Fine Tuning Our Biofuels Policy

How to Make Recent Initiatives Better

Jake Caldwell runs through recently announced USDA and EPA biofuels policy measures and how they can be improved to reap the greatest economic and environmental benefits.

This type of woody biomass is a a pellet made with wood waste and a small amount of plastic binder and is part of the next generation of biofuels. (AP/John Flesher)
This type of woody biomass is a a pellet made with wood waste and a small amount of plastic binder and is part of the next generation of biofuels. (AP/John Flesher)

The U.S. Department of Agriculture and Environmental Protection Agency’s recent actions can be a springboard toward a more diverse biofuels policy in the United States. With these incentives and further reform we can build on the existing foundation and chart a more comprehensive approach. The appropriate incentives can ensure biofuels play a direct role in diversifying our energy sources, creating jobs in rural communities, and cutting our dependence on oil.

A recently released USDA Economic Research Service report noted the positive impact of biofuels on the U.S. economy by stating, in part, that “Replacing higher priced imported oil with domestic biofuels yields greater benefits as consumer spending on motor fuels is reduced.” And yet there are significant fiscal and policy challenges ahead that we must confront today.

Advanced or next-generation biofuels in particular hold great promise. The next generation of biofuels include fuel derived from algae and cellulosic biofuels made from nonfood feedstocks such as agricultural waste, woody biomass, municipal waste, or low-input crops such as switchgrass. But to capture the promise of advanced biofuels we must also make short-term investments in the infrastructure needs of the current generation of biofuels.

The Obama administration has been active in recent weeks on several significant advances in biofuels policy. Many of these initiatives reflect and build upon earlier policy recommendations made by the Center for American Progress and others. They are steps in the right direction, but our biofuels policy still needs reform to maximize the economic and environmental benefits to the nation.

Agriculture Secretary Tom Vilsack announced last month a series of policy initiatives intended to expand biofuel use and promote development in the next generation of these fuels. The initiatives include:

  • The establishment of five new United States Department of Agriculture or USDA regional biomass research centers located from Arkansas to Alabama to Wisconsin and other key regions of the United States
  • Funding to spur the construction of new biorefineries
  • Financial assistance to growers and producers of alternative biofuel feedstocks
  • Resources to expand blender pump distribution infrastructure
  • Partnerships with the airline industry, U.S. military, and federal government to expand the use of biofuels

Many of USDA’s recently announced biofuels initiatives also are aimed at delivering lasting benefits directly to rural communities. Biomass growers are primarily located in rural areas, and the costs of collecting and transporting biomass means that many production facilities are also in these communities, providing jobs and raising regional revenues.

Separately, the EPA announced that it is willing to approve higher blends of ethanol in newer vehicles to allow the use of 15 percent ethanol and 85 percent gasoline or E15 in our gas tanks. EPA is also proposing a labeling system on fuel pumps so that consumers can choose the fuel and blend of their choice for their vehicle.

Let’s review what these initiatives mean for biofuel production in the United States and how they can be improved upon.

USDA and EPA’s recent actions are a good start but more needs to be done

New biomass regional research centers and funding for biorefineries

Rural areas will increasingly become both the direct providers of renewable energy and the beneficiaries of a region-by-region clean energy transformation as an increasing number of sustainable biomass and biofuels energy facilities—and the jobs that accompany them—are sited in rural communities.

The establishment of regional biomass innovation research centers and incentives to build biorefineries are part of rural development efforts and will ensure appropriate biofuel feedstocks and supply chains are available in more diverse regions of the country. USDA, however, will still need to address shortcomings in its biorefinery loan guarantee program to ensure advanced biorefineries attempting to produce cellulosic biofuels at commercial levels qualify for federal credit support.

Financial assistance to growers and producers of alternative biofuel feedstocks

USDA’s Biomass Crop Assistance Program provides incentives to farmers to begin growing advanced biofuel energy crops such as switchgrass and miscanthus. The $525 million program provides funding to producers and farmers of renewable energy crops of up to 75 percent of the cost of establishing the energy crop and annual payments for up to 15 years for crop production.

USDA’s announcement shifts this program from pilot to permanent phase, which is a good sign. But USDA regrettably has chosen not to require eligible biomass producers to meet lifecycle greenhouse gas emissions standards. This omission may eliminate eligible advanced biofuels produced from these feedstocks under this USDA program from qualifying for the Renewable Fuel Standard, which demands a lifecycle greenhouse gas analysis.

The Renewable Fuel Standard, or RFS, implements the biofuels mandate Congress imposed in the 2007 energy bill. The mandate requires biofuels production to grow to 36 billion gallons by 2022. Twenty-one billion gallons of this total must come from advanced biofuels. Traditional biofuels such as corn account for 15 billion gallons. To qualify for the RFS mandate any additional biofuels must achieve greenhouse gas emissions reductions of 20 percent less than the gasoline being displaced by biofuels. If the mandate is to be met for advanced biofuels, then, greenhouse gas reduction requirements must be placed on these biofuels in production under USDA programs.

The lack of lifecycle greenhouse gas emissions standards may also encourage the use of unsustainable wood sources for feedstock rather than designated energy crops. USDA should therefore reinstate the lifecycle greenhouse gas emissions requirement for feedstocks seeking eligibility in the Biomass Crop Assistance Program.

Resources to expand blender pump distribution infrastructure

USDA is also prioritizing retail distribution infrastructure for biofuels. It is attempting to ensure biofuel blends are reliably available at filling stations through the installation of new blender fuel pumps that allow drivers to choose the ratio of biofuels to gasoline they put in their fuel tanks. The potential $675 million blender pump infrastructure program will provide matching funds to gasoline retailers to install blender pumps and underground storage tanks at their stations.

Even with matching funds, however, it may prove difficult to convince reluctant retailers to install blender pumps and tanks at an estimated cost of $135,000 per storage tank and pump. Additional incentives for retailers, then, and incentives for production of more flex-fuel vehicles capable of accepting varying blends of biofuels and gasoline will be required.

Partnerships with the airline industry, U.S. military, and federal government to expand the use of biofuels

The federal government also boasts $500 billion in annual purchasing power and is a major consumer of transportation fuels. USDA’s effort to boost its use of biofuels in its own agency vehicle fleet and partnerships with the airline industry and U.S. Navy are commendable efforts to deploy biofuels into the broader economy and mobilize the federal government to lead by example.

Approving higher blends of ethanol in newer vehicles

EPA’s approval of E15 in newer cars is not without controversy. Automakers and small engine manufacturers worry the new blend may corrode rubber engine components and attract water to fuel. Livestock producers and the food industry raise concerns regarding more ethanol production and its impact on feed and food prices. And public health advocates and environmentalists note the potential for increased tailpipe emissions from ethanol and environmental degradation from increased corn and ethanol production. These concerns are legitimate and deserve careful attention.

EPA’s approval of the E15 blend rate reflects a cautious approach and, importantly, a willingness to constantly monitor and review the science and impacts of its decision going forward. EPA’s action initially will affect only 18 percent of U.S. vehicles, and the agency pledges to await further testing results before expanding eligibility for E15.

Other issues: The biofuel blender credit and import tariffs

Agriculture Secretary Tom Vilsack has noted that changes are needed to the current 45-cents-a-gallon ethanol credit for blenders who add ethanol to gasoline, saying, “[W]e need to begin to think about reforms to the ethanol credit program to make it more efficient and effective at addressing the full range of challenges we face in meeting our goals for traditional and next generation biofuels.”

The current blender’s credit raises fiscal concerns. The USDA Economic Research Service report mentioned earlier noted that in light of the existing RFS mandate, the elimination of the biofuel blender tax credit of 45 cents per gallon has the potential to increase U.S. gross domestic product by $4 billion to $6 billion. The study noted, “The greater the value of displaced petroleum for each dollar of biofuel produced and the lower the tax credits, the greater the benefit to the U.S. economy.” In contrast, maintaining the tax credit with the RFS will reduce GDP by roughly the same amount.

Impact of renewable fuel standard on U.S. gross domestic product

In an era of tight budgets and large deficits the current blender tax credit costs taxpayers $5 billion to $6 billion a year and is fiscally imprudent. The RFS mandate arguably makes the tax credit redundant and the majority of the benefits associated with the blender’s credit flow to refiners and not actual biofuel producers.

When the blender’s tax credit expires at the end of 2010, Congress should reduce and shift the 45-cent credit to a variable and performance-based producer tax credit that rewards advanced biofuels producers for lifecycle greenhouse gas reductions. A new performance-based producer tax credit will save taxpayers money, reduce the deficit, and help ensure the most innovative and efficient biofuels make it into the tanks of our cars and trucks sooner rather than later.

Finally, Congress should also eliminate the 54-cent import tariff on biofuels from countries such as Brazil, which raises costs to all consumers and is inconsistent with our World Trade Organization obligations.

The right way forward

The combination of Congress’s RFS mandate to produce 36 billion gallons of biofuels by 2022, the recently announced USDA initiatives, and EPA’s boost in the ethanol blend to E15 for late-model cars and trucks should enable the current biofuels industry to support the additional reforms needed in key aspects of biofuels policy.

To review, these reforms include:

  • Further promotion of advanced biofuels that deliver measurable lifecycle greenhouse gas emissions reductions
  • Reform of the federal loan guarantee programs for the construction of biorefineries
  • Boosting biofuel distribution infrastructure
  • Elimination of the current import tariff on imported biofuels
  • A phase-out of the expiring blender’s credit in favor of a variable and performance-based producer tax credit            

The goal remains the same: Biofuels that deliver measurable lifecycle greenhouse gas emissions reductions, minimize the use of food-based feedstocks, and reduce public health and environmental impacts should be encouraged. With the right policy in place we can maximize the benefits of biofuels, and ensure they contribute to greater economic growth, less pollution, and reduced oil dependence.

Jake Caldwell is the Director of Policy for Agriculture, Trade & Energy at American Progress.

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