For the second time in two years, the U.S. biodiesel industry is losing its federal tax incentive. This time, the industry is hoping it won't take a nosedive.

The $1-per-gallon subsidy for blending biodiesel with regular diesel fuel lapses on Sunday -- just as it did two years ago, leaving idle a quarter of the nation's biodiesel refineries, including one in Minnesota.

"We don't anticipate a repeat," said Ben Evans, a spokesman for the National Biodiesel Board, an industry trade group.

The key reason is that a federal mandate now requires oil companies to blend biodiesel. The U.S. Environmental Protection Agency (EPA) last week upped the target by 20 percent to 1 billion gallons in 2012. Minnesota has a separate mandate for a 5 percent biodiesel blend.

That means oil companies and fuel terminals must keep blending biodiesel even though they no longer receive a tax credit. For users of diesel fuel, the end of the blender credit likely will mean a few cents per gallon price increase at the pump.

The mandate, known as the Renewable Fuel Standard, was authorized under a 2007 federal law, but the annual biodiesel blending target wasn't immediately defined by the EPA. When the tax credit lapsed at the end of 2009, biodiesel production dropped by 42 percent, leaving 52 of the nation's 190 biodiesel plants closed. The credit was restored this year, and the industry would like Congress again to reauthorize it.

Most biodiesel is made from soybeans, though other oils and fats increasingly are being used, including industrial corn oil produced at ethanol plants.

Officials at Minnesota's two large, soybean-fed biodiesel plants, Minnesota Soybean Processors of Brewster and the Renewable Energy Group refinery in Glenville, said they don't expect the lapse in the federal subsidy to force them to close.

The Brewster plant, which is near Worthington, has continued operating through the changes in federal policy. The plant in Glenville, eight miles southeast of Albert Lea, reopened in August after a three-year shutdown and a change of ownership.

Minnesota has two smaller biodiesel plants -- Ever Cat Fuels in Isanti, which processes waste cooking oil, and the closed FUMPA Bio-Fuels plant in Redwood Falls, which is being sold.

U.S. biodiesel plants have reported record output this year, with annual production expected to exceed 1 billion gallons for the first time.

But the industry also has been hit with a scandal in the marketing of renewable fuel credits, which are traded on an EPA-sponsored exchange. Oil companies and others often buy credits from blenders and others to comply with the renewable fuel mandates.

One company in Maryland has been charged and another in Texas is under investigation for selling biodiesel credits that federal investigators contend are fraudulent. At least 24 companies that spent tens of millions of dollars on the invalid credits face penalties for unwittingly buying them. The credits are known as Renewable Identification Numbers, or RINs.

Taryl Enderson, general manager of the Minnesota Soybean Processors cooperative, said he worries that the fraudulent trading in biodiesel RINs will stall the industry's momentum.

"It set back the market because now companies are looking for a way to basically insure that the RIN they are getting is solid," Enderson said.

The fraud also has angered oil refiners who already opposed the biodiesel-blending mandate.

"We were victims of a salacious crime," said Charles Drevna, president of the National Petrochemical and Refiners Association, which represents refiners. He said EPA's enforcement actions against unwitting purchasers of invalid RINs "punishes the victim for the crime."

The EPA's policy is "buyer beware" for traders of the credits, its website says. An EPA spokeswoman had no immediate comment Wednesday.

Drevna said the biodiesel program is bad public policy because it supports an industry that can't compete on its own. "The mandate literally picks the pocket of the American consumer," he said.

But Evans of the Biodiesel Board defended the program, saying it has helped to launch a new domestic fuels industry. He said biodiesel has benefited from federal incentives since 2005, much less than the decades of support to the corn-ethanol industry, whose subsidies also expire Sunday.

"We are a very young industry," he said. "We have had about five years of commercial-scale production."

David Shaffer • 612-673-7090