Growth in Biofuels Catches Congress’s Attention

Published November 1, 2006

In response to healthy government subsidies and mandates, the biofuels industry is expanding at a rapid pace. Already it is a multibillion-dollar enterprise.

But along with this growth, there are divergent views among policymakers and stakeholders concerning where the industry can or should be going and how much growth it is reasonable to expect over time.

Continued Growth Projected

With world oil prices high, producing transportation fuels such as ethanol from biomass appears a more attractive proposition than ever before. The U.S. Department of Energy’s Energy Information Administration projects that in 2030 annual U.S. demand for ethanol use in transportation fuels should range–depending on world oil price projections–somewhere between 10 and 15+ billion gallons annually.

This level of production roughly corresponds to anywhere from 5 percent to 9 percent of the expected U.S. gasoline pool in 2030.

That amount of ethanol production is not trivial in economic terms. With ethanol futures already above $2.50 a gallon and almost certain to go higher, ethanol production represents a multibillion-dollar opportunity. As a result, stakeholders are busy promoting industry growth.

Political Fights Loom

That has brought on political fights over issues such as subsidies, support for research and development initiatives, favorable tax treatment, loan guarantees, partnership arrangements, and other considerations sure to play out in forthcoming sessions of Congress.

Despite high gas and oil prices, many (though not all) biofuels stakeholders believe continued legislative supports are essential for attracting and maintaining investment interest within the industry. In a number of instances, current legislative supports will expire during the next few years.

The 1992 Energy Policy Act (EPAct1992) provided tax deductions for the purchase of alternative fuel vehicles and required that a percentage of vehicles in agency and company fleets be capable of operating on alternative fuels. Biodiesel and ethanol have also been advantaged by elements of the Energy Policy and Conservation Act (signed into law by President Gerald Ford in 1975), which established national fuel economy standards, as well as the 1990 Clean Air Act Amendments, which require promotion of low-emission vehicles (biodiesel and ethanol have low sulfur content).

Other legislation also props up the biofuels industry. These measures include federal funding for biorefineries, renewable energy development, and biodiesel education programs in the 2002 Farm Security & Rural Investment Act, which expires in September 2007.

In addition, the Volumetric Ethanol Excise Tax Credit gives a federal tax credit to ethanol blenders, which expires at the end of 2010, and provides a tax credit of up to $1 per gallon for the sale and use of biodiesel fuel, which expires at the end of 2008.

An EPAct2005 provision establishes a renewable fuels standard requiring use of 7.5 billion gallons of renewable fuel in gasoline nationwide by 2012. The Energy Information Administration projects U.S. ethanol consumption to be above 10 billion gallons annually by around 2013. Additionally, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA) provides funding for alternative fuel transit buses and establishes an additional tax credit for the sale of alternative fuels.

Legislation Taking Shape

There has been no shortage of initiatives aimed at biofuels industry interests in recent legislative activity on the Hill. Examples include H.R. 626, the Volumetric Enhancing Hardware Incentives for Consumer Lowered Expenses (VEHICLE) Technology Act of 2005; S. 606, the Reliable Fuels Act; S. 650, the Fuels Security Act of 2005; S. 971, the Clean Efficient Automobiles Resulting from Advanced Car Technologies (CLEAR ACT) of 2005; S. 1232, the Fuels Security Act of 2005; and S. 1609, the 20/20 Biofuels Challenge Act of 2005. All have been introduced in Congress and are awaiting action.

The 2007 Farm Bill may well play a pivotal role in extending government support for the industry. Already, the Senate Agriculture, Nutrition, and Forestry Committee has held hearings about industry growth prospects. Some committee members see biofuels as a domestic resource capable of reducing dependence on foreign oil.

Proposed expansions of the energy section in the farm bill could yield additional incentives for biofuels projects. There may be a push for other incentives, such as an extension of the biodiesel tax credit through 2010.

Future sugar policy also will likely be a topic of interest, as countries such as Brazil produce ethanol from sugar and some senators are concerned about proposals to lift the tariff on sugar imports. One ambitious legislative proposal that may be considered calls for increasing ethanol use to 30 billion gallons by 2025, and an increase in use of biodiesel and alternative diesel to 250 million gallons in 2008 and 2 billion gallons in 2015.

How all the competing stakeholder interests and legislative initiatives will ultimately influence what transpires on the Hill is far from evident; the devil is in the details that have yet to emerge.

Price Strains

One concern likely to be addressed at length is the potential impact of biofuels production on food crops–crop use competition has created tension between the food and biofuels sectors. The trend in this competition is not altogether clear, as rising crop prices make ethanol production from crops less attractive, which would be exacerbated if ethanol fuel subsidies were weakened. One market affects the other (feedstock costs are a major cost element of ethanol production), and the price of oil affects both.

The impact of fertilizer supplies on ethanol production could also become an issue of increasing concern, as fertilizer shortages and rising fertilizer costs could push up crop production costs. If commodity speculators in the agricultural sector enter the fray, this too could become an influential factor.

All these uncertainties should make the congressional farm bill discussions an interesting affair.

William L. Kovacs ([email protected]) is vice president of the U.S. Chamber of Commerce Environment, Technology, and Regulatory Affairs Division.