the White House on Friday.

President George W. Bush was expected to sign the bill, which also extends the $1 a gallon biodiesel tax credit through 2009. Soybean oil is a major feedstock for U.S. biodiesel.

The bill would end the practice of shipping biodiesel through the United States to collect the credit, said a Senate Finance Committee spokeswoman, adding "it will be the end of splash and dash as we know it."

In "splash and dash," tankers loaded with foreign-made biodiesel stop at U.S. ports to pick up enough conventional diesel fuel to qualify for the biodiesel credit before sailing for a final destination.

The addition of 9,000 gallons of conventional diesel would be enough for a 9 million-gallon tanker to collect the credit on its entire cargo, according to one description.

While it would end a widely criticized loophole, the step would not resolve objections by the European Union. An EU source, who spoke on condition of anonymity, said U.S.-produced biodiesel could receive the tax break and be shipped to Europe, where it may undercut European biodiesel.

"We are still facing the subsidy," he said. "We have no problem with the United States providing incentives for biodiesel for use in the United States."

EU trade officials began an investigation in June whether imports of U.S. biodiesel violate international trade rules because of subsidies.

U.S. biodiesel makers said elimination of "splash and dash" would end a tax and energy policy abuse. "We look forward to working with U.S. authorities to enforce this change and ensure that these unjustified transactions end," said Manning Feraci of the National Biodiesel Board.

By one estimate, "splash and dash" cost the Treasury $300 million in 2007.

U.S. makers produced 500 million gallons of biodiesel in 2007. High market prices for soybeans make it difficult for biodiesel to compete with diesel fuel from petroleum, say analysts.

In January, the EU said up to one-fifth of its biodiesel market was taken by fuel imported via the United States.

(Reporting by Charles Abbott; Editing by Christian Wiessner)