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Suddenly over the last few days, I've been noticing lots of TV and radio ads plugging the benefits of biodiesel. Why now? I thought. Then I remembered. The $1/gallon tax credit for blending biodiesel with regular diesel expired at the end of last year. 

The industry is desperate to get Congress to restore the subsidy, but at what cost? In recent years, the biodiesel industry raked in $1 billion or more while displacing 2 percent or less of US diesel consumption. In other words, we’re not buying much energy security for our taxpayer dollars.

The bigger problem is that by extending the life of this tax credit, we could end up subsidizing deforestation in Southeast Asia and accelerated climate change. In addition to lessening our dependence on foreign oil (maybe), an oft-stated goal of US biofuel support policies is to reduce greenhouse gas emissions. But the current generation of soy biodiesel and corn ethanol used in the United States can just as easily lead to the opposite. When food crops are used for fuel instead, new land is often plowed up to replace the lost food, releasing carbon into the atmosphere in the process.

And then there is palm oil, another biodiesel feedstock. Production of palm oil is on the rise in Indonesia to meet displaced demand for vegetable oil and new demand for biodiesel. This is a particularly worrying trend because of the large amounts of carbon stored in Indonesia’s tropical forests and peatlands, which have in the past been razed to make way for palm plantations. The European Union, the largest source of demand for biodiesel, and the US Environmental Protection Agency (EPA) have placed some restrictions on the use of palm biodiesel precisely because of the potential negative impact on forests. And yet, the International Institute for Sustainable Development reports that:  

Over 2006–2012, the share of palm oil in the feedstock mix for biodiesel produced in Europe increased from 8 to 20 per cent (from 0.4 million tonnes to 1.9 million tonnes).

Here is where the US biodiesel tax credit could make things worse. While an EPA ruling prohibits palm biodiesel from being counted as helping to meet a federal mandate to blend biofuels with conventional diesel and gasoline, it appears that blenders could still claim the tax credit (if restored) for using palm biodiesel. With a modest price gap between US soybean oil and Southeast Asian palm oil, the $1/gallon tax credit is enough to offset shipping costs and make palm biodiesel competitive in the US market. Is this really how we want to spend our taxpayer dollars?


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.