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Monday, February 7, 2011

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 an estimated 13.2 billion gallons per year in 2010. U.S. biodiesel production, albeit much smaller, has also shown strong growth, rising from 0.5 million gallons in 1999 to 678 million in 2008 before declining to an estimated 327 million in 2010.

Despite this rapid growth, total agriculture-based biofuels production accounted for only about 5% of total U.S. transportation fuel consumption (on a gasoline-equivalent basis) in 2010. Federal biofuels policies have had costs, including unintended market and environmental consequences and large federal outlays (estimated at over $7 billion in 2010). Despite the direct and indirect costs of federal biofuels policy and the relatively 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), issued waivers to allow ethanol blending of up to 15% (per gallon of gasoline) for use in model year 2001 and newer light-duty motor vehicles. However, the limitation to newer vehicles, coupled with infrastructure issues, is likely to limit rapid expansion of blending rates
  • 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
  • Several trade issues (including Chinese anti-dumping charges against an ethanol by-product and threats of a WTO dispute case against the U.S. ethanol import tariff from Brazil’s main sugar cooperative) have emerged in early 2011 that, if realized, could slow further development of the U.S. biofuels sector.

Date of Report: January 24, 2011
Number of Pages: 37
Order Number: R41282
Price: $29.95

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