Biodiesel tax credit intended to reduce oil dependency backfires

Articles — By forcechange on November 29, 2008 11:33 am

Yesterday we looked at two alternative fuel policies that have backfired with unintended consequences.  Today we look at a third:

Under current federal law, US biodiesel manufacturers are granted a $1 tax credit for every gallon of fuel they produce.  Biodiesel in the US is usually produced from soybean oil or recycled cooking oil from restaurants, which is blended with petroleum diesel.

The original intention of the law was to reduce greenhouse gas emissions and our dependency on foreign oil.  However, in practice, the majority of the biodiesel produced under this tax system has been exported to foreign countries.  The European Union receives the vast majority of these exports, along with Mexico and Canada.  Through August of this year alone, biodiesel exports reached 511 million gallons, and total production for the year is estimated to be only 600 million gallons. 

Similar to the flex-fuel boondoggle and federal alternative fuel boondoggle, the real world application of this policy has cost millions of dollars and failed to accomplish its goal.  This further underlines the importance of caution and flexibility in creating environmental and energy policies.  Caution and flexibility will help ensure that we don’t replace one unsustainable situation with another.  Private businesses are going to be aiming to receive even more taxpayer money that will be available in coming years.  We need to make sure that this money is used for intelligent and effective policy and not just domestic subsidies. 

With respect to the biodiesel situation, new federal mandates that require additional usage of biodiesel in the domestic fuel supply will increase domestic demand and lower exports.  However, as with any governmental mandate, this policy will likely have its own unintended consequences, to be determined.