UK CALLS ON EU TO INVESTIGATE U.S. BIODIESEL SUBSIDIES

UNCLAS LONDON 002318

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ETRD ENRG EAGR UK
SUBJECT: UK CALLS ON EU TO INVESTIGATE U.S. BIODIESEL SUBSIDIES



1. Summary: The UK Government has associated itself with its
biodiesel industry in asking the EU to investigate whether US
subsidies on biodiesel are trade distorting and should give rise to
countervailing duties. HMG has "no appetite for a fight" about
this, and wants to continue importing biodiesel, but worries that
the low-priced US product is stifling investment in a potentially
important industry based in some of the poorer regions of the UK.
Ireland, Germany, the Netherlands and possibly France may also weigh
in alongside the UK. End Summary.


2. Fergus Harradence, Head of Unit, and Phil Richards, Sr. Policy
Advisor, Multilateral Trade Negotiations, Dept of Trade and Industry
briefed EconCouns June 14 on UK concerns about US subsidies on
biodiesels. DTI was sensitized to this issue by the Depts. of
Transport and HMTreasury and by the British biodiesel industry.
According to the industry, US subsidies result in a $100/tonne price
advantage for US biodiesel in the UK market ($675/tonne vs. $775 on
average for UK-produced biodiesel.) Imports from the US also
benefit from subsidies given to European producers, which the EU
allows the various member states to offer their nascent industries.
In the UK it is 20 pence per liter. The industry argues that it is
impossible to compete with US-subsidized product, even using the
lowest cost inputs available to them such as waste vegetable oil
from "chip shops" (French fry vendors).


3. As troubling as the direct price competition is, the industry
contends that the relatively small amount of US imported biodiesel
is having a more far-reaching effect on overall price expectations
in the entire market, our DTI contacts continued. The industry
argues that the low price for US product, even though not widely
available, drives the price the rest of industry can charge. This
low price point is damping down investment in British biodiesel.
This is particularly troubling for the UK government because the
British biodiesel industry is centered in the economically depressed
regions in the north east and north west of the UK, areas the
government has targeted for development. The areas have many
advantages for biodiesel: cheap land prices, existing energy
infrastructure and expertise, and deep water ports. Not
insignificantly, a key minister for this issue, Environment's David
Milliband, a rising star in the Labour Party, is an MP from a
constituency in the north east, Harradence noted.


4. In response to the industry's lobbying, four ministers (from
DTI, Treasury, Transport and DEFRA (Dept of Environment, Farming and
Rural Affairs) wrote to EU Trade DG Peter Mandelson to request a
countervailing duty investigation. Harradence stressed that HMG had
no "appetite for a full scale fight" on this. They did not want to
push for a ban on imports, for example, even if a Commission
investigation confirmed the industry's allegations that the US
subsidy was distorting trade. The only remedy under consideration
was a countervailing duty. He noted that both sides to the dispute
were subsidizing their producers in various ways and amounts. The EU
needed biodiesel imports to meet its own targets. It had little
arable land available for this. There are few other alternative
sources, moreover. Brazil produces bioethanol. South Africa
produces some biodiesel but does not export much.


5. The industry, represented by the European Biodiesel Board (EBB)
on behalf of its member associations at the national level, will
need several months to prepare its submission to the Commission. If
the submission convinced the Commission there was sufficient prima
facie evidence of a problem, the Commission could then take up to 13
months to investigate. It is possible that it will conclude that no
harm has been done. The initial reaction from the Commission has
been somewhat skeptical about the EBB's allegations. Harradence
considered it quite possible that an investigation would conclude
that no injury was done. He was also skeptical about press reports
of EU traders sending biodiesel roundtrip across the Atlantic to
collect US subsidies and return to the EU market, the so-called
"splash and dash" gambit. He thought it more likely that biodiesel
from Malaysia or elsewhere had benefited from this approach.


6. Ireland, Germany and the Netherlands also share the UK's
concerns. Harradence expected France to join in as well, but has
not heard from them. Other EU biofuel producers, such as Sweden,
are less concerned because they produce bioethanol, not biodiesel.
He said the key EU interlocutor at the Commission was a Briton,
Steve Gospage.
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