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. 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: 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.

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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.

• 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

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

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Source: U.S. Energy Information Administration and USDA, ERS

Energy Tax Actof 1978 gaveethanol a $0.40/galcredit on the Federalmotor fuels tax

Surface TransportationAssistance 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 1984increased ethanol taxexemption to $0.60/gal and the blender’s income tax credit to $0.60/gal

Regulations under theClean Air Act Amendments of 1990started in 1992

MTBE discovered inCalifornia drinking waterin 1998

In 1999 CaliforniaGovernor banned MTBE by 12/03

Blender’sIncome tax credit of$0.40/gal

Energy policyAct of 1992applied ethanoltax credits to lower blends

RFG beginsin 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

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The National Soy FuelsAdvisory Committee wasEstablished in 1992

Congress amends EPACTto include biodiesel

USDA started theBioenergy Programunder the authority of the CCC CharterAct

The Farm Billextends USDA’sBioenergy 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

80 to 260 mill gals

29 to 79 mill gals

10 to 28 mill gals

0.25 to 9 mill gals

no data reported

-Tax exemptions- Producer payments

No current state incentives but large mandated oxy-fuel and RFG markets encourage ethanol production

States with incentivesbut little production

States with significantethanol production butno 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

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RFSRFS resultsin 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 Demandfor 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 Demandfor 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 Yes NO

Is bioenergy production increasing? 2) Enhance energy security:

Can bioenergy help lower our dependence on petroleum imports?

3) Provide environmental benefitsCan bioenergy help clean up our environment?

4) Benefit farmers Can bioenergy increase the demand for farm commodities?