Biofuels in the United States Transportation Sector: Public Policy and Its Effects on the Industry

Nicholas Horelik 2008 WISE Intern

Tufts University

August 7, 2008

Sponsored by The American Institute of Chemical Engineers

Executive Summary

As we move into the future amidst rising energy prices and heightening environmental concerns, there is

significantly increased legislative interest in promoting the use of biofuels in the United States

transportation sector. At both the state and federal level, in 2001 the number of enactments of biofuels-

related subsidies, investment incentives, technical assistance programs, and regulations has been greater

than the number of all biofuels enactments in all previous years combined. The number of new

enactments has only continued to climb, with many different types of policy mechanisms being proposed

and some significant pieces of legislation already being implemented. The most prominent of these

policies is the national Renewable Fuels Standard, which mandates an increasing amount of biofuels use

to ultimately replace 30% of gasoline and diesel consumption. Indeed, the industry has seen significant

growth due in large part to the public policies of the present, but to a large extent it can be attributed to

the policies of the past. As a result, it becomes particularly important to understand the historical

interplay between different policy mechanisms and the market so that we can better gauge how effective

similar policy efforts will be today.

Ultimately, the recent growth in biofuels is mainly attributed to the rise in use of ethanol as an oxygenate

in reformulated gasoline. The main causes of this increase in consumption were heightening oil prices

and the regulation enforced by the EPA that required the motor fuel in certain areas to contain a minimum

amount of oxygen, which in older engines improved the pollution characteristics of the fuel upon

combustion. Before the turn of the century, fuel blenders and refiners relied extensively on methyl tert-

butyl ether (MTBE) to maintain compliance to these regulations, which was an octane booster and an

oxygenate for gasoline. However, in 2003 MTBE was banned, leaving ethanol as the only commercially

available replacement. It was this enormous immediate demand that kick-started the growth of the

ethanol industry.

Continued government aid will be required to ensure further growth in biofuels, particularly in regards to

infrastructure investments. The Renewable Fuel Standard as well as other state and federal mandates

should continue to maintain an artificial demand for biofuels, but further improvements in distribution

infrastructure are still needed to support wide-spread use. If biofuel fueling stations, pipelines, rail cars,

and compatible vehicles do not achieve prevalence, then no real demand for biofuels will develop. In

addition, the technology for deriving biofuels from cellulosic sources needs to mature to a point of

economic efficiency. If the industry does not gain such a stable foothold now when the political will and

market conditions make development possible, then as history shows us, biofuels will return to obscurity

in the event that fossil fuel prices fall.

About WISE Founded in 1980 through the collaborative efforts of several professional engineering societies, the

Washington Internships for Students of Engineering has become one of the premier Washington

internship programs. Its goal is to groom future leaders of the engineering profession who are aware

of and can contribute to the important intersections of technology and public policy. Please see

http://www.wise-intern.org for more information.

Acknowledgements This paper would not have been possible without the support of many individuals and organizations.

In particular, the author would like to thank Maria Burka and Paul Stone from the American

Institute of Chemical Engineers, as well as Professors Larry Cohen, Blaine Pfeifer, and Hyunmin Yi

from Tufts University for making this experience possible. In addition, the author would like to

acknowledge Erica Wissolik, Melissa Carl, and all of the staff at the ASME and IEEE offices for

their contributions in organizing the program.

Finally, this report would not have been possible without contributions and assistance from Dr. Jeff

and all of the other 2008 WISE interns.

Paper Citation Horelik, E. Nicholas, “Biofuels in the United States Transportation Sector: Public Policy and Its Effects on the Industry.” Journal of Engineering and Public Policy, Vol. 9, (2008) available at <www.wise-intern.org>

Table of Contents

1. Introduction ............................................................................................................................................... 2 1.1 Setting the Stage for Biofuels ............................................................................................................. 2 1.2 Recent US Biofuels Policy in Brief .................................................................................................... 3 1.3 Scope ................................................................................................................................................... 3

2. Background ............................................................................................................................................... 4 2.1 Biofuels in Brief .................................................................................................................................. 4

2.1.1 Definitions .................................................................................................................................... 4 2.1.2 Feedstocks .................................................................................................................................... 5 2.1.3 Production Methods ..................................................................................................................... 5 2.1.4 Vehicle Compatibility .................................................................................................................. 6 2.1.5 Benefits and Criticisms ................................................................................................................ 6 2.1.6 Other Biofuels .............................................................................................................................. 8

2.2 Historical Background ........................................................................................................................ 9 2.2.1 Framing the Discussion ................................................................................................................ 9 2.2.2 Pre-1970 ..................................................................................................................................... 10 2.2.3 The Oil Shocks of the 1970s ...................................................................................................... 11 2.2.4 The 1980s ................................................................................................................................... 11 2.2.5 The 1990s ................................................................................................................................... 13 2.2.6 Comparisons to Today’s Era ...................................................................................................... 13

2.3 Policy Potential ................................................................................................................................. 14 3. Recent Growth of the Biofuels Industry ................................................................................................. 16

3.1 Consumption ..................................................................................................................................... 16 3.1.1 Ethanol and Biodiesel as Fuel Extenders ................................................................................... 16 3.1.2 Biofuels Compatible Vehicles ................................................................................................... 17 3.1.3 Feedstock Consumption ............................................................................................................. 18

3.2 Production and Distribution .............................................................................................................. 18 3.2.1 Fueling Stations ......................................................................................................................... 18 3.2.2 Biorefineries ............................................................................................................................... 18 3.2.3 Distribution ................................................................................................................................ 19

3.3 Economic Considerations ................................................................................................................. 20 3.3.1 Fuel Prices .................................................................................................................................. 20 3.3.2 High Corn and Soybean Feedstock Costs .................................................................................. 21

3.4 Prospects for the Immediate Future .................................................................................................. 22 4. US Biofuels Policy .................................................................................................................................. 23

4.1 Government Mechanisms of Involvement ........................................................................................ 23 4.1.1 Approach .................................................................................................................................... 23 4.1.2 Implementation .......................................................................................................................... 25

4.2 Important Recent Legislation ............................................................................................................ 25 4.2.1 Regulations and Mandates ......................................................................................................... 26 4.2.2 Renewable Fuels Standards ....................................................................................................... 29 4.2.3 Incentives for Research, Development, and Demonstration ...................................................... 30 4.2.4 Taxes and Financial Incentives .................................................................................................. 31 4.2.5 Modifications by the 2008 Farm Bill ......................................................................................... 32

5. Final Thoughts and Recommendations ................................................................................................... 34 5.1 Summary of Most Influential Policies .............................................................................................. 34

5.1.1 Historically ................................................................................................................................. 34 5.1.2 Recently ..................................................................................................................................... 34

5.2 Future Considerations ....................................................................................................................... 34 5.2.1 Supply Infrastructure and Vehicle Demand ............................................................................... 34 5.2.1 Other Potential Roadblocks ....................................................................................................... 35

5.3 Recommendations ............................................................................................................................. 36 Appendix ..................................................................................................................................................... 37

A1 – Biomass Feedstock Classifications ............................................................................................ 37 A2 – Estimated Location and Quantity of US Biomass Resources .................................................... 37 A3 – FFV Vehicle Registrations ......................................................................................................... 38 A4 – E85 Fleets and Fueling Stations ................................................................................................. 39 A5 – Biodiesel Fueling Locations ....................................................................................................... 40 A6 – Biodiesel Production Facilities .................................................................................................. 40 A7 – State and Federal Enactments by Fuel Type .............................................................................. 41 A8 – State and Federal Alternative Fuel Enactments by Policy Mechanism ...................................... 41 A9 – State and Federal Alternative Fuel Enactments by Targeted Agent .......................................... 42 T1 – List of Significant Biofuels Legislation (1974-2000) ................................................................. 42 T2 – Current Federal Policy Affection Biofuels as of March 2008 .................................................... 44 T3 – The Renewable Fuel Standard Mandates, as Amended in 2007 ................................................. 47

Citations ...................................................................................................................................................... 48

1

List of Acronyms AFDC Alternative Fuels Data Center

AFVs Alternative Fuel Vehicles

B20 A blend of 20% biodiesel and 80% regular diesel

CAFE Corporate Average Fuel Economy

CBI Caribbean Basin Initiative

CBP Customs and Border Patrol

CGF Corn Gluten Feed

CGM Corn Gluten Meal

DDGS Dried Distillers Grains with Solubles

DOE Department of Energy

DOT Department of Transportation

E10 A blend of 10% ethanol and 90% gasoline

E85 A blend of 85% ethanol and 15% gasoline

EIA Energy Information Administration

EPA Environmental Protection Agency

EPACT Energy Policy Act

ETBE Ethyl tert-Butyl Ether

EU European Union

FFVs Flexible Fuel Vehicles

GAO Government Accountability Office

IRS Internal Revenue Service

MTBE Methyl tert-Butyl Ether

NAFTA North American Free Trade Agreement

NEV Net Energy Balance

NREL National Renewable Energy Laboratory

RFG Reformulated Gasoline

RFS Renewable Fuel Standard

USDA United States Department of Agriculture

VBETC Volumetric Ethanol Excise Tax Credit

VEETC Volumetric Biodiesel Excise Tax Credit

VOCs Volatile Organic Compounds

2

1. Introduction Currently the production and use of biomass-derived ethanol and diesel for transportation is seeing

significant growth after years of only modest increases, being supported extensively through recent state

and federal energy policy. There is no question that these policies played an important role in spurring

this growth, but in fact the exact extent of each individual policy mechanism’s effectiveness is somewhat

less clear. Indeed, tax provisions, programs, and regulations enacted in the 1970s encouraged only

modest growth in biofuels at the time, but they set the stage for the recent explosive developments. As a

result, these older policies cannot be ignored when trying to examine how policy spurred the growth of

the industry today.

Currently, about half of the gasoline used in the United State for transportation contains ethanol blended

at 10% or less, representing roughly 3% of the energy use in this sector. Owing to the environmental

benefits and national security enhancements that the widespread adoption of such domestic biofuels

would imply, it is hoped by many in the government that this fraction will continue to grow to 30% by

2022. However, many hurdles remain, such as a significant lack of vehicles that can run on higher

percentages of ethanol and an insufficient ethanol distribution network. At the same time, the ethanol

market has remained very tight, with distribution infrastructure barely keeping up with the growing

demand. Indeed, it is precisely in this area that energy policy finds its use, attempting to bridge the gap

between supply and demand to bring about the desired increased use of biofuels.

1.1 Setting the Stage for Biofuels

Liquid transportation fuels made from biomass have been sought after in Congress since the oil shocks of

the 1970s, when many were worried that Hubbert Peak Oil theory, which stated that eventually the

world's oil production rate will plateau before entering a period of terminal decline, was becoming a

reality. During that time, alternative energy sources were actively pursued by a variety of legislative

efforts. Ultimately, however, although biofuels were promoted to some extent, they did not catch on,

remaining less than 1% of energy consumption for transportation for 20 years. Americans were able to

ride out those energy crises, which in reality were only temporary shortages and supply disruptions, until

oil production picked up again and prices dropped to reasonable levels. Eventually, Peak Oil was

returned to the category of “fringe theory,” bringing with it many alternative energy programs.

Since the turn of the century, however, energy prices have again been on the rise due to increasing

demand and decreasing supply. The oil industry admits that there has been a significant decline in new

oil infrastructure investment for a variety of reasons, implying that this time the crises will not be short-

lived. In addition, the rapid development of China and India has introduced a significant and growing

3

demand for conventional fuels that is not expected to decrease. Furthermore, rising concerns over global

climate change have been gaining varying degrees of political traction, with many beginning to agree that

carbon emissions should be regulated and curtailed. All of these issues set the stage for biofuels to gain

prominence as a renewable and environmentally friendly alternative, despite the many remaining

economic and technical obstacles to their adoption.

1.2 Recent US Biofuels Policy in Brief

In the United States, energy policy has supported the development of biofuels technology and promoted

its use for many years through tax preferences, financial assistance programs, and regulations. Only

recently, however, has there been a significant increase in political interest and a coalescence of policy

initiatives to result in noticeable effects on the energy market. As one of the most significant of these

measures, the Energy Policy Act of 2005 introduced a Renewable Fuels Standard (RFS) that sets annually

increasing mandates for the use of ethanol as a motor fuel, with the Energy Independence and Security

Act of 2007 increasing those mandates to their current levels. According to this RFS, 9 billion gallons of

biofuel use are mandated for 2008, increasing incrementally to 36 billion gallons in 2022. By 2020, it

mandates that half of this consumption come from “advanced biofuels” derived of cellulosic material

other than corn. By any account, these are very ambitious targets, as the technology for such advanced

biofuels is still several years away from maturity. In addition, there are still many economic concerns to

be overcome before the industry can be considered self-sustaining, all of which are issues that future

policy can address.

1.3 Scope

This paper is meant to provide a reader with no previous knowledge of policy or biofuels with

background on biofuels and biofuels policy, discussing its effects on the current state of the industry. To

do this, the paper includes 3 main sections:

• Historical Context – Emphasis on policy pertaining to biofuels • Industry Update – Understanding the current state of biofuels progress • Policy Explanations – Mechanisms and key legislative actions

In the end, the lessons learned from history can be seen to have applications in current times of high

energy prices, especially amid the rising concerns surrounding notion of the wide-spread use of biofuels

going into the future. If care is not taken, the past could be repeated and biofuels could again fall into

obscurity. Of course, if something better comes along then we might want to let that happen; however,

with the policies and technologies we have today we shouldn’t be moving forward in the dark.

4

2. Background

2.1 Biofuels in Brief

A general understanding of the factors involved with biofuels production and use is essential when

considering policy options that affect the industry.

2.1.1 Definitions

Broadly defined, biofuels are any fuels derived from living or recently-dead biological material (i.e. not

fossilized). Clearly this covers a wide range of fuel sources, and not necessarily new ones, as humans

have used biofuels such as firewood for centuries. Indeed they still see many applications in a variety of

industrial and commercial sectors. For example, biomass such as wood, waste, and by-products can be

burned as a supplement to fossil fuels in factories and power plants. Of greatest interest today, however,

is the use of biomass feedstocks to make liquid fuels as a substitute for gasoline and diesel in the

transportation sector. In particular, although alternatives exist, this refers to ethanol and esters (biodiesel).

Indeed, this is the exact definition of ‘biofuels’ used in most recent media and legislation, and therefore it

will be used as the definition for the remainder of this paper.

Figure 1. Outlines the most common means for deriving energy from biomass, highlighting the processes most pertinent to the transportation sector. The principle transportation biofuels in the US are ethanol and biodiesel, represented as plant methyl ester (PME) on the diagram. (Source: FAO 2004)

5

2.1.2 Feedstocks

Traditional Feedstocks – Traditionally, ethanol is fermented and distilled from simple sugars and

biodiesel is derived from vegetable oils. In principle, then, any plant that can supply these components is

an eligible feedstock for biofuels production. When considering the processing costs to obtain sugar or

oil from the field, however, certain crops have had a distinct advantage – particularly those that have been

harvested and processed with mature technologies for years. In the United States, this means that corn

and soybeans have taken center-stage as ethanol and biodiesel feedstocks. Similarly, sugarcane and

rapeseed are the sources of choice for Brazil and the EU, respectively.

Cellulosic Feedstocks – Much hope has been invested in alternative technologies for deriving sugars from

cellulosic biomass, which does not compete with food markets in addition to being much more abundant

and geographically disperse. It has been estimated that United States can reasonably supply roughly 1

billion tonnes of such biomass per year, with a significant portion consisting of dedicated cellulosic

energy crops as well as agricultural and municipal wastes1 (Perlack et al.).2 Because of the extra

processing steps, however, the current technology to cost-effectively obtain fermentable sugars from these

sources is prohibitively expensive (GAO). With the considerable amount of money currently being

invested in research, development, and demonstration, significant progress on this front is expected within

the next five years.

2.1.3 Production Methods

Depending on the feedstock, biochemical, thermochemical, or thermophysical methods can be used to

obtain liquid fuels from biomass, as suggested by figure 1.

Corn Ethanol – For corn ethanol, the sugars in the feedstock are fermented with yeasts in either a dry mill

or a wet mill processing plant, which both produce valuable co-products. Wet mill plants tend to be

bigger operations, also producing corn gluten feed (CGF), corn gluten meal (CGM), corn oils, and corn

syrups and sweeteners. On the other hand, dry mill plants are smaller, more common in number, and

often more focused on ethanol production, producing dried distillers grains with solubles (DDGS) and

wet cake as co-products. In addition, both types of plants are also collecting and selling CO2 for use in

dry-ice production and in carbonated beverages (Wu).

1 Figures A1 and A2 in the appendix outline these different categories, as well as demonstrate where they could be

obtained. 2 It is a result of this widely-circulated USDA study that leads many in the government to hope for a 30%

replacement of transportation fuels with biofuels. Most of this replacement would have to come from cellulose.

6

Biodiesel – Biodiesel production is usually done through acid or base catalysis processes which also

produces other marketable co-products. As a typical example, reactors take 12% alcohol, 1% acid or base

catalyst, and 87% oil, outputting 4% alcohol, 1% fertilizer, 9% glycerin, and 86% methyl ester (a

common biodiesel) (National Biodiesel Board).

Cellulosic Ethanol (aka “2nd generation” or “advanced biofuels”) – Production of ethanol from

cellulosic feedstocks is still in the earliest phases of development, with only a handful of demonstration

facilities in the US and abroad (Richard). In general, the biomass feedstocks are first pretreated by acid,

ammonia, or thermophysical methods to prepare the cellulosic material for conversion to sugars. After

that, specialized enzymes or microbes either break up the sugars in cellulose for traditional fermentation

or convert the cellulose directly to ethanol. Because of these extra steps, these processes have historically

been significantly more expensive than corn ethanol processes to carry out (GAO).

2.1.4 Vehicle Compatibility

Regular Vehicles – Lower blends of ethanol and biodiesel in gasoline can be used in regular engines at

low concentrations without any noticeable effect on performance, making almost every vehicle on the

road a potential user of biofuels in the near future. Indeed, almost half of the gasoline consumed in the

United States today already contains some ethanol at low concentrations.

Specialized Vehicles – Pure ethanol and biodiesel as well as higher blends must be used in dedicated

ethanol or biodiesel vehicles known as Alternative Fuel Vehicles (AFVs), or in vehicles designed to

handle any mixture of biofuel and gasoline, known as Flexible Fuel Vehicles (FFVs).

Fuel Stations – Generally speaking, only minor modifications to conventional fuel station equipment are

necessary to handle low blends of these biofuels. For higher blends, however, significant investments are

often required to replace incompatible materials in tanks and piping. For example, costs can range from

$7,559 to $247,600 for new facilities, and from $1,736 to $68,000 for retrofitting existing facilities (NREL).

2.1.5 Benefits and Criticisms

In addition to the enhancement of national security through the increased adoption of a domestically

produced fuel, biofuels have other distinct advantages. However, their use is not completely devoid of

negative effects. 3

3 The discussion comparing the suitability of different biofuels feedstocks and methods as they relate to the

environment and the economy is ongoing and complex, but is outside the scope of this paper.

7

Energetics and the Environment – For all biofuels, renewable biological material is the direct source of

the fuel. As a result, the use of such fuels tends to be more environmentally friendly than fossil fuels in

the sense that upon combustion they only release carbon that was originally captured from the atmosphere

(often termed 'carbon neutrality'). However, the extent to which that is true is highly dependent on how

exactly the biofuel is processed, and from which feedstock it originated. For example, ethanol made from

corn in the US can be seen to have a significantly lower net energy value (NEV)4 than that made from

other feedstocks, such as cellulosic ethanol or ethanol from sugarcane in Brazil (Shapouri et al. 2004).

This can be readily understood by realizing that an energy input (and subsequently pollution from burning

more fuel) is required for every step of the chain in figure 1, and that for different technologies and

feedstocks there are different efficiencies. Therefore, while the resulting ethanol from two different

feedstocks may be chemically identical, the wide-scale adoption of one versus the other can have

differing effects on the environment (Fargione et al.).

Physical Properties – Both ethanol and biodiesel contain less energy per volume compared to gasoline

and regular diesel.5 In addition, both are very hygroscopic and have different solvent properties, which

can lead to a host of problems in vehicles and distribution infrastructures. For example, as a polar

molecule ethanol tends to drive off common nonpolar additives to gasoline (volatile organic compounds –

VOCs), resulting in a higher vapor pressure of toxic fumes which introduces environmental concerns

(EIA). Furthermore, ethanol’s flame temperature, heat of vaporization, and other physical properties can

cause lower efficiencies or damage to modern engines. However, all of these issues can be overcome, and

indeed with properly engineered engines they can be turned into advantages over traditional fuels6.

Currently, though, they continue to represent additional hurdles to widespread adoption.

Food vs. Fuel Debate – Currently, one of the biggest areas of concern is the price of food in global

markets, which is estimated in 2007 to have risen somewhere between 40% and 75% since 2005, even

though US food prices have risen only 4 or 5% (Economist, FAO 2007). According to some studies, the

rise of biofuels production accounted for a major portion of this increase, leading to the reconsideration of

biofuels policies in the UK, Italy, and other countries (Harrison et al.). Indeed, some at the UN have even

4 The NEV ratio is determined by the amount of energy available from burning the fuel compared to the amount

of energy that went in to producing it. Although these numbers can vary widely depending on the model of analysis, according to a USDA study in 2001, corn ethanol had an NEV of 1.06 without considering co-products, and an NEV of 1.67 considering co-products. Cellulosic ethanol, on the other hand, has an NEV in the range of 5 to 10, depending on the source of biomass used (Shapouri et al. 2004).

5 Approximately, by volume, ethanol contains 2/3 the energy of gasoline and biodiesel 80% the energy of diesel. 6 Ethanol can serve as an oxygenate which improves the pollution characteristics of combustion, and engines

tuned to use ethanol can achieve faster injection rates and higher compression ratios, thus becoming more efficient (Brusstar et al.). Similarly, biodiesel has a higher cetane number and better lubricity, decreasing engine wear and improving performance (National Biodiesel Board).

8

been cited calling biofuels a crime against humanity (Ferrett). This assertion, however, is disputed by

many other studies, particularly among those that use older models for evaluating this complicated

system. In the US, it is generally thought by those in government agencies that biofuels production only

accounted for about 3% of the increase (US Senate Committee on Energy and Natural Resources),

although this fraction is the subject of intense debate worldwide (Runge et al.). In principle, if corn

remains a widely used feedstock then increased demand for ethanol will ensure that corn prices remain

high, which would likely affect the rest of the food market by raising prices of other crops. It is precisely

for this reason that so much interest is being invested in alternative, cellulosic feedstocks.

2.1.6 Other Biofuels

It should be noted that ethanol and biodiesel are not the only liquid biofuels that have potential for use in

the transportation sector, even though they have taken center-stage today. In addition to ethanol, other

alcohols such as methanol and butanol have been used in vehicles, and other processes such as those

deriving liquid fuels from algae are in development.

Methanol – Methanol was consumed in relatively significant quantities in government vehicles and in

racecars, although since the early 1990s its use today has been almost entirely phased out (Methanol

Institute, EIA). While the production of methanol via pyrolysis of biomass and through other methods

can be highly efficient and cost-effective (Nichols), its high toxicity and significantly lower volumetric

energy density puts it at a severe disadvantage to gasoline and ethanol for use as a motor fuel.

Butanol – Butanol is like ethanol in that it can be produced via fermentation from the same feedstocks as

ethanol, although historically these processes have been very inefficient. However, recent advancements

in commercializing butanol as a fuel have demonstrated its viability in today’s infrastructure. Butanol is

not hygroscopic, making it compatible with nearly all existing gasoline infrastructure, and its energy

content is only 10-20% lower than that of gasoline. While the EPA currently permits only butanol-

gasoline blending of up to 11.5% by volume, proponents claim that regular vehicles can run on high

blends of butanol with insignificant modifications (AFDC, ButylFuel).

Algae – Liquid biofuels for transportation might also be derived from algae, sometimes referred to as “3rd

generation” biofuels. Through these processes, carbon dioxide, nutrients, and sunlight are used to

maintain algae that can produce oils for biodiesel, butanol, or even gasoline. Algae technologies are still

in their initial phases, although several demonstration facilities are either planned or are currently in

production (Bullis, CNN).

9

These are but a few examples of alternative biofuels that have either been used in the past or are emerging

as potentially competitive in the future. While today’s discussion primarily focuses on ethanol, it is

highly important not to forget about some of these alternatives, which potentially could be significant in

the future.

2.2 Historical Background

A brief history of fuel ethanol with respect to the supply and demand situation in the transportation sector

helps understand the motivations behind the policy push for biofuels today as well as the reasoning

behind the mechanisms employed. In particular, when examining why current policy has seen much

more success in affecting the market than ever before it is useful to see the differences between today’s

socioeconomic climate and that of the past.

2.2.1 Framing the Discussion

Policy 101 – Regardless of the mechanism for energy policy, all initiatives come under periodic

Congressional review and require re-authorization and re-appropriation. Depending on the language of

the bills that made it through Congress, each respective program can have entitlement funding that lasts a

certain set number of years, or be supported entirely by annually appropriated discretionary money.

Similarly, tax credit legislation is usually written so as to expire after a certain number of years. It is for

precisely this reason that the number of energy programs (and the biofuels provisions therein) has grown

and shrunk over the years, depending on whether or not energy was of particular concern to the nation.

In this context, the distinction between short-term and long-term options should also be recognized when

analyzing energy policy. Many research-based initiatives as well as programs that ultimately require the

construction of new infrastructure are long-term options that have little real effect on an energy crisis in

the short-term. On the other hand, policies promoting conservation can have more significant short-term

effects. In times of need, usually all types of policies are pursued to varying degrees of success. Given

our nation's mechanism of funding, then, it should be no surprise that when short-term events bring down

energy prices long-term programs tend to become under-appreciated and unfunded, as happened in the

mid 1980s.

As a result, one of the most useful ways to frame this discussion is to keep in mind the fossil fuel

production prices of the time, as they represent the direct competition to alternative fuels and allude to the

kinds of pressures for change imposed on politicians. Indeed, the number of policy actions can be seen to

increase after periods of rising energy prices and decrease as prices fall. See table T1 in the appendix for

an extensive reference list of Congressional acts related to biofuels between 1970 and 2000.

10

Figure 2. The historical production prices for fossil fuels, adjusted for inflation, with the percent changes from the previous year.

2.2.2 Pre-1970

In the early 1900s ethanol was considered by many of the first automakers to be the fuel of the future.7

Indeed, America had been producing large quantities of ethanol in farm distilleries years earlier, where it

found use as lighting, cooking, and as an industrial fuel. After significant decreases in the price and

scarcity of gasoline in 1907 from Texas oil discoveries, however, combined with the US prohibition,

interest in ethanol as a motor fuel dropped off without making a comeback until the 1970s. However,

before then there were several occasions where it appeared the ethanol industry was close to gaining a

significant market presence.

Early Automobiles – In the early 1930s, gasoline blends with anywhere from 5% to 17% ethanol were

marketed for cars, branded as Alcogas, Vegaline, and Agrol, depending on what part of the nation it was

sold. However, even though the fuel’s properties as an octane booster were well known, lead additives

that accomplished the same thing were slightly cheaper, effectively knocking these ethanol blends off the

market (Looker).

The Great Depression – In 1933 with 25% employment and in the midst of the Dustbowl drought, many

farmers were leaving their ethanol stills to find work in the cities. Many, including Henry Ford,

7 For instance, the Ford Model T was originally designed to run on ethanol, gasoline, or any combination of the two.

11

supported the enactment of significant ethanol incentives to help the Midwest. These incentives were

never passed, however, due to opposition from petroleum lobbies (Kovarik).

World War II – From 1941 to 1945 ethanol production was increased to help meet the energy demands of

World War II, bringing the traditional methods of production to a reasonable level of maturity. However,

since the demand sharply fell after the war, production was scaled back significantly to almost non-

existent levels (Kovarik).

2.2.3 The Oil Shocks of the 1970s

As a result of the oil supply disruptions of 1973 and 1979, the 1970s and early 80s marked the beginning

of an increased interest in alternatives to oil. A wide variety of policy actions, including taxes on

conventional fuels, tax incentives for alternative fuels, financial assistance programs, money for research,

and regulations were all initiated to encourage conservation and investment in alternative fuels

infrastructure. Alcohol fuels were often included in biomass-related government efforts, with over 1

billion dollars being appropriated to biomass programs with the Interior and Related Agencies

Appropriation Act of 1978.

Ethanol Use Encouraged – In addition to the beginning of “gas guzzler” taxes on the use of conventional

fuels, in 1975 it was decided that the use of lead in gasoline was to be completely phased out by 1986.

Methyl tert-butyl ether (MTBE, made from petroleum and natural gas) would eventually replace lead as

the most commonly used octane booster, but ethanol and ethyl tert-butyl ether (EBTE, made from

ethanol) also became attractive candidates as additives, spurring some growth. Also during this period,

ethanol for the first time received attention through a tax exemption to the motor fuels excise tax with the

Energy Tax Act of 1978. Significantly, it was defined as alcohol not made from fossil fuels, solidifying

the future use of biological feedstocks such as corn. Other tax provisions for fuel blenders and purchasers

throughout the early 80s would further favor ethanol use in motor fuels, and financial assistance programs

such as loans and grants to ethanol producers would spur production.

As a result of all these factors, significant growth in the ethanol industry was observed. In 1980, the first

US survey of ethanol production revealed that about 10 ethanol production facilities existed, producing

about 50 million gallons per year (EIA).

2.2.4 The 1980s

During the beginning of the 1980s, immediately following the end of the 1979 oil crisis, a multitude of

federal laws and incentives were enacted that directly and indirectly attempted to aid the alternative fuels

industries. In addition to continued tax credits and exemptions, the Energy Security Act of 1980 provided

12

loans and grants for plant construction, as well as money for research and development. These efforts

were largely funded by an import tariff on cheaper ethanol from Brazil, and the Crude Oil Windfall

Profits Act of 1980 which began taxing the massive profits of oil companies. As a result of these

programs, the number of ethanol plants would grow to 163 in 1984, producing 510 million gallons per

year in 1984 (EIA).

Reagan and the Free-Market Approach –The Reagan administration, beginning in 1981, supported a

policy of allowing the free market to dictate developments in the energy industry, and as a result they

initiated a series of tax reforms and program cutbacks. The tax credits enacted under the Energy Tax Act

of 1978 were not renewed, as well as many of the investment incentives in that act and the Crude Oil

Windfall Profits Act of 1980. The thought was that the significantly high energy prices should be

sufficient to drive investment in alternative fuels without unnecessary government help.

The Oil Glut – As another result of the oil crises, several factors came together by the mid 1980s to bring

about a substantial drop in the price of gasoline in the United States. These factors included:

• Increased Supply o Iraq and Iran resume exports o Relaxation of oil price controls in 1975

Allowed for increased domestic oil production o Increased world oil production

Many new oil fields discovered • Decreased Demand

o Slowed economic activity in industrial countries o Conservation policies here and abroad

Fuel economy standards, etc. o Alternative energy sources here and abroad

Nuclear and natural gas electricity, renewable energy As a result of the oil glut and decreased federal support for the ethanol industry, gasoline retook its place

as the dominant transportation fuel, while energy concerns drifted away from the minds of lawmakers and

their constituents.

Growth of Ethanol Stalls – As a result of the falling price of gasoline coupled with inefficiencies in the

conversion processes employed, many ethanol plants became less profitable and started going out of

business. By 1985, of the 163 plants operating the year before, only 74 (45%) remained in operation,

despite all the help received from programs and subsidies. From this time until 2000, ethanol output

would not increase by much more than 100 million gallons of annual capacity until 2002 (EIA).

13

2.2.5 The 1990s

In the late 80s and early 90s, energy concerns were less prominent, and the growth of the biofuels

industry remained slow, in part due to several seasons of poor crop yields. However, with the post-

Reagan government reverting back to interventionist strategies in the energy industry, important

regulations that had some bearing to biofuels were enacted during this period. Now the focus was on

environmentalism, which did not particularly spur growth in the ethanol industry. Some research and

development for biomass energy did continue, and loan and grant programs did indeed exist, although

arguably these programs received much less focus.8

Environmental Regulations – The most important biofuels-related legislative actions of this period were

air pollution regulations that set the stage for the explosive growth of today. In 1988, Denver Colorado

mandated oxygenates in fuels used in the winter to mitigate carbon monoxide emissions, prompting many

other cities to follow suit. Ultimately, this led to the Clean Air Act Amendments of 1990, further

mandating the wide-spread use of oxygenates in areas designated by the EPA as over-polluting. What

resulted was a series of seasonal requirements for maximum vapor pressure of toxic fumes and oxygen

content in the fuel, which was henceforth known as reformulated gasoline (RFG). MTBE and other

ethers found considerable markets as oxygenates in RFG, in addition to their previously established use as

octane boosters. It would be much later when MTBE water pollution concerns began cropping up that the

real source of the demand for ethanol appeared.

Low Oil Prices – Oil prices reached a low of $10 per barrel between 1998 and 1999, and had been falling

since 1986 with an average of $17 per barrel for that time period (EIA). These low prices hurt oil

producers and discouraged further investment in oil production, while at the same time being beneficial to

refiners and encouraging gasoline consumption. This also served as a financial disincentive for the use of

alternative fuels.

2.2.6 Comparisons to Today’s Era

Like the 1970s the nation is again faced with high oil prices, although for variety of differing reasons. It

still remains to be seen whether or not prices will fall as they did before, but there are several factors that

seem to suggest that this oil crises will not be as short-lived as before.

Ever since the oil glut of the 80s when massive increases in production and refining capacity went

unused, the oil industry has significantly underinvested in new infrastructure and workforce talent (Davis

et al.). In addition, there have been several supply disruptions such as the Iraq War, insurgents in Nigeria, 8 As expressed by official within the DOE, biomass energy was considered somewhat of a fanciful futuristic

novelty by many in the organization, and as a result there was less emphasis placed upon the related programs.

14

and the hurricanes of Rita and Katrina. As a result, oil production does indeed have room to grow,

particularly with the prospect of increased exploitation of natural resources in places like the US outer

continental shelf, the Canadian oil sands, and others. However, other factors may prove that increased oil

production will not be the best answer to the world’s rising energy needs.

Global Growth – With significant recent growth in countries such as China and India, there is little

expectation that the demand for oil will fall off anytime soon. Indeed, in 2006 these two countries made

up 11.6% of global petroleum consumption, up from 7.6% ten years prior. Recently their use has climbed

up even further. If this kind of growth continues, these two countries’ massive populations and growing

wealth could very well lead them to catch up with US consumption, which for comparison was 24.5% of

world consumption in 2006 (EIA). In this light it becomes questionable whether oil supplies are capable

of catching up to the demand as they did in the 80s, allowing prices to fall significantly.

Increased Environmental Concerns – Concern regarding global climate change has also been gaining

significant attention in recent years, particularly in regards to the emission of greenhouse gases such as

carbon dioxide. Since CO2 emissions from the transportation sector has historically made up about 30%

of US emissions, any attempt to lower the overall amount of CO2 emitted in the United States will

invariably affect the market for oil. Indeed, in 2007, the transportation sector consumed 14.26 million

barrels of petroleum products, or just about 70% of US petroleum consumption, with the industrial sector

making up about 24% (EIA).

Both of these factors enhance the attractiveness of biofuels such as ethanol as an alternative to traditional

fossil fuels more than ever before. Not only does the economic viability appear strong for a decent

amount of time in the future, but the potential environmental benefits are becoming apparent to an

increasingly large number of people. As a result, legislative excitement regarding biofuels has been

revived, although a multitude of problems still exist.

2.3 Policy Potential

Ultimately, a quick examination of the history of fuel ethanol in the transportation sector makes clear that

petroleum based fuels have dominated the market, resulting in relatively little development in biofuels

production and distribution infrastructure. In this situation the catch 22 intrinsic in the nature of the fuel

ethanol industry can be ascertained, which is clearly the central issue policymakers must address if the

economically sustainable increased adoption of biofuels is desired.

Chicken or Egg – There will never be a significant demand for ethanol as an alternative to fossil fuels

unless the supply and distribution infrastructure is significantly built up and improved upon so that

15

customers have access to cheap fuel and vehicles run on it. However, without such a real demand for this

fuel, the risk of those large capital investments deters that very growth.

In this light, the role of policy to promote and support both the supply and demand for biofuels is readily

apparent. Indeed, energy policymakers have been attempting to do precisely this for all alternative fuels

over the past 30 years through a combination of a wide variety of methods, although with relatively little

success. However, since the year 2000 policy efforts have redoubled with more ambitious goals that are

indeed having some effects. Whether or not the industry can grow to a point of economic self-

sustainability where a significant amount of gasoline is displaced remains to be seen, and indeed will

likely require further policy action.

16

3. Recent Growth of the Biofuels Industry

Since the turn of the century, the consumption and production capacity and of biofuels has grown

considerably, more than ever before in history. Recent federal and state policy actions can be identified

as causes, although the past policies that set the stage for this growth have also played a significant role.

Before examining these policies, a quick look at the current state of the industry will prove beneficial.

3.1 Consumption

The increased amount of biofuels used in the transportation sector has come almost entirely from corn

ethanol, with smaller amounts of biodiesel from soybean oil. According to the Department of Energy’s

Energy Information Administration (EIA), between 2004 and 2007 the annual US ethanol consumption

has increased from 3.5 billion gallons to about 6.8 billion gallons, with an average of 94% of that ethanol

originating from domestic production. In addition, the total biodiesel production and consumption

increased from 28 million gallons to about 491 million gallons over the same time period (EIA). Even

after this continuing increase in use, ethanol and biodiesel still only accounted for about 2.6% of the

energy used for transportation in 2007, with the remainder coming from conventional diesel and gasoline

(EIA).

Figure 3. Recent growth of ethanol and biodiesel consumption in the United States.

3.1.1 Ethanol and Biodiesel as Fuel Extenders

According to the EIA, 99% of ethanol in the United States is consumed as a blend with gasoline at 10%

ethanol (known as E10) or less, often referred to as ‘gasohol.’ Similarly, the relatively small amounts of

biodiesel on the market are used primarily as B20 (20% biodiesel in regular diesel), B5, or B2. All of

17

these fuels can be used in regular engines, and indeed this use has been encouraged for many years

through state and federal laws and regulations that require their use to improve efficiency and decrease

pollution. In addition, when mixed with traditional fuels at these lower percentages, the drop in mileage

in regular vehicles often goes unnoticed by consumers, allowing retailers to sell these blends at the same

price as if it were pure gasoline (GAO). Conversely, higher blends of ethanol, such as E85 (85% ethanol

in gasoline), need to be sold at a discount to attract customers. As a result, the sale of these lower

percentage blends is encouraged.

3.1.2 Biofuels Compatible Vehicles

The number of FFVs on the road has also been increasing at a modest pace in the last several years,

although the number of these vehicles believed to be fueled by E85 is estimated to be around 5% (figure

4). In 2006, for example, the number of light-duty9 FFVs on the road as indicated by sales and vehicle

survivability statistics from the Alternative Fuels Data Center (AFDC) was just over 5.5 million, whereas

only 300,000 of these vehicles were fueled by E85.10 Due to a general scarcity of E85 fuel, E85

dispensing stations, and a lack of consumer awareness, this E85 use was used primarily within federal,

state, and municipal fleets where mandated by law. However, with recent commitments from major US

automakers, the number of FFVs produced is expected to substantially increase further in the next several

years (International Trade Administration). See figure A3 for a map of FFV vehicle registrations by zip

code, and figure A4 for a map of fleet locations and sizes.

Figure 4. Growth of FFVs on the road in comparison to those believed to be run on E85.11

9 As reported by the AFDC, the number of medium and heavy duty FFVs is negligible (1% and 0% in 2005). 10 Compared to an average of 14 million new light duty vehicles sold annually for the last 10 years (AFDC). 11 Since a large portion of FFVs are fueled with gasoline, these estimates are derived primarily from federal, state,

and municipal fleets, where renewable fuel use is mandated in legislative statute.

18

3.1.3 Feedstock Consumption

In 2007, the corn used to produce ethanol constituted just under 25% of the total US corn crop (figure 5),

which has also been growing in size in recent years due to improved farm efficiency and advancements in

seed engineering (National Agricultural Statistics Service). As mentioned previously, this increase in

corn use has led to significant concern regarding the competition of ethanol production with food.

Figure 5. Historical US corn crop and percentage used for ethanol production.

3.2 Production and Distribution

3.2.1 Fueling Stations

The majority of ethanol and biodiesel fueling stations are located geographically near the centers of

production, as well as in areas of high biofuel fleet concentrations. Since those locations are generally

near the centers of corn and soybean feedstocks, this results in a high concentration of fueling stations in

the Midwest, with a smaller amount of biodiesel infrastructure being somewhat more widely dispersed.

For example, in 2007 over 50% of a total of 1,208 fueling stations offering E85 were located in only five

states: Minnesota (25.6%), Illinois (12.1%), Indiana (7.7%), and Iowa (5.88%). For the 742 biodiesel

fueling stations, however, each state nation-wide had on average 2% of the total, with no state having

more than 10% (AFDC). While the number of these fueling stations continues grow, with 1,328 offering

E85 as of July 21, 2008, this still remains an insignificant percentage (<1%) of all motor fuel refueling

station nation-wide. See figures A4 and A5 in the appendix for maps of E85 and biodiesel refueling

stations.

3.2.2 Biorefineries

As of July 25, 2008, there were 168 ethanol production plants operating, with 382 new plants either

planned or under construction (DTN). The majority of these plants are smaller and increasingly more

19

efficient dry mills, with a smaller amount being larger wet mills. Almost all of these planned and

operating plants are corn ethanol plants, with less than 10 cellulosic demonstration plants under

construction (RFA). See figure 6 below for a map of ethanol production facilities and figure A6 in the

appendix for a map of biodiesel production facilities.

Figure 6. The use of biofuels is most concentrated near the locations of production, given the high costs of transporting the fuels. Source: DTN

Efficiency Increases – According to a 2007 industry survey by the Renewable Fuels Association (RFA)

with data analysis from the Argonne National Lab (Wu), industry efficiency has increased since a 2001

USDA survey (Shapouri et al. 2005). Summarized below are the major findings of this ANL/RFA study.

• Ethanol yield per bushel of corn increased 6.4% for dry mills and 2.4% for wet mills • Total energy use decreased 21.8% in dry mills and 7.2% in wet mills • Dry mill grid electricity use decreased 15.7% • There is a shift in process fuel use from coal to natural gas in the dry mills • DDGS sold from dry mills has increasingly (37% of the surveyed plants) been sold as

wet feed, reducing the heat demand of the plant • Water consumption decreased in dry mills by 26.6%

3.2.3 Distribution

Distribution considerations are the key to explaining the geographic locations of biorefineries and fueling

stations in the Midwest despite the fact that majority of US gasoline consumption takes place along the

coasts. In particular, technical difficulties in transporting ethanol require its distribution through

increasingly less economical methods. For instance, ethanol cannot be introduced into existing pipelines

20

because of its water accumulation properties,12 and the construction of dedicated new pipelines is

currently prohibitively expensive. As a result, ethanol is primarily distributed by rail, barge, and truck, all

of which are tied to the price of fossil fuels and are more prone to disruption. Indeed, rail industry

representatives have indicated that the current freight system, the primary means of shipping ethanol, is

reaching its capacity (GAO, Wu).

Truck Rail Barge Pipeline

Dry mills

Ethanol 26.3% 73.7%

DDGS 43.5% 56.5%

Wet cake 100.0%

CO2 83.3% 16.7%

Wet mills

Ethanol 25.0% 66.0% 9.0%

CGF/CGM 76.0% 1.0% 24.0%

CO2 13.0% 37.0% 50.0%

Table 1. Average transportation mode for products and co-products of ethanol plants. (Source: RFA 2007 industry survey, with data analysis by Argonne National Lab)

3.3 Economic Considerations

3.3.1 Fuel Prices

Even though reported prices per gallon for E85 are lower than gasoline (AFDC), ethanol has been more

expensive to produce and sell on an energy equivalent basis compared to gasoline (figure 7). In the

majority of cases, retailers are selling a scarcer more expensive fuel with a noticeable drop in mileage to

an exceedingly small customer base (FFVs). While part of the reason for this is due to the previously

described infrastructure difficulties, the majority of the higher costs are a result of production costs, which

consist primarily of feedstock costs. In addition, the prices for natural gas, coal, and electricity used for

processing have also been rising (ANL/RFA).

12 In addition, most existing petroleum pipelines flow from ports and coastal refineries along the costs and inland,

whereas ethanol needs to be shipped away from the Midwest to the coasts (EIA 2006).

21

Figure 7. The average fuel price for E85 on an energy equivalent basis has been higher that for gasoline. Only about 1% of ethanol produced for transportation is used in E85, with the rest being blended into gasoline at less than 10%. Source: AFDC

3.3.2 High Corn and Soybean Feedstock Costs

Recently, high prices for these feedstocks have driven ethanol and biodiesel prices up considerably. This

situation has been exacerbated by recent flooding in the Midwest, which led to significant losses in crop

yields. Indeed, the price of corn has skyrocketed, jumping up to a national average of just under $7.00 per

bushel after remaining relatively stable between $1.50 and $3.00 for the last 10 years. Similarly, aside

from a spike up to $9.00 per bushel in 2004, soybean prices have reached almost $14 per bushel after

remaining stable between $4.00 and $6.00 over the same time period (NASS). This has caused profit

margins for ethanol plants to fall, forcing several plants to begin seeking bankruptcy protection (DTN,

Hord, Peer).

22

3.4 Prospects for the Immediate Future

Increased Corn Ethanol Capacity – Despite the shortcomings in E85 fuel dispensing infrastructure, the

industry is still rapidly expanding production capacity. This can be clearly seen in figure 6, with the

construction of 73 new refineries and 319 more in the planning stages, representing a capacity increase of

more than 5.5 billion gallons per year13 (RFA). DOE and industry experts generally agree that 15 to 16

billion gallons is about the maximum ethanol capacity that the US corn industry could support (GAO).

The majority of this additional ethanol will be consumed as an additive to gasoline at 10% or less, until

nearly all gasoline in the country is blended at this level. After that, either blending at 20% for use in

regular engines must be tested and approved,14 or the infrastructure for higher blends such as E85 must be

significantly built up (including dispensing stations and vehicles).

Research, Development and Demonstration of Cellulosic Technologies – In light of the concerns

regarding the competition of food and fuel surrounding corn ethanol, most of the current hope for the

future of biofuels has been invested in using alternative cellulosic feedstocks for ethanol production. The

energetics, environmental aspects, and feedstock outlook all represent significant advantages of cellulosic

ethanol, but the economics of building and operating a cellulosic ethanol plant are more than three times

that for building a corn ethanol plant (GAO). As a result, further research and development of cellulosic

technologies has been a priority for government and industry, especially amidst future mandates for use of

such “advanced biofuels” being cited in the law. While it remains questionable whether or not these

timetables for cellulosic ethanol can be feasibly complied with, progress has indeed been made, with

plans for several new plants that use material other than corn to produce ethanol currently in the initial

stages15.

13 Indeed, production capacity is growing quite rapidly – in March of 2008, the Renewable Fuels Association was

reporting a total capacity of 8.3 billion gallons per year (compared to 6.8 billion gallons produced in 2007). In April 2008, the EIA reported that already 2.8 billion gallons of ethanol have been supplied to the market year-to-date.

14 Preliminary tests done in Minnesota suggest that using E20 in regular vehicles is relatively safe (Bevill et al.). 15 One such plant is under construction in Soperton, Georgia. The goal is to produce 40 million gallons of ethanol

annually from wood residues (Wallace)

23

4. US Biofuels Policy

As discussed, there have been many pieces of legislation the United States pertaining to transportation

biofuels originating from as far back as the 1970s, even though policy developments declined when gas

prices did. With prices rising again, legislative interest has picked up dramatically at both the state and

federal levels. In general, the policy has either provided incentives for production and use and/or

consisted of money for research and development. Although it can be difficult to separate the effects of

policy from the pressures of market conditions, it is clear that many of these past and recent policies have

played a significant role in the observed recent growth of the biofuels industry.

4.1 Government Mechanisms of Involvement

When responding to the energy concerns of their constituents, lawmakers who wished to affect change in

the energy industry by promoting the use of biofuels have had several traditional options available to

them. In general, policy can promote more production, more use, or more research of biofuels-related

technology, and it can come either from an act of Congress or an executive order.

4.1.1 Approach

Direct Approaches – In general, the United States policy options for the direct promotion of biofuels

include:

• Regulations o Restrictions on competitors o Mandates for use

• Financial incentives o Tax preferences o Loan guarantees o Construction grants o Accelerated depreciation of capital

• Research and development o Targeted research at national labs o Research and demonstration grants o Technology transfer programs

• Other programs o Educational programs o Technical assistance programs

• Tariffs and trade agreements o Import tariffs to discourage cheaper imports

The previous list represents the five categories into which the traditional biofuels policies fit, with broad

examples. Each type of policy measure has different costs associated with it, and targets different

24

players. In general, as identified by the Alternative Fuels Data Center, part of DOE’s Office of Energy

Efficiency and Renewable Energy, previous laws and incentives have targeted:

• Fuel station builders and operators • Alternative fuel and alternative fuel vehicle researchers • Fuel purchasers • Original equipment manufacturer (OEMs) and retrofitters • Individuals • Fleet purchasers and managers • Truck stop electrification station builders and operators16 • Alternative fuel dealers • Alternative fuel producers

It should be understood that not all of these approaches and targets are necessarily equally effective,

depending on a variety of factors. Legislation can have differing affects depending on regional

economics, and can in some cases contradict other pieces of legislation in the biofuels policy arsenal. For

example, import tariffs on ethanol produced in Brazil can promote domestic production. However, in a

market that’s reached production capacity amidst an increasing volumetric ethanol consumption mandate,

that same law hinders domestic use by driving prices up through the denial of access to cheaper sources.

Indirect Approaches – In addition to the previously mentioned targets, policy can affect the biofuels

industry indirectly, either intentionally or unintentionally. While these effects are most commonly

unintentional, they can be arguably the most important factors that ultimately determine the fate of the

growth of the industry. For instance, any policy action such as subsidies or trade agreements that result in

lower corn prices or an increased corn supply will affect the price and viability of ethanol derived from

corn. On the other hand, any government action that reduces the supply of oil imports or otherwise

strains the supply of oil, such as a war, will also promote biofuels by augmenting demand for alternatives.

This is not to say, of course, that all such options are politically available to policymakers, but only that

the effects of other policies can be dramatic and should be kept in mind when thinking about the overall

goals of the country.

Petroleum Taxes/Carbon Tax – One of the most significant untried indirect (and arguably very politically

unavailable) policies to promote the production and use of biofuels would be any legislation that puts an

additional cost on the use of traditional fuels. This could include a tax on CO2 or a carbon cap and trade

system. According to a survey of economists carried out by the Wall Street Journal, a majority of

economists surveyed believe such a policy would have the most economically efficient effect in

16 Truck Stop Electrification stations at rest stops allow long-haul trucks to draw power from electrical generators

instead of an idling engine during federally mandated rest periods.

25

promoting biofuels, more than any other policy (Wall Street Journal). While indeed this policy would be

unpopular with oil and coal companies as well as with consumers who would have to pay higher prices at

the pump, it could potentially increase tax revenues directly and indirectly by removing the need for the

other, less efficient alternative energy policies. Of course, with such a sweeping measure there are a

multitude of factors to consider, including the ability of the energy sector as a whole to meet energy

demand under these constraints.

4.1.2 Implementation

Government Agencies – The main government agencies relied upon by Congress to implement biofuels

policy include:

• United States Department of Agriculture (USDA) • Department of Energy (DOE) • the Environmental Protection Agency (EPA) • Internal Revenue Service (IRS) • Department of Transportation (DOT) • US Customs and Border Protection (CBP).

In general, each agency implements the policy requirements related to it, but there are some significant

overlaps in terms of the mechanisms employed. For example, the IRS accommodates tax law changes,

the EPA handles mandates through regulations and standards, and CBP enforces tariffs and trade

restrictions. When it comes to subsidies, however, the DOE, USDA, DOT, and EPA all play various

roles. In general, the main activities of the DOE have been focused around the theme of research,

development, and demonstration. As such they invest in research at their national labs and provide grants

and loan guarantees for external research and technology demonstrations at companies and universities.

The USDA, naturally, has been more focused on agricultural developments, such as the administration of

loan guarantees, capital reimbursements, and grants that go to participants in the agricultural sector, both

large companies and small farms. Likewise, the EPA also administers specialized funding programs

related to air quality, while the DOT focuses on fuel economy standards such as CAFE and other highway

initiatives.

4.2 Important Recent Legislation

There have been many policies related to biofuels over the years, but never before has there been the kind

of explosive growth in their production and use that we see today. Several important components of

recent public policy can be identified as drivers for this, and indeed it can be seen that policymakers have

become increasingly interested in recent years. In fact, the number of legislative enactments related to

biofuels from each of the last two years has been greater than the number of all legislative enactments

26

from before 2001.17 Of course, policy does not completely control the marketplace or the development of

new technologies, but it can create situations that facilitate development to some extent. Ultimately it is

the combination of market conditions and all of the different policies initiatives, whether directly related

to biofuels or not, that have led to the recent growth in the industry. Some examples of the most

significant legislative actions leading to the biofuels development of today, and which are important for

future development, are listed below. See Table T2 for a complete listing of currently applicable federal

policy implementations affecting the biofuels industry.

• Environmental regulations

o Oxygenate requirements o Bans on MTBE use o CAFE standards

• Fleet requirements for vehicles acquisitions and fuel use o The Energy Policy Act of 1992 and amendments o Executive 13149

• Blending mandates – state and federal Renewable Fuel Standards o The Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 o Midwest state requirements

• Tax laws o Volumetric Ethanol Excise Tax Credit (VEETC)

• RD&D and Financial Assistance Programs o Biomass Research and Development Initiative

• Ethanol Import Tariff

4.2.1 Regulations and Mandates

Environmental regulations and alternative fuel/vehicle use mandates have had the most significant recent

effect on the biofuels industry. They are responsible for creating the market that kick-started the industry

after 2003, and have played an important role to promote the development of distribution infrastructure

and compatible vehicles.

The MTBE Phase-out Promotes Ethanol Demand – Ever since the Clean Air Act Amendments in 1990,

MTBE was used in high concentrations to fulfill the EPA’s oxygenate requirements in gasoline across the

country18. In 1995, however, after high levels of MTBE were discovered in many water wells by the US

Geological Survey, many states began enacting bans (US Dep. of the Interior). In 2003 California was

the first major MTBE consuming state to have its ban come into effect, triggering the beginning of an

overall national phase-out as other states such as New York followed suit. This is the single-most

17 See figures A7, A8, and A9 to see the increasing trends in state and federal enactments. 18 In 1993 production of MTBE was the second most produced organic chemical in the United States (US Dep. of

the Interior)

27

significant source of the recent demand for ethanol,19 which has been marketed as a safe alternative to

MTBE (although that assertion may or may not be true).20 Importantly, this source of demand is very

nearly saturated now that MTBE has been completely phased out, although production capacity and other

mandates for ethanol use continue to climb.

Figure 8. The increased recent demand for ethanol has been created by the MTBE phase-out. A Gasoline Gallon Equivalent (GGE) is the number of gallons of each fuel that has the same energy content of one gallon of gasoline.

CAFE Promotes Production of AFVs – The Corporate Average Fuel Economy standards established in

1975 under the Energy Policy and Conservation Act required automakers to raise the average fuel

economy of the vehicles they produced. In addition, the Alternative Motor Fuels Act of 1988 allowed

manufacturers to gain credits for producing AFVs and FFVs. This policy is largely responsible for all

19 Along with rising crude oil prices, this was arguably a large factor in driving up gasoline prices on the coasts

after 2002. (1) The purchasing from a limited supply of ethanol in the Midwest that had to be delivered via a limited supply of rail cars and barges was initially quite expensive. In some cases it was more economical to pay the tariff and import from Brazil. (2) In order to handle the different chemical properties of the ethanol they did buy, many infrastructure investments were required at blending stations to keep ethanol-RFG separate from non-ethanol-RFG, which had a different chemical makeup of VOCs incompatible with ethanol. (3) Initially there was a limited supply of non-MTBE gasoline blendstock to purchase from. These three hardships led to a stipulation in the Energy Policy Act in 2005 which “remove[d] the burden on industry of having to comply with the oxygen requirement.” This is only a temporary relief, however, as under the RFS blenders will have to step up their ethanol blending in several years anyways. (EIA 2006)

20 Ethanol is not significantly less toxic than MTBE, but MTBE makes groundwater non-potable at very low concentrations. As a polar compound, ethanol drives off nonpolar hydrocarbons in gasoline such as benzene (Medlin).

28

such production developments in this area. For instance, according to the EIA, virtually all of these

vehicles produced since 1992 were for the sole purpose of satisfying these requirements. Unfortunately,

this often led to remarkably inefficient vehicles.21 In addition, the owners of these vehicles often were

not aware of the capability for fueling on high blends of ethanol or biodiesel, and public fueling stations

were relatively scarce outside of the Midwest. Despite these shortcomings, however, this policy spurred

the production of these vehicles, setting the stage for the future development of standards and expertise,

an important factor in bringing the technology to the next level of maturity.

Fleet Requirements and Distribution Infrastructure – Federal fleet requirements to purchase and use the

AFVs produced as a result of CAFE standards have been around since the Energy Policy Act of 1992,

which required that 75% of new vehicle acquisitions in federal fleets be AFVs. Many state, local

government, and private fleets have opted-in similar requirements.22 Commonly, however, FFVs were

purchased to fulfill these requirements and then simply run on gasoline. It would be later executive

orders such as EO13149 in 2000 as well as laws such as the energy acts of 2005 and 2007 that would

effectively require these vehicles to be fueled on alternative fuels. Measures such as these have increased

the number of federally operated fueling stations to some extent, again furthering the development of fuel

dispensing technology. In many cases, however, fleets have found exemptions from these fuel

requirements by pursuing petroleum reduction paths instead, and the actual use of alternative fuels has not

actually grown (figure 10). Indeed, this issue is dealt with in executive order EO13423 (issued in 2007),

which mandates an increase in renewable fuel use by at least 10% annually.

250255260265270275280285290295

Mill

ion

GG

Es

2000 2001 2002 2003 2004 2005 2006

Covered Petroleum and Alternative Fuel Consumption

Alternative FuelsCovered Petroleum

Source: AFDC Figure 9. Federal fleet fuel consumption.

21 The E85 certified Suburban made by GM in the 1990s only averaged about 15 mpg, but with the renewable fuel

credits under CAFE, it counted as a vehicle with 29 mpg (Wallace) 22 It was left up to the discretion of the DOE whether or not to enforce fleet mandates at these levels, with official

eventually deciding not to, saying it was unnecessary to achieve the national gasoline reduction goals (AFDC).

29

Ethanol Import Tariff – An import duty of $0.54 per gallon of pure ethanol is levied on all countries not

part of US free trade agreements, with an additional duty of 2.5% the value of the fuel. The goal of this

tariff is to allow the domestic ethanol industry to compete with cheaper imports, particularly from

Brazilian sugarcane ethanol. Because of free trade agreements such as NAFTA and CBI, however, many

of these imports are allowed to enter the country duty-free by routing through exempt countries (Koplow).

For instance, hydrous ethanol produced in Brazil can be exported to countries in the Caribbean where it is

reprocessed to remove the excess water, after which it becomes an export of that country and exempt

from the tariff. These imports have made up less than 10% of all ethanol consumed in the last several

years, and as such the effect of this loophole should be considered relatively negligible. However, in the

future rising fuel mandates under the new Renewable Fuel Standard may necessitate more importation if

domestic production does not meet demand. Indeed, econometric studies done even before the RFS was

expanded projected that if growth continues as planned, prices would be 13.6% lower without the tariff

(Elobeid et al.).

4.2.2 Renewable Fuels Standards

Perhaps the most ambitious of recent biofuels regulations and mandates are federal and state renewable

fuels standards (RFS) that explicitly mandate the use of biofuels in the transportation sector. The federal

Renewable Fuel Standard introduced in the Energy Policy Act of 2005 and increased by the Energy

Independence and Security Act of 2007 mandates that among all gasoline sold in the United States there

must be consumed at least 15 billion gallons of “conventional” renewable fuels (corn ethanol) in 2015

along with 5.5 billion gallons of cellulosic and other “advanced” biofuels. The total amount of biofuels is

then mandated to grow via further increases in cellulosic production to 36 billion gallons by 2022.23

Implementation – As administered by the EPA, the federal RFS program is implemented using a free-

market credit trading system, where each gallon of renewable fuel is given a unique identification number

that can be used to demonstrate a fuel blender’s compliance or sold to other blenders who are not

blending at the annually mandated amount, as determined by the EPA (EPA, Feb. 2008).24 This system

allows for all blenders and retailers of motor fuel to come under compliance, even if they do not have the

infrastructure to handle ethanol or their geographic location makes the use of ethanol uneconomical.

Under the authority granted the EPA by the Clean Air Act, violators of this system are liable for a fine of

$32,500 per day.

23 See Table T3 for the complete list of the annually increasing mandates of the current RFS. 24 The composition of a “gallon of renewable fuel” may change depending on the source. For example, a gallon of

cellulosic ethanol counts as 2.5 gallons of renewable fuel, whereas corn ethanol is 1.0. Other biofuels will be assigned a number by the EPA according to the energy content and environmental benefits of those fuels as determined by the EPA.

30

State Standards and Portfolios – In addition to the federal mandate, many states have similar renewable

portfolio standards requiring the use of renewable biofuels, each mandating different amounts of blending

for ethanol and biodiesel. In particular, 10 states have their own RFSs and blending requirements (Pew

Center on Global Climate Change as of June 26, 2008). For example, in Minnesota all diesel is required

by law to contain 2% biodiesel, and by 2022 all gasoline must contain 20% ethanol. However, variations

calling for different “boutique” fuels from state to state are unpopular among many in the refining and

fuel delivery industry, with the National Petrochemical and Refiners Association indicating that such state

mandates be should be federally preempted (Business Wire).

Industry Effects and Difficulties – So far the biggest effect of the federal RFS on the industry has been a

reduction in the risk of investment in an ethanol plant given the guaranteed future demand, spurring

recent growth. Indeed, production capacity had already exceeded the levels required in the 2005 RFS due

to the MTBE phase-out, which was one of the primary reasons for the increased RFS in 2007. However,

more time is needed to see the long-term effects of the expanded RFS on the market, including whether it

will be successful without severely hampering the economy. Already many have pointed to the increase

in production and blamed it for increases in livestock feed prices, such as the governor of Texas who

requested a state waiver to the requirements (EPA, May 2008).25 The EPA’s decision regarding this

waiver is still pending, and will likely not be decided until after a USDA study on the effects of biofuels

use on the economy comes out later this year.

4.2.3 Incentives for Research, Development, and Demonstration

Research and Development – Grant programs have also played a role in developing biofuels technology,

although to a lesser extent than mandates and regulations. In general, these programs have given money

to researchers working on developing the fundamentals behind biofuels technology, such as enzyme and

microbial developments to improve yields. Except in cases where technology transfer programs were

successfully carried out, it is difficult to judge the full extent of the effect these programs had in

promoting recent growth, if at all. In most cases, such programs tend to promote increased fundamental

knowledge during the early stages of development, but when the technology becomes commercially

interesting it is the companies involved that drive further developments. As a result, R&D programs from

the 70s, 80s and 90s may have had some role to play, but the extent to which they did remains unclear.

Demonstration Money – Of more significance are those programs that provide money to industry for

demonstrations and pilot plants. These programs, such as the Biomass Research and Development

25 A state waiver to the RFS may be granted by the EPA administrator if implementation would “severely harm the

economy or the environment” of the region or if there is an inadequate domestic supply.

31

initiative created in 2000 (which funds general R&D as well) allow the government more direct control to

bring a greater measure of technological development directly to commercial viability, provided that the

demonstrations are successful. Most recently, given the perceived urgency of movement to non-corn

ethanol, government demonstration programs have been investing in cellulosic plants. For example, 9

such biorefinery projects were recently chosen by the DOE for a cumulative award of $240 million

dollars to be distributed between them, with the remainder of the funding for these projects ($495 million)

coming from private industry and investors (DOE).

4.2.4 Taxes and Financial Incentives

Perhaps one of the biggest areas of support for biofuels, and the most intensely debated with regards to

loopholes and costs, lies with subsidies. Indeed, entire books have been written just to describe the

multitude of tax preferences and financial incentives that promote biofuels with analysis as to the costs

and effects. Practically every one of the possible policy targets listed in section 4.1.1 has been the subject

of some tax credit or other financial incentive program during the last 30 years, leading to some

development. While the extent of the effects of these policies is difficult to determine,26 some of the more

prominent measures stand out as being potentially instrumental in facilitating recent growth, as indicated

by dashed boxes in figure 11.

Figure 10. Summary of biofuels subsidy mechanisms. Source: Koplow

26 A 2007 Government Accountability Office (GAO) report criticized the DOE for lacking a strategic approach to

evaluating the effects of biofuels tax policy, although arguably this does not fall under the purview of the DOE.

32

Volumetric Excise Tax Credits – The Volumetric Ethanol Excise Tax Credit (VEETC) as well as the

Volumetric Biodiesel Excise Tax Credit (VBETC) are the single largest subsidies for biofuels to date

(Koplow). These give blenders a $0.50 tax credit per gallon of pure ethanol and a $1.00 tax credit per

gallon of pure biodiesel they add to the finished motor fuel they sell. This credit has been instrumental in

maintaining ethanol’s price competitiveness as an additive to gasoline, since except until recently the

difference between the wholesale price of ethanol and that of unblended gasoline has stayed below $0.40

(DTN).

Investment Tax Incentives – While the VEETC may be critical in allowing the industry to remain solvent

while still in the early phases of development, perhaps some of the most important of all financial

incentives are the ones that promote additional investment. The Energy Policy Act of 2005, for example,

created a 30% federal income tax credit up to a maximum of $30,000 against the cost of installing ethanol

compatible dispensing equipment at fuel stations and residences.

Costs – Mainly as a result of the kinds of strategies employed by the VEETC and the VBETC, the costs

of maintaining these biofuels financial incentives have increased linearly with increased consumption. In

2006, the VEETC alone was responsible for about $4 billion in revenue loses, with the VBETC

responsible for $355 million. As seen by the estimates in table 2, these costs represent more than half of

the total biofuels subsidies that year.

Table 2. Summary of estimated cost range for all combined US government subsidies in support of biofuels. Source: Koplow

4.2.5 Modifications by the 2008 Farm Bill

While all of the biofuels credits and programs prior to March 2008 are listed in table T2 in the Appendix,

the Food, Conservation, and Energy Act of 2008 (P.L. 110-246) did indeed make some changes and

additions to the biofuels policy lineup. Significantly, many of the programs supported by this bill

33

received large initial mandatory funding levels. As summarized by the BRDI, the major biomass-related

provisions of this bill include:

• Funding production and research of specialty crops and animal manure for energy uses. • Establishing a Renewable Energy Advisory Committee (REC) for the U.S. Department of

Agriculture (USDA) and its Land Grant University partners. • Setting guidelines for Federal Biobased Products Procurement. • Funding and guaranteeing loans for cellulosic biorefinery construction. • Funding repowering assistance to replace fossil fuel heat and power with renewable sources. • Establishing contract grower payments for bioenergy crops. • Involving the Commodity Credit Corporation in bioenergy crop markets. • Establishing biofuel producer payments for advanced biofuels. • Encouraging use of forest feedstocks for bioenergy. • Supporting biodiesel use for transportation fleets. • Funding and guaranteeing loans for the Rural Energy for America Program’s renewable energy

efforts. • Reauthorizing the Biomass Research and Development Initiative (BRDI) through 2012, and

allowing for more flexible BRDI technical solicitations. • Establishing a Community Wood Energy Program. • Requesting a comprehensive cooperative Federal study of biofuels infrastructure needs and

solutions. • Requesting a comprehensive cooperative Federal study of biofuels production, feedstocks,

markets, and policies. • Amending several tax and trade provisions for cellulosic ethanol and other biofuels, including:

o Cellulosic Biofuel Production Tax Credit o Alcohol Credit and Volume Calculation o Ethanol Tariffs and Duty Drawback Limits on Imports

34

5. Final Thoughts and Recommendations

5.1 Summary of Most Influential Policies

5.1.1 Historically

Biofuels have seen a relatively consistent level of support in the tax code ever since the 1970s, with

varying levels of interest in R&D and industry development depending on the economic climate of the

times. Even though biofuels did not capture any significant share of the fuels used in the US

transportation sector before the year 2000, several important legislative actions and policies set the stage

for recent growth. In general, the most important of these were regulatory in nature, introducing

important market pressures that culminated in the growth we see today.

• Clean Air Act – EPA authority • Lead phase out – Initiated MTBE use • Oxygenate requirements – Widespread MTBE use • EPACT of 1992, CAFE – AFV and FFV production • State and federal fleet requirements – Developed dispensing infrastructure • Taxes and financial assistance – Keeps biofuels competitive compared to gasoline

5.1.2 Recently

The combination of the policies of the past with another bought of significantly elevated energy prices has

led to the rapid recent growth in the ethanol industry. The most significant policies enacted since the year

2000 include:

• MTBE bans – Dramatic and immediate increased ethanol demand • Executive orders – Required alternative fuel use • Renewable Fuel Standard – Reduced ethanol plant investment risks • Demonstration Plant Construction Money – Drives cellulosic ethanol technology forward

5.2 Future Considerations

Confidence is high that the bio-fuels industry is here to stay and will continue to grow, in large part due to

the guaranteed demand afforded the industry by the RFS. Despite this, there may be some problems

looking ahead in the near term.

5.2.1 Supply Infrastructure and Vehicle Demand

MTBE – Owing to the factors discussed throughout this paper, the industry has stepped up construction of

new ethanol production capacity. Initially, the immediate demand for ethanol arose in the void left by

MTBE after 2003, forcing blenders to buy considerable amounts of ethanol from a limited supply. Given

35

the considerable amount of demand this created, the industry had plenty of room to grow for several

years. However, now that the demand for ethanol as an oxygenate has been saturated, further growth

relies almost exclusively on the RFS. Since this demand is not immediate, the construction of new corn-

ethanol plants is becoming riskier, and growth looks likely to slow.

Future Demand – The future demand for ethanol, as guaranteed by the RFS, will be in regular vehicles at

blends of 10%. Once that market is saturated, with all cars in the nation fueled by a 10% gasoline-ethanol

mix, the next step would be a move to a 20% blend. However, if gasoline prices remain high, the

attractiveness of E85 should increase as more FFVs are sold and as more consumers become aware of

their capabilities. Regardless, in order to accommodate this growth, the infrastructure to ship ethanol

from the Midwest to the coastal regions will have to be significantly built up, and fueling stations capable

of handling ethanol will have to become more prevalent. These are issues that public policy can

potentially address.

5.2.1 Other Potential Roadblocks

In general, the economy has not been performing well given the housing market collapse and the general

trend of rising energy costs. Many in the ethanol industry, like in most other industries, are facing

financial problems in the near term. However, there are several economic considerations unique to

ethanol.

Food vs. Fuel – The current competition for corn as a feedstock for ethanol and for livestock presents a

rather significant publicly conspicuous supply constraint for ethanol use, especially given recent flooding

in the Midwest that has inundated farmland. In light of the multitude of bad press, the ethanol industry

may stand to suffer from public opposition to the RFS. Indeed, it may become necessary for the EPA

administrator to grant waivers to the RFS if the supply cannot meet the demand (although that point may

be several years away). The resolution of this situation will ultimately be decided by the success or

failure of cellulosic ethanol, which promises to relieve this pressure on corn prices.

If Gas Prices Fall – If gasoline prices were to fall considerably, ethanol would not be able to compete

without government help. In this case, only the most efficient producers would survive, and most would

go out of business, as happened in the 1980s. If desired, this circumstance could be prevented by

aggressive public policy measures such as a carbon tax, as previously described.

36

5.3 Recommendations

Most of the discussion in section 5.2 is predicated on the assumption that a more complete switch away

from gasoline to ethanol produced from biomass is desired, although a greater flexibility might ultimately

prove more beneficial to the nation.27 Indeed, many in Congress proclaim that they do not want to

choose the technology through their policies, but given the multitude of direct references to ethanol in the

law, that is effectively what has been done.

To Reach the 30% Biofuels Goal – In order to bring the nation to the point were 30% of traditional

transportation fuels are comprised of biofuels, it seems likely that continued government support will be

required. The most important next step is the advancement of cellulosic feedstock processing methods,

and indeed this is what is currently being pursued (DOE).28 This would alleviate the pressure on food

prices and ease distribution concerns to a small extent, as plants could be more dispersed. The extent to

which the government gets further involved is up for debate. For instance, tax credits and grants could be

proposed to address the infrastructure needs of the industry, but ultimately these facilities will be built

regardless, as long as the demand exists. The effect of the subsidies, then, would simply be to speed up

the process. If one expects that gas prices will fall, then this kind of speed might prove crucial in

allowing the industry to gain a stable foothold.

To Reach 30% Less Dependence on Fossil Fuels – While the current RFS does include provisions for

special treatment of alternative “advanced biofuels,” more room should be allowed for alternatives in the

transportation sector, such as butanol, algae fuels, hydrogen, electricity, and others, both within the tax

code and without. In particular, the money going to ethanol and biodiesel through tax credits and other

incentives is considerable, and these programs are all extremely specific to these fuels. Definitions that

include other possibly more environmentally and economically attractive alternatives should be

considered. As mentioned previously, it may be most effective to directly limit emissions and then let the

market decide which renewable fuel is the most economical. Of course, the feasibility of such an effort

would have to be seriously studied, as it could very likely impose a significant hardship on many existing

industries.

27 “Reducing America’s dependence on foreign oil” is a common line heard in speeches recently, but it doesn’t

necessarily refer exclusively to biofuels. 28 It is important at this point for the tax code to significantly favor cellulosic ethanol producers, as is stipulated in

EPACT2005 and 2007, which allow one gallon of cellulosic ethanol to count as 2.5 gallons of corn ethanol.

37

Appendix

A1 – Biomass Feedstock Classifications (FAO 2004)

A2 – Estimated Location and Quantity of US Biomass Resources (NREL)

38

A3 – FFV Vehicle Registrations (NREL)

39

A4 – E85 Fleets and Fueling Stations (NREL/AFDC)

40

A5 – Biodiesel Fueling Locations (AFDC)

A6 – Biodiesel Production Facilities (National Biodiesel Board)

41

A7 – State and Federal Enactments by Fuel Type (AFDC)

A8 – State and Federal Alternative Fuel Enactments by Policy Mechanism (AFDC)

Regulation Enactments by Mechanism

0

20

40

60

80

100

120

Pre-2001 2001 2002 2003 2004 2005 2006 2007

SourceL AFDC, Jan 2008

Num

ber o

f Ena

ctm

ents

Fuel Production StandardsRenew Fuels Standards

Renewable Fuels Mandates

Acquisition RequirementsVehicle Registrations

Emissions Inspections

Idle ReductionsFuel Use Requirements

Fuel Taxes

Rest Stops

Economic Development

42

A9 – State and Federal Alternative Fuel Enactments by Targeted Agent (AFDC)

Inecntive and Law Enactments by Targeted Agent

0

50

100

150

200

250

300

Pre-2001 2001 2002 2003 2004 2005 2006 2007

Source: AFDC, Jan 2008

Num

ber o

f Ena

ctm

ents

Station Builder/Operator

Alternative Fuel and Alt. Fuel VehicleResearcherAlternative Fuel Purchaser

OEM/Retrofitter

Individual

Fleet Purchaser/Manager

Truck Stop ElectrificationBuildier/OperatorAlternative Fuel Dealer

Alternative Fuel Producer

T1 – List of Significant Biofuels Legislation (1974-2000)

Year Policy Action Biofuels-Related Provisions

1974

Federal Non-nuclear Energy Research and Development Act of 1974 (FNERD) (P.L. 95-39)

-Authorized DOE funding studies related to alternative fuels and or loan grants to assist in construction of alternative fuel demonstration facilities

Solar Energy Research, Development, and Demonstration Act of 1974 (P.L. 93-473)

-Legislative support for R&D for converting cellulose and other organic materials into fuel

1975 Energy Policy and Conservation Act of 1975 (EPCA) (P.L. 94-63)

-Established CAFÉ standards. -Amended in 1988 giving CAFE credits for alternative-fuel vehicles

1977 Food and Agricultural Act of 1977 (P.L.95-113) -USDA loan guarantees for biomass pilot plants (never built), expanding USDA renewables R&D provisions

1978

Energy Policy Act of 1978 Energy Tax Act (ETA) (P.L. 95-618)

-Tax credits for renewable energy equipment -Full motor fuel excise tax exemption of $0.04 for 10% ethanol blends, resulting in a $0.40/gallon subsidy -Additional 10% energy investment tax credit for biomass-ethanol conversion equipment

1979

Interior and Related Agencies Appropriation Act of 1979 (P.L. 96-126)

-$19 billion appropriations for Energy Security Reserve Fund, with $1.5 billion for FNERD of 1974 -$100 million each for feasibility studies and cooperative commercial plant development

43

-$500 million for loan guarantees of FNERD

1980

Crude Oil Windfall Profits Tax Act of 1980 (WPT) (P.L. 96-223)

-Extended ethanol tax credit until 1992, extended biomass-ethanol investment tax credit until 1985 -Tax exempt industrial development bonds for development of facilities producing renewable energy -Introduced income tax credit for ethanol fuel blenders (as an alternative to the exemption), $0.40/gallon of 190 proof ethanol used, $0.30/gallon 150-190 proof

Energy Security Act of 1980 (P.L. 96-294) Biomass Energy and Alcohol Fuels Act

-Extensive loan guarantee programs, as well as money for USDA and DOE biomass R&D

Supplemental Appropriation and Rescission Act of 1980 (P.L. 96-304)

-Appropriated $100 million for studies, and an additional $200 million for commercial development

Gasohol Competition Act of 1980 (P.L. 96-493) -Modified contract law to put ethanol-gasoline blends on equal footing with conventional motor fuels, prohibiting discrimination against such ‘gasohol’ in the form of limitations on credit instruments or other unreasonable limitations on the sale of said fuel

Omnibus Reconciliation Act of 1980 (P.L. 96-499) -Import tariff on fuel ethanol to protect against cheaper Brazilian imports

Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (P.L. 96-510)

-Established the “Superfund” program, which taxed oil refineries at $0.79/barrel (later raised to $0.097/barrel) for hazardous waste cleanup costs

1981 Economic Recovery Tax Act of 1981 (ERTA) (P.L. 97-34)

-Accelerated depreciation of renewable energy equipment, introduced income tax credit for R&D

1982

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (P.L.97-248)

-Repealed accelerated depreciation incentives from ERTA

Surface Transportation Assistance Act of 1982 (P.L. 97-424)

-Raised gasoline excise tax to $0.09/gallon and the 10% ethanol blend exemption to $0.05/gallon ($0.50/gallon ethanol subsidy), and a full exemption for purer blends (85% ethanol min.) -Raised blender income tax credit to $0.50/gallon of 190 proof, $0.375/gallon 150-190 proof

1982 Unextended ETA Tax Credits Expire -Affecting non-renewable energy property (e.g. synfuels, recycling, gas from geopressurized brine, shale oil, and cogeneration equipment)

1984

Deficit Reduction Act of 1984 (P.L. 98-369) -Modified the motor fuels excise tax

Tax Reform Act of 1984 (P.L. 99-198) -Raised the 10% ethanol exemption to $0.06/gallon -Raised blender income tax credit to $0.60/gallon of 190 proof, $0.45/gallon 150-190 proof

1985 1985 ETA Tax credits Extended by WPT Expire -Investment tax credits expire

1986

Tax Reform Act of 1986 (P.L.99-514) -Extended WPT biomass property tax credits until 1987-Raised the ethanol subsidy to $0.60/gallon -Amended ethanol import tariff

Superfund Amendments & Reauthorization Act of 1986 (P.L. 99-499)

-Modified the motor fuels excise tax

1988 Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647)

-Modified the motor fuels excise tax

44

Alternative Motor Fuels Act of 1988 (P.L. 100-494)

-Authorizes studies of alternative motor fuels and state assistance programs -Amends EPCA1975 extending CAFE credits to alternative fuels -Recommends federal fleets contain alternative-fuel vehicles -Requires that alcohol fuel be available at federal fueling stations

1990

Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508)

-Decreased 10% ethanol blend exemption to $0.054/gallon, leaving pure ethanol sales exemption at $0.54/gallon -Extended excise tax and ethanol exemptions until 2002

Clean Air Act Amendments of 1990 (P.L. 101-549)

-Amends Clean Air Act of 1963 (which was extended in 1970) to instruct the EPA to enforce mandated use of oxygenated fuels in/during selected areas/seasons

1992

Energy Policy Act of 1992 (P.L. 102-486) -Modified ethanol excise tax exemption to include blends of less than 10%:

-$0.041 exemption for 7.7% ethanol -$0.0308 exemption for 5.5% ethanol

-Mandated that 75% of federal light-duty vehicle fleet acquisitions be alternative-fueled vehicles

1993 Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66)

-Raised the motor fuels excise tax by $0.043

1994

1994 IRS Ruling -Extended excise tax exemption and income tax credit to blenders producing ethyl tert-butly ether (EBTE), an alternative oxygenate made from ethanol

1994 EPA Renewable Oxygen Standard (ROS) -Required that 30% of oxygenates come from renewable sources

1995 1995 EPA ROS Repealed by Court Ruling -American Petroleum Institute and National Petroleum

Refining Association vs. EPA -MTBE remains the dominant oxygenate

1997 Taxpayer Relief Act of 1997 (P.L. 105-34) -Modified the motor fuels excise tax to further favor alternative fuels

1998 Federal Highway Bill (P.L. 105-178) -Extended the excise tax exemption for ethanol until

2007, decreasing it to current level of $0.51/gallon in 2005

2000

Agricultural Risk Protection Act of 2000 (P.L. 106-224) Biomass Research and Development Act

-Established the Biomass Research and Development Initiative, which coordinates grants for plant demonstrations and biomass research activities

Executive Order 13149 -Requires federal agencies to significantly reduce their petroleum consumption by using alternative fuels

T2 – Current Federal Policy Affection Biofuels as of March 2008

Source: Alternative Fuels Data Center Agency Type Reference Summary

45

Incentives

DOT Biobased Transportation Research Funding

23 U.S. Code 502 and 7 U.S. Code 8109

-Funds for bio-based research through National Biodiesel Board

IRS

Alternative Fuel Infrastructure Tax Credit 26 U.S. Code 30C

-Tax credit for up to 30% or 30,000 the cost of installing alternative fuel dispensing equipment -Expires Jan. 2010

Biodiesel Income Tax Credit 26 U.S. Code 40A

-$1.00 credit/gallon of B100 agri.-derived diesel -$0.50 credit/gallon of B100 waste grease diesel -Specifies EPA registration and ASTM standards compliance

Biodiesel Mixture Excise Tax Credit 26 U.S. Code 6426

-Same as the above, but for lower blends. Vendors are not eligible for both credits

Small Agri-Biodiesel Producer Tax Credit 26 U.S. Code 40A

-Additional income tax credit of $0.10/gallon of agri.-derived diesel for small producers (<60million gallons per year) -Expires Jan. 2009

Small Ethanol Producer Tax Credit 26 U.S. Code 40 -Same as above, but for ethanol

Volumetric Ethanol Excise Tax Credit (VEETC) 26 U.S. Code 40

-$0.51/gallon of pure ethanol excise tax credit for blenders -Expires Jan. 2011

USDA

Biomass Research and Development Initiative (Joint DOE)

7 U.S. Code 8601 -Grant funds for biomass energy R&D as well as demonstration facilities

Renewable Energy Systems and Energy Efficiency Improvements Grant

7 U.S. Code 8106

-Grant and loan guarantees for renewable energy systems for agri. business and small rural business -Not funded for FY2008

Value-Added Producer Grants (VAPG) 7 U.S. Code 1621

-Grants for planning or working capital for marketing value-added agri. products and farm-based renewable energy

Laws and Regulations

CBP Import Duty for Fuel Ethanol

Harmonized Tariff Schedule Number 99010050, and Public Law 96-499, 99-514, 109-423

-2.5% ad valorem tariff on fuel ethanol imports -Secondary $0.54/gallon duty -NAFTA, CBI, ATPA countries exempt

DOE

Alternative Fuel Definition 42 U.S. Code 13211 -Defines E85 and B100 as alt., non-petroleum fuel

Vehicle Acquisition and Fuel Use Requirements for Federal Fleets

42 U.S. Code 13212 and Executive Order 13423

-Requires 75% of new light-duty vehicles to be alternative fuel vehicles -Requires increasing use of alt. fuels (10% per year)

Vehicle Acquisition and Fuel Use Requirements for Private and Local Government Fleets

42 U.S. Code 13257 -DOE ruling decided not to implement vehicle and fuel mandates in these fleets

Vehicle Acquisition and Fuel Use Requirements for State and Alternative Fuel Provider

42 U.S. Code 13251 and 13263A, and 10 CFR 490

-Required certain state gov. and alt. fuel provider fleets run on alt. fuels. -DOE waivers allow petroleum

46

Fleets reduction paths instead

DOT Corporate Average Fuel Economy (CAFE) 49 U.S. Code 329

-Sets average fuel economy standards for light-duty vehicles, manufacturers producing alt. fueled vehicles earn credits towards compliance

EPA

Aftermarket Alternative Fuel Vehicle (AFV) Conversions 40 CFR 85 -Converted vehicles are required to

meet EPA standards

Renewable Fuel Standard (RFS) Program

42 U.S. Code 7545(o) and 40 CFR 80.1100-80.1167

-Requires anyone providing gasoline (blenders, refiners, and importers) to use a certain amount of ethanol each year -See table T3 for RFS values

GSA Vehicle Incremental Cost Allocation 42 U.S. Code 13212 (c)

-Requires the GSA and other organizations providing vehicles to federal agencies to allocate the incremental costs of purchasing alternative fuel vehicles across the entire fleet of vehicles distributed by GSA

IRS

Alternative Fuel Definition - Internal Revenue Code 26 U.S. Code 6426

- Biodiesel, ethanol, and renewable diesel are excluded from IRS alt. fuels definition

Alternative Fuel Tax Exemption IRS Publication 510

-Alt. fuels used for certain purposes are non-taxable (e.g. farming, school buses, etc.)

Programs

DOE

Clean Cities DOE Response to EPACT92

-Coordinates volunteer coalitions and public/ private partnerships to reduce petroleum dependence in trans. sector

Loan Guarantee Program 42 U.S. Code 16513 -For projects reducing GHGs or supporting commercial use of advanced biofuels tech.

State Energy Program (SEP) Funding

1996 Consolidation of 1975 programs: SECP and ICP

-Grants and Technical assistance to states and territories to promote conservation and renewable energy

DOT

Alternative Transportation in Parks and Public Lands Program

49 U.S. Code 5320 -Provides funding and technical assistance for the adoption of alternative vehicles in public parks

Clean Fuels Grant Program 49 U.S. Code 5308, 49 CFR 624

-Funds to assist in the development of alternative fuel and biodiesel busses and fuel stations

Congestion Mitigation and Air Quality (CMAQ) Improvement Program

23 U.S. Code 149 -Funding for local DOTs and MPOs for emissions-reduction strategies, including biodiesel retrofits

EPA

Air Pollution Control Program 42 U.S. Code 7405

-Assistance for local governments in developing emissions-reduction strategies, with an emphasis on alternative fuel use

Clean Fuel Fleet Program (CFFP) 42 U.S. Code 7586

-Implementation of Clean Air Act Amendments of 1990 -Requires that certain fleets in over-polluting areas consist of a certain percentage of vehicles run on cleaner fuels

Pollution Prevention Grants 42 U.S. Code 13104 -Funds to assist local governments in

47

Program identifying better environmental strategies to comply with federal and state environmental regulations

USDA Biobased Products and Bioenergy Program 7 U.S. Code 8109

-Loans under USDA Business and Industry Guaranteed Loan Program for converting biomass into products or energy

T3 – The Renewable Fuel Standard Mandates, as Amended in 2007

Year Conventional

Renewable Fuels

Advanced Biofuels Total Renewable

Fuels Cellulosic Biodiesel Non-Conventional Biofuels Subtotal

2006 4.00 4.00 2007 4.70 4.70 2008 9.00 9.00 2009 10.50 0.50 0.10 0.60 11.10 2010 12.00 0.10 0.65 0.20 0.95 12.95 2011 12.60 0.25 0.80 0.30 1.35 13.95 2012 13.20 0.50 1.00 0.50 2.00 15.20 2013 13.80 1.00 1.00 0.75 2.75 16.55 2014 14.40 1.75 1.00 1.00 3.75 18.15 2015 15.00 3.00 1.00 1.50 5.50 20.50 2016 15.00 4.25 1.00 2.00 7.25 22.25 2017 15.00 5.50 1.00 2.50 9.00 24.00 2018 15.00 7.00 1.00 3.00 11.00 26.00 2019 15.00 8.50 1.00 3.50 13.00 28.00 2020 15.00 10.50 1.00 3.50 15.00 30.00 2021 15.00 13.50 1.00 3.50 18.00 33.00 2022 15.00 16.00 1.00 4.00 21.00 36.00

48

Citations

Alternative Fuels Data Center, DOE Office of Energy Efficiency and Renewable Energy Bevill, K.; Charles, H., "Opinions vary on Minnesota E20 test results," Ethanol Producer Magazine, May 2008 Brusstar, M.; Bakenhus, M., "Economical, High-Efficiency Engine Technologies for Alcohol Fuels," US EPA,

2002. Presented at International Symposia on Alcohol Fuels, San Diego, CA, September 2005 Bullis, K., "Fuel from Algae" Technology Review, February 22, 2008 Business Wire, “Renewable Fuel Standard Implementation: RFS Credit Trading Program Should Be Clear,

Enforceable and Provide Flexibility for Refiners” Business Wire, April 10, 2007 ButylFuel LLC, www.butanol.com CNN, "PetroSun Algae-to-Biofuels Update," CNNMoney.com, July 31, 2008 Davis, A.; Gold, R., “Oil Officials See Limit Looming on Production; Politics, Lack of Finds Curtail World Supply;

Counting on the Saudis” Wall Street Journal. New York, N.Y.: Nov 19, 2007. pg. A.1 DOE Press Release, "DOE to Provide up to $40 Million in Funding for Small-Scale Biorefinery Projects in

Wisconsin and Louisiana," July 14, 2008 <http://www.energy.gov/news/6413.htm> Retrieved July 25, 2008

DTN Ethanol Center, www.dtnethanol.com The Economist, "The End of Cheap Food," December 6th, 2007 Elobeid, A.; Tokgoz, S., “Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian

Ethanol Markets,” Center for Agricultural and Rural Development, Iowa State University. Working Paper 06-WP 427, October 2006 (revised)

Energy Information Administration “Annual Energy Review 2007,” Report No. DOE/EIA-0384(2007) June 23,

2008 Energy Information Administration, “Eliminating MTBE in Gasoline in 2006,” 02/22/2006 Energy Information Administration “July 2008 Monthly Energy Review,” July 24, 2008 Energy Information Administration “STEO Supplement: Summer 2006 Motor Gasoline Prices,” July 2006 Short-

Term Energy Outlook Supplemental Environmental Protection Agency, [FRL–8528–9], "Revised Renewable Fuel Standard for 2008, Issued Pursuant to

Section 211(o) of the Clean Air Act as Amended by the Energy Independence and Security Act of 2007," Federal Register, Vol. 73, No. 31, February 14, 2008, Notices

Environmental Protection Agency,[EPA–HQ–OAR–2008–0380; FRL–8569–5], "Notice of Receipt of a Request

From the State of Texas for a Waiver of a Portion of the Renewable Fuel Standard," Federal Register, Vol. 73, No. 100, May 22, 2008, Notices

Fargione, J.; Hill, J.; Tilman, D.; Polasky, S.; Hawthorne, P., "Land Clearing and the Biofuel Carbon Debt," 1235

(2008); 319 Science DOI: 10.1126/science.1152747

49

Ferrett, G., "Biofuels 'Crime Against Humanity,'" BBC News, Saturday, 27 October 2007 Food and Agriculture Organization of the United Nations, “Unified Bioenergy Terminology,” December 2004 Food and Agriculture Organization of the United Nations, “Food Outlook – November 2007,” GIEWS 2007,

AH876/E Government Accountability Office, "Biofuels: DOE Lacks a Strategic Approach to Coordinate Increasing

Production with Infrastructure Development and Vehicle Needs," June 2007. GAO-07-713 Harrison, P.; Taylor, P., "France says EU may need to reconsider biofuel goal," Reuters, June 30, 2008 Hord, B., "Mead ethanol plant filing bankruptcy," Omaha World-Herald. November 30, 2007 Koplow, D. "Biofuels – At What Cost? Government support for ethanol and biodiesel in the United States: 2007

update," Global Subsidies Initiative, International Institute for Sustainable Development, October 2007 Kovarik, B., "Biofuels: History and public debate," Presented at the University of Maryland School of Public Policy,

April 11, 2008 International Trade Administration, "The Road Ahead for the U.S. Auto Market," US Department of Commerce

Office of Aerospace and Automotive Industries, March 2007 Looker, D., "Ethanol: What might have been," Farm Business Editor, February 14, 2006 Medlin, J., "MTBE: The Headache of Cleaner Air," Environmental Health Perspectives. Vol 103, No. 7-8, July-

August 1995 Methanol Institute, "Methanol Fuels Indy Race Cars and Cleaner Air" May 21, 1997, Methanol Institute National Agricultural Statistics Service, "Agricultural Prices," Agricultural Statistics Board, USDA. June 27, 2008 National Biodiesel Board, “Biodiesel Production Fact Sheet,” www.biodiesel.org, Retrieved July 2008 National Renewable Energy Laboratory, “Cost of Adding E85 Fueling Capability to Existing Gasoline Stations:

NREL Survey and Literature Search,” March 2008, NREL/FS-540-42390 Nichols, R., "The Methanol Story: A Sustainable Fuel for the Future," Journal of Scientific & Industrial Research

Vol. 62, January-February 2003,pp 97-105 Peer, M., "Corn Chomps Into Ethanol Producers' Margins," Forbes.com. June 18, 2008 Perlack, R.; Wright L.; Turhollow, A.; Graham, R.; Stokes, B.; Erbach, D., “Biomass as Feedstock for a Bioenergy

and Bioproducts Industry: The Technical Feasibility of a Billion-Ton Annual Supply,” USDA, DOE. April 2005

Pew Center on Global Climate Change, "Mandates and Incentives Promoting Biofuels,"

<http://www.pewclimate.org/what_s_being_done/in_the_states/map_ethanol.cfm> Updated June 26, 2008; Retrieved July 5th, 2008

Renewable Fuels Association, “Changing the Climate: Ethanol Industry Outlook 2008,” February 2008.

www.ethanolrfa.com Richard, M.G., “Cellulosic Ethanol in Japan: BioEthanol & Celunol,” TreeHugger.com, January 2007

50

Runge, F.; Senauer B., "How Biofuels Could Starve the Poor," Foreign Affairs, May/June 2007 Shapouri, H.; Gallagher, P., "USDA’s 2002 Ethanol Cost of Production Survey" Office of Energy Policy and New

Uses, USDA. Agricultureal Economic Report No. 841, July 2005 Shapouri, H.; Duffield, J.; McAloon, A.; Wang, M., “The 2001 Net Energy Balance Of Corn-Ethanol,” USDA/OCE,

USDA/ARS, ANL. Published May 2004. Proceedings of the Conference on Agriculture as a Producer and Consumer of Energy, Arlington, VA., June 24-25, 2004

U.S. Department of the Interior, “United States Geological Survey, National Water Quality Assessment Program,”

Fact Sheet FS-114-95, March 1995 U.S. Senate. Committee on Energy and Natural Resources. “Full Committee Hearing: to receive testimony on the

relationship between US renewable fuels policy and food prices (SD-366)” 110th Congress, 1st Session, 12 June 2008, Washington DC

Wall Street Journal, "Monthly Economic Forecasting Survey," February 2007 Wallace, E., "Ethanol: A Tragedy in 3 Acts," Business Week. April 27, 2006 Wu, M., “Analysis of the Efficiency of the U.S. Ethanol Industry 2007,” ANL/RFA, March 2008