In addition to federal biofuels policies, many states have also enacted policies, in part because they want to be proactive in addressing national and international concerns (i.e., reducing oil imports, reducing greenhouse gas emissions), and in part to address local economic and environmental issues (e.g., increasing agricultural incomes, providing local jobs, water contamination from MTBE).
State biofuels policies are most heavily concentrated in the Midwest and Great Plains, although states outside of these regions are beginning to formulate policies as well. The focus on biofuels has been strongest in the Midwest due to the reliance of corn as a feedstock, which has lead to the concentrated production of ethanol in this area. Due to issues associated with transporting ethanol, most consumption (7 of the top 10 states) also occurs in the Midwest. Biodiesel production is more widely distributed than is ethanol production, but it too is more concentrated in the Midwest and Great Plains regions.
State policies typically involve the use of producer incentives, retail incentives, and renewable fuel standards. Other policy instruments include infrastructure grants and/or credits, fleet fuel purchase requirements, and research and development grants.
Biofuel producer incentives (credits) are designed to promote the construction and expansion of biofuels production facilities. Due to high start up costs and uncertain input costs for biofuels, these incentives are meant to reduce production and investment costs. Mechanisms include tax credits for every gallon of biofuel produced or exemption from some level of state sales or property taxes for materials, capital, and land used to produce biofuels. Some production incentives apply generally to biofuels, while others are specific to either ethanol or biodiesel.
As of 2006, 22 states have enacted producer incentives for ethanol: (CA,FL,HI,IN,KS,ME,MD,MN,MS,MO,MT,NC,ND,OK,PA,SC,SD,TX,TN,WA,WI, and WY) and 18 states have incentives for biodiesel (AR,FL,IN,KS,KY,ME,MD,MS,MO,MT,NC,ND,OK,PA,SC,SD,VA, and WA).
Retail incentives are intended to help make biofuels more price competitive with gasoline and diesel at the fuel pump. States typically charge an excise or use tax on every gallon of fuel sold. These incentives will either provide biofuels with a reduced tax rate or a complete exemption from the taxes. The level of exemption for a given fuel will depend on the amount of biofuels blended into it. Therefore, E85 is usually taxed at a lower rate than E10, and the same is true for B20 relative to B2. As of 2006, 17 states (AK,CT,HI,IA,ID,IL,IN,ME,MN,NE,ND,NM,OK,SC,SD,TX, and WA) have enacted tax exemptions for ethanol and 14 states (IA,ID,IL,IN,LA,MT,NE,ND,NM,RI,SC, SD,TX, and WA) have biodiesel incentives.
Several states have enacted their own renewable fuel standards to increase the amount of biofuels used within the states. Iowa has the most aggressive state renewable fuel standard in the country, with biofuel use (ethanol and biodiesel) expected to account for 25 percent of transportation fuel use in the state by 2020. Retailers are able to meet this standard through E10, E85, and biodiesel blends. Missouri requires most gasoline (excludes aviation fuels and premium gasoline) sold in the state to be at least 10% ethanol by 2008 and goes into effect only when the price of ethanol is lower than the price of unblended gasoline permitting consumers to purchase the least expensive fuel available at the time. Hawaii requires 85 percent of gasoline used in Hawaii to be 10% ethanol. Its fuel standard is unique in that it relies on the state’s sugarcane crop and waste as the feedstocks for biofuels production. Louisiana requires 2% of gasoline sales to be ethanol once in-state ethanol production reaches 50 million gallons per year. The same requirement of 2% will apply to biodiesel once in-state production reaches 10 million gallons per year. Washington requires that 2% of the state’s diesel use be met with biodiesel by December 1, 2008. The biodiesel requirement increases to 5% once the state can produce 3% on its own demand. By the same date, 2% of gasoline use must be ethanol and the requirement may increase to 10% as long as this does not adversely affect the state’s ability to meet Clean Air Act standards. Minnesota requires the ethanol content of gasoline to reach 20% by 2013, but the standard could also be fulfilled by ethanol composing 20 percent of gasoline sales by 2013. Minnesota has also enacted a requirement that all diesel fuel sold in Minnesota must contain 2 percent biodiesel.
Infrastructure grants and credits are offered to fuel retailers to help cover the cost of installing or retrofitting refueling equipment to be compatible with ethanol. Most of these incentives cover a certain percentage (usually up to 50 percent) of the costs associated with the modifications. Currently, 10 states (IA,IL,MN,NC,ND,NJ,OH,SC,SD, and TN) have infrastructure grant and credit incentives.
State government purchase requirements are intended to make the state lead by example, and can help reduce government energy expenditures by allowing governments to use the most energy efficient equipment. These programs account for the long term energy costs of a technology and look to minimize costs over time. Due to the large product needs of governments, purchase requirements for renewable energy using products can have a significant impact on demand for biofuels. Currently, 23 states (CA,CO,GA,HI,IA,IL,IN,KS,KY,MD,MN,MO,MS,NE,NC,NM,NY,OH,SD,VA,VT,WA, and WI) have renewable fuel purchase requirements for their state vehicle fleets. The requirements vary with respect to how binding they are (i.e., permitted or required), and may depend on the current prices of a renewable fuel relative to its conventional counterpart.
Other grants may be offered to promote renewable energy in general or a specific type of renewable technology; for research and development efforts; for implementation activities; or to reduce costs. The percentage of the project cost covered by a grant varies. Grants can help develop new technologies that may not have been feasible within the market otherwise.
Examples of state grants include research funding for the National Corn-to-Ethanol Research Pilot Plant at Southern Illinois University (Illinois) which is designed to develop technologies to reduce ethanol production costs and make ethanol production more sustainable. Delaware’s Green Energy Fund provides grants of up to 25% of costs for projects that improve Delaware’s renewable energy market. Grants for a single biodiesel production facility may not exceed $300,000. Indiana has enacted plans for rural communities in the state to meet their energy needs from renewable resources. The initial pilot community is Reynolds, IN--phase 1 of the plan focuses on biofuels and includes installation of E85 and B20 pumps at a local BP fuel station and conversion of the town fleet of vehicles to E85 compatible. General Motors (with help from the Indiana State Department of Agriculture) has agreed to provide special pricing on flexible fuel vehicles and 20 randomly selected residents were given two year leases on a flexible fuel vehicle.
Other energy and environmental policies, while not providing direct incentives for biofuels, may impact biofuel production and use. For example, due to drinking water contamination from Methyl Tertiary Butyl Ether (MTBE), an oxygen additive for gasoline, 25 states have banned the use of MTBE (AZ,CA,CO,CT,IA,IL,IN,KS,KY,ME,MI,MN,MO,MT,NC,NE,NH,NJ,NY,OH,RI,SD,VT,WA, and WI and 5 states (DE,MA,MD,MS, and PA) have proposed banning MTBE. Ethanol can be used as an oxygen additive in gasoline in place of MTBE.