Agriculture-based Biofuels Policy

Alternative Fuels Legislation

For the last several decades, government incentives have influenced production of agriculture-based renewable energy. These federal policies work to stimulate alternative uses of domestic grain and oilseeds, promote national security through greater energy self-sufficiency, and encourage rural economic development. Ethanol and biodiesel output have increased dramatically in recent years: a combined 1.4 billion gallons in 1998 escalated to over 11 billion gallons in 2009. This surge in output, virtually all in the form of cornstarch ethanol, can be attributed to federal incentives—tax credits, renewable fuel requirements, and research and development funding.

The appropriate level and type of federal intervention in renewable energy markets is an issue that Congress is facing. With the expansion of corn-based ethanol and an increase in demand for grain and oilseed, farm incomes have elevated and several rural economies have been revived. This expansion has created a spillover effect in other markets, such as land, livestock, farm input and energy. Each year, policy provisions that assist the United States biofuels industry, including tax credits and the import tariff, “are set to expire pending congressional action to extend them,” [1].

There are spillover impacts, such as land use change to bioenergy crops, increased water use for bioenergy production, and market forces on the food and feed industry with competition for land and commodities. Many land use changes and water resources impacts have been described in this curriculum. This policy section provides a review of the main federal policy driving bioenergy development, particularly, ethanol production.

Federal Legislation Driving Ethanol

In recent years, three major bills have impacted the bioenergy industry. The Energy Policy Act of 2005, “established a Renewable Fuel Standard (RFS) that mandated minimum-use volumes of biofuels in the national transportation fuel supply,” (Figure 4.1) [1]. A second Act, the Energy Independence and Security Act (EISA) of 2007 expanded the RFS. Lastly, the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) extended and expanded incentives for ethanol production. The Farm Bill extended tariffs on imported ethanol and promoted use of bio-based products. In February 2010, the Environmental Protection Agency announced new and final rules with the RFS that included mandatory reductions in life-cycle greenhouse gas emissions for each biofuels category and, “restrictions on the type and nature of feedstocks used to produce RFS-qualifying biofuels,” [1].

The Rise to E15

In October 2010, the United States Environmental Protection Agency (EPA) announced a waiver, raising the allowable ethanol blend rate with gasoline for some late model vehicles to 15 percent (E15), from the previous allowable blend rate of 10 percent (E10). The waiver applies only to model year 2007 and newer cars and light trucks. Further testing and available data on E15’s impact on engine durability and emissions are now being examined. To date, testing has shown that E15 does not harm emissions control equipment in newer cars and light trucks. “A decision on the use of E15 in model year 2001 to 2006 vehicles will be made after EPA receives the results of additional DOE testing,” [2]. This EPA regulation change could have a dramatic effect on ethanol production if it eventually applies to all vehicles. In other cases, such as motorcycles, heavy-duty vehicles, or non-road engines, there is not yet enough data to support such a waiver. However, an increase in research and testing, and subsequent waiver to E15 for more vehicle types, could increase ethanol production significantly.

Future Expectations

Since the inception of the RFS in 2005, U.S. total biofuels production has exceeded the standard (through 2010). Under the Energy Independence and Security Act (EISA) of 2007, “the cellulosic biofuels mandate grows quickly from 100 million gallons per year (mgpy) in 2010 to 16 billion gallons by 2022,” [1]. In the five years following 2010, increases in biofuel production from the RFS are primarily intended to result from cellulosic biofuels rather than cornstarch ethanol (Figure 4.2). However, major uncertainty remains, with the speed of cellulosic biofuels development. The ability or inability of the U.S. biofuels sector to expand production capacity, to meet the ever-increasing RFS mandate, will most likely be an issue that Congress will face in the near future.

Another issue that Congress could potentially face is the effectiveness of incentives that spur commercial viability in cellulosic biofuels production. Early in 2010, cellulosic biofuels were being produced on a very small, non-commercial scale in the U.S., thus making the 100 mgpy mandate for 2010 an intimidating target. On February 3, 2010, the EPA consequently announced a reduction in the 2010 cellulosic biofuels RFS to 6.5 million gallons. “Waivers are built into EISA to accommodate shortfalls if the U.S. biofuels industry (with imports) fails to meet the RFS,” [1]. Congress will most likely debate legislative solutions such as modifying eligibility requirements or reducing RFS cellulosic biofuel volumes to overcome potential long-term shortfalls.

Potential Impacts

Significant consequences can be expected for food and energy markets, and for water resources, as the RFS mandate for biofuels steadily increases and becomes binding, especially if there is significant increased demand for corn-based ethanol. The potential conflict associated with conversion of domestic food crops to biofuels can be related back to the short-lived commodity price spikes of mid-2008.

The EISA of 2007 and the 2008 Farm Bill redirected biofuels research and development emphasis to cellulosic biofuels, in an effort to shift biofuels policy distortions away from livestock feed and other markets, [1]. This may reduce the corn-based ethanol demand, because cellulosic biofuels have the ability to be produced from non-food feedstocks, such as crop residues, dedicated energy crops and woody biomass. Accordingly, a slowdown or failure in meeting the RFS goals for cellulosic biofuels production could have inadvertent consequences by increasing the demand for corn-based ethanol and the resulting environmental impact from landscape conversion and increased water resources exploitation.