Legislation in the United States affects the production and sales of BD because it alters the market for the product in a number of ways, including cost reduction via direct subsidy and indirect subsidy via tax credit, mandated use, and increased cost for competing goods. The following graph (Source: BD Conference) shows production output of BD in the US per year, in conjunction with the the introduction of legislation affecting the market.
The legislation included above affects the supply, demand, and price. The 1998 alternative fuel use credit reduced the price to consume BD, but supply was relatively fixed until the USDA established the CCC Bioenergy Program in the 2000 and the reauthorization in the 2002 “Farm Bill.” The Farm Bill made it cheaper for BD producers to purchase feedstock, which led to a cheaper and more competitive end product.
In 2002, Minnesota was the first state to mandate diesel sold in the state be a BD blend, at a minimum of 2% (B2) by 2005. Mandating B2 sales increased the demand for BD in a fixed supply market, which raises prices. Increased prices and increased demand provides incentives for producers because of the greater potential for profit. Production increased from 15M gallons in 2002 to 25M gallons in 2004. In 2004, the American Jobs Creation Act provided additional tax credits for BD production ($1 per gallon) and recycling fats and oils ($0.50 per gallon).
By drastically reducing the price at the pump, and pending mandated inclusion of BD, the market spiked to 75M gallons in 2005. Because of a variety of market factors, soy based BD became price competitive with PD and production ramped up to 450M gallons in 200713 and most recently, 700M gallons in 2008. While not priced below PD, EPA requirements for Ultra-Low Sulfur Diesel increase the demand for BD because it is used as a fuel additive to compensate for loss of lubricity.
Included in legislation that provides for biofuel subsidies, are taxes on competing products, making them more expensive and less competitive in the market. An example applicable to biofuels, although not BD, is that of ethanol in the United States. Ethanol gasoline blends are subsidized via VEETC by the US government at a rate of $0.51 per gallon. To directly pay for the subsidies provided at the pump for corn based ethanol, a $0.54 per gallon tariff is levied on sugarcane based ethanol imports from Brazil [H.R. 6137]. Not only does the subsidy directly reduce the price of corn based ethanol at the pump, it increases the price of sugarcane based ethanol, making domestic production of ethanol more cost competitive.