Putting Your Money Where Your Mouth Is: The Varied Success of Biofuel Incentive Policies in the United States and the European Union

Why sir, there is every possibility that you will soon be able to tax it!1

I. Introduction

Lawmakers often use tax and other financial incentives to spur the development of socially valuable industries.2 Lawmakers hope such incentives will help the target industries gain market share and eventually become viable competitors in their relevant markets, at which point the incentives will be able to sunset.3 If the incentives successfully sunset and the industry is then subject to taxation, the government may be able to recoup its investment.4 However, creating incentives that allow an industry to gain strength and flourish on its own is no simple task.

The United States and the European Union (EU) have used various incentives to promote the biofuel industry for decades.5 The industry, led by the development and use of ethanol and biodiesel, is socially valuable for a number of political, environmental, and economic reasons. Biofuels continue to become more cost-effective to produce, but absent government support they are far from being a viable replacement for fossil fuels.6

Ethanol and biodiesel are the two leading biofuels.7 Government financial incentives for the production and use of ethanol and biodiesel have been praised as a way to support the environment and decrease dependence on foreign oil.8 However, critics of biofuel incentives point out that biofuels have not always delivered on their proponents' environmental and political promises.9Biofuel production has not always been environmentally friendly, and the industry is still not capable of producing the amount of fuel necessary to significantly reduce dependence on foreign oil.10 Despite such criticism, the United States and the EU continue to support and provide tax relief to the biofuel industry.

The EU's biofuel directives and incentives have not successfully met the goals mandated by legislation.11 The United States has met general biofuel goals in the past, but has only recently implemented a specific renewable fuels standard (RFS) calling for substantially increased amounts of biofuels to be consumed yearly by 2012.12 This Note examines the policy reasons for supporting the biofuel industry through incentives, and contends that the EU needs to increase the number of financial incentives compared to the number of mandates put forth in order to meet the goal of increased market share for biofuels.

II. Background

A. Beginnings of the Biofuel Industry

While biofuel research and technology continues to develop, the industry is far from new. The biofuel industry was present in the United States as early as 1908.13 At that time, the United States' biofuel industry focused on ethanol, as it does today.14 Henry Ford was a proponent of renewable fuels.15 Ford's Model T was able to run either on petroleum fuel or pure alcohol fuel.16 Prior to World War II, Standard Oil marketed a 25 percent ethanol blend fuel on the east coast, and an ethanol plant in Kansas produced eighteen million gallons of ethanol per year. Ethanol from that plant was sold at several thousand service stations in the Midwest.17 After World War II, however, the ethanol industry in the United States lost support due to advances in the technology and supply of petroleum.18 The industry did not regain strength in the United States until the 1970s.19

The biofuel industry was also present...

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