Bioenergy Policy Options

1
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

2
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.g
  ov/RE/bioenergy.html

3
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

4
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 Presidents 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.

5
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 EPAs
  clean fuel programs to produce reformulated
  gasoline and oxygenated fuels.

6
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 USDAs 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.
• .

7
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

8
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 USDAs Rural
  Business Service provides funding for ethanol
  plants
• Source DOE, EERE http//www.eere.energy.gov/R
  E/bioenergy.html

9
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

10
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.

11
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

12
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_at_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

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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_at_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

14
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_at_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

15
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_at_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

16
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

17
The 2002 Farm Bill Revised the CCC Bioenergy
Program

• 1) Extended the Program to FY 2007
• Broadened the list of eligible feedstocks to
  include animal byproducts, e.g., lard and tallow,
  and recycled fats, oils, and greases
• 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

18
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.

19
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

20
Largely due to Government policies, ethanol
production grew from about 62 million gallons in
1976 to over 2 billion gallons in 2002
Surface Transportation Assistance Act of 1983
increased ethanol tax exemption to 0.50/gal
and the blenders income tax credit to 0.50/gal
Energy Tax Act of 1978 gave ethanol a
0.40/gal credit on the Federal motor fuels tax
MTBE discovered in California drinking water in
1998
Regulations under the Clean Air Act Amendments
of 1990 started in 1992
RFG begins in 1995
Blenders Income tax credit of 0.40/gal
In 1999 California Governor banned MTBE by 12/03
Tax Reform Act of 1984 increased ethanol
tax exemption to 0.60/gal and the blenders
income tax credit to 0.60/gal
Energy policy Act of 1992 applied ethanol tax
credits to lower blends
Source U.S. Energy Information Administration
and USDA, ERS
21
Biodiesel production remained flat until the
creation of USDAs Bioenergy Program in FY 2000
that caused production to jump from about 2
million gallons to 6.5 million gallons in FY 2001
The Farm Bill extends USDAs Bioenergy Program to
2006
USDA started the Bioenergy Program under the
authority of the CCC Charter Act
Congress amends EPACT to include biodiesel
The National Soy Fuels Advisory Committee
was Established in 1992
Source Anecdotal information and USDA, Farm
Services Agency
22
Most states with higher ethanol consumption have
state incentives and/or participate in EPA clean
fuel programs that use ethanol
-Tax exemptions - Producer payments
States with incentives but little production
No current state incentives but large mandated
oxy-fuel and RFG markets encourage ethanol
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
23
Ethanol consumption more likely to grow in States
that ban MTBE
States planning to ban MTBE
24
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

25
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

26
Estimated Effect of the renewable fuels
standard (RFS) on future ethanol production
Million gallons of ethanol
RFS results in 1.4 bill gal increase
RFS
USDA baseline
Historical estimates
27
What is the effect of the renewable fuels
standard (RFS) on future biodiesel production?

• We dont know
• USDA doesnt 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

28
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 USDAs CCC Program

29
EPA Diesel Fuel Regulations Could Increase the
Demandfor Biodiesel as a Lubricity Additive

• EPAs 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 fuels 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.

30
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

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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?