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Sunday, October 30, 2011

Biomass and Cellulosic Biofuels

Title: Biomass and Cellulosic Biofuels

Important bills have been enacted in recent years with major impacts on the biofuels industry. First, the Energy Policy Act of 2005 (EPAct, P.L. 109-58) established a renewable fuel standard (RFS) that mandated minimum-use volumes of biofuels in the national transportation fuel supply. Second, the Energy Independence and Security Act of 2007 (EISA, P.L. 110-140) greatly expanded the RFS. In particular, under EISA the biofuels mandate, or RFS, expands from 9 billion gallons in 2008 to 36 billion gallons in 2022, with special carve-outs for advanced biofuels (i.e., non-corn-starch ethanol), cellulosic biofuels, and biodiesel. Finally, the Food, Conservation, and Energy Act of 2008 (the farm bill, P.L. 110-246) extended and expanded incentives for ethanol production, extended tariffs on imported ethanol, and promoted use of biobased products.

The Environmental Protection Agency (EPA), the federal agency in charge of administering the RFS program, announced final rules (February 3, 2010) for implementing the RFS. In addition to the specific volume mandates, the new rules implement mandatory reductions in life-cycle greenhouse gas (GHG) emissions for each biofuels category, and restrictions on the type and nature of feedstocks used to produce RFS-qualifying biofuels.

Congress will likely be confronted with the ability (or inability) of the U.S. biofuels sector to expand production capacity to meet the ever-increasing RFS mandate. U.S. biofuels production has easily exceeded the RFS since its inception in 2005 and through 2009. However, in 2010 U.S. biofuels production appeared on the verge of bumping up against the so-called “blend wall”—the 10% blending limit of ethanol to gasoline in U.S. transportation fuel—which could challenge the industry’s ability to meet the RFS mandate in the future. Blend wall aside, as the RFS mandate for biofuels steadily increases and becomes binding, it will have important consequences for food and energy markets. The short-lived commodity price spikes of mid-2008 hinted at the potential conflict associated with conversion of domestic food crops to biofuels.

In an attempt to shift biofuels policy distortions away from livestock feed and other markets, both EISA and the 2008 farm bill redirect biofuels research and development emphasis to cellulosic biofuels, since they can potentially be produced from non-food feedstocks such as crop residues, dedicated energy crops, and woody biomass. Under EISA the cellulosic biofuels mandate grows quickly from 100 million gallons per year (mgpy) in 2010 to 16 billion gallons by 2022. As a result, after 2015, most of the increase in the overall RFS is intended to come from cellulosic biofuels rather than corn-starch ethanol. However, the speed of cellulosic biofuels development remains a major uncertainty and currently lags the schedule set in EISA.

Congress might face issues relating to cellulosic biofuels production such as the effectiveness of incentives to spur commercial viability. Under EISA, EPA is required to calibrate annual fuel-use mandates based on expected production capacity. In early 2010, cellulosic biofuels were being produced in the United States on a very small, non-commercial, scale, thus making the 100 mgpy mandate a daunting target. As a result, the EPA announced (Feb. 3, 2010) a reduction in the 2010 cellulosic biofuels RFS to 6.5 million gallons. Then, on Nov. 29, 2010, in its final rule on 2011 RFS mandates, EPA announced a 2011 cellulosic biofuels mandate of 6.6 mgpy, down from the 250 mgpy scheduled in EISA.

Waivers are built into EISA to accommodate shortfalls if the U.S. biofuels industry (with imports) fails to meet the RFS. If shortfalls are expected to continue to occur, Congress might debate legislative remedies such as changing eligibility requirements or reducing RFS volumes to accommodate potential long-term shortfalls.

Another contentious biofuels issue confronting Congress involves the challenges of an expansion of the ethanol-to-gasoline blend rate from 10% (E10) to 15% (E15). In the absence of such an expansion, many in the ethanol industry fear that the blend wall will limit the ability of the U.S. fuel market to absorb further production increases in ethanol. The resulting surplus, if it were to occur, would likely depress biofuels prices and investment. The EPA has been reviewing this issue and, on October 13, 2010, issued a partial waiver for E15 for use in model year 2007 or newer light-duty motor vehicles. A decision on the use of E15 in model year 2001-2006 vehicles is expected in early 2011 after EPA receives the results of additional Department of Energy testing. However, EPA has announced that no waiver would be granted for E15 use in model year 2000 and older light-duty motor vehicles, as well as in any motorcycles, heavy duty vehicles, or non-road engines. Numerous changes have to occur before gas stations will begin selling E15, including many approvals by states and potentially significant infrastructure changes (pumps, storage tanks, etc.). As a result, the vehicle limitation to newer models, coupled with infrastructure issues, are likely to limit a rapid expansion of blending rates.

From an international perspective, Brazil and the United States are leading biofuels producers and the European Union is a major consumer and importer. Numerous biofuels trade issues are areas of debate for Congress during the 112th Congress. A leading trade issue is the $0.54 per gallon tariff that the United States applies to ethanol imported from most countries. Although the tariff was implemented to offset benefits intended for U.S.-produced biofuels, it raises the price of ethanol and reduces potential supply, a key issue in light of the RFS. Furthermore, the domestic tax credit for ethanol has been reduced gradually over time from $0.54 per gallon to $0.45 per gallon today. As a result, the tariff not only offsets the domestic benefit, but imposes a punitive charge of $0.09 per gallon on qualifying imported ethanol.

Another trade-related biofuels issue is the unexpected expansion of U.S. ethanol exports during 2010 in stark contrast to the often-stated policy goal of biofuels production contributing to U.S. energy independence. Some question the extent to which U.S. biofuels subsidies should be maintained for fuel that is not used in the U.S. fuel market.

Date of Compendium: September 29, 2011
Number of Pages: 176
Order Number: IS40254
Price: $49.95 (Subscribers to Congressional Research Report newsletter pay $29.97)