Bioenergy Policy Options
James Duffield
Hosein Shapouri
Agricultural Economists
Office of Energy Policy and New Uses
Office of the Chief Economist
http://www.usda.gov/agency/oce/oepnu/index.htm
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: http://www.eere.energy.gov/RE/bioenergy.html
Types of Bioenergy
•
Biofuels are liquid fuels including ethanol, methanol, biodiesel, and gaseous
fuels such as hydrogen and methane derived from biomass feedstocks. Cornethanol 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: http://www.eere.energy.gov/RE/bioenergy.html
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 1990. 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: http://www.eere.energy.gov/RE/bioenergy.html
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 2002
2002 Farm Bill: Energy Title, IX
http://www.usda.gov/energy/
•
Section 9002: Federal Procurement of Biobased Products
Funding: $1 million per year, FY 2002-2007
Lead Agency: Office of Energy Policy and New Uses
Key Staff Contact: Marvin Duncan, Mduncan@oce.usda.gov
•
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 2003-2007
Lead Agency: Office of Energy Policy and New Uses
Key Staff Contact: Jim Duffield, Jduffield@oce.usda.gov
•
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 2003-2007
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, HShapouri@oce.usda.gov
•
Section 9008: Biomass Research and Development
Funding: $5 million in FY 2002 and $14 million, FY 2003-2007
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 2004-06
Lead Agency: Farm Service Agency
Key Staff Contact: Jim Goff, BioenergyProgram@wdc.usda.gov
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 141.3 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 219.3 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 2007
2)
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 2005. Base payments are eliminated in 2006
4)
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 600-900 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.
Most States Have Bioenergy Incentives
•
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: http://www.dsireusa.org
Largely due to Government policies, ethanol production grew from about
62 million gallons in 1976 to over 2 billion gallons in 2002
Million gallons
RFG begins
in 1995
In 1999 California
Governor banned MTBE
by 12/03
Source: U.S. Energy Information Administration and USDA, ERS
2002
1988
1986
1984
1982
1980
1978
1976
0
2000
500
Energy policy
Act of 1992
applied ethanol
tax credits to
lower blends
1998
Tax Reform Act of 1984
increased ethanol tax
exemption to $0.60/gal
and the blender’s income
tax credit to $0.60/gal
1996
1000
MTBE discovered in
California drinking water
in 1998
1994
1500
1992
2000
1990
2500
Surface Transportation
Assistance Act of 1983
increased ethanol tax
Energy Tax Act
exemption to $0.50/gal
of 1978 gave
and the blender’s
ethanol a $0.40/gal
income tax credit to
credit on the Federal $0.50/gal
Regulations under the
motor fuels tax
Clean Air Act
Amendments of 1990
Blender’s
started in 1992
Income tax
credit of
$0.40/gal
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
1000 gallons
The Farm Bill
extends USDA’s
Bioenergy Program to
2006
16000
14000
12000
10000
Congress amends EPACT
to include biodiesel
8000
6000
USDA started the
Bioenergy Program
under the authority
of the CCC Charter
Act
The National Soy Fuels
Advisory Committee was
Established in 1992
4000
2000
0
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
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
States with incentives
but little production
-Tax exemptions
- Producer payments
No current state incentives
but large mandated oxyfuel and RFG markets
encourage ethanol
production
States with significant
ethanol production but
no major state incentives
80 to 260 mill gals
10 to 28 mill gals
29 to 79 mill gals
0.25 to 9 mill gals
no data reported
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
6000
5000
RFS results
in 1.4 bill
gal increase
RFS
4000
USDA baseline
3000
2000
Historical estimates
1000
0
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
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 2010.
•
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
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?
Yes




NO