Biofuels
DOE Lacks a Strategic Approach to Coordinate Increasing Production with Infrastructure Development and Vehicle Needs Gao ID: GAO-07-713 June 8, 2007The U.S. transportation sector is almost entirely dependent on oil, a condition that poses significant economic and environmental risks. Biofuels, such as ethanol and biodiesel, have the potential to displace oil use in transportation fuel. GAO was asked to describe the status of and impediments to expanding biofuel production, distribution infrastructure, and compatible vehicles as well as federal policy options to overcome the impediments. GAO was also asked to assess the extent to which the Department of Energy (DOE) has developed a strategic approach to coordinate the expansion of biofuel production, infrastructure, and vehicles and has evaluated the effectiveness of biofuel tax credits. GAO interviewed representatives and reviewed studies and data from DOE, states, industry, and other sources.
Combined ethanol and biodiesel production increased rapidly from about 3.4 billion gallons in 2004 to about 4.9 billion gallons in 2006, but these biofuels--primarily ethanol--composed only about 3 percent of 2006 U.S. gasoline and diesel transportation fuel use. Due to limitations on the production and use of corn--the primary feedstock used to produce ethanol in the United States--15 billion to 16 billion gallons is the generally agreed maximum amount of U.S. corn ethanol production. Using cellulosic feedstocks, such as corn stalks or other plant material, could expand the amount of ethanol produced, but the production costs are currently twice those of corn ethanol. Policies that support cellulosic ethanol research have the potential to increase the future availability of cost-competitive ethanol. Existing biofuel distribution infrastructure has limited capacity to transport the fuels and deliver them to consumers. Biofuels are transported largely by rail, and the ability of that industry to meet growing demand is uncertain. In addition, in early 2007, about 1 percent of fueling stations in the United States offered E85--a blend of about 85 percent ethanol and 15 percent gasoline--or high blends of biodiesel, such as B20 or higher. Increasing the availability of E85 at fueling stations is impeded largely by the limited availability of ethanol for use in high blends. Several policy options, such as mandating their installation, could increase the number of biofuel dispensers in stations. However, until more biofuel is available at a lower cost, it is unlikely that more fueling stations would lead to significantly greater biofuels use. In 2006, an estimated 4.5 million flexible fuel vehicles (FFV) capable of operating on ethanol blends up to E85 were in use--an estimated 1.8 percent of the nearly 244 million U.S. vehicles. The number of FFVs may increase substantially because of a recent commitment by DaimlerChrysler, Ford, and General Motors to increase FFV production to compose about 50 percent of their annual production by 2012. Several policy options, such as a tax credit for FFV production, could increase the number of FFVs, but would likely have little impact on biofuel use until E85 is less expensive and more widely available. It is also a concern that because many FFVs are less fuel efficient than other vehicles and rarely use E85, they actually increase petroleum use. DOE has not yet developed a comprehensive approach to coordinate its strategy for expanding biofuels production with the development of biofuel infrastructure and production of vehicles. Such an approach could assist in determining which blend of ethanol--E10, E85, or something in between-- would most effectively and efficiently increase the use of the fuel and what infrastructure development or vehicle production is needed to support that blend level. In addition, DOE has not evaluated the performance of biofuel-related tax credits, the largest of which cost the Treasury $2.7billion in 2006. As a result, it is not known if these expenditures produced the desired outcomes or if similar benefits might have been achieved at a lower cost.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-713, Biofuels: DOE Lacks a Strategic Approach to Coordinate Increasing Production with Infrastructure Development and Vehicle Needs
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
June 2007:
Biofuels:
DOE Lacks a Strategic Approach to Coordinate Increasing Production with
Infrastructure Development and Vehicle Needs:
GAO-07-713:
GAO Highlights:
Highlights of GAO-07-713, a report to congressional requesters
Why GAO Did This Study:
The U.S. transportation sector is almost entirely dependent on oil, a
condition that poses significant economic and environmental risks.
Biofuels, such as ethanol and biodiesel, have the potential to displace
oil use in transportation fuel. GAO was asked to describe the status of
and impediments to expanding biofuel production, distribution
infrastructure, and compatible vehicles as well as federal policy
options to overcome the impediments. GAO was also asked to assess the
extent to which the Department of Energy (DOE) has developed a
strategic approach to coordinate the expansion of biofuel production,
infrastructure, and vehicles and has evaluated the effectiveness of
biofuel tax credits. GAO interviewed representatives and reviewed
studies and data from DOE, states, industry, and other sources.
What GAO Found:
Combined ethanol and biodiesel production increased rapidly from about
3.4 billion gallons in 2004 to about 4.9 billion gallons in 2006, but
these biofuels”primarily ethanol”composed only about 3 percent of 2006
U.S. gasoline and diesel transportation fuel use. Due to limitations on
the production and use of corn”the primary feedstock used to produce
ethanol in the United States”15 billion to 16 billion gallons is the
generally agreed maximum amount of U.S. corn ethanol production. Using
cellulosic feedstocks, such as corn stalks or other plant material,
could expand the amount of ethanol produced, but the production costs
are currently twice those of corn ethanol. Policies that support
cellulosic ethanol research have the potential to increase the future
availability of cost-competitive ethanol.
Existing biofuel distribution infrastructure has limited capacity to
transport the fuels and deliver them to consumers. Biofuels are
transported largely by rail, and the ability of that industry to meet
growing demand is uncertain. In addition, in early 2007, about 1
percent of fueling stations in the United States offered E85”a blend of
about 85 percent ethanol and 15 percent gasoline”or high blends of
biodiesel, such as B20 or higher. Increasing the availability of E85 at
fueling stations is impeded largely by the limited availability of
ethanol for use in high blends. Several policy options, such as
mandating their installation, could increase the number of biofuel
dispensers in stations. However, until more biofuel is available at a
lower cost, it is unlikely that more fueling stations would lead to
significantly greater biofuels use.
In 2006, an estimated 4.5 million flexible fuel vehicles (FFV) capable
of operating on ethanol blends up to E85 were in use”an estimated 1.8
percent of the nearly 244 million U.S. vehicles. The number of FFVs may
increase substantially because of a recent commitment by
DaimlerChrysler, Ford, and General Motors to increase FFV production to
compose about 50 percent of their annual production by 2012. Several
policy options, such as a tax credit for FFV production, could increase
the number of FFVs, but would likely have little impact on biofuel use
until E85 is less expensive and more widely available. It is also a
concern that because many FFVs are less fuel efficient than other
vehicles and rarely use E85, they actually increase petroleum use.
DOE has not yet developed a comprehensive approach to coordinate its
strategy for expanding biofuels production with the development of
biofuel infrastructure and production of vehicles. Such an approach
could assist in determining which blend of ethanol”E10, E85, or
something in between” would most effectively and efficiently increase
the use of the fuel and what infrastructure development or vehicle
production is needed to support that blend level. In addition, DOE has
not evaluated the performance of biofuel-related tax credits, the
largest of which cost the Treasury $2.7 billion in 2006. As a result,
it is not known if these expenditures produced the desired outcomes or
if similar benefits might have been achieved at a lower cost.
What GAO Recommends:
GAO recommends that the Secretary of Energy (1) collaborate with public
and private sector stakeholders to develop a strategic approach that
coordinates expected biofuel production with distribution
infrastructure and vehicle production, and (2) collaborate with the
Secretary of the Treasury to evaluate and report on the extent to which
biofuel-related tax expenditures are achieving their goals.
DOE reviewed a draft of this report and generally agreed with the
findings and recommendations
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-713].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Mark Gaffigan at (202)
512-3841 or gaffiganm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Biofuel Production Has Increased, and Federal Support Targeting
Technology Development Could Address Some of the Impediments to Greater
Production:
The Biofuel Distribution Infrastructure Has Limited Capacity to
Transport the Fuels and Deliver Them to Consumers, and Expanding the
Distribution System Faces a Variety of Impediments:
The Number of Biofuel Compatible Vehicles Is Projected to Increase, but
Challenges, such as Limited Consumer Demand, Remain:
DOE Has Not Yet Developed a Strategic Approach to Coordinate the
Expansion of Biofuel Production with Infrastructure and Vehicles, and
the Effectiveness of Biofuel Tax Expenditures Has Not Been Evaluated:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
GAO Contact:
Staff Acknowledgments:
Figures:
Figure 1: Location of Ethanol Production Plants in 2007:
Figure 2: Location of Public and Federal Fueling Stations That Offered
E85 in 2007:
Figure 3: Location of Public and Federal Fueling Stations That Offered
B20 through B100 in 2007:
Figure 4: Location of Public Fueling Stations That Offered E85 in 2007
and Number of Privately Owned FFVs by State in 2006:
Figure 5: Location of Federal Fueling Stations That Offered E85 in 2007
and Number of Federal Fleet FFVs by State in 2006:
Abbreviations:
CAFE: Corporate Average Fuel Economy:
DOE: Department of Energy:
EIA: Energy Information Administration:
EPA: Environmental Protection Agency:
FFV: flexible fuel vehicle:
GPRA: Government Performance and Results Act:
MTBE: methyl tertiary butyl ether:
NREL: National Renewable Energy Laboratory:
RFS: Renewable Fuels Standard:
UL: Underwriters Laboratories:
USDA: U.S. Department of Agriculture:
VEETC: Volumetric Ethanol Excise Tax Credit:
[End of section]
June 8, 2007:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Norm Coleman:
Ranking Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Barack Obama:
United States Senate:
In 2006, the United States accounted for slightly less than 25 percent
of the world's oil consumption, making it the world's largest consumer.
In particular, the nation's transportation sector is almost entirely
dependent on oil and accounts for nearly two-thirds of total U.S. oil
consumption. To meet growing demand for oil in the face of limited and
declining domestic production, the nation imported about two-thirds of
its oil and petroleum products in 2006. Absent dramatic reductions in
consumption and significantly increased use of alternative fuels, the
nation will become increasingly dependent on imported oil. Because oil
is a global commodity and because there is currently relatively little
spare oil production capacity, even a minor disruption in the global
oil supply could cause large increases in price and economic
difficulties for tens of millions of Americans. In addition, there are
growing concerns about the negative environmental impacts of oil use,
including its role in greenhouse gas emissions that are contributing to
potentially significant and damaging changes to the global climate
system.
According to the Department of Energy (DOE), if certain technological
and other barriers are overcome, domestically produced biofuels made
from renewable biomass have the potential to displace as much as 30
percent of current U.S. transportation fuel consumption by 2030, as
well as help reduce emissions of greenhouse gases and support farm
economies in many states. The development of alternative forms of
energy, such as biofuels, has been a national goal since the oil crises
of the 1970s, but to date progress has been limited. Currently, the
most commonly produced biofuels are ethanol and biodiesel, made
primarily from corn and soybean oil feedstocks, respectively. Ethanol
is primarily blended with gasoline in mixtures of 10 percent or less
that can be used in any vehicle, but a relatively small volume is also
blended at a higher level called E85--a blend of approximately 85
percent ethanol--which can only be used in specially designed flexible
fuel vehicles (FFV).[Footnote 1] Similarly, biodiesel is mostly blended
with petroleum diesel at low levels, such as B2 (2 percent biodiesel),
but is also commonly blended with diesel as B20 (20 percent biodiesel).
Biodiesel in any blend level, as well as 100 percent biodiesel (B100),
can generally be used in any diesel engine vehicle.
Using biofuels, particularly in high-level blends as a substitute for
oil in transportation fuels, is subject to a number of limitations. For
example, corn and soybeans are primarily used in livestock feed and
human food products, and therefore using these crops to produce
biofuels will likely cause livestock feed and human food prices to
rise. Moreover, ethanol is not a gallon-for-gallon replacement for
gasoline because it contains only about two-thirds of the energy of a
gallon of gasoline. While ethanol combusts more efficiently than
gasoline, drivers nonetheless experience about a 25 percent reduction
in miles per gallon in vehicles using high blends such as E85. In
addition, although DOE, the U.S. Department of Agriculture (USDA), and
most other researchers maintain that a gallon of corn ethanol contains
more energy than it takes to produce a gallon of the fuel, a small
number of researchers believe that corn ethanol has a negative energy
balance, meaning that it takes more energy to produce than it contains.
Furthermore, because vehicle manufacturers have generally designed
vehicles to operate primarily on gasoline or diesel, the use of fuels
containing more than 10 percent ethanol or 5 percent biodiesel is not
covered under the warranty of most vehicles.
The federal government has implemented a variety of measures to support
and promote the greater availability and use of biofuels in place of
petroleum. For example, the Environmental Protection Agency (EPA) is
responsible for administering the Renewable Fuels Standard (RFS), which
mandates that transportation fuel blenders increase their use of
renewable fuels such as ethanol and biodiesel from 4 billion gallons in
2006 to 7.5 billion in 2012.[Footnote 2] Other federal agencies, such
as DOE and USDA, conduct and fund efforts to further the development of
the next generation of biofuels, principally ethanol from cellulosic
biomass, which could be produced from farmed crops such as switchgrass
and low-value residues from sources like wheat straw and corn stalks
that are in abundant supply.[Footnote 3] DOE is also responsible for
monitoring compliance with the requirement that 75 percent of federal
fleet vehicle acquisitions be capable of using alternative fuels and
that the use of the fuels be increased. In addition, the Department of
Transportation administers the Corporate Average Fuel Economy (CAFE)
program, which regulates fuel economy for passenger vehicles sold in
the United States and provides incentives to automobile manufacturers
for producing alternative fuel vehicles, such as FFVs that can use
regular gasoline or ethanol blends up to E85.
Federal policy further encourages biofuel availability and use through
incentives such as the Volumetric Ethanol Excise Tax Credit (VEETC),
which provides a 51 cent per gallon tax credit to fuel blenders for
ethanol they blend with gasoline, and a tax credit for the installation
of fueling stations to expand public access to biofuels. Tax credits
are a type of tax expenditure that result in revenue loss for the
federal government. Through tax expenditures, the government forgoes a
certain amount of tax revenue to encourage specific behaviors by a
particular group of taxpayers. The biofuel-related tax credits are in
effect spending programs channeled through the tax system. We recently
reported that according to Office of Management and Budget officials,
individual agencies should take responsibility for identifying tax
expenditures that affect their missions.[Footnote 4] We also reported
that an evaluation of the various energy supply tax credits might
involve both DOE and the Department of the Treasury (Treasury). The
Government Performance and Results Act (GPRA) of 1993 established a
statutory framework for evaluating the performance of federal programs,
including tax expenditures. The act requires federal agencies to, among
other things, establish program performance goals, gather data on
performance, and report the results.
In this context, you asked us to describe the status of the nation's
(1) biofuel production, (2) biofuel distribution infrastructure, and
(3) biofuel compatible vehicles. For each of these components of
biofuel development, we also examined impediments to expansion and
federal policy options that have been proposed to overcome the
impediments. Finally, you asked us to assess the extent to which DOE
has developed a strategic approach to coordinate the expansion of
biofuel production with distribution infrastructure (transport systems
and fueling stations) and vehicle needs and assess the extent to which
DOE has evaluated the effectiveness of biofuel tax credits.
In conducting our work, we reviewed data and analyses from DOE's Energy
Information Administration (EIA) and other federal, state, and industry
sources to determine the current status and trends for ethanol and
biodiesel production.[Footnote 5] We reviewed key scientific and
economic studies and spoke with federal and state agency officials,
biofuel producers, and academics to identify impediments to increasing
biofuel production and the potential policy options that could be
pursued to overcome the impediments. To determine the current status
and trends for the biofuel distribution infrastructure, including
fueling stations that provide E85 or biodiesel blends, we reviewed data
from DOE's Alternative Fuels Data Center. We spoke with representatives
of major oil companies regarding their biofuel policies for branded
fueling stations, and spoke with federal and state agency officials,
biofuel producers and distributors, and fueling equipment manufacturers
and certifiers regarding challenges to transporting biofuels and
increasing the number of biofuel fueling stations and policy options to
address those challenges. To determine the current status and trends
for biofuel compatible vehicles, including federal fleet vehicles, we
reviewed data and analysis from DOE and other federal and automobile
industry sources. We spoke with major domestic and foreign automobile
manufacturers regarding their plans for producing biofuel compatible
vehicles as well as federal and state agency officials and consumer and
environmental group representatives regarding the key barriers to
increasing the number of biofuel compatible vehicles and policy options
to mitigate those barriers. To assess the extent to which DOE has
developed a strategic approach to coordinate the expansion of biofuel
production with distribution infrastructure and vehicle needs and
evaluated the effectiveness of biofuel tax credits, we met with key
officials at DOE and gathered documentation of how they plan,
implement, monitor, and evaluate the performance of biofuel-related
programs.
We did not evaluate the costs and benefits of producing and using
greater amounts of biofuels, expanding the biofuel distribution
infrastructure, or increasing the number of biofuel compatible
vehicles. Rather, we assessed the current status of production,
distribution infrastructure, and vehicles; identified impediments to
their further expansion; and noted steps that could be taken to expand
the production and use of biofuels should Congress deem it to be in the
national interest. We assessed the reliability of the industry and
agency data that we used and found the data to be sufficiently reliable
for the purposes of this report. We performed our work between June
2006 and June 2007 in accordance with generally accepted government
auditing standards.
Results in Brief:
Ethanol and biodiesel production is rapidly increasing, but the
challenge of producing biofuels at a lower cost than that of petroleum
fuels makes it unlikely that they will displace a considerable amount
of petroleum in transportation fuels until less expensive production
processes are developed. From 2004 to 2006, annual U.S. ethanol
production increased from 3.4 billion gallons to about 4.9 billion
gallons, and annual biodiesel production expanded from 28 million
gallons to approximately 287 million gallons. Despite these rapid
increases, ethanol and biodiesel together composed only about 3 percent
of gasoline and diesel motor fuel used in 2006. About 99 percent of the
ethanol produced in 2006 was blended with gasoline at levels of 10
percent or less, and most biodiesel was blended with diesel fuel at
levels of 20 percent or less. The key challenge to increasing biofuel
production is making biofuels cost competitive with petroleum-based
transportation fuels. Currently, the cost of biofuel is largely
determined by the cost of feedstocks--primarily corn and soybeans--that
are in limited supply and have increased in price due to high demand
for biofuel production. For this and other reasons, such as high demand
for ethanol as a fuel additive, the average wholesale price of ethanol
per gallon in 2006 was about 33 percent more than the average wholesale
price of gasoline. Since ethanol contains one-third less energy than
gasoline, the price differential is even more significant than this
comparison indicates. According to DOE, producing ethanol using
cellulosic biomass as the feedstock could greatly expand the amount of
ethanol available, but current production costs are roughly double
those of corn ethanol. DOE has set a target of 2012 to achieve
technological advances, such as reducing the cost of the enzymes used
in the production process, which would make cellulosic ethanol cost
competitive with corn ethanol. Energy experts with whom we spoke and
our own analysis indicate that because of limitations on the amount of
corn and soybeans that are available for biofuel production, given
competition for the use of land to grow crops for livestock and human
consumption, significant expansion of biofuels production will be
unlikely without policies that put a priority on support for cellulosic
ethanol research and development and that offer enhanced incentives for
its production.
The biofuel distribution infrastructure has limited capacity to
transport the fuels and deliver them to consumers, and significant
growth in the distribution system faces a variety of impediments.
Biofuels are primarily transported by rail, but also by truck and
barge, and limited capacity in this distribution system has led to
supply disruptions and concerns about the system's ability to
effectively transport greater amounts of biofuels if production
significantly increases. The key challenges to meeting biofuel
transport needs are potential capacity limitations in the freight rail
system and the cost of developing a dedicated ethanol pipeline system
if one is needed. In addition, less than 1 percent of fueling stations
offer E85 or high blends of biodiesel. In early 2007, approximately
1,100 fueling stations, primarily in the Midwest, offered E85, and
approximately 400 fueling stations throughout the country offered B20
through B100. Efforts to increase the number of stations offering high-
level biofuel blends face challenges. Most significantly, absent a
breakthrough in cellulosic technology, it is likely that little ethanol
would be blended as E85. Most of the ethanol that is currently
projected by EIA to be produced through 2030 could be used--and would
likely bring a higher price to the sellers--in low blends as a gasoline
extender or oxygenate to reduce vehicle emissions, as this is the way
that about 99 percent of ethanol is currently being used. Biofuels also
require specialized storage and dispensing equipment. For example,
because ethanol is corrosive, E85 requires separate storage tanks,
pumps, and dispensers at fueling stations. It can cost a fueling
station operator around $3,300 to minimally modify existing equipment
or about $60,000 to install new equipment--which may be a significant
impediment for many potential retailers. Several potential options have
been proposed to increase the number of stations offering biofuels,
such as providing enhanced tax credits for station owners to install
biofuel compatible dispensers or mandating that station owners install
them. While these policy options would likely result in more stations
that offer biofuels, given the higher costs and limited availability of
biofuels, it is unlikely that the greater number of biofuel fueling
stations would lead to significantly greater use of biofuels at this
time.
The relatively few biofuel compatible vehicles in use in the United
States could increase substantially in the near future because of
planned production increases by manufacturers, but impediments to
further production increases remain. In 2006, there were an estimated
4.5 million FFVs in the United States--about 1.8 percent of the nearly
244 million U.S. vehicles. Recently, DaimlerChrysler, Ford, and General
Motors committed to increasing FFV production to compose about 50
percent of their annual production by 2012 despite limited consumer
demand for FFVs and the additional engineering research and material
costs to produce FFVs on a significantly larger scale. Several policy
options have been proposed to increase the number of biofuel compatible
vehicles, such as providing automobile manufacturers with, in addition
to the CAFE credits they already receive, tax incentives to offset the
additional costs of manufacturing more FFVs or requiring automobile
manufacturers to make an increasing percentage of their fleet biofuel
compatible until the U.S. automotive fleet is 100 percent FFVs.
However, according to the Department of Transportation, DOE, and EPA,
some automobile manufacturers have already used CAFE incentives to
produce many FFVs that are less fuel efficient and that consumers
generally do not operate with biofuels, resulting in increased
petroleum use. While various policy options could increase the number
of biofuel compatible vehicles, they would likely have little impact on
biofuel use unless these fuels become cost competitive and more widely
available in higher blends. For example, in early 2007, there were an
estimated 257,000 privately owned FFVs throughout California but only
one publicly accessible fueling station--located in the San Diego area-
-that offered E85.
DOE has not yet developed a comprehensive strategic approach to
coordinate the expansion of biofuel production with biofuel
distribution infrastructure development and vehicle production, and has
not evaluated the effectiveness of biofuel tax credits. It is currently
not known what blend of ethanol--E10, E85, or something in between--
would most effectively and efficiently increase the use of the fuel;
what level of distribution infrastructure development or vehicle
production is needed to support that blend level; and when the
infrastructure and vehicles will be needed. While DOE's Biomass Program
has a strategic approach for increasing ethanol production, DOE has not
yet developed a comprehensive strategic approach for determining the
distribution infrastructure and vehicles needed to transport and use
the increased production that could result from the program. Such an
approach could assist in resolving these questions and help DOE and
other agencies determine what level and types of federal involvement in
research and development or subsidies for infrastructure development or
vehicle production are needed to help meet national goals for
increasing biofuels use. In addition, the tax credits provided under
the VEETC cost the federal government about $2.7 billion in forgone
revenue in 2006, according to the Treasury Department. However, DOE and
Treasury have not worked together to define their roles and
responsibilities for establishing outcome-oriented goals or evaluating
and reporting on the results of these and other tax expenditures.
Consequently, the extent to which these large tax expenditures have
resulted in the production of more ethanol than would have occurred
without them, or produced specific outcomes, such as reducing petroleum
imports, is unknown. Furthermore, it is not known if similar benefits
or outcomes might be achieved by less costly means.
To improve biofuel-related planning and to provide Congress better
information on the costs and benefits of biofuel tax expenditures, we
are recommending that the Secretary of Energy (1) collaborate with
public and private sector stakeholders to develop a comprehensive
strategic approach to increasing the availability and use of biofuels
that coordinates expected biofuel production levels with the necessary
distribution infrastructure development and vehicle production, and (2)
collaborate with the Secretary of the Treasury to evaluate and report
on the extent to which biofuel-related tax credits are effectively and
efficiently achieving their goals, as well as the extent to which they
support the department's comprehensive strategic approach for biofuels.
In commenting on a draft of this report, DOE agreed with our
recommendations. DOE's comments appear in appendix I.
Background:
Over the last 30 years, the United States has benefited from relatively
inexpensive and abundant oil supplies, but has also experienced
periodic disruptions resulting in price shocks and related energy
crises. In 1973, oil cost about $15 per barrel (adjusted for inflation)
and accounted for 96 percent of the energy used by the transportation
sector. The disruption of oil imports caused by the 1973 oil embargo by
the Organization of Arab Petroleum Exporting Countries led to the
doubling of oil prices in the United States between 1973 and 1974.
Prices doubled again between 1978 and 1981 during the Iranian
Revolution and the Iran-Iraq war. Oil prices fell in the mid-1980s, and
as the U.S. economy expanded and domestic sources of oil declined, U.S.
reliance on imported crude oil grew from 40.5 percent of the U.S.
supply in 1980 to 66.1 percent in 2006. Oil now accounts for 98 percent
of the energy consumed for transportation, according to EIA.
Furthermore, EIA expects oil consumption in the transportation sector
to grow by more than 40 percent, increasing from 4.8 billion barrels
annually in 2004 to 6.8 billion barrels in 2030.
Biofuels, such as ethanol and biodiesel, are alternative transportation
fuels produced from renewable sources. Increasing ethanol and biodiesel
production and use have been touted by proponents as a means to address
energy security concerns and lower greenhouse gas emissions while
raising domestic demand for U.S. farm products. Currently, the most
commonly produced biofuels are ethanol and biodiesel, made primarily
from corn and soybean oil feedstocks, respectively. The United States
is the world's largest corn producer-- in the 2005-to-2006 marketing
year, farmers produced over 11 billion bushels of corn and exported
about 19 percent of the harvest.[Footnote 6] The United States is also
the world's largest soybean producer--in the 2005-to-2006 marketing
year, farmers produced over 3 billion bushels of soybeans and exported
about 31 percent of the harvest.
In general, large-scale ethanol production is either corn-based or
sugar-based, using feedstocks such as sugarcane. Corn, which contains
starch that can relatively easily be converted into sugar, is the
feedstock for about 98 percent of the ethanol produced in the United
States. While Brazil produces large amounts of ethanol from sugarcane,
according to USDA, in the United States, the cost of domestic sugarcane
feedstock would make ethanol production twice as costly as using corn.
Biodiesel is produced by chemically combining a feedstock--such as
recycled cooking grease, animal fat, or most commonly soybean oil--with
alcohol. Biorefineries not only produce biofuels, but the conversion
processes also create valuable coproducts--for example, ethanol
production also results in distillers grains that are used as livestock
feed.
Since the late 1970s, energy, environmental, and agricultural
legislation and policies have encouraged the production and use of
ethanol and biodiesel. The Energy Tax Act of 1978 first authorized a
motor fuel excise tax exemption for ethanol blends, which was extended
in several subsequent statutes. A 54 cent per gallon duty on imported
ethanol to offset the U.S. tax incentives was recently extended through
the end of 2008.[Footnote 7] The American Jobs Creation Act of 2004
established a tax credit of up to $1 per gallon of biodiesel produced,
and the Energy Policy Act of 2005 (EPAct 2005) extended this credit
through 2008. Laws are also in place giving income tax credits and loan
guarantees to small ethanol producers. Provisions of the Clean Air Act
Amendments of 1990 established programs to control carbon monoxide and
ozone problems created by motor fuel emissions, and ethanol and methyl
tertiary butyl ether (MTBE) were the primary oxygenates blended into
gasoline to meet the programs' standards. Because MTBE was subsequently
found to contaminate water, its use is currently being phased out--25
states have banned the additive as of 2006--increasing demand for
ethanol. EPA's recently adopted low-sulfur diesel standards designed to
help reduce harmful emissions could increase demand for biodiesel,
which provides lubricity benefits when blended with regular diesel. The
Farm Security and Rural Investment Act of 2002 contained the first
energy title in farm bill history, authorizing a range of programs
through 2007 to promote bioenergy production and consumption.
In addition, some states have established laws and policies to increase
renewable fuel availability and use through biofuel mandates,
production incentives, and tax credits. According to the American
Coalition for Ethanol, in 2006, 4 states had mandates for the use of
renewable fuels, and 12 states had such a mandate under consideration.
In addition, 17 states provided ethanol production incentives, and 12
states offered incentives to encourage retailers to provide biofuels at
their stations. One of the first states to actively promote biofuels
was Minnesota, which currently mandates that 2 percent of the diesel
transportation fuel consumed in the state be biodiesel and that 20
percent of gasoline transportation fuel be ethanol by 2013.[Footnote 8]
Minnesota state officials view their support for biofuels as a means to
boost their farm economy by increasing demand for feedstock crops while
also contributing to a cleaner environment.
Despite the federal and state efforts to support and promote ethanol
and biodiesel, the public has been slow to accept them because they
have not been cost competitive or readily available compared to
relatively cheap and abundant petroleum-based fuels.[Footnote 9]
Furthermore, because biofuels contain less energy per gallon than their
petroleum-based counterparts, consumers must purchase more of the fuels
to travel the same distance. A gasoline blend containing 10 percent
ethanol results in a 2 to 3 percent decrease in miles-per-gallon fuel
economy, while in a higher blend such as E85, the decrease is
proportionally larger. The energy content of a gallon of biodiesel is
about 8 percent lower than that of petroleum diesel, causing vehicles
running on B20, for example, to experience about a 2 percent decrease
in miles per gallon, while for vehicles running on B100, the decrease
is proportionally larger.
Furthermore, the net energy value of biofuels has been the subject of
debate. Numerous studies conducted since the late 1970s have estimated
the net energy value of corn ethanol, but variations in data and
assumptions have resulted in a wide range of estimates, a few
indicating that it takes more nonrenewable energy to produce ethanol
than is delivered when the fuel is consumed. In 2002, USDA conducted a
study to estimate the net energy value of ethanol and to identify the
cause of variance among studies.[Footnote 10] USDA's analysis
determined that corn ethanol yields 34 percent more energy than it
takes to produce it--considering the entire fuel cycle of growing the
corn, harvesting it, transporting it, and distilling it into ethanol--
when using the assumption that the fertilizers used in growing the corn
were produced by modern processing plants, the corn is converted in
modern ethanol plants, and farmers achieve average corn yields.
Furthermore, only about 17 percent of the energy used to produce
ethanol comes from gasoline or diesel fuel. Therefore, for every gallon
of petroleum fuel used to produce ethanol, about six energy equivalent
units of ethanol can be produced. Biodiesel, according to a 1998 joint
USDA-DOE study, yields 220 percent more energy than is used in its
production.
Research on the environmental effects of biofuels on air quality has
shown a variety of impacts depending on how the fuels are blended and
where they are used. Through 2005 ethanol was primarily used in blends
under 10 percent to meet a minimum oxygenate requirement for
reformulated gasoline--in accordance with the Clean Air Act Amendments
of 1990--to reduce vehicle emissions in certain metropolitan areas with
high levels of ground-level ozone. Although oxygenates lead to lower
emissions of carbon monoxide, in some cases they may lead to higher
emissions of nitrogen oxides and volatile organic compounds, which can
in some areas lead to increased ground-level ozone formation due to
atmospheric conditions.[Footnote 11] Regarding greenhouse gas
emissions, an Argonne National Laboratory study found that for the
entire fuel cycle--from growing the corn to producing the ethanol--
corn-based E10 generates about 1 percent lower greenhouse gas emissions
than gasoline, while emissions are about 20 percent lower for
E85.[Footnote 12] Biodiesel reduces nearly all forms of air pollution
compared to petroleum diesel, although ozone-forming nitrogen oxide
emissions are created. According to a joint DOE and USDA study,
biodiesel also reduces greenhouse gasses, for example, producing 78
percent less carbon dioxide than diesel fuel for the entire fuel cycle.
In an effort to obtain greater net energy and environmental benefits
than with corn ethanol, DOE's Biomass Program is leading research
efforts toward developing a process to produce cellulosic ethanol that
is cost competitive with gasoline. Cellulosic ethanol is chemically the
same as corn-or sugar-based ethanol, but is produced from feedstocks
that are of lower economic value. These feedstocks include switchgrass
as well as fast-growing woody crops such as hybrid poplar trees, and
other biomass materials, such as logging and crop residues. Because
cellulosic feedstocks require far less natural gas-derived fertilizer
for their production, the overall energy balance and other benefits of
cellulosic ethanol could be significantly greater than those of corn
ethanol. For example, the Argonne National Laboratory study concluded
that cellulose-based E85 could reduce fossil energy consumption, such
as that of natural gas, coal, and oil, by roughly 70 percent and could
reduce greenhouse gas emissions by roughly 70 to 90 percent per vehicle
mile traveled in a midsize car. However, while cellulosic feedstocks
are abundant and inexpensive, currently, cellulosic feedstock
conversion technology is rudimentary and expensive. Consequently, while
pilot facilities are operating in the United States and Canada, there
are currently no commercial cellulose-to-ethanol facilities operating
in the United States, although plans to build such plants are under
way. Biodiesel research is not a top priority for DOE, but private
companies are developing technology, for example, to produce biodiesel
from feedstocks such as algae.
Biofuel Production Has Increased, and Federal Support Targeting
Technology Development Could Address Some of the Impediments to Greater
Production:
U.S. annual ethanol and biodiesel production increased rapidly from
2004 to 2006, but together these fuels composed only about 3 percent of
gasoline and diesel motor fuel used in 2006. The challenge of producing
biofuels at a lower cost than petroleum fuels makes it unlikely that
they will displace a considerable amount of the petroleum used in
transportation fuels until new production processes are developed. The
higher relative cost of producing biofuels is largely due to the cost
of the primary feedstocks--corn and soybean oil. Producing ethanol from
alternative feedstocks such as switchgrass or other biomass materials
could expand the geographic range of biofuel plants, but the challenge
of producing cost competitive cellulosic ethanol is even greater than
for conventional corn ethanol. Nevertheless, policy options exist that
could help overcome some of these challenges, allowing biofuels to
compose an even greater proportion of the nation's total transportation
fuel supply.
U.S. Ethanol and Biodiesel Production Is Increasing, but These Fuels
Provide Only a Very Small Proportion of the Nation's Total Motor
Transportation Fuel:
From 2004 to 2006, annual U.S. ethanol production increased about 43
percent from 3.4 billion gallons to about 4.9 billion gallons. About 99
percent of the ethanol produced in 2006 was used in gasoline blends of
10 percent or less, and the remaining 1 percent was blended to produce
E85. U.S. ethanol production capacity is projected to rise rapidly.
According to the Renewable Fuels Association, in early 2007, 114
ethanol plants were operating, 7 of these plants were expanding, and 78
new plants were under construction. According to EIA, on the basis of
estimates of the number of plants under construction, domestic ethanol
production could rise to at least 7.5 billion gallons by 2008. Looking
out further, EIA projects ethanol use of 11.2 billion gallons in 2012
and, absent significant cellulosic ethanol production, 14.6 billion
gallons in 2030.[Footnote 13] However, some other projections are
higher, such as a May 2007 Iowa State University study sponsored in
part by USDA, which estimates 14.8 billion gallons of corn ethanol
production by 2011.[Footnote 14] Nevertheless, U.S. ethanol production
composed only 3.4 percent of the total amount of gasoline used in 2006.
Moreover, on an energy equivalent basis, ethanol made up only 2.3
percent of gasoline used in 2006, because ethanol contains about two-
thirds the energy of gasoline. EIA estimates that ethanol will likely
account for only 7.6 percent of the volume of gasoline projected to be
consumed in 2030.
From 2004 to 2006, annual U.S. biodiesel production increased more than
10-fold from 28 million gallons to approximately 287 million gallons.
Biodiesel is mostly used in B20 or lesser concentrations, such as B2,
in part due to state mandates, such as in Minnesota, that all diesel
fuels contain 2 percent biodiesel. At the beginning of 2007, 105
biodiesel plants were operating, 8 plants were expanding, and 77
companies have plants under construction. Even with this expansion, EIA
projects that domestic biodiesel production will likely increase to
only 308 million gallons in 2012, and only 395 million gallons in 2030,
in part because some plant production capacity is used for other
products such as cosmetics.[Footnote 15] Despite rapid increases in
production, biodiesel composed only an estimated 0.6 percent of total
diesel motor fuel used in 2006, and a somewhat smaller proportion on an
energy equivalent basis due to the fact that biodiesel contains about 8
percent less energy than diesel does.
The recent large increase in biofuel production has occurred for a
number of reasons. Greater ethanol production occurred largely as a
result of the phaseout of the fuel additive MTBE. Fuel blenders needed
a replacement for MTBE to achieve desired performance and emissions
characteristics, and ethanol was the best available choice. In
addition, the 51 cent per gallon VEETC has helped to make ethanol more
cost competitive with gasoline. While the RFS mandate has guaranteed a
base level of demand for the fuel, according to economists with whom we
spoke, it has had a limited role in increasing ethanol production. In
2006, the production of ethanol exceeded the amount of renewable fuel
needed to meet the RFS by 21 percent and, according to our analysis of
EIA data, is projected to exceed the amount required in 2012, 3 years
before then, in 2009. Current levels of biodiesel production are
largely due to the federal excise tax incentives provided by the
American Jobs Creation Act of 2004, which was extended through 2008
under EPAct 2005.[Footnote 16] These incentives include the $1 per
gallon tax credit for biodiesel produced from virgin oils or fats and a
50 cent per gallon tax credit for biodiesel produced from recycled
grease. Additionally, biodiesel production has increased, in part
because of the RFS, which includes biodiesel as a fuel that counts
toward meeting the program's overall requirements for the amount of
renewable content in motor fuel. Furthermore, state-level biodiesel
incentives such as Minnesota's B2 mandate have encouraged biodiesel
production by guaranteeing use of the fuel.
Efforts to Significantly Increase Biofuel Production May Be Impeded by
Various Factors That Contribute to High Production Costs Relative to
Those of Petroleum Fuels:
A key challenge to increasing biofuel production is making biofuels
cost competitive with gasoline and diesel fuel. The higher costs of
producing biofuels contributes to higher biofuel wholesale prices
compared to those for gasoline or diesel, making biofuels less
desirable as a substitute. For example, based on a March 2007 estimate
provided by USDA, the cost to produce a gallon of ethanol, including
the cost of corn and processing, is about $2.51 per gallon of gasoline
equivalent,[Footnote 17] while based on our analysis of EIA estimates,
in January 2007, the crude oil and refining components of the retail
price of gasoline were about $1.46 per gallon.[Footnote 18] In 2006,
the average wholesale price of ethanol was 33 percent more on a per
volume basis than the wholesale price of a gallon of regular unleaded
gasoline and about 102 percent more expensive on a gallon of gasoline
equivalent basis. In addition to the higher cost of production, the
higher wholesale price for ethanol in 2006 was also attributable, to a
certain extent, to the high demand for ethanol caused by the MTBE
phaseout, as well as the general rise in petroleum and natural gas
prices.
Feedstocks such as corn and soybean oil are the largest costs of
biofuel production, and the high prices of these feedstocks are
impediments to reducing ethanol and biodiesel production costs.
According to EIA, the U.S. ethanol industry relies almost exclusively
on corn, and as shown in figure 1, production facilities are
concentrated in the Midwest, where the feedstock is most plentiful.
According to USDA, prices for corn have risen sharply, likely because
of increased demand for its use in ethanol. Prices for soybean oil have
increased recently in anticipation of reduced soybean planted area in
2007 because of increased planting of corn. For example, in the 2005-
to-2006 marketing year corn cost $2.00 per bushel, which we estimate
was about 62 percent of the cost of producing ethanol. According to
USDA, corn prices are projected to average between $3.00 to $3.40 per
bushel in the 2006-to-2007 marketing year and according to our analysis
make up an estimated 74 percent of the cost of producing ethanol. For
biodiesel production, in the 2005-to-2006 marketing year soybean oil
cost on average 23 cents per pound, which we estimate was about 79
percent of the cost of producing biodiesel in 2006. USDA projects
soybean oil prices to rise to between an average of 27 cents per pound
to 29 cents per pound in the 2006-to-2007 marketing year and according
to our analysis make up an estimated 82 percent of the cost to produce
biodiesel.
Figure 1: Location of Ethanol Production Plants in 2007:
[See PDF for image]
Source: Renewable Fuels Association data.
[End of figure]
Limits on both the total production of feedstocks and the amounts of
those feedstocks that are available for energy production are also
impediments to significantly increasing biofuel production. For
example, in 2006, an estimated 15 percent of the corn available in the
2005-to-2006 marketing year was used to produce about 4.9 billion
gallons of ethanol, which composed 3.4 percent of total gasoline
consumption.[Footnote 19] Assuming that ethanol production continues to
expand as projected by EIA, by 2012, about 30 percent of the corn crop
will be needed to produce 11.2 billion gallons of ethanol, which would
constitute 7.4 percent of projected total gasoline
consumption.[Footnote 20] Since corn crop yields have historically only
increased at a rate of about 2 percent per year, the corn needed to
significantly increase ethanol production will come from planting more
acres of corn by putting pastureland and idle land into production,
planting corn where other crops were previously grown, or using corn
that is currently exported or used as feed for livestock or other
purposes. Concerns exist about the potential impacts of such actions on
food prices and the environment. For example, using more corn for
energy production will likely exert additional upward pressure on corn
prices, potentially influencing livestock feed markets and meat prices.
Furthermore, environmental concerns exist regarding greater water use
and impacts on wildlife if land set aside for purposes such as water
conservation or wildlife habitat is put into production. Because of
these limitations and concerns, DOE and industry experts generally
agree that approximately 15 billion to 16 billion gallons is the
maximum amount of ethanol production that can be derived from the U.S.
corn supply. Similar concerns exist regarding the impacts of devoting
larger proportions of the soybean crop to biodiesel production,
although the impacts are likely to be smaller because of the smaller
scale of increases to biodiesel production projected by EIA.
According to DOE, producing cellulosic ethanol from alternative
feedstocks could greatly expand the amount of ethanol produced, but
currently the costs of facility construction and production are
significantly greater than those of corn ethanol. According to a DOE
study, there is sufficient biomass in feedstocks such as wood chips and
corn stalks to potentially produce roughly 60 billion gallons of
ethanol per year by 2030, or about 30 percent of the amount of gasoline
EIA projects to be consumed in that year. Biomass that could be used in
cellulosic ethanol production is plentiful and relatively inexpensive
nationwide, and plants built in proximity to the feedstocks would help
to lessen the cost of obtaining the feedstocks as well as distributing
biofuels nationwide. However, according to DOE's National Renewable
Energy Laboratory (NREL), the total project investment for a cellulosic
ethanol plant with a production capacity of 50 million gallons per year
is estimated at about $250 million dollars, as compared to a total
project investment of $76 million for a corn ethanol plant of similar
capacity.[Footnote 21] Furthermore, according to DOE, the cost of
producing a gallon of cellulosic ethanol is about twice the cost of
corn-based ethanol. The cost to produce cellulosic ethanol is higher
than that of corn-based ethanol because of processing costs, enzyme
costs, and the cost to collect the feedstocks. Considerable research
and development by NREL and its partners has significantly reduced the
estimated cost of producing the enzyme used to break down cellulose
into sugar to make ethanol, but according to DOE further successes in
research and development are needed to make cellulosic ethanol a viable
economic option for expanded ethanol production.[Footnote 22]
Several Policy Options, Including Support for Cellulosic Ethanol
Production Technology, Could Help Overcome Some of the Impediments to
Increasing Biofuel Production:
One policy option for increasing biofuel production is raising the
amount or extending the duration of tax incentives for ethanol and
biodiesel production. This option provides the advantage to producers
of offsetting a greater portion of their costs. However, a disadvantage
is the potential for significant additional federal revenue losses,
depending on the level of increase or the length of the extension.
Furthermore, according to some economists, it is difficult to predict
the effect of revised tax incentives. If the incentives are set too low
to offset production costs, biofuel production will not rise
significantly; if incentives are set too high, producers will receive
windfall profits if production costs decline or oil prices increase
significantly.
Linking the level of biofuel tax incentives to the price of petroleum
fuels could provide the advantage of limiting government revenue losses
by providing tax credits only when biofuels are not cost competitive
with petroleum fuels. For example, one proposal for a variable tax
credit would provide 5 cents in ethanol tax credits for every $1 the
price of oil is below the trigger price of $45 per barrel.[Footnote 23]
However, according to some economists with whom we spoke, establishing
a variable tax credit would be challenging due to the difficulty of
determining the correct trigger price for oil as well as constructing
the variable subsidy to deal with constantly fluctuating corn prices.
Another form of variable tax credit could be based on the renewable
energy content of the biofuel, taking into account the net energy
balance of production. Such a credit could provide greater support to
fuels that displace a greater amount of petroleum and yield greater
environmental benefits. One economist with whom we spoke noted that a
variable tax credit could also support other biofuels, in addition to
ethanol and biodiesel, stressing the importance of not excluding other
promising biofuels.[Footnote 24] However, the economists with whom we
spoke noted a disadvantage to any production incentives for biofuels.
Assuming lower costs are passed on to consumers, they may be encouraged
to drive more miles or purchase less efficient vehicles, resulting in
little or no reduction in petroleum fuel consumption.
Another option for increasing biofuel production is raising the level
of the RFS. This option offers the advantage of virtually guaranteeing
increased biofuel production and use to a specific predetermined level.
Furthermore, a higher RFS could ensure a larger market for biofuels,
thus mitigating risks for investors and encouraging expenditures for
developing new production technology. A disadvantage of this option is
that if biofuel prices significantly increase with an RFS mandate in
place, then the price of fuel for consumers could also significantly
increase. Corn prices have risen sharply recently with rapid increases
in ethanol production, and could be expected to increase further under
a higher RFS as demand for fuel production creates greater competition
with other feedstock users. If the costs of biofuel production
increase, the costs of complying with the RFS for blenders who
integrate biofuels into the transportation fuel supply will also
increase, and these costs could be expected to be passed on to
consumers. Advances in production technology that have the potential to
lower costs--such as cellulosic ethanol production that uses lower-cost
feedstocks--could help meet a higher RFS with cost-competitive
biofuels, but it is currently unclear exactly when such technological
advances will be achieved.
A third option for increasing biofuel production is to provide support
for the development of cellulosic ethanol production technology. This
could involve ensuring continued funding for research and development,
increasing federal cost-sharing efforts to reduce risk to producers,
and adding incentives for the production of biomass feedstocks. These
policy options have the advantage of potentially resulting in a huge
increase in cost-competitive biofuel production. The disadvantages are
that such policies could require significant federal expenditures and
there are no guarantees as to when or if cost- competitive cellulosic
ethanol will be produced. According to the NREL officials with whom we
spoke, DOE's research and development efforts for cellulosic ethanol
are currently funded and on schedule toward the goal of making
production commercially viable by 2012.[Footnote 25] However, they said
that technological uncertainties remain and it is therefore essential
that research funding continue to meet this goal.[Footnote 26]
According to NREL, the primary nontechnological barrier to expanding
cellulosic ethanol production is the perceived financial risk, making
it difficult for companies to secure funding to build facilities. To
initially reduce financial risk, DOE provided grants in 2002 totaling
$80 million dollars to fund six small-scale cellulosic ethanol
biorefineries that support the technology in the demonstration phase.
Then, in February 2007, DOE announced it would give $385 million in
grants to six cellulosic ethanol biorefineries over a 4-year period to
help the industry develop larger-scale pilot production
facilities.[Footnote 27] Another measure that would help producers to
mitigate the financial risks of full-scale commercial production is a
federal insurance program that would pay cellulosic ethanol producers a
settlement if they did not achieve their first-year production goals.
According to one NREL official with whom we spoke, the advantage of an
insurance program is that it can be based on well-defined performance
metrics that limit potential government payments to specific outcomes,
as opposed to the potentially larger losses from defaults under a loan
guarantee program for producers. Another option suggested by NREL is a
program to provide direct payments to growers of cellulosic feedstock,
such as switchgrass, in order to ensure that an adequate supply of
those feedstocks is available when cellulosic ethanol plants begin full-
scale production. The insurance and grower payment programs both have
the potential advantage of helping to increase initial cellulosic
ethanol production but could end up being costly.
Other policy options, while not directly related to biofuel production,
could nevertheless influence the availability and use of biofuels. For
example, removing the existing 54 cent per gallon import duty on
ethanol could have the advantage of significantly increasing the
availability of biofuels for blending into the U.S. transportation fuel
supply, largely because of the huge potential for increased imports of
low-cost biofuels from South America. However, this could present a
threat to the continued development of domestic biofuel production and
would no longer provide an offset to the payment of biofuel excise tax
credits to blenders of foreign ethanol. According to a recent survey of
economists conducted by the Wall Street Journal, as well as several
economists with whom we spoke, additional taxes on petroleum fuels or
taxes on carbon dioxide emissions would be the most economically
efficient means of increasing biofuel use.[Footnote 28] Taxes would
allow biofuels to be used at the level where they provide the greatest
economic, environmental, and other benefits for the least cost, rather
than at a mandated level that is, according to an economist with whom
we spoke, difficult to correctly determine. Such an approach has the
potential advantages of making all biofuels more cost competitive with
petroleum fuels, and the added cost of petroleum fuels could encourage
conservation. The potential disadvantage of this approach is that it is
likely to be unpopular with consumers facing higher prices at the pump
and with businesses that extract fossil fuels, such as the oil and coal
industries.
The Biofuel Distribution Infrastructure Has Limited Capacity to
Transport the Fuels and Deliver Them to Consumers, and Expanding the
Distribution System Faces a Variety of Impediments:
Currently biofuels are transported primarily on the freight rail
system, and this system has limited capacity to transport greater
amounts of biofuels if production significantly increases. We estimate
that in early 2007, about 1 percent of fueling stations in the United
States offered E85--primarily in the Midwest--or high blends of
biodiesel (B20 through B100). Under current conditions, significant
growth in the number of stations that offer high blends of biofuels
beyond the regions where the fuels are produced appears unlikely.
Increasing the availability of biofuels at fueling stations is impeded
in large part by the limited supplies of ethanol and biodiesel and the
cost of storage and dispensing equipment for biofuels. Several policy
options could help to increase the number of stations that offer
biofuels, but until a larger supply of cost-competitive biofuels is
available, it is doubtful that a greater number of stations would lead
to greater use of biofuels.
Limited Capacity Exists to Transport Biofuels, and the Costs Are Higher
than for Petroleum Fuels:
According to DOE, biofuels are not transported through the petroleum
product pipeline system because of concerns that, for example, ethanol
will attract water in the pipes, rendering it unfit to blend with
gasoline, and no dedicated biofuel pipeline system exists. Furthermore,
according to DOE, the existing petroleum product pipelines are
generally not configured to transport ethanol from regions where it is
currently produced to regions where it is consumed. Therefore, ethanol
is transported primarily by rail, but also by truck and barge, and
biodiesel is transported by rail and truck--a distribution system that
is more complicated than for petroleum fuels and has contributed to
regional supply shortages. For example, while ethanol production is
concentrated in the Midwest largely because of the proximity of large
corn feedstock supplies, demand for ethanol as a blend component to
replace MTBE in gasoline is high on the east and west coasts. In
California gasoline is blended with about 5.7 percent ethanol.
According to EIA, limited rail and truck capacity complicated the
delivery of ethanol between April and June 2006, contributing to
regional ethanol supply shortages and price spikes.
The current biofuel transport system is also more costly than for
petroleum fuels. According to NREL, the overall cost of transporting
ethanol from production plants to fueling stations is estimated to
range from 13 cents per gallon to 18 cents per gallon, depending on the
distance traveled and the mode of transportation. In contrast, the
overall cost of transporting petroleum fuels from refineries to fueling
stations is estimated on a nationwide basis to be about 3 to 5 cents
per gallon.
The key challenges to meeting biofuel transport needs are potential
capacity limitations in the freight rail system and the cost of
developing a dedicated ethanol pipeline system if one is needed.
Looking to the future, DOE and ethanol industry experts are concerned
about transporting greater amounts of biofuels if production
significantly increases. Substantial increases in overall freight
traffic are forecast, and as we recently reported, the freight railroad
industry's ability to meet the growing demand is largely
uncertain.[Footnote 29] Replacing, maintaining, and upgrading the
existing aging rail infrastructure are extremely costly, and while
railroads told us that they plan to make substantial investments in
infrastructure, the extent to which these investments will increase
capacity as freight demand increases is unclear. Alternatively,
existing petroleum pipelines could be used in certain areas to
transport ethanol if ongoing efforts by operators to identify ways to
modify their systems to make them compatible with ethanol or ethanol-
blended gasoline are successful. Building dedicated pipelines to
transport ethanol would be extremely expensive, according to a 2006
NREL report, which estimates the current costs of constructing
pipelines at roughly $1 million per mile, although the cost can vary
dramatically based on right-of-way issues, the number of required
pumping stations, and other considerations.
The Relatively Small Number of Fueling Stations Offering E85 Are
Concentrated in the Midwest, while Stations Offering Biodiesel Are More
Widely Dispersed:
In early 2007, approximately 1,100 public and federal fueling stations
offered E85, concentrated largely in the Midwest, as shown in figure 2.
The number of fueling stations that offered E85 increased by an average
of about 350 per year between 2004 and 2006. Despite this rapid
increase, we estimate that the number of fueling stations that offered
E85 was only about 0.6 percent of the total number of all fueling
stations. According to industry experts, most fueling stations with E85
are located in proximity to ethanol plants in order to minimize
distribution costs. For example, in early 2007, 55 percent of the
fueling stations that offered E85 were concentrated in five midwestern
states--Minnesota, Illinois, Iowa, South Dakota, and Nebraska--where
about 75 percent of the nation's ethanol is produced (see fig. 2). Of
the total number of fueling stations that offered E85, in early 2007,
57 were federally operated for use by government fleet vehicles and
were distributed nationwide.
Figure 2: Location of Public and Federal Fueling Stations That Offered
E85 in 2007:
[See PDF for image]
Sources: Congressional Research Service and DOE's Alternative Fuels
Data Center data.
[End of figure]
In early 2007, approximately 400 public and federal fueling stations
across the country offered biodiesel blends of B20 through B100, as
shown in figure 3.[Footnote 30] The number of fueling stations that
offered biodiesel increased by an average of about 186 per year between
2004 and 2006. Despite this rapid increase, we estimate that the number
of fueling stations that offered biodiesel was only about 1 percent of
the total number of fueling stations that offered diesel. Biodiesel
fueling stations are dispersed nationwide because production facilities
are not concentrated in any specific region. Biodiesel is commonly used
in low blends--B20 is a popular blend because it provides better
mileage than pure biodiesel yet still provides some of its benefits,
such as good lubricity. In addition, B20 is common because federal
fleet vehicles that use the blend earn credits toward meeting the
statutory requirements for the acquisition of alternative fuel vehicles
by federal agencies.[Footnote 31] Of the approximately 400 public and
federal fueling stations that offered biodiesel in early 2007, 75 were
federally operated, and were for use by the government fleet of
vehicles.
Figure 3: Location of Public and Federal Fueling Stations That Offered
B20 through B100 in 2007:
[See PDF for image]
Source: DOE's Alternative Fuels Data Center data.
[End of figure]
According to DOE and officials from state governments, the increase in
the number of fueling stations that offered E85 is due in part to
federal grants to states and private businesses distributed through
DOE's Clean Cities Program. This program was established in 1993 as
part of the department's efforts to advance the nation's economic,
environmental, and energy security by supporting local decisions to
adopt practices that contribute to reduced petroleum consumption and is
the department's only program aimed at expanding the biofuel
infrastructure. Between 1999 and 2006, Clean Cities provided $11
million in grants to 33 states to install biofuel infrastructure. Clean
Cities' criteria for awarding the grants include, for example, the
ability of the grantee to (1) access and dispense a significant amount
of biofuel, and (2) share at least 50 percent of the project costs, as
well as the grantee's record of past success with alternative fuel
infrastructure development. The $7.2 million in 2006 grants, with
private and state or local cost sharing, will result in biofuel
dispensers in 210 locations--primarily for E85--being installed in 21
states, such as California, Colorado, Georgia, and Iowa, and biofuel
blending infrastructure being added in 9 states. According to a Clean
Cities official, the program has successfully targeted grants to
locations where grantees have a high probability of increasing biofuel
use. However, significant increases in ethanol production would create
the need for greater infrastructure expansion, thus placing much
greater demands on this program.
In addition, certain states have provided significant funding to
install E85 fuel dispensers at stations. For example, from 2005 to
2006, at least 29 E85 dispensers were added to stations in Iowa,
partially funded with grants provided by a 2-year state program, and 64
E85 dispensers were added in Illinois, partially funded with grants
from a private foundation, but administered by the state Department of
Commerce and Economic Opportunity. According to a Clean Cities
official, the increase in the number of fueling stations that offered
biodiesel was due in part to federal grants to states and private
businesses distributed by the Clean Cities Program and significant
additional funding provided by state governments. Furthermore, the
state mandate in Minnesota that all diesel fuel contain at least 2
percent biodiesel by volume required that all stations provide
biodiesel as B2, and in future years, B2 mandates in the states of
Washington and Louisiana will likely contribute to increased
availability of biodiesel blends in those states. While EPAct 2005
provided a tax credit of up to $30,000 toward the cost of installing
biofuel dispensers and related equipment, the impact of this tax credit
on the number of biofuel dispensers installed in 2006 is not yet known.
The Limited Supply of Ethanol Available for Use as E85 and the Need for
Specialized Storage and Dispensing Equipment Are among the Key
Impediments to Providing Biofuels at More Fueling Stations:
The limited amount of ethanol made available for use in E85 is the
primary impediment to significantly expanding the number of stations
that offer the fuel. According to EIA, in 2006, about 1 percent of the
ethanol produced in 2006 was used in E85. Little ethanol was available
for E85 because producers prefer to sell ethanol at a higher price for
use in low blends rather than selling ethanol at a discount for use in
E85. High demand for ethanol in low blends as an oxygenate and fuel
extender has contributed to wholesale ethanol prices that are
significantly higher than the wholesale price of gasoline. An
additional incentive to selling ethanol in blends of 10 percent or
lower, according to one major fuel blender with whom we spoke, is that
the fuel economy reduction at that level is too small for consumers to
notice; hence, the fuel can be sold at the same price as conventional
gasoline at fueling stations. On the other hand, to attract customers,
fueling stations must generally sell E85 at a discount to conventional
gasoline to offset the noticeably lower miles per gallon that drivers
experience when using the fuel. For example, in 2006, according to
DOE's Alternative Fuel Price Reports, E85 sold for 11 percent less on
average than regular gasoline at a sample of fueling stations
nationwide. However, few producers are willing to discount ethanol so
that fueling stations can price E85 lower than gasoline. Consequently,
EIA projects that use of ethanol for E85 will continue to be limited
until the market for blends of 10 percent and under is nearly
saturated.
For biodiesel, the low overall production levels are the primary
impediment to significantly expanding the number of fueling stations
that offer biodiesel blends. According to our estimate, in 2006, the
approximate amount of biodiesel produced was only 0.6 percent of the
amount of diesel fuel used and, according to EIA, by 2030 is projected
to remain at 0.6 percent of the amount of diesel used, or 395 million
gallons. Furthermore, according to EIA, if production reaches 300
million gallons to 600 million gallons annually, competition with food
and feed markets for soybeans may make biodiesel production more
expensive and further reduce its competitiveness with diesel. Even
without additional competition over soybeans, according to DOE's
Alternative Fuel Price Reports, in 2006, pure biodiesel sales prices
were on average 26 percent higher than those of diesel fuel at a sample
of biodiesel fueling stations nationwide. According to EIA, the higher
price of biodiesel relative to diesel contributes to low demand for
biodiesel. Finally, using biodiesel can result in clogged fuel filters-
-the solvent properties of biodiesel can loosen accumulated settlements
in fuel tanks left by diesel--and performance problems under certain
conditions, such as gelling in cold weather, which are further
impediments to increasing the number of stations that sell biodiesel.
The cost of specialized storage and dispensing equipment is an
impediment to further expanding the number of fueling stations that
offer biofuels. While this is a lesser impediment for biodiesel, it may
be a significant impediment for potential E85 retailers because the
corrosive characteristics of ethanol in high concentrations may, for
example, cause metal equipment parts made of zinc and aluminum to
degrade and contaminate the fuel over time, potentially harming the
engines of vehicles that use the fuel.[Footnote 32] Station owners may
modify equipment at relatively little cost or may spend significantly
more for new specialized equipment due to concerns about equipment
safety and liability. For example, Illinois state officials told us
that the costs to convert existing gasoline storage tanks and
dispensers to E85 at 64 fueling stations from 2005 to 2006 averaged a
relatively low $3,354. This generally involved simply replacing some
dispenser parts, although it sometimes included cleaning the storage
tank. According to a major manufacturer of fuel-dispensing equipment,
the cost to purchase a new dispenser designed for E85 is about $13,000-
-about $7,000 more than for a regular gasoline dispenser. Further,
according to a study commissioned by DOE, a completely new installation
including items such as an underground tank, a dispenser, associated
piping, and concrete work costs up to about $62,400. An associated
impediment is the lack of a dispenser that has been certified for E85
use by Underwriters Laboratories (UL).[Footnote 33] According to
representatives of Wal-mart, BP, and Marathon Petroleum, the lack of a
UL-approved E85 dispenser has been a greater barrier than the potential
cost of the equipment and has caused them to defer plans to offer the
fuel at their respective company-owned stations until such a dispenser
is available. According to UL, the organization is in the process of
developing safety requirements for E85 dispensers and components,
although initial results of a survey it conducted indicate that E85
fuel exposures have not resulted in significant safety or maintenance
problems for existing equipment.
Finally, the marketing policies of some major oil companies may limit
the availability of biofuels at fueling stations. According to our
estimate, roughly 37 percent of the 169,000 fueling stations in the
United States--including company and franchise operations--are under
the brand of one of the five major oil companies we spoke to--BP
America, Chevron Products Company, ConocoPhillips, ExxonMobil, and
Shell Oil Products US. However, according to information provided by
DOE's Alternative Fuels Data Center, in early 2007, only about 9
percent of the fueling stations that offered E85 and about 8 percent of
the stations that offered higher blends of biodiesel were under the
brand of one of the five oil companies. According to representatives of
the five major oil companies, while no stations are prohibited from
selling biofuels, none of the companies offer E85 to their stations as
a branded product and none of the companies offer biodiesel except
where required to by state mandate. Industry experts with whom we spoke
told us that branded stations that offer E85 procure their own supply
of the fuel from other sources. For this reason, officials from one of
the five oil companies told us that their company policy prohibits
branded stations from advertising E85 on their marquees. All five of
the companies require E85 to be labeled to differentiate it from
branded fuels. Company representatives said that they require labeling
E85 fuel dispensers to protect their brand name, since the company does
not control product quality, and to ensure that consumers do not
misfuel vehicles that are not designed to operate on E85.
A Number of Policy Options Could Help Increase the Number of Stations
That Offer Biofuels, but Increased Use Is Unlikely without a Larger
Supply of Cost-Competitive Biofuels:
Members of Congress have proposed various policy options to increase
the number of fueling stations that offer biofuels, including the
following:
² Mandating major oil companies to install at least one E85 dispenser
at their fueling stations. Such a mandate could also require the
percentage of company-owned properties with an E85 dispenser to
gradually increase over time, eventually to 50 percent.
² Increasing the amount of the alternative fueling infrastructure tax
credit to greater than the current limit of 30 percent of the cost of
any qualified alternative vehicle refueling property or $30,000.
² Allowing the public to access biofuel dispensers located on federal
properties.
² Using fines from CAFE penalties paid by automobile manufacturers to
provide grants for biofuel dispensers.[Footnote 34]
² Prohibiting biofuel marketing restrictions on fueling station
franchisees and restrictions on selling biofuels only in certain areas
of their property.
While any one of these mandates, incentives, or other strategies would
likely increase the number of stations that offer biofuels to the
public, absent the availability of a large supply of cost-competitive
biofuel where they are located, it is unlikely that they would
significantly increase biofuel use. Efforts to increase the number of
stations that provide biofuels have primarily been successful in areas
where large amounts of biofuels are produced, and the fuel is more
likely to be sold for less than gasoline. For example, in Minnesota,
which in early 2007 had about 28 percent of the nation's E85 stations
and almost 10 percent of the nation's ethanol production capacity in-
state, cost-competitive E85 is provided largely as a result of local
ethanol producers' willingness to sell ethanol below its market price
for E85 blending, the state's 13 cents per gallon ethanol production
incentive payment, and the state's 5.8 cents per gallon excise tax
exemption for stations that sell E85. Minnesota has already saturated
its E10 market, making the state's excess supply of ethanol available
for use in higher blends, such as E85. Outside of the Midwest, few
regions have an available supply of cost-competitive ethanol to allow
for E85 price discounts, and blenders generally choose to use available
ethanol in E10 or lower blends because it is more profitable than
higher blends. Until other regions of the United States have large
supplies of cost-competitive ethanol or biodiesel, it is unlikely that
increasing the number of stations that offer biofuels in those regions
will result in significantly greater biofuel use.
The Number of Biofuel Compatible Vehicles Is Projected to Increase, but
Challenges, such as Limited Consumer Demand, Remain:
The relatively few biofuel compatible vehicles in use in the United
States could increase substantially in the near future because of
planned production increases by major automobile manufacturers.
Nonetheless, according to some manufacturers with whom we spoke,
further production increases are impeded by limited consumer demand for
FFVs and the additional costs of producing them. Increasing the number
of diesel vehicles is impeded by the additional costs to make the
vehicles compliant with emissions regulations. Several policy options
have been proposed to address these challenges. These may increase the
number of biofuel compatible vehicles but would be unlikely to increase
biofuel use until the fuels are less expensive and more widely
available.
The Relatively Small Number of Biofuel Compatible Vehicles in Use May
Increase Substantially in the Near Future:
According to data provided by the Alliance of Automobile Manufacturers
and DOE, in 2006, there were an estimated 4.5 million FFVs in use
capable of operating on ethanol blends up to E85. We estimate that this
number accounts for about 1.8 percent of the 244 million U.S. vehicles.
EIA's most recent estimate projects FFV sales to increase from about
600,000 in 2006 to about 1.8 million per year in 2012 and compose about
10 percent of sales of new light duty vehicles.[Footnote 35] EIA
projects FFV sales to reach about 2 million per year by 2030 and remain
at about 10 percent of total light duty vehicle sales. However, these
numbers could increase significantly due to a March 2007 commitment by
DaimlerChrysler, Ford, and General Motors to increase FFV production to
compose about 50 percent of their annual production by 2012.
According to data provided by the Alliance of Automobile Manufacturers
and DOE, in 2006, there were an estimated 4.9 million diesel vehicles
generally capable of operating on biodiesel blends. We estimate that
this number accounts for about 2 percent of the total number of
vehicles in the United States. EIA's most recent estimate projects
diesel vehicle sales to increase from about 360,000 in 2006 to about
424,000 per year in 2012 and make up about 2.4 percent of sales of
total light duty vehicles. EIA projects diesel vehicle sales to reach
about 1.2 million per year by 2030, which is about 6 percent of total
light duty vehicle sales.
The federal fleet of vehicles contains large numbers of FFVs and diesel
vehicles. According to the General Services Administration, in fiscal
year 2006, federal fleet FFVs numbered 96,229, composing about 15
percent of the total number of federal fleet vehicles and about 99
percent of the alternative fuel vehicles acquired by federal
agencies.[Footnote 36] In fiscal year 2006, diesel vehicles numbered
79,954, composing nearly 13 percent of the total federal fleet of
vehicles.
According to EIA, automakers produced virtually all FFVs since 1992 for
the sole purpose of acquiring credits toward the fuel economy
requirements of the Department of Transportation's CAFE program. Under
this program FFVs are treated as though they attain higher fuel economy
than they necessarily would for the purpose of encouraging
manufacturers to produce them. The Energy Policy Act of 1992 (EPAct
1992) required federal agencies to purchase FFVs. Specifically, it
required that at least 25 percent of federal vehicle purchases be
alternative fuel vehicles in 1996, increasing to 75 percent by
1999.[Footnote 37] The Energy Conservation and Reauthorization Act of
1998, which amended EPAct 1992, encouraged federal agencies to use
biodiesel by allowing them to partially meet the EPAct 1992 vehicle
acquisition requirements by using biodiesel in federal fleet diesel
vehicles.
Limited Consumer Demand and Additional Production Costs Are Impediments
to Increasing the Number of Biofuel Compatible Vehicles:
According to some automobile manufacturer representatives with whom we
spoke, consumers have limited awareness of FFVs. As a result, few
potential vehicle purchasers visit dealerships looking for FFVs.
Furthermore, according to some manufacturers and EIA, consumers who
purchase FFVs are often unaware that their vehicles are capable of
using E85. According to a manufacturer representative with whom we
spoke, awareness is increasing in part because of increased advertising
in 2006 designed to educate potential buyers about FFVs. Accordingly, a
survey of new vehicle buyers by Harris Interactive and Kelley Blue Book
found that buyer awareness of FFVs increased from 42 percent in January
2006 to 63 percent in November 2006.
However, consumers looking for an FFV to purchase have a relatively
narrow range of vehicles to select from. Currently, few models of
smaller, more fuel efficient vehicles are flex-fuel capable. According
to EPA and DOE, only 3 FFVs available in model year 2007 were compact
or midsize cars, while 23 were large cars, pickup trucks, vans,
minivans, or sport utility vehicles. Some automobile manufacturer
representatives with whom we spoke said that they have limited the
models and total numbers of FFVs they make because of the additional
production cost per vehicle, ranging between $30 and $300, depending on
the manufacturer. In addition, one automobile manufacturer
representative with whom we spoke told us that the significant research
and development costs associated with designing flexible fuel systems
for different engines and model types limited the models of FFVs the
company makes.
Despite increasing consumer awareness and commitments from
manufacturers to produce more FFVs, consumer demand may continue to be
limited by the lack of E85 fueling stations in areas where the largest
numbers of vehicles are located, as shown in figure 4. For example,
according to data provided by the Alliance of Automobile Manufacturers,
in 2006, the largest numbers of privately owned FFVs were located in
Texas, Florida and California. While there were about 415,000 privately
owned FFVs in Texas, in early 2007 only 18 publicly accessible fueling
stations offered E85. In Florida there were about 307,000 privately
owned FFVs but only 2 publicly accessible fueling stations offered E85
in early 2007, and in California, there were an estimated 257,000 FFVs
but only 1 publicly accessible fueling station--located in the San
Diego area--offered E85.
Figure 4: Location of Public Fueling Stations That Offered E85 in 2007
and Number of Privately Owned FFVs by State in 2006:
[See PDF for image]
Sources: DOE's Alternative Fuels Data Center and Alliance of Automobile
Manufacturers data.
[End of figure]
Increasing the availability of diesel vehicles is impeded by the
additional costs to make the vehicles compliant with emissions
regulations. Biodiesel contains oxygen, which aids in combustion but
results in emissions of nitrogen oxides that can lead to increased
ground-level ozone. According to an industry expert with whom we spoke,
the compliance cost of meeting current emissions standards for diesel
vehicles adds about $3,000 to the cost of the vehicles.
Several Policy Options Could Help Address Impediments to Increasing the
Number of Biofuel Compatible Vehicles, but the Effect on Biofuel Use Is
Unknown:
A number of policies to increase the production of biofuel compatible
vehicles have been proposed by members of Congress. The proposals
include the following:
² providing a production cost tax credit of about $100 per vehicle to
automobile manufactures for each FFV they produce;
² mandating that automobile manufacturers produce FFVs, for example, by
requiring the percentage of vehicles that are biofuel compatible to
gradually increase over time to eventually 100 percent of the
manufacturer's fleet;
² and taxing conventionally fueled vehicles.
On the basis of the impediments we have identified, it is unlikely that
increasing the number of biofuel compatible vehicles would increase
biofuel use until there is a large enough supply of cost- competitive
fuel that is readily available to drivers. Regarding FFVs, increasing
the number of such vehicles may actually increase gasoline usage if E85
is not readily available because the FFVs currently on the road--and
potentially those that are added in the future--are larger vehicles
that get relatively poor gas mileage and are operating mainly on
gasoline. According to a report from the Department of Transportation,
DOE, and EPA, automobile manufacturers have used CAFE incentives to
produce less fuel efficient FFVs that consumers generally do not
operate with biofuels, resulting in increased petroleum use. The report
projected in 2003 that 9 billion gallons of additional gasoline would
be used between 2005 and 2008 as a result of the CAFE credit for FFVs.
We have also reported that the CAFE program's effectiveness in reducing
oil consumption is hampered by the provision that grants credits to
manufacturers for selling FFVs because these vehicles often run on
regular gasoline.[Footnote 38]
The lack of access to E85 for federal fleet FFVs illustrates the
potential pitfalls of putting FFVs on the road without a sufficient
number of stations to provide the fuels. While there were about 96,000
FFVs in the federal fleet in fiscal year 2006, there are only 57
fueling stations dedicated to supplying them with E85 in early 2007.
Federal fleet FFVs were distributed nationwide, but the largest numbers
were in the states of California, Texas, and Florida, as shown in
figure 5. In California, there were 8,146 federal fleet FFVs, but only
3 stations--2 federal and 1 public--that provide E85. Similarly, there
are only 24 E85 stations in Texas to serve 6,810 federal FFVs, and only
8 stations in Florida to serve 6,606 federal FFVs. This situation can
lead to greater petroleum fuel usage by federal agencies. As we
reported in February 2007, the U.S. Postal Service was required to
purchase FFVs even though the available vehicles had larger engines
than were needed. Because the Postal Service found that E85 was
generally 17 percent more expensive than gasoline, and that E85
stations were sometimes too far away to justify the travel costs, it
chose to fuel these vehicles with regular gasoline, resulting in
increased use of petroleum fuels.[Footnote 39] The agency's FFV fleet
failed to create enough E85 demand to spur investment in the
installation of E85 dispensers at fueling stations, even in areas where
there were large numbers of Postal Service FFVs.
Figure 5: Location of Federal Fueling Stations That Offered E85 in 2007
and Number of Federal Fleet FFVs by State in 2006:
[See PDF for image]
Sources: DOE's Alternative Fuels Data Center and DOE's and General
Services Administration's (GSA) Federal Automotive Statistical Tool
data.
[End of figure]
DOE Has Not Yet Developed a Strategic Approach to Coordinate the
Expansion of Biofuel Production with Infrastructure and Vehicles, and
the Effectiveness of Biofuel Tax Expenditures Has Not Been Evaluated:
Currently DOE lacks a comprehensive strategic approach to coordinate
the expansion of biofuels production with biofuel distribution
infrastructure development and vehicle production. While DOE's Biomass
Program has a strategic approach to increasing ethanol production, DOE
has not yet developed a comprehensive strategic approach for
determining the infrastructure (transport system and fueling stations)
and vehicles needed to distribute and use the increased production that
could result from the program. A strategic approach could assist in
resolving important questions, such as which blend level of ethanol--
E10, E85, or something in between--would most effectively and
efficiently increase the use of the fuel and which elements of the
biofuel infrastructure should receive government support. In addition,
federal agencies have not evaluated the performance of biofuel-related
tax expenditures, making it impossible to determine their impacts on
the economy, environment, or energy security.
DOE's Strategy for Increasing Ethanol Production Is Not Coordinated
with a Comprehensive Strategic Approach for Distribution Infrastructure
Development and Vehicle Production:
DOE has a strategic approach for increasing ethanol production, which
it developed in collaboration with other federal agencies and the
private sector. The agency's approach is spelled out in the multiyear
plan for its Biomass Program, which describes the agency's approach to
the research and development of cellulosic biomass-to-fuel
technologies; provides analysis of the markets involved in each
technology; lists relevant accomplishments; outlines specific goals,
milestones, and barriers; and describes what the role of the federal
government should be. For example, the Biomass Program focuses on
technologies that have a high level of technical and economic risk but
also offer significant potential rewards for the nation. In addition,
Congress established the Biomass Research and Development Board
(Biomass Board) to help ensure a coordinated strategic approach to
research and development spending at DOE, USDA, EPA, the National
Science Foundation, and other agencies. The goal of the Biomass Board
is to bring coherence to federal strategic planning and to maximize the
benefits from federal grants and assistance. Members of the Biomass
Board, with advice from private sector stakeholders, identify gaps in
fuel production technology that need to be addressed by research and
development and seek to coordinate efforts in order to avoid
duplication of effort.
However, DOE has not yet developed a comprehensive strategic approach
to coordinate the significantly larger volume of biofuel production
that could result from the Biomass Program with distribution
infrastructure development and vehicle production. DOE officials told
us they recognize the importance of developing a strategic approach and
have taken an initial step in that direction. According to a DOE
official with whom we spoke, in March 2007, officials from DOE's
Biomass Program drafted a position paper that supported moving
nationwide ethanol blends beyond E10 to E15 or E20 in order to achieve
the most efficient expansion of ethanol use. DOE would continue to
support E85 only in areas with high ethanol production levels. However,
the position paper has not yet been approved, and according to one DOE
official with whom we spoke, it is still unclear how this position will
affect future DOE activities and priorities related to ethanol
infrastructure. After DOE finalizes its decision on ethanol blend
levels, the official told us that it would then need to coordinate with
other agencies to develop a strategic approach to biofuel
infrastructure expansion. In that regard, DOE has recently begun
working with USDA and other federal agencies through the Biomass Board
to develop a plan to achieve the President's goal of displacing 20
percent of U.S. gasoline consumption in the next 10 years. According to
DOE, private sector stakeholders involved in biofuel production,
delivery infrastructure, and vehicles will also have a key role in the
development of successful strategies for expanding biofuel production
and use.
In the absence of a strategic approach, important questions--such as
what distribution infrastructure and vehicles are needed to support
DOE's chosen blend level, when they are needed, or what government
support is needed and what will develop through market forces--remain
unanswered. For example, if cellulosic ethanol production begins on a
commercial scale, the expansion of biofuel infrastructure to meet the
President's target level of 35 billion gallons by 2017 may be achieved
through the use of E10 nationally and E85 regionally, or with the use
of E20 nationally. Determining which fuel blend strategy to pursue is
critical in guiding the development of distribution infrastructure
because, according to several industry officials, a national E20
approach may not require much investment in new dispensers, and
depending on the results of current fuel system testing, it might be
accomplished with the existing automobile fleet. However, using E20
nationally may not be feasible if transportation limitations prevent
the large-scale distribution of ethanol beyond its regional production
centers, in which case regional expansion of E85 may make sense. For
example, rail industry representatives with whom we spoke indicated
that there is currently no spare capacity in the rail system to
transport higher levels of biofuels. As a result, achieving even
relatively small increases in biofuel use may be difficult with the
current transportation infrastructure. It is also not known what roles
the government and private sector should play in the development and
expansion of the nation's biofuel infrastructure and fleet of biofuel
compatible vehicles. For example, DOE has not determined the extent to
which the federal government needs to be involved in supporting the
expansion of the E85 fueling station infrastructure or whether the
needed infrastructure will continue expanding largely as a result of
market forces and state support in areas that produce large amounts of
ethanol.
DOE Has Not Evaluated the Performance of Biofuel-Related Tax
Expenditures:
Federal biofuel tax expenditures are composed of excise tax credits for
ethanol and biodiesel blenders, tax credits for small ethanol and
biodiesel producers, a tax credit for alternative fueling
infrastructure development, and a special depreciation deduction for
cellulosic ethanol facilities.[Footnote 40] Through these tax
expenditures, the government forgoes a certain amount of tax revenue to
encourage biofuel use because of the presumed benefits, such as
reducing greenhouse gases and improving energy security and rural
economies. The largest of the biofuel tax expenditures is the VEETC,
which according to the Department of the Treasury, cost about $2.7
billion in forgone tax revenue in 2006.
The Government Performance and Results Act provides an impetus for
executive branch agencies to evaluate tax expenditures that affect
their missions. However, as we previously reported, one of the key
impediments to moving forward in evaluating tax expenditure outcomes is
the continuing lack of clarity about the roles of the Office of
Management and Budget (OMB), Treasury, and the departments or agencies
with program responsibilities, such as DOE.[Footnote 41] We also
reported that OMB officials said the agency did not have the expertise
or resources to conduct its own comprehensive analyses of tax
expenditures and that individual agencies should take responsibility
for identifying tax expenditures that affect their missions, with
Treasury's Office of Tax Analysis leading efforts to evaluate tax
expenditures. To help evaluate whether tax expenditures are achieving
the desired results, our work related to GPRA and the experience of
leading organizations have shown the importance of establishing outcome-
oriented performance goals and measures. However, DOE and Treasury have
not worked together to define their roles and responsibilities for
evaluating biofuel tax expenditures, nor has either agency established
the performance goals or measures needed to conduct an evaluation, or
gathered and reported any performance data. Consequently, there is no
reporting on whether biofuel tax expenditures are achieving their
desired goals.
It is important to evaluate the outcomes of biofuel tax expenditures so
that the government can determine if spending on biofuels has positive
results. Evaluating the outcomes of biofuel tax expenditures consists
of comparing the level of forgone tax revenue to the outcomes or
benefits. The outcomes or benefits would be the dollar savings
resulting from improved energy security or the improvements to rural
economies, for example, and should be greater than the amount of
forgone tax revenue for there to be a positive result.[Footnote 42] In
addition, knowing the level of benefits on a measurable basis, such as
per gallon of biofuel, would allow policymakers to determine the level
of tax expenditure that would ensure a positive result. Being able to
determine the proper level of tax expenditure per gallon is important
because if it is set too high, then biofuel use would be more costly to
taxpayers than the benefit it provides, and likewise, if tax
expenditures are too low, not enough biofuel would be used and the
potential benefits from increased biofuel use would remain unrealized.
Because neither DOE nor any other executive branch agency has conducted
an analysis of the benefits of the VEETC, it is impossible to know
whether the 51 cent tax expenditure for every gallon of ethanol blended
with gasoline is too high, too low, or at the proper level.
It is also important to evaluate the outcomes of biofuel tax
expenditures so that the government can determine if there are more
cost-effective means to achieve the same outcomes. Tax expenditures are
not the only means to increase the production and use of biofuels.
Taxes on gasoline and a RFS that requires a specified level of biofuel
use are other policy options that have been implemented and could be
expanded to achieve the same outcome as the VEETC is assumed to
achieve, but at a lower cost to the government. For example, according
to analysis conducted by DOE and USDA and some economists with whom we
spoke, the current approach of using both an RFS and an excise tax
credit, such as the VEETC, may be largely redundant because biofuel use
can never be lower than the level mandated by the RFS. Consequently,
most of the benefits that accrue to society from the levels of biofuel
use mandated by the RFS could have been achieved without the need for
any forgone tax revenue.
Although executive branch agencies have not evaluated the performance
of biofuel tax expenditures, other organizations have conducted limited
evaluations that have raised questions about the effectiveness of these
tax expenditures. For example, in 2006, the Congressional Research
Service analyzed the VEETC and biodiesel tax credits and issued a
report stating that tax expenditures are generally an inefficient way
to deal with environmental or energy security concerns and this was the
case with biofuel tax expenditures, which do not directly address the
external costs of petroleum motor fuels production, use, or
importation, such as the costs of greenhouse gas emissions.[Footnote
43] The report also found that with the RFS in place, the VEETC has
caused substantial and unnecessary losses in federal tax revenue
without providing a significant incentive for additional production.
These losses could increase in the future if production increases. For
example, at the current rate of subsidy, if 15 billion gallons of
ethanol were produced annually, it would cost the Treasury an estimated
$7.6 billion annually. In addition, a study by the Global Subsidies
Initiative estimated that the government provided a total subsidy of
$1.80 for each gallon of gasoline displaced with ethanol in the United
States transportation sector.[Footnote 44] To a large extent, this
subsidy came from tax expenditures, particularly the VEETC. Because
outcome goals for biofuel tax expenditures have not been established
and performance data have not been gathered, it is impossible to
determine if the $1.80 per gallon cost resulted in an equal or greater
amount of benefits.
Conclusions:
Congress and the President have made commitments to support the
development of domestically produced biofuels, biofuel fueling
stations, and FFVs because of the expected benefits for rural
economies, energy security, and the environment. However, the nation
can and should think more strategically about these commitments.
Because there are limits on the amount of corn ethanol that can be
produced as well as market conditions that favor selling ethanol for
blending as E10, it is unlikely that ethanol producers will make
significant quantities of corn ethanol available for blending as E85.
Without a sufficient volume of competitively priced ethanol for E85,
federal investments in E85 fueling station infrastructure and FFVs
would result in additional costs and yet would not likely be effective
at increasing the use of the fuel. To date, DOE's Clean Cities program
has made a relatively small investment in expanding the number of E85
fueling stations, but it is questionable whether even this limited
federal expenditure was necessary or whether any additional federal
funds should be devoted to further expansion unless ethanol production
dramatically increases. Likewise, because most FFVs are larger, less
fuel efficient vehicles that generally use gasoline, there are
environmental costs associated with providing incentives through the
CAFE program for increasing the production of these vehicles in the
absence of an available, cost-competitive supply of E85.
Currently the nation lacks a comprehensive strategic approach to
coordinate the expansion of biofuels production with distribution
infrastructure development and vehicle production. Because such an
approach does not exist, fundamental questions remain unanswered. For
example, it has not yet been determined whether conventional vehicles
can run on blends of more than E10 without damaging the vehicles and
still meet EPA Clean Air Act requirements. The answer to this question
will have a significant impact on when or if biofuel-specific
infrastructure or vehicles are needed. Absent a coordinated, strategic
approach, the nation runs the risk of unnecessarily investing in
fueling stations or FFVs that cannot be effectively utilized or of
producing significant quantities of ethanol but not having an effective
way to deliver the fuel to stations and consumers. Finally, as biofuel
production increases, biofuel tax expenditures will become increasingly
expensive. However, because DOE and Treasury have not defined their
roles and responsibilities or evaluated and reported on the performance
of biofuel tax credits, policymakers have little basis for evaluating
whether the benefits of these tax expenditures outweigh the costs.
Recommendations for Executive Action:
To improve biofuel-related planning and to provide Congress better
information on the costs and benefits of biofuel tax expenditures, we
are recommending that the Secretary of Energy:
² Collaborate with public and private sector stakeholders to develop a
comprehensive strategic approach to increasing the availability and use
of biofuels that coordinates expected biofuel production levels with
the necessary distribution infrastructure development and vehicle
production.
² Collaborate with the Secretary of the Treasury to evaluate and report
on the extent to which biofuel-related tax expenditures are effectively
and efficiently achieving their goals, as well as the extent to which
they support the department's comprehensive strategic approach for
biofuels. As a first step, the Secretaries will need to define their
roles and responsibilities for conducting the evaluation.
Agency Comments and Our Evaluation:
We provided a copy of our draft report to the Department of Energy for
its review and comment. In its written response DOE agreed with both of
our recommendations and described its key initiatives to promote
cellulosic ethanol development and deployment, as well as its efforts
with other federal agencies and the private sector to coordinate
increased biofuels production, infrastructure development, and vehicle
technology. DOE also provided technical comments, which we incorporated
into the report as appropriate. DOE's comments and our detailed
responses are presented in appendix I.
We are sending copies of this report to the Secretary of Energy,
appropriate congressional committees, and other interested members of
Congress. We also will make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site
at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or gaffiganm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix II.
Signed by:
Mark E. Gaffigan:
Acting Director, Natural Resources and Environment:
[End of section]
Appendix I: Comments from the Department of Energy:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Department of Energy:
Washington, DC 20585:
May 25. 2007:
Mr. Mark E. Gaffigan:
Acting Director, Natural Resources and Environment:
Government Accountability Office:
441 G Street, NW Room 2T-23A:
Washington, DC 20548:
Dear Mr. Gaffigan:
Thank you for the opportunity to comment on the draft Government
Accountability Office Report, entitled "DOE Lacks a Strategic Approach
to Coordinate Increasing Production With Infrastructure Development and
Vehicle Needs." The Department of Energy, with the help of many Federal
agencies, is taking a leadership role in commercializing cellulosic
biofuels. Our efforts address issues that run the gamut from feedstock
production to filling up at the pump. They include fuel production
technologies, vehicle and delivery infrastructure, as well as vehicle
testing and optimization to name a few.
The Department of Energy, together with a number of other federal
agencies, is taking a leading role in the development,
commercialization, and deployment of cost competitive cellulosic
ethanol. We are working together with other federal agencies to
identify and promote infrastructure needs that will be necessary to
handle the rapid increase of ethanol, cellulosic ethanol and
alternative fuels that will be necessary to meet the President's goal
of displacing twenty percent of America's gasoline use in 10 years.
Let me provide you with several key initiatives which the Department of
Energy has undertaken to promote cellulosic ethanol development and
deployment in the short term. I then want to describe what the
Department is doing with other federal agencies and the private sector
to coordinate increased biofuels production and infrastructure
development.
As you know, commercial scale cellulosic ethanol refineries do not yet
exist. To help develop this industry and create cost competitive
cellulosic ethanol, the Office of Energy Efficiency and Renewable
Energy announced a solicitation under Section 932 of the EPACT of 2005,
and recently selected six advanced technology biorefinery
demonstrations to validate cost competitive biofuels and other
products. These investments, including private capital, will infuse up
to $1.2 billion toward commercializing biofuels. In addition, the
Department just released a solicitation for up to $400 million,
including private funding, to support the development of small-scale
biorefineries that can quickly be moved to commercial scale. These
public-private investments in technology of up to $1.6 billion,
combined with sound business strategy, give the United States a high
probability of success in commercializing biofuels. The report
indicates that greater vehicle use and infrastructure deployment will
not occur without a large supply of cost-competitive biofuels and we
agree. However, the report does not recognize efforts underway by the
Department of Energy and other Federal agencies to make the bio fuels
and bioproducts industry happen.
As part of our intermediate and long-term strategy, the Department of
Energy is providing an additional investment of up to $375 million to
back this technology development through the creation of three
"Bioenergy Research Centers." The purpose of these centers will be to
engage one of America's most successful industries, biotechnology, into
longer term research such as plant genomics in optimizing feedstocks
and conversion processes. Through its loan guarantee program, the
Department is helping spur commercialization of biofuels. By providing
the full faith and credit of the U.S. government, loan guarantees will
enable the government to share some of the financial risks in
demonstrating new biofuel-related technologies.
The Department of Energy is also formulating a biofuels infrastructure
strategy that brings together our biofuels and vehicle technology
programs. The purpose of this effort will be to look at vehicle
performance impacts from operation on various biofuel blends.
Comprehensive testing will be conducted in close coordination with the
Environmental Protection Agency and may include engine optimization and
integration of energy storage into bio-fueled vehicles.
The scope of the report goes beyond the mission and authority of the
work by the Department of Energy. However, the Department is working
very closely with the U.S. Department of Agriculture to promote bio
fuels and bioproducts. The Secretaries of Energy and Agriculture have
recently appointed members to a reconstituted "Biomass Research and
Development Board." This high level board of ten federal agencies is co-
chaired by the Under Secretary for Rural Development, Department of
Agriculture and the Assistant Secretary for Energy Efficiency and
Renewable Energy, Department of Energy and includes:
* the Acting Deputy Secretary of Transportation;
* the Assistant Administrator for Research and Development,
Environmental Protection Agency;
* the Director of the National Science Foundation;
* the Assistant Secretary, Land and Minerals Management, Department of
Interior;
* Assistant Secretary for Economic Policy, Department of Treasury;
* Under Secretary of Science, Department of Energy;
* Under Secretary for Research, Education and Economics, Department of
Agriculture;
* Office of Science and Technology Policy;
* Federal Environmental Executive; and:
* Chief Scientist, National Institute of Standards and Technology,
Department of Commerce.
This Board will look at all aspects of a biofuel-based economy and
publish a National Biofuels Action Plan that communicates the
government's strategies for production, delivery and end-use necessary
for widespread deployment and commercialization.
This national plan will support both the President's "Twenty in Ten"
initiative and his May 14, 2007, Executive Order that calls for
interagency cooperation in addressing transportation sector greenhouse
gas emissions. Furthermore, major stakeholders involved in biofuel
production, delivery infrastructure and vehicles will be consulted on
the plan and its implementation strategies. The Government
Accountability Office's report failed to emphasize the key role that
these private stakeholders will have on the investment and
implementation of successful strategies for biofuels commercialization.
We agree with the report's recommendation for the Departments of Energy
and Treasury to work together on evaluating the effectiveness of tax
policies.
Enclosed, please find additional comments that provide more detail on
the specifics o^ your report. If you have any questions, please contact
me at 202-586-5523.
Signed by:
Steven G. Chalk:
Deputy Assistant Secretary for Renewable Energy:
Office of Technology Development:
Energy Efficiency and Renewable Energy:
Enclosure:
GAO Comments:
The following are GAO's comments on the Department of Energy's letter
dated May 25, 2007.
1. While a detailed discussion of all federal programs related to
biofuels and bioproducts is beyond the scope and objectives of this
report, we believe that the report sufficiently recognizes the key
efforts under way by DOE and other federal agencies.
2. We revised the report to indicate that private sector stakeholders
will play a key role in the investment and implementation of a
successful strategy for biofuels commercialization.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Mark E. Gaffigan, (202) 512-3841or gaffiganm@gao.gov:
Staff Acknowledgments:
In addition to those named above, Stephen D. Secrist, Assistant
Director; Brad C. Dobbins; Winchee Lin; Robert J. Marek; and Bryan G.
Rogowski made key contributions to this report. Also contributing to
the report were Catherine A. Colwell, John W. Delicath, Franklin W.
Rusco, MaryLynn Sergent, James A. Stack, and Barbara R. Timmerman.
(360708):
FOOTNOTES
[1] DOE's Energy Information Administration estimates that the actual
annual average ethanol content of E85 is 74 percent due to the need to
reduce the ethanol content in fall, winter and spring to avoid vehicle
starting problems in cooler weather.
[2] The President recently announced a goal of producing 35 billion
gallons of alternative fuels, such as biofuels, coal-to-liquids, and
natural gas, by 2017.
[3] Switchgrass is a native grass that thrives on marginal lands, needs
little water, and no fertilizer.
[4] See GAO, Government and Performance Accountability: Tax
Expenditures Represent a Substantial Federal Commitment and Need to Be
Reexamined, GAO-05-690 (Washington, DC: Sept. 23, 2005).
[5] EIA is a statistical agency of DOE that provides energy data,
forecasts, and analysis to promote sound policymaking, efficient
markets, and public understanding regarding energy and its interaction
with the economy and environment.
[6] The marketing year for corn is from September 1 each year to August
31 of the following year, and the marketing year for soybeans is from
October 1 each year to September 30 of the following year.
[7] Tax Relief and Health Care Act of 2006 (Pub. L. No. 109-432).
[8] EPA has determined that the sale of blends of E10 or less for most
vehicles and up to E85 for FFVs is allowed under the Clean Air Act
Amendments of 1990. The state of Minnesota and the Renewable Fuels
Association are currently sponsoring research to determine the effects
of ethanol blends up to E20 on vehicle fuel systems and emissions. The
sponsors plan to submit the results to EPA for an evaluation of E20's
compliance with the Clean Air Act. If EPA rules in favor of allowing
the use of blends up to E20, the ruling would apply nationwide. In the
interim, Minnesota is attempting to meet its 20 percent goal by a
combination of E10 and E85 use. In addition, DOE plans to work with EPA
to develop a national test program to gather the data required to
facilitate the legal certification of fuel blends up to E15 or E20.
[9] Some people believe that the prices U.S. consumers pay for
petroleum fuels do not reflect their true costs. For example, some
researchers have concluded that petroleum fuels would sell at a much
higher price--making biofuels more competitive--if the full
environmental costs of producing and using petroleum fuels and the full
costs of ensuring oil supply security worldwide were accounted for in
the price. A comparison of the costs of biofuels and petroleum fuels
would also have to take into account the full environmental and other
costs of producing biofuels, such as the impacts of potentially
devoting greater land area to commercial agriculture and using greater
amounts of fresh water for irrigation.
[10] USDA, The Energy Balance of Corn Ethanol: An Update, (AER-813),
Office of Energy Policy and New Uses, July 2002. Subsequently, in a
January 2006 study published in Science magazine, University of
California, Berkeley, researchers reviewed six representative analyses
of fuel ethanol and found that those that reported negative net energy
incorrectly accounted for input energy and used some obsolete data.
[11] Section 1504(a) of the Energy Policy Act of 2005 (Pub.L. No. 109-
58) eliminated the reformulated gasoline oxygenate standard as of May
2006 and required EPA to revise its regulations for the program to
allow the sale of nonoxygenated reformulated gasoline.
[12] DOE, Effects of Fuel Ethanol Use on Fuel-Cycle Energy and
Greenhouse Gas Emissions, Argonne National Laboratory, January 1999.
The study analyzed emissions of three major greenhouse gasses--carbon
dioxide, methane, and nitrous oxide.
[13] DOE, EIA, Annual Energy Outlook 2007, DOE/EIA-0383(2007). EIA's
projection assumes that the support for ethanol provided in recently
enacted federal legislation will be extended indefinitely.
[14] Iowa State University, Emerging Biofuels: Outlook of Effects on
U.S. Grain, Oilseed, and Livestock Markets, Center for Agricultural and
Rural Development, May 2007.
[15] EIA's projection in the Annual Energy Outlook 2007 assumes that
the support for biodiesel provided in recently enacted federal
legislation will not be extended beyond 2008. However, according to
EIA, should the tax credit for biodiesel be reauthorized after 2008, it
would significantly increase biodiesel production.
[16] Biodiesel production was also supported by grants from the
Commodity Credit Commission Bio-energy Program, which was not funded
beyond 2006.
[17] "Gallon of gasoline equivalent" equates the energy content of a
gallon of ethanol to that of a gallon of gasoline.
[18] According to USDA, the estimated production cost for ethanol is
based on the cost of the corn feedstock and processing costs. USDA used
the early 2007 corn cost of about $3.50 per bushel. The production cost
for gasoline includes at a minimum, the cost of crude oil and refining
costs. According to EIA, the crude oil cost is the average price of
crude oil purchased by refiners. The refining costs are derived from a
calculation of the difference between the monthly average spot market
price of gasoline and the average price of crude oil purchased by
refiners, and includes an undetermined amount of refiner profits.
[19] EIA includes ethanol as a component in its calculation of total
gasoline consumption.
[20] This calculation is based on USDA's projected corn supply in the
2012-to-2013 marketing year, which is about 13.5 billion bushels.
[21] Total project investment figures are in 2007 dollars and include
plant construction, equipment, installation, site development, and
other costs such as startup costs and permits.
[22] NREL, managed by Midwest Research Institute and Batelle, is the
principal research laboratory for DOE's Office of Energy Efficiency and
Renewable Energy.
[23] Senate Bill 162, National Fuels Initiative, 110th Cong., 1st Sess.
(2007).
[24] For example, biobutanol is a next-generation biofuel that can be
made from corn or cellulosic biomass, has similar energy content to
gasoline, and could be distributed through existing fuel pipelines.
[25] DOE established this goal to meet the objectives of the
President's 2006 Advanced Energy Initiative, aimed at reducing the
nation's dependence on foreign sources of energy.
[26] NREL recently completed a draft assessment of the market drivers
and technology needs to achieve the goal of supplying 30 percent of
2004 motor gasoline fuel demand with biofuels by 2030. See NREL, A
National Laboratory Market and Technology Assessment of the 30x30
Scenario, NREL Technical Report /TP-510-40942, January 2007.
[27] Cellulosic ethanol producers can also take advantage of a loan
guarantee program created by EPAct 2005. We recently evaluated the
program and reported that DOE has not completed key steps to ensure
that the program will be well managed and able to accomplish its
objectives, and that there are risks to the government because of DOE's
potential to underestimate loan guarantee subsidy and administrative
costs. See GAO, The Department of Energy: Key Steps Needed to Help
Ensure the Success of the New Loan Guarantee Program for Innovative
Technologies by Better Managing Its Financial Risk, GAO-07-339R
(Washington, D.C.: Feb. 28, 2007). There is also a special depreciation
deduction for cellulosic ethanol plants contracted to be acquired after
December 20, 2006, that allows producers to take a depreciation
deduction of 50 percent of the adjusted basis of a new cellulosic
ethanol plant in the year it is put in service. In addition, EPAct 2005
authorized DOE to make per gallon incentive payments to cellulosic
ethanol producers until production reaches 1 billion gallons, or 2015,
whichever comes first.
[28] Wall Street Journal, "Politics & Economics: Economists Back Fossil-
Fuel Tax To Spur Alternative Energies," February 9, 2007.
[29] See GAO, Freight Railroads: Industry Health Has Improved, but
Concerns about Competition and Capacity Should Be Addressed, GAO-07-94
(Washington, D.C.: Oct. 6, 2006).
[30] DOE collects full data on stations that offer B20 through B100,
and limited data on stations that offer lower blends of biodiesel. Many
stations offer a low blend. For example, all diesel fuel sold in
Minnesota is 2 percent biodiesel by law.
[31] The Energy Conservation Reauthorization Act of 1998 amended the
Energy Policy Act of 1992 to allow federal fleets to generate one
alternative fuel vehicle acquisition credit for every 450 gallons of
pure biodiesel (equivalent to 2,250 gallons of B20) purchased for use
in diesel vehicles with a gross vehicle weight rating of more than
8,500 pounds.
[32] In cold climates the tanks and lines used for higher biodiesel
blends need to be warmed to prevent gelling of the fuel.
[33] UL is an independent, not-for-profit product safety certification
organization that tests products and writes standards for safety.
[34] Automobile manufacturers are required to pay penalties for not
complying with CAFE standards. According to the Department of
Transportation, in 2005 these penalties amounted to $27,472,539.
[35] Light duty vehicles have a gross vehicle weight of 8,500 pounds or
less. Common examples include cars, pickup trucks, and sport utility
vehicles.
[36] Federal alternative fuel vehicles in fiscal year 2006 included
vehicles that can operate on compressed natural gas, E85, electricity,
liquefied natural gas, or liquefied petroleum gas. However, in fiscal
year 2006, alternative fuel vehicles acquired by federal fleets only
included FFVs and compressed natural gas capable vehicles.
[37] EPAct 1992 also required certain state government and alternative
fuel provider fleets to acquire alternative fuel vehicles.
[38] See GAO, Passenger Vehicle Fuel Economy: Preliminary Observations
on Corporate Average Fuel Economy Standards, GAO-07-551T (Washington,
D.C.: Mar. 6, 2007).
[39] See GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel
Prices Requires Improved Tracking and Monitoring of Consumption
Information, GAO-07-244 (Washington, D.C.: Feb. 16, 2007).
[40] Volumetric Ethanol Excise Tax Credit §301 (Pub.L. No. 108-357),
Biodiesel Tax Credit §1344 (Pub. L. No. 109-58), Small Ethanol Producer
Credit §11502 (Pub. L. No. 101-508), Small Agri-Biodiesel Tax Credit
§1345 (Pub. L. No. 109-58), Alternative Fuel Infrastructure Tax Credit
§1342 (Pub. L. No. 109-58), Special Depreciation Allowance for
Cellulosic Biomass Ethanol Plant Property §209 (Pub. L. No. 109-432).
[41] See GAO-05-690.
[42] Setting targets for and monitoring the number of gallons of
biofuel produced and used (outputs) does not measure the benefits of
biofuels (outcomes) and therefore cannot be used to measure the
performance of biofuel tax expenditures.
[43] U.S. Senate. Committee on the Budget. Tax Expenditures: Compendium
of Background Material on Individual Provisions (S. PRT. 109-072, pp.
91). Prepared by the Congressional Research Service. Washington: 2006.
[44] See Doug Koplow, Biofuels--At What Cost?: Government Support for
Ethanol and Biodiesel in the United States, the Global Subsidies
Initiative of the International Institute for Sustainable Development,
October 2006. The $1.80 estimate includes all government support for
ethanol and corn, including state-level ethanol incentives and other
federal nontax expenditures such as direct payments to corn producers.
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