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Tuesday, May 14, 2013

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 authorized a variety of incentives, regulations, and programs to encourage the production and use of agriculture-based biofuels—i.e., any fuel produced from biological materials. 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 (e.g., tax credits, import tariffs, grants, loans, and loan guarantees) 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 or enhancing federal policy support.

The U.S. biofuels sector responded to these government incentives by expanding output every year from 1980 through 2011 (with the exception of 1996), with important implications for the domestic and international food and fuel sectors. Production of the primary U.S. biofuel, ethanol (derived from corn starch), has risen from about 175 million gallons in 1980 to nearly 14 billion gallons in 2011. U.S. biodiesel production (derived primarily from vegetable oil), albeit much smaller, has also shown strong growth, rising from 0.5 million gallons in 1999 to a record 969 million gallons in 2012. Despite the rapid growth of the past decades, total agriculture-based biofuels consumption accounted for only about 8% of U.S. transportation fuel consumption (9.7% of gasoline and 1.5% of diesel) in 2012.

Federal biofuels policies have had costs, including unintended market and environmental consequences and large federal outlays (estimated at $7.7 billion in 2011, but declining to $1.3 billion in 2012 with the expiration of the ethanol blender’s tax credit). 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 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:

• Many federal biofuels policies require routine congressional monitoring and occasional reconsideration in the form of reauthorization or new appropriations.

• 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, could 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.

In 2012, the expiration of the blender tax credit, poor profit margins (due primarily to high corn prices), and the emerging blend wall limitation have contributed to a drop-off in ethanol production and have generated considerable uncertainty about the ethanol industry’s future.

Date of Report: May 1, 2013
Number of Pages: 44
Order Number: R41282
Price: $29.95

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