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bioweb.sungrant.org » Technical » Policy » Federal Biofuels Policy
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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.
Many of the drivers of biofuels policy address what economists call externalities—that is costs borne by society as a whole, but not fully borne by biofuel consumers or producers. Many policy instruments are designed to shift a larger potion of the social costs to users and producers. Other tools are designed to reduce the risk of developing new technologies, particularly to private sector investors. 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, thus reducing total petroleum consumption and imports of petroleum. Increased vehicle fuel efficiency standards, known as 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.).
Subsidies to encourage the domestic production of fuels can be generic (i.e., a stipulated amount per Btu of energy) or be specified at rates not linked to energy value. 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.
The rationale for loan guarantees is that new fuel technologies and markets are riskier than are conventional fuels with established markets, and loan guarantees are needed to cover the added risk of developing new technologies and products. Purchase guarantees are used to increase the use of domestically-produced alternative fuels when their cost of production is likely to exceed conventional fuels. Purchase guarantees can be negotiated or obtained through competitive bidding with numerous variations in how they operate. As an example, under a government sponsored competitive bidding operation, the government could indicate the quantity of alternative fuels it is prepared to buy each year, and companies submit bids based on the price to supply the desired quantity, with the low price being awarded the contract. A price guarantee can function in a manner similar to a purchase guarantee or it can function more like a variable subsidy (i.e., firms could be offered a subsidy if crude oil prices fell below a set level). For example, for a crude oil threshold of $45, no subsidy would be provided for oil prices above $45/barrel, but could be provided (e.g., at a dollar for dollar energy equivalent basis) at oil prices below $45/barrel. Alternatively, price guarantee programs could be based on a tax at higher oil prices (e.g., at a threshold of $80/barrel, oil would be taxed). |
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| Current federal ethanol policies |
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Federal ethanol policy began with the Energy Tax Act of 1978 which created a $0.04/gallon tax exemption on all gasoline containing at least 10 percent ethanol (E10) (equivalent to $0.40/gallon of ethanol and fluctuating between $0.40 and $0.60 per gallon of ethanol since its inception). Following the oil embargos of the 1970s, Congress passed the Energy Security Act of 1979, which included a volumetric ethanol excise tax credit (VEETC) which reduced the federal excise tax by 5.2 cents per gallon for E10. Other blends were also eligible, and received 52 cents for every gallon of ethanol used. 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. The rationale for these policies have varied somewhat over the years as ethanol was initially viewed as a means to increase corn demand, as an environmentally friendly renewable fuel (Clean Air Act, 1990), and recently as a means to reduce imported oil from volatile regions of the world. The history of federal ethanol legislation is summarized in table 1.
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 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. As a result of the change, the full amount of user excise taxes goes to the HTF 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 2.78% of annual fuel sales to be from renewable sources (4 billion gallons), and an Environmental Protection Agency (EPA) rule increases the target to 3.71% for 2007. The RFS increases 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. Additionally, beginning in 2013 a minimum of 250 million gallons/year of cellulose-derived ethanol is to be included in the RFS. Parties 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. |
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| Current federal biodiesel policies |
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Biodiesel policy was first incorporated into federal policy in the Energy Conservation Reauthorization Act of 1998, which amended the Energy Policy Act to allow biodiesel to qualify as a renewable fuel to meet alternative fuel requirements for public agencies. This amendment launched a huge increase in biodiesel use as the U.S. Postal Service and the Departments of Defense, Energy, and Agriculture began using biodiesel. School districts, parks services, public utility companies, and garbage and recycling services also increased their biodiesel consumption.
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 agribiodiesel 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. |
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| Other federal biofuels policies |
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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 procurements in excess of $10,000 to reasonably priced items containing the highest percentage of biobased products. This program does not apply to the purchase of vehicles and electricity. The section provides for a voluntary labeling program of certified biobased products, and provides financial assistance to manufacturers for testing of biobased products. Annual funding from 2002 to 2007 is $1 million, and the proposed FY2007 funding was $2.5 million (EESI, 2006). The effectiveness of this program has been demonstrated by the Defense Energy Support Center (DESC), which is responsible for federal government fuel purchases and is responsible for supplying fuels to U.S. Army, Navy, Air Force, and Marine bases and stations throughout the country. DESC is the largest single purchaser of biodiesel in the U.S.
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 (re-authorization of the Biomass Research and Development Act). The funding under this section is $14 million/year for fiscal years 2003 through 2007. One goal of the program is to find ways to expand the use of biofuels. Research and development efforts are focused on overcoming technical barriers to biofuels (e.g., cellulosic feedstock production and conversion). Subsequently, the Biomass Research and Development Act of 2000 has been reauthorized twice with the current authorization contained in the Energy Policy Act of 2005 (P.L. 109-190). The program is authorized at $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 $115.5 million for FY2003, and up to $150 million/year for FY 2004 through 2006. The level of benefits paid for base production are phased down from 50% in 2003, to 30% in 2004, to 15% in 2005, and eliminated in 2006. 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.
Several other programs are authorized subject to appropriations, including the Biorefinery Development Grants (Section 9003), the Energy Audit and Renewable Energy Development Program (Section 9005), and Carbon Sequestration Research (Section 9009). The Value-Added Agricultural Market Product Development Grants Program (Sec. 6401) was amended to allow renewable energy systems to qualify for grants (171 projects in 42 states were funded in 2005; $14.6 million).
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 (table 2) (Koplow, 2006). Raw biodiesel subsidies are higher than ethanol, but biodiesel subsidies per gasoline gallon equivalent are less because biodiesel has a higher per gallon energy content than ethanol (i.e., the biodiesel subsidy is about twice that of ethanol, but biodiesel has about 1.5 times the energy of ethanol). The low and high values represent differences due to the inclusion of state subsidy programs which differ by state. Annualized figures include increased production required to meet the federal Renewable Fuel Standard (RFS). Estimated subsidies for 2006 are based on estimated 2006 production obtained from the Renewable Fuels Association and the U.S. Department of Agriculture. As with any study of this kind, the estimated values are based on a number of assumptions. The study documents the assumptions so that the reader can judge the validity of the estimates for themselves. For comparison, the direct and indirect costs associated with only the national security costs of imported oil are estimated to exceed $300 billion annually (Southern States Energy Board, 2006; Copulos, 2003), equivalent to more than $1.00 per gallon of liquid fuel consumed (Tyner, 2006a).
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| Proposed biofuels legislation |
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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, 2006a,b) 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 requires major oil companies to carry E85 at half of their gas stations by 2017. Currently, no mandate is in place to require a fuel stations to provide ethanol (E85) or biodiesel (B20). Many oil companies are resistant to installing alternative fuel pumps at their affiliated stations, citing high retrofitting costs (e.g., $200,000 per station) as the reason. Other studies estimate the cost of retrofitting many stations to be between $5,000 and $15,000 (Lugar, 2006c). Currently, there are 1,025 E85 fueling sites in the U.S. including military bases and research laboratories (American Coalition for Ethanol, 2006). Most of these stations, however, are privately owned. Retrofitting of half of the gas stations of the six largest gasoline companies would result in 25% of U.S. fueling stations being able to sell E85 or B20 (Lugar, 2006c). A mandate for clean fuel stations would help alleviate the distribution problem currently facing the U.S. biofuels industry. Greater availability of alternative fuels could also lead to an increase number of flexible fuel vehicles, as consumers become more likely to purchase one if they know E85 availability is widespread and convenient.
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 U.S. has an ad valorem tariff of 2.5% of the product value, and a duty of $0.54/gallon for imported ethanol (RFF, 2007). The bill would also permanently extend the $0.54/gal duty. |
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References |
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American Coalition for Ethanol (2006). StatUS: 2006, ACE State by State Ethanol Handbook. Retrieved December 8, 2006, from http://www.ethanol.org/.
Biofuels Security Act of 2007. Introduced in Senate by Senator Harkin and co-sponsored by Senators Lugar, Dorgan, Biden, and Obama, 110th Congress, 1st session, 1/4/2007, S.23.IS. Available at <http://thomas.loc.gov/cgi-bin/query/D?c110:1:./temp/~c110Zkr4W4::>. Last accessed 2/25/2007.
Copulos, Milton R. (2003). The Hidden Cost of Imported Oil. Retrieved December 18, 2006, from http://www.ndcf.org.
Environmental and Energy Study Institute. 2002 Farm Bill (P.L. 107-171): Energy Related Provisions. April 2006. Available at <http://www.eesi.org/publications/Fact%20Sheets/2006/farmbill_energy_title_4-16-06.pdf >. Last accessed 4/23/2007.
Koplow, Doug. (2006). Biofuels – At What Cost? Government support for ethanol and biodiesel in the United States. Global Subsidies Initiative. Retreived December 18, 2006, from http://www.globalsubsidies.org/IMG/pdf/biofuels_subsidies_us.pdf.
Lugar, Richard G. (2006a). “Lugar Announces Energy Plan,” Senator Lugar's address to the Richard G. Lugar-Purdue University Summit on Energy Security, August 29, 2006. Retrieved December 8, 2006, from http://lugar.senate.gov/energy/ and http://www.purdue.edu/energysummit.
Lugar, Senator Richard G. (2006b). “National Fuels Initiative,” S. 4000 introduced September 29, 2006. Retrieved December 8, 2006, from http://thomas.loc.gov/.
Lugar, Richard G. (2006c). “U.S. Energy Security – A New Realism.” Speech to the Brookings Institution, March 13, 2006. Retrieved December 8, 2006, from http://lugar.senate.gov/energy/.
North Dakota Department of Commerce (2006). National Legislative History. Retrieved December 8, 2006, from http://goefuel.com/.
Renewable Fuels and Energy Independence Promotion Act of 2007. Introduced in House of Representatives by Representatives Pomeroy and Hulshof, 110th CONGRESS, 1st Session, 1/4/2007, H. R. 196. Available at: http://thomas.loc.gov/cgibin/query/D?c110:1:./temp/~c110MSGRvR. Last accessed 2/25/2007.
Resources for the Future. Ethanol Trade Facts. Available at http://www.ethanolrfa.org/resource/facts/trade/. Last accessed 2/25/2007.Southern States Energy Board. (2006). American Energy Security. Retrieved December 8, 2006, from http://www.americanenergysecurity.org/.
Tyner, Wallace E. (2006). “Policy Alternatives to Stimulate Private Sector Investment in Domestic Alternative Fuels.” Presentation to the Lugar-Purdue Energy Security Summit, August 29, 2006. Retrieved December 8, 2006, from
http://www.purdue.edu/energysummit/.
United States Congress. 107th Congress. Farm Security and Rural Investment Act of 2002. Available at http://www.ers.usda.gov/Features/FarmBill/2002FarmAct.pdf. Last accessed 4/23/2007. |
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