U.S. biodiesel market faces uncertain future: EIA

WASHINGTON (Reuters) - The future of the U.S. biodiesel market is on shaky ground as the removal of a tax credit loophole and new European import tariffs could slow down trade, the Energy Information Administration said on Wednesday.

Half a billion gallons (1.9 billion liters) of biodiesel, a renewable fuel made from vegetable oils or animal fats, is expected to be blended into diesel fuel in the United States in 2009 under the renewable fuel standard.

The target is mandated to increase to 1 billion gallons by 2012. This along with rising fuel prices prompted a surge in production in past years with tax incentives funneling much of the fuel abroad, the EIA said.

“However, the outlook for the U.S. biodiesel market this year remains highly uncertain,” the agency said in its weekly review of the oil market.

The $1 per gallon tax credit for biodiesel blended with petroleum diesel, known as the Blender Tax Credit, was extended to the end of the year.

But a loophole in the tax credit that stimulated much trade was closed in October as part of the Emergency Economic Stabilization Act of 2008.

The “splash and dash” loophole allowed operators to add a small amount of petroleum diesel to imports of pure biodiesel and then export the new blend to take advantage of the tax credit.

“Adding just 1 gallon of conventional diesel to 1,000 gallons of biodiesel was enough to qualify for the BTC,” the EIA report said.

While the loophole was in place, biodiesel imports grew from 4 million gallons in 2004 to 315 million gallons last year. Shipments from Asia and Latin America became increasingly large over the years, the agency said.

Closing the loophole prevents U.S. firms that blend and then export foreign-produced biodiesel from getting a tax break. Only exports of blended domestic biodiesel will get the credit.

But export opportunities for U.S. biodiesel may also be limited this year, the EIA said, as the European Union has imposed new tariffs on U.S. imports of the renewable fuel.

Biodiesel exports to the EU will carry with them an anti-dumping tariff of up to 29 percent and an anti-subsidy duty between 29 and 41 percent.

The United States exported some 677 million gallons of biodiesel in 2008 mostly to countries in the EU.

The new tariffs, which took effect March 19 and will be in place for the next six months, could dampen trade prospects for 2009, the EIA said.

Reporting by Jasmin Melvin; Editing by Marguerita Choy