The Economics of a Blender's Tax Credit versus a Tax Exemption: The Case of U.S. 'Splash and Dash' Biodiesel Exports to the European Union

A conceptual framework is advanced that determines world biodiesel prices, the policy parameters in the country establishing the price, and the binding mandate or tax exemption. The effect of a tax credit differs with international trade compared to traditional closed economy analysis. The U.S. 'splash & dash' program, with its $1/gallon tax credit, had minimal impacts on European Union (EU) biodiesel producer profits. Reduced world oil prices and EU tax exemptions, as well as increased rapeseed oil prices, are shown to have reduced the profitability of EU biodiesel production. EU imports from the United States can be beneficial for EU taxpayers, fuel consumers, and U.S. biodiesel producers. Copyright 2011, Oxford University Press.