Heeding complaints by the European biodiesel industry, the European Commission (EC) has launched an inquiry into U.S. biodiesel subsidies which are alleged to have resulted in dumping of U.S. biodiesel into the European market.

At the centre of the controversy is a Volumetric Blenders Tax Credit adopted by the U.S. in 2004 which grants a tax credit of US$ 1 per gallon - or over US$ 300 per ton - of biodiesel blended in the United States.

A so-called "splash and dash" loophole in the policy allows U.S. refiners to import low-cost biodiesel from third countries, mix it in the U.S. with a ‘splash' of diesel and still claim the tax credit, according to the European Biodiesel Board (EBB), an industry group.  The resulting B99 biodiesel (99.9% biodiesel and 0.1% petroleum-based diesel) can be exported to Europe where it is marketed as pure biodiesel and benefits from additional support ranging from tax breaks to mandatory quotas, depending on the country.

The EU also provides tax credits for biodiesel producers, but only for biodiesel consumed in the EU. As a result, the EBB complains biodiesel producers in the EU have been put at an unfair disadvantage.

Although the "splash and dash" imports - those which originate in a third country - have received most of the attention, they represent a small part of the problem, said Amandine Lacourt, a spokesperson for the EBB. The majority of the biodiesel exported to Europe from the U.S. originates in the U.S, not from other countries like Malaysia and Indonesia.

In March 2007, the EBB had already written to the European Union's Trade Commissioner, Peter Mandelson, expressing its "strong concern" over the subsidy. US lawmakers at the time indicated that they were planning to close the "splash and dash" loophole.

However, proposed legislation that would have resolved the issue for the EBB failed to garner the approval of both houses of Congress.

Last August, the House passed the Renewable Energy and Energy Conservation Tax Act of 2007, which would have limited the Blenders Tax Credit to biodiesel sold in the U.S. This would have closed the "splash and dash" loophole, and more generally prevented U.S. companies from exporting biodiesel which benefited from the tax credit. The bill, which did not pass the Senate, would also have repealed millions of dollars in tax credits for oil and gas companies.

An almost identical version of the bill was again passed by the House in February of this year, but has also failed to receive Senate approval.

More recently, the House passed the Energy and Tax Extenders Act of 2008, extending the Blenders Tax Credit until the end of 2009. This bill would close the "splash and dash" loophole, although it would not prevent U.S. companies from exporting subsidized biodiesel blends to Europe as long as it was produced - not just blended - in the United States. As of 1 July 2008, however, this bill had yet to be passed by the Senate.

With a negotiated resolution unsuccessful, the EBB submitted a complaint to the EC in April. In a press release issued the same month, the EBB alleges that subsidized B99 biodiesel from the U.S. constitutes price-setting and has disrupted the margins of European biodiesel producers, putting many of them out of business.

Based on what it considered sufficient evidence in the EBB complaint, the EC decided to initiate both anti-subsidy and anti-dumping investigations into U.S. imports of biodiesel. The EC says it will reach a preliminary decision by 13 March 2009, which could potentially lead to countervailing measures and anti-dumping duties against the U.S.

Imports of U.S. biodiesel into the EU market increased from some 7000 tonnes in 2005 to about 1 million tonnes in 2007, a more than 14,000% increase, according to the EC.