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Monday, October 25, 2010

Agriculture-Based Biofuels: Overview and Emerging Issues

Randy Schnepf
Specialist in Agricultural Policy

Since the late 1970s, U.S. policymakers at both the federal and state levels have enacted a variety of incentives, regulations, and programs to encourage the production and use of agriculture-based biofuels. Initially, federal biofuels policies were developed to help kick-start the biofuels industry during its early development, when neither production capacity nor a market for the finished product was widely available. Federal policy has played a key role in helping to close the price gap between biofuels and cheaper petroleum fuels. Now, as the industry has evolved, other policy goals (e.g., national energy security, climate change concerns, support for rural economies) are cited by proponents as justification for continuing policy support.

The U.S. biofuels sector has responded to these government incentives by expanding output every year since 1996, with important implications for the domestic and international food and fuel sectors. The production of ethanol (the primary biofuel produced in the United States) has risen from about 175 million gallons in 1980 to 10.7 billion gallons per year in 2009. U.S. biodiesel production is much smaller than its ethanol counterpart, but has also shown strong growth, rising from 0.5 million gallons in 1999 to an estimated 776 million gallons in 2008 before being impeded by the nationwide financial crisis.

Despite this rapid growth, total agriculture-based biofuels production accounted for only about 4.3% of total U.S. transportation fuel consumption in 2009. Federal biofuels policies have had costs, including unintended market and environmental consequences and large federal outlays (estimated at $6 to $8 billion in 2009). Despite the direct and indirect costs of federal biofuels policy and the small role of biofuels as an energy source, the U.S. biofuels sector continues to push for greater federal involvement. But critics of federal policy intervention in the biofuels sector have also emerged.
  • Current issues and policy developments related to the U.S. biofuels sector that are of interest to Congress include the following: 
  • Many federal biofuels policies (e.g., tax credits and import tariffs) require routine congressional monitoring and occasional reconsideration in the form of reauthorization or new appropriations funding. 
  • The 10% ethanol-to-gasoline blend ratio—known as the “blend wall”—poses a barrier to expansion of ethanol use. The Environmental Protection Agency (EPA), in October 2010, issued a waiver to allow ethanol blending (per gallon of gasoline) for standard engines of up to 15% for use in model year 2007 and newer light-duty motor vehicles. However, the vehicle limitation to newer models, coupled with infrastructure issues, is likely to limit rapid expansion of blending rates. 
  • The evolution of EPA’s methodology for estimating lifecycle greenhouse gas emission reductions of different biofuels production paths (relative to their petroleum counterparts) and the treatment of indirect land use changes will determine which biofuels qualify under the Renewable Fuel Standard. 
The slow development of cellulosic biofuels has raised concerns about the industry’s ability to meet large federal usage mandates, which, in turn, has raised the potential for future EPA waivers of mandated biofuel volumes and has contributed to a cycle of slow investment in and development of the sector.

Date of Report: October 14, 2010
Number of Pages: 34
Order Number: R41282
Price: $29.95

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