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Federal Biofuels Policy	Printer Friendly

The United States is currently attempting to develop energy policy instruments to deal with issues related to energy use. The reasons for developing energy policy are many and varied, and can include social, economic, environmental, and security considerations. For example, in the United States, a primary driver for current biofuels policy initiatives is national security due to reliance on imports, in many cases from unfriendly or unreliable sources, of over 60% of the petroleum used. Other drivers include climate change concerns resulting from the use of fossil fuels.   Energy policy can be developed to affect the demand for, and/or supply of energy. Interventions can be specific to a particular technology, source, or use, or they can be generic–applying to all energy sources or uses. Demand side policy instruments include energy taxes which encourage consumers to use less fuels or buy more efficient vehicles, or increased vehicle fuel efficiency standards (e.g., changing the corporate average fuel economy (CAFE) rules) would also reduce fuel demand.   On the supply side, numerous approaches can be used, including subsidies, fuel standards, or guarantees (i.e., for loans, purchase quantities, purchase prices, etc.). Capital subsidies involve support for a portion of the capital cost of building production and/or distribution facilities and infrastructure. The rationale for these payments is that, in the initial years of development prior to gaining experience in constructing facilities and developing the technology, capital costs are higher than they are after sufficient experience has been achieved. Capital subsidies share the initial cost for early developers. Renewable (or alternative) fuel standards (or mandates) are intended to increase domestic production and use of alternative fuels, and can be implemented with or without subsidies. Guarantees include loan guarantees which cover the added risk of developing new technologies and products; purchase guarantees which are used to increase the use of domestically-produced alternative fuels when their cost of production is likely to exceed conventional fuels; and price guarantees which can function similar to a variable subsidy or could be based on a tax at higher oil prices.

Current federal ethanol policies
Federal ethanol policy began with the Energy Tax Act of 1978 and has evolved over time. More recently, the American Jobs Creation Act of 2004 (Public Law 108-357) and the Energy Policy Act of 2005 have included a number of ethanol policies. Currently, ethanol production is federally subsidized at a rate $0.51/gallon of ethanol blended with gasoline. The American Jobs Creation Act of 2004 (Public Law 108-357) modified the existing excise tax exemption into a flat tax credit and extended the credit until 2010. The subsidy is paid per gallon of ethanol regardless of ethanol prices, input and production costs, energy value, or other market factors. The change from an excise tax exemption to a general tax credit was made to prevent ethanol subsidies from reducing the Highway Trust Fund (HTF), which is funded through gasoline excise taxes and which is used to improve the nation’s transportation system.   The Energy Policy Act of 2005 includes a Renewable Fuel Standard (RFS) which mandates a minimum amount of renewable fuel that must be used in U.S. automobile fuel consumption. Initial guidelines (for 2006) required the use of 4 billion gallons of renewable fuels, increasing to 7.5 billion gallons in 2012. However, since passage of the RFS in 2005, increased production of ethanol has rendered the current RFS irrelevant as actual 2007 ethanol production will exceed the 2012 standard contained in the legislation. The RFS also contains provisions for cellulose-derived ethanol requiring a minimum of 250 million gallons/year beginning in 2013. Parties that are required to participate in the RFS but are unable or unwilling to do so, can purchase credits from other fuel blenders. The credits have a lifespan of 12 months and every gallon of cellulose-derived ethanol is equal to 2.5 gallons of renewable fuel.   The small ethanol producer tax credit is available to producers who annually produce less than 60 million gallons of ethanol. The Energy Policy Act of 2005 (Section 1347) changed the definition of a small producer from 30 million to 60 million gallons per year. For the first 15 million gallons, $0.10/gal is received, and $1.5 million is set as an annual cap for each producer. Passage of the Jumpstart Our Business Strength (JOBS) Act in 2004 made this credit applicable to farmer owned cooperatives. This credit can be offset against the alternative minimum tax (AMT) and will expire at the end of 2010.   The alternative fuel infrastructure tax credit provides up to 30% of the cost to transition refueling equipment from gasoline to ethanol. Businesses may receive up to $30,000 and individuals may receive up to $15,000. To qualify, the fuel must be at least 85 percent ethanol (E85). This provision is effective through December 31, 2010.

Current federal biodiesel policies
Biodiesel policy was first incorporated into federal policy in the Energy Conservation Reauthorization Act of 1998, which allows biodiesel to qualify as a renewable fuel to meet alternative fuel requirements for public agencies.   The biodiesel blenders tax credit was established in the American Jobs Creation Act of 2004 (Public Law 108-357) and extended through 2008 by the Energy Policy Act of 2005 (Section 1344). It provides $1.00 per gallon for agribiodiesel produced from virgin oils. These oils may come from agricultural commodities or animal fats. A credit of $0.50/gallon is provided for biodiesel from materials such as recycled grease. If used in a mixture, the credit is $0.01/gallon for each one percent of agribiodiesel used, and $0.005/gallon for each one percent for waste-grease biodiesel contained in the mixture.   The small biodiesel producer tax credit is available for producers who annually produce less than 60 million gallons. This provision was already in place for ethanol and extended to biodiesel in the Energy Policy Act of 2005 (Section 1345). For agri-biodiesel producers with a capacity of less than 60 million gallons per year, a $0.10/gallon income tax credit is paid for the first 15 million gallons of annual production, with the maximum annual amount provided per producer capped at $1.5 million. Passage of the Jumpstart Our Business Strength (JOBS) Act in 2004 made this credit applicable to farmer owned cooperatives. Unlike the small ethanol producer tax credit, the biodiesel credit cannot be offset against the alternative minimum tax. This credit is set to expire at the end of 2008.   Section 1346 of the Energy Policy Act of 2005 amends the biodiesel tax credits to include renewable diesel fuel which is produced from biomass resources using a thermal depolymerization process, and is valued at $1.00 per gallon. To qualify, the fuel must meet ASTM standard D975 or D396.   The Clean School Bus USA program assists school districts to modify existing buses to run on biodiesel or to purchase new buses that use biodiesel. Grants cover 50% of the cost to replace old buses or 100% of the cost to retrofit old buses. Funding for 2005 was $7.5 million but has increased for 2006 and 2007 and is currently authorized at $55 million.   The alternative fuel infrastructure tax credit provides up to 30% of the cost to transition refueling equipment from diesel to biodiesel. Businesses may receive up to $30,000 and individuals may receive up to $15,000. To qualify, the fuel must be at least 20 percent biodiesel (B20). This provision is effective through December 31, 2010.   Currently, biodiesel production is federally subsidized at a rate of $1.00 per gallon for biodiesel. The subsidy is paid per gallon of biodiesel regardless of biodiesel prices, input and production costs, energy value, or other market factors.

Other federal biofuels policies
The 2002 Farm Bill includes several energy related provisions (U.S. Congress, 2002). The biobased procurement program (Section 9002) requires federal agencies, contractors, and Congress to give preference to products meeting price, availability, and performance standards. Annual funding from 2002 to 2007 is $1 million, and the proposed funding for FY 2007 was $2.5 million.             Section 9004 of the Farm Bill provides $1 million per year for fiscal years 2003 through 2007 to conduct a biodiesel fuel education program. The program is targeted toward government and private vehicle fleet managers and the public, and focuses on the benefits of biodiesel.   The USDA Office of Rural Development provides grants, loans, and loan guarantees to farmers, ranchers, and rural small businesses for the development of renewable energy projects and energy efficiency improvements (Section 9006). Projects must occur in rural areas, may not be used for research and development, and 75% of the project cost must be provided by the applicant. While originally funded at $23 million/year for fiscal years 2003 through 2007, the Deficit Reduction Act of 2005 reduced the funding authorization for this program to $3 million (in discretionary funding) for fiscal year 2007.   Section 9008 provides for biomass research and development funding. This program has been reauthorized twice and current authorization is contained in the Energy Policy Act of 2005 (P.L. 109-190). Authorized funding is $200 million/year for fiscal years 2006 through 2015, but the administration’s FY2007 budget proposal is $12 million.   The USDA Commodity Credit Corporation (CCC) bioenergy program (Section 9010 of the 2002 Farm Bill) reimburses ethanol and biodiesel producers for the purchase of commodities to expand existing production. In order to be eligible, bioenergy must be produced from qualified agricultural commodities including barley, corn, grain sorghum, wheat, oat, rice, soybean, canola, sunflower seed, rapeseed, safflower, flaxseed, mustard, crambe, sesame seed, and cottonseed; from fats, oils, and greases; or from cellulosic commodities like switchgrass or hybrid poplars. Payments are calculated based upon annual production and the amount of feedstock used. Its intent is to encourage small producers since it can often be difficult to profit in the first year. Program funding was up to $150 million/year for FY 2004 through 2006 with a phasedown of the percent of costs covered. The administration’s FY2007 budget proposal did not include funds for this program.   The USDA bioeconomy grant program assists small biobased businesses with the marketing and certification of their products. Grants also support development associations and land grant institutions in efforts to improve regional bioeconomies and farmer-owned enterprises, and includes demonstrations of processing and harvesting innovations. Education and outreach programs provide training and technical assistance to feedstock producers regarding processing needs, and consumer education materials about biobased products and fuels.             Estimated costs of federal biofuels subsidies Under existing policies, on a per gallon of gasoline equivalent basis, it is estimated that ethanol subsidies will range from $1.44 and $1.96/gallon annually until 2012, and biodiesel subsidies will range between $1.24 to $1.70/gallon. The low and high values represent differences due to the inclusion of state subsidy programs which differ by state and include increased production required to meet the federal Renewable Fuel Standard (RFS). For comparison, the direct and indirect costs associated with only the national security costs of imported oil are estimated to exceed $300 billion annually, equivalent to more than $1.00 per gallon of liquid fuel consumed.

Proposed biofuels legislation
Legislation to increase the CAFE standards has been introduced in Congress (e.g., National Fuels Initiative of 2006), but no bills have been passed.   President Bush, in his 2007 State of the Union Address, proposed an alternative fuels standard of 35 billion gallons by 2017-a roughly seven-fold increase over current ethanol production. Fuel sources could be renewable fuels, clean coal liquids, or other domestic sources. The Biofuels Security Act of 2007 (introduced by Senators Lugar and Harkin) seeks to increase the renewable fuels standard (RFS) to 30 billion gallons per year by 2020 and 60 billion gallons per year by 2030, and also requires that all U.S. automobiles produced be flexible fuel vehicles by 2017.   The Biofuels Security Act of 2007 also requires major oil companies to carry E85 at half of their gas stations by 2017 which would result in 25% of U.S. fueling stations being able to sell E85 or B20. Currently, no mandate is in place to require fuel stations to provide ethanol (E85) or biodiesel (B20). Many oil companies resist installing alternative fuel pumps citing high retrofitting costs as the reason, but other studies dispute the industry estimates. Most of the 1,025 E85 fueling sites in the U.S. are privately owned and are located at military bases and research laboratories. The Renewable Fuels and Energy Independence Promotion Act of 2007 (introduced by Representatives Pomeroy and Hulshof) seeks to permanently extend tax breaks for ethanol and biodiesel production that are currently set to end in 2010. The bill would also permanently extend the $0.54/gal duty on imported ethanol.