U.S. biodiesel market faces uncertain future: EIA

By Jasmin Melvin

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.