France plans to end biofuel tax breaks by 2012

PARIS (Reuters) - The French government said on Friday it will phase out tax breaks for biofuels by 2012, arguing that higher oil and grain prices have removed the need for fiscal support.

In its draft 2009 budget, the government said it will remove in stages from January reductions given to biodiesel and ethanol on France's national fuel tax (TIPP).

"The cost price of biofuels is no longer structurally disconnected from those of standard fuels," the government said, stressing that crude oil prices will remain high.

"Tensions affecting agricultural raw materials have reached levels that no longer justify tax exemptions on the grounds of helping to provide outlets for farm production," it said.

The government also argued that the continuation of a penalty on fuels that do not meet national targets for biofuel incorporation would maintain support for biofuel production.

"It's incomprehensible," Philippe Tillous-Borde, head of Sofiproteol, owner of France's largest biodiesel maker Diester Industrie, told Reuters.

"This will favor imports from non-EU countries like the U.S. and Argentina -- products that benefit from export subsidies --, which will further distort competition."

Tillous-Borde also said the planned measures ignored biofuels' contribution to the environment compared to standard fuels.

French producers are currently exempt from paying 0.22 euros per liter of the TIPP fuel tax for biodiesel and 0.27 euros per liter for bioethanol.

Under the proposed changes, the tax break on biodiesel will fall to 0.135 euros a liter in 2009, 0.10 euros in 2010, 0.06 in 2011 and then zero in 2012.

For ethanol, the tax reduction will be cut to 0.17 euros a liter in 2009, 0.15 in 2010 and 0.11 in 2011, before also ending in 2012.

The government had planned to reduce progressively tax breaks for biofuels as the sector expanded.

But the size and timing of the cuts represents a setback for the biofuels sector as it faces mounting criticism over its environmental impact and contribution to rising food prices.

The government said biofuel investment in France has reached 1.7 billion euros. It expects to save 401 million euros next year from the reduced tax breaks.

Alain Jeanroy, coordinator of a French ethanol industry group, said the planned measures were incoherent.

"We are developing a policy which taxes renewable energies more than fossil fuels," he told Reuters.