Bioenergy Policy Options James Duffield Hosein Shapouri Agricultural Economists Office of Energy Policy and New Uses Office of the Chief Economist Presented at the National Public Policy Education Conference, September 21-24, 2003, Salt Lake City, Utah

Bioenergy Bioenergy uses renewable biomass resources to produce an array of energy related products including electricity, liquid, solid, and gaseous fuels, heat, chemicals, and other materials. Bioenergy accounts for about three percent of the primary energy production in the United States. Bioenergy resources come from biomass, i.e., any plant derived organic matter available on a renewable basis, including dedicated energy crops and trees, agricultural food and feed crops, agricultural crop wastes and residues, wood wastes and residues, aquatic plants, animal wastes, municipal wastes, and other waste materials. Source: DOE, EERE:

Types of Bioenergy Biofuels are liquid fuels including ethanol, methanol, biodiesel, and gaseous fuels such as hydrogen and methane derived from biomass feedstocks. Corn- ethanol is most common biofuel produced today, with biodiesel as a distant second. Cellulosic ethanol is the hope of the future. Biopower is electricity generated from biomass. All of today's capacity is based on direct-combustion technology: The burning of biomass to produce steam in boilers. The steam is used to produce electricity in steam turbine generators. Most biopower produced today is from waste wood. Future biopower technologies may include co-firing, gasification (biogas), pyrolysis, and anaerobic digestion. Biobased chemicals and industrial products, other than food and feed, derived from biomass feedstocks. Examples: green chemicals, renewable plastics, natural fibers, and natural structural materials. Source: DOE, EERE:

Motivation Behind Energy Policies 1) Energy Security Policymakers see domestic biofuels as potential reserves during emergencies, such as war or an energy crisis like the one experienced in the 1970s. Improve energy security by reducing our dependence on foreign oil from unstable countries. A primary goal of the Energy Policy Act of 1992 was to increase the domestic production of alternative fuels to reduce our dependence on foreign oil. The President’s National Energy Policy Group reported that Federal programs designed to promote alternative fuels, such as ethanol and biodiesel, “has helped to reduce U.S. reliance on oil-based fuels.”

Motivation Behind Energy Policies 2) Environmental Benefits Many biofuels are considered to be cleaner burning than their petroleum counterparts. They are generally more biodegradable, nontoxic, less likely to cause cancer, and have the potential to reduce greenhouse gasses. Environmental policies encourage bioenergy production, such as the Clean Air Act Amendments of Ethanol additives are used in EPA’s clean fuel programs to produce reformulated gasoline and oxygenated fuels.

Motivation Behind Energy Policies 3) Benefits to Farmers Bioenergy polices create new markets for farmers, e.g., corn-ethanol and biodiesel. Tthe primary goal of USDA’s CCC Bioenergy Program is to “increase domestic consumption of agricultural commodities by expanding or aiding in the expansion of domestic markets for agricultural commodities. Increasing the demand for farm commodities through bioenergy policies can result in higher prices, for example, increasing corn demand by 100,000 bushels to produce ethanol, results in a 2-4 percent increase in corn price. USDA benefits from bioenergy policies that support farm prices because farm program payments decline as farm prices rise..

Methods Used to Encourage Bioenergy Development Federal Incentives Motor fuel excise tax exemption, e.g., ethanol receives $0.52/gal tax credit Blenders Income tax credit Income tax deduction on purchase of renewable fueled vehicles Income tax credit for businesses that sell or use alcohol as a fuel

Methods Used to Encourage Bioenergy Development Federal Incentives Continued Production tax credit for electricity generated by qualified energy resources, defined as wind, closed-loop biomass, or poultry waste The Renewable Energy Production Incentive provides financial incentive payments for electricity produced and sold by new qualifying renewable energy generation facilities. Eligible technologies include landfill gas, wind, and biomass Guaranteed Loan Programs offered by USDA’s Rural Business Service provides funding for ethanol plants Source: DOE, EERE:

Methods Used to Encourage Bioenergy Development Bioenergy Research Many Government agencies are involved in bioenergy research, including DOE, EPA, DOC, DOD, DOI, USDA and others USDA research program focus on new uses for farm commodities: - Biofuel technology (e.g., enzyme development for ethanol production) - Value added coproducts for biofuels (e.g., lactic acid and low-calorie sweetener) - Energy crops (e.g., switch grass) - Finding new uses for animal fats (e.g., biodiesel) - Biobased packaging from wheat straw - National Corn to Ethanol Pilot Plant in Edwardsville, IL

Government Regulations Increase the Demand for Bioenergy Air quality regulations have been a major stimuli for ethanol production Ethanol first started being used as a fuel additive in the late 1970s when EPA began phasing out lead in gasoline. Removing lead from gasoline lowered the octane level of gasoline. Because of its high octane content, ethanol soon established a role as an octane enhancer. The Clean Air Act Amendments of 1990 established the Oxygenated Fuels Program and the Reformulated Gasoline (RFG) to control carbon monoxide and ground-level ozone problems. Both programs require that certain urban areas in “non-attainment” add oxygen to their gasoline: 2.7 percent by weight for oxygenated fuel and 2.0 percent by weight for RFG. Blending ethanol with gasoline is one way to meet the oxygenated requirements. Blending methyl tertiary butyl ether (MTBE) with gasoline also can be used to meet the requirements.

Alternative-Fueled Vehicle Requirements Established to Encourage Biofuel Use Energy Policy Act of 1992 requires government and state motor fleets to purchase alternative-fueled vehicles (75% of new purchases). Alternative fuel providers must also comply (90 % of new purchases). DOE has the authority to implement a private and local government program if necessary. The Energy Conservation Reauthorization Act of 1998 amended EPACT to include biodiesel fuel use credits. The rule, effective January 2001, gives fleet operators one AFV credit for using 450 gallons of biodiesel. Auto industry receives Corporate Average Fuel Economy credits to manufacture flexible-fueled vehicles

Farm Security and Rural Investment Act of Farm Bill: Energy Title, IX Section 9002: Federal Procurement of Biobased Products Funding: $1 million per year, FY Lead Agency: Office of Energy Policy and New Uses Key Staff Contact: Marvin Duncan, Section 9003: Biorefinery Grants Funding: Authorized funding but no funding appropriated Lead Agency: Rural Development Agency Key Staff Contact: Bill Hagy, Bill Hagy-RBS.GW.OCE_NET

2002 Farm Bill: Energy Title, IX Section 9004: Biodiesel Fuel Education Program Funding: $1 million per year, FY Lead Agency: Office of Energy Policy and New Uses Key Staff Contact: Jim Duffield, Section 9005: Energy Audit and Renewable Energy Development Program Funding: Authorized funding but no funding appropriated. Lead Agency: Rural Development Agency Key Staff Contact: Bill Hagy, Bill Hagy-RBS.GW.OCE_NET Section 9006: Renewable Energy Systems and Energy Efficiency Improvements Funding: $23 million year, FY Lead Agency: Rural Development/Rural Business-Cooperative Service Key Staff Contact: Bill Hagy, Bill Hagy-RBS.GW.OCE_NET

2002 Farm Bill: Energy Title, IX Section 9007: Hydrogen and Fuel Cell Technologies Funding: No funds authorized Lead Agency: Office of Energy Policy and New Uses Key Staff Contact: Hosein Shapouri, Section 9008: Biomass Research and Development Funding: $5 million in FY 2002 and $14 million, FY Lead Agency: Natural Resource Conservation Service Key Staff Contact: Merlin Bartz, Merlin Bartz-USDA.GW.OCE_NET

2002 Farm Bill: Energy Title, IX Section 9010: Continuation of the Bioenergy Program Funding: Up to $115.5 million, FY 2003 and up to $150 million per year, FY Lead Agency: Farm Service Agency Key Staff Contact: Jim Goff, Background on CCC Bioenergy Program Established by USDA in FY 2001 to encourage ethanol and biodiesel production. Cash payments available from the CCC to bioenergy producers compensating them for a portion of their increased commodity purchases: Under 65 million gallons, payment on 1 bushel for every 2.5 bushels of corn or soybeans used for production 65 million gallons or more, payment will be 1 bushel for every 3.5 bushels of corn or soybeans used for production

Results of FY 2001 Bioenergy Program Ethanol producers received $32.7 million for additional gallons. The average payment rate was about $0.23 per gallon Biodiesel producers received $7.9 million for 6.4 million gallons. The average payment rate was about $1.23 per gallon Results of FY 2002 Bioenergy Program Ethanol producers received $66.1 million for additional million gallons. The average payment rate was about $0.30 per gallon Biodiesel producers received $12.6 million for 8.9 million gallons. The average payment rate was about $1.42 per gallon

The 2002 Farm Bill Revised the CCC Bioenergy Program 1)Extended the Program to FY )Broadened the list of eligible feedstocks to include animal byproducts, e.g., lard and tallow, and recycled fats, oils, and greases 3)Added payments on base for biodiesel producers. The level of benefits paid for base production will be gradually phased down from 50 percent in 2003, to 30 percent in 2002, and 15 percent in Base payments are eliminated in )Payment rates on biodiesel made from non-soybean oils and fats were adjusted to be more equitable to biodiesel made from soybeans

State Regulations Affect Bioenergy Demand Banning MTBE in California has Stimulated Ethanol Demand Because of its propensity to contaminate drinking water, MTBE has been banned in California. The ban begins in January 2004, but the California refiners have already begun to replace MTBE with ethanol. This is expected to increase the annual use of ethanol in California by million gallons. U.S. ethanol production in 2002 was 2.1 billion gallons. Altogether 16 states plan to ban MTBE and two other states are likely to pass a law banning MTBE. There also is a proposal in the Senate version of the Energy Bill that calls for an national ban of MTBE.

16 states have tax credits and/or producer payments for ethanol and biodiesel 11 states have grant programs, personal income tax credits and corporate income tax credits for constructing biofuel facilities, conducting research on renewable fuel technologies, developing renewable energy systems, and investing in alternative energy development 23 states have a “Renewable Energy Portfolio Standard” or other type of renewable electricity program that provides incentives for biomass power, anaerobic digestion and other renewable fuels used to generate power Only 14 states have no incentives for bioenergy Source: Most States Have Bioenergy Incentives

Largely due to Government policies, ethanol production grew from about 62 million gallons in 1976 to over 2 billion gallons in 2002 Source: U.S. Energy Information Administration and USDA, ERS Energy Tax Act of 1978 gave ethanol a $0.40/gal credit on the Federal motor fuels tax Surface Transportation Assistance Act of 1983 increased ethanol tax exemption to $0.50/gal and the blender’s income tax credit to $0.50/gal Tax Reform Act of 1984 increased ethanol tax exemption to $0.60/gal and the blender’s income tax credit to $0.60/gal Regulations under the Clean Air Act Amendments of 1990 started in 1992 MTBE discovered in California drinking water in 1998 In 1999 California Governor banned MTBE by 12/03 Blender’s Income tax credit of $0.40/gal Energy policy Act of 1992 applied ethanol tax credits to lower blends RFG begins in 1995

Biodiesel production remained flat until the creation of USDA’s Bioenergy Program in FY 2000 that caused production to jump from about 2 million gallons to 6.5 million gallons in FY 2001 The National Soy Fuels Advisory Committee was Established in 1992 Congress amends EPACT to include biodiesel USDA started the Bioenergy Program under the authority of the CCC Charter Act The Farm Bill extends USDA’s Bioenergy Program to 2006 Source: Anecdotal information and USDA, Farm Services Agency

Most states with higher ethanol consumption have state incentives and/or participate in EPA clean fuel programs that use ethanol - Tax exemptions - Producer payments No current state incentives but large mandated oxy- fuel and RFG markets encourage ethanol production States with incentives but little production States with significant ethanol production but no major state incentives Source: Ethanol consumption estimated by U.S. Department of Transportation, Federal Highway Administration, 2000

Ethanol consumption more likely to grow in States that ban MTBE States planning to ban MTBE

Energy Bill Would Have Major Effect on Bioenergy Development Renewable fuel standard – renewable fuel blended with motor fuel must increase from 2.3 billion gallons in 2004 to 5 billion gallons in 2012 Federal Government requirement to purchase electricity from renewable fuel sources – 3% in FY 2003, increasing to 7.5 % in 2010 Renewable portfolio standard for electric utilities – increase their use of renewable energy from 1 % in FY 2005 to 10 % in FY 2020 Federal fleets required to increase their use of alternative fuels MTBE would be banned in the United States within 4 years States have the authority to waive the 2-percent oxygen content requirement for reformulated gasoline Appropriations for Energy research and development, including renewables

Energy Bill Would Have Major Effect on Bioenergy Development Renewable electricity production tax credit extended to 2007 Amendment to small ethanol producers tax credit to include farm co-ops Alternative Vehicles and fuels incentives provides tax credits for purchasing new alternative fuel vehicles

Estimated Effect of the renewable fuels standard (RFS) on future ethanol production Million gallons of ethanol USDA baseline RFS RFS results in 1.4 bill gal increase Historical estimates

What is the effect of the renewable fuels standard (RFS) on future biodiesel production? We don’t know USDA doesn’t have baseline for biodiesel Biodiesel has not been able to get beyond niche markets Ethanol may dominate the RFS market, particularly in the early years Biodiesel and other renewable fuels will have to play catch-up with ethanol - Ethanol industry already has a fuel marketing and distribution system - Already significant demand for ethanol additives - Consumer confidence has not been established for biodiesel

Proposed Legislation Could Increase the Future Demand for Biodiesel S.1149 Energy Tax Incentives Act of 2003 has provision that proposes to provide tax credits for production of biodiesel fuels Agri-biodiesel receives 1 cent for each whole percentage (not exceeding 20 percent) blended with diesel fuel Recycled biodiesel receives 0.5 cents for each whole percentage (not exceeding 20 percent) blended with diesel fuel Tax credit is applied to the Federal motor fuel tax of 24.4 per gallon and would reduce funds for the Federal Highway Trust Fund. The funds diverted from the Highway Trust Fund could be reimbursed from USDA’s CCC Program

EPA Diesel Fuel Regulations Could Increase the Demand for Biodiesel as a Lubricity Additive EPA’s low sulfur highway diesel fuel regulations begin July 2006 and the Draft Nonroad Diesel Fuel Regulations may begin June Lowering the sulfur in diesel fuel also lowers the fuel’s lubricity. As a result the demand for diesel fuel lubricity additives is expected to increase significantly. Research suggests that Biodiesel is an excellent fuel lubricity agent. Only a small amount of biodiesel (1-2 percent) is needed to restore the lubricity level of ultra low sulfur diesel fuel. The lubricity additive market could provide a much larger market than the niche markets that currently exist for biodiesel.

The combination of both Supply and Demand Policies Could Increase Biodiesel Production Significantly Supply Side Incentives CCC Bioenergy Program Energy Tax Incentives Act of 2003 Demand Side Incentive Renewable Fuels Standard

Conclusions Can Bioenergy Policies Meet Their Intended Objectives? 1) Increase bioenergy production Yes NO Is bioenergy production increasing? 2) Enhance energy security : Can bioenergy help lower our dependence on petroleum imports? 3) Provide environmental benefits Can bioenergy help clean up our environment? 4) Benefit farmers Can bioenergy increase the demand for farm commodities?