The biodiesel industry could be in for a trans-Atlantic battle. The European Commission is reportedly set to launch a formal investigation into U.S. biodiesel subsidies which allegedly undercut European biodiesel prices and allow so-called "splash and dash" operations.

The pending confrontation comes as the industry is already dealing with the debate over food vs. fuel, where some are calling for cuts in biofuel targets (see World Bank says food prices hit by biofuels).

Biodiesel is usually made with vegetable oils, such as soybean oil, or animal fats.

In the U.S., biodiesel can be subsidized up to $300 per tonne, and some companies are taking advantage of that subsidy by shipping tankers full of foreign biodiesel to the States and adding a small amount, or a "splash," of U.S. diesel.

Adding that splash means the entire shipment can qualify for the subsidy. The tanker then usually takes that newly subsidized biodiesel and "dashes" off to Europe, one of the largest markets for the alternative fuel.

Some European companies are also said to have shipped biodiesel to the U.S. to take advantage of the payout, with the biodiesel then sent right back to Europe. That version of splash and dash is called the "U-boat" trade.

The Brussels-based European Biodiesel Board recently filed a joint anti-dumping and anti-subsidy complaint to the European Commission regarding what it calls unfair U.S. exports.

The commission has yet to announce any action on the complaint, but there are reports that Peter Mandelson, EU's commissioner for trade, has already signed off on a move to launch a formal inquiry.

An investigation could lead to tariffs on U.S. biodiesel coming into the EU.

A spokesman for Peter Mandelson would not comment on whether or not the complaint had been received, citing commission policy.

The commission, which has 45 days to analyze any complaints, would need to make a decision on the European Biodiesel Board's filing next month.

But there is a chance a deal could be brokered before that point.

Although the trade commissioner's spokesman would not comment on the European Biodiesel Board case, he pointed out that in general the commission's procedures allow for some informal negotiations.

In a written statement, Mandelson's office said, "In the specific case of an anti-subsidy complaint, the commission invites the government of the country concerned to have consultations with the commission prior to the initiation of a formal investigation with the aim of clarifying the situation and arriving at a mutually agreed solution."

"If such solution cannot be reached the commission may decide to open a formal investigation."

Those formal investigation normally take no longer than a year, and must be completed within 15 months under EU regulations.

If it does come down to a trade war, the U.S. biodiesel industry isn't likely to take it lying down.

At the time of the European Biodiesel Board's complaint, Manning Feraci, VP of federal affairs at the Jefferson City, Mo.-based National Biodiesel Board, said, "The motivation behind this case is simple – the EBB is trying to use litigation as a protectionist tool to shield them from U.S. competition."

"The U.S. biodiesel industry plans to use every resource at its disposal to wage a vigorous defense against the EBB's baseless allegations," said Feraci.

"In addition, our industry will aggressively challenge existing EU trade barriers – such as the EU's discriminatory biodiesel fuel specification – and other EU biofuel policies that are inconsistent with WTO rules and provide preferential treatment to European fuel producers."

Whatever the outcome of any negotiations, it will have come too late for at least one European company.

Last month, Middlesbrough, England-based D1 Oils (AIM: DOO) announced that it was exiting biodiesel production, blaming subsidized U.S. imports for the move (see UK's D1 Oils exits biodiesel refining business).

D1 Oils, a member of the European Biodiesel Board, said it would shut down its newly built biodiesel refineries in Middlesbrough and Bromborough, focusing its ongoing operations on plant science and planting.

The company plans to continue its work on jatropha, which it said produces an inedible oil feedstock for biodiesel and is able to make use of land not suitable for arable agriculture.