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Bioenergy Policy Options

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Bioenergy Policy Options James Duffield Hosein Shapouri Agricultural Economists Office of Energy Policy and New Uses Office of the Chief Economist – PowerPoint PPT presentation

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Title: Bioenergy Policy Options


1
Bioenergy Policy Options
  • James Duffield
  • Hosein Shapouri
  • Agricultural Economists
  • Office of Energy Policy and New Uses
  • Office of the Chief Economist
  • http//www.usda.gov/agency/oce/oepnu/index.htm
  • Presented at the National Public Policy Education
    Conference, September 21-24, 2003, Salt Lake
    City, Utah

2
Bioenergy
  • Bioenergy uses renewable biomass resources to
    produce an array of energy related products
    including electricity, liquid, solid, and gaseous
    fuels, heat, chemicals, and other materials.
    Bioenergy accounts for about three percent of the
    primary energy production in the United States.
  • Bioenergy resources come from biomass, i.e., any
    plant derived organic matter available on a
    renewable basis, including dedicated energy crops
    and trees, agricultural food and feed crops,
    agricultural crop wastes and residues, wood
    wastes and residues, aquatic plants, animal
    wastes, municipal wastes, and other waste
    materials.
  • Source DOE, EERE http//www.eere.energy.g
    ov/RE/bioenergy.html

3
Types of Bioenergy
  • Biofuels are liquid fuels including ethanol,
    methanol, biodiesel, and gaseous fuels such as
    hydrogen and methane derived from biomass
    feedstocks. Corn-ethanol is most common biofuel
    produced today, with biodiesel as a distant
    second. Cellulosic ethanol is the hope of the
    future.
  • Biopower is electricity generated from biomass.
    All of today's capacity is based on
    direct-combustion technology The burning of
    biomass to produce steam in boilers. The steam is
    used to produce electricity in steam turbine
    generators. Most biopower produced today is from
    waste wood. Future biopower technologies may
    include co-firing, gasification (biogas),
    pyrolysis, and anaerobic digestion.
  • Biobased chemicals and industrial products, other
    than food and feed, derived from biomass
    feedstocks. Examples green chemicals,
    renewable plastics, natural fibers, and natural
    structural materials.
  • Source DOE, EERE http//www.eere.energy.
    gov/RE/bioenergy.html

4
Motivation Behind Energy Policies
  • 1) Energy Security
  • Policymakers see domestic biofuels as potential
    reserves during emergencies, such as war or an
    energy crisis like the one experienced in the
    1970s.
  • Improve energy security by reducing our
    dependence on foreign oil from unstable
    countries. A primary goal of the Energy Policy
    Act of 1992 was to increase the domestic
    production of alternative fuels to reduce our
    dependence on foreign oil.
  • The Presidents National Energy Policy Group
    reported that Federal programs designed to
    promote alternative fuels, such as ethanol and
    biodiesel, has helped to reduce U.S. reliance on
    oil-based fuels.

5
Motivation Behind Energy Policies
  • 2) Environmental Benefits
  • Many biofuels are considered to be cleaner
    burning than their petroleum counterparts. They
    are generally more biodegradable, nontoxic, less
    likely to cause cancer, and have the potential to
    reduce greenhouse gasses.
  • Environmental policies encourage bioenergy
    production, such as the Clean Air Act Amendments
    of 1990. Ethanol additives are used in EPAs
    clean fuel programs to produce reformulated
    gasoline and oxygenated fuels.

6
Motivation Behind Energy Policies
  • 3) Benefits to Farmers
  • Bioenergy polices create new markets for
    farmers, e.g., corn-ethanol and biodiesel. Tthe
    primary goal of USDAs CCC Bioenergy Program is
    to increase domestic consumption of agricultural
    commodities by expanding or aiding in the
    expansion of domestic markets for agricultural
    commodities.
  • Increasing the demand for farm commodities
    through bioenergy policies can result in higher
    prices, for example, increasing corn demand by
    100,000 bushels to produce ethanol, results in a
    2-4 percent increase in corn price.
  • USDA benefits from bioenergy policies that
    support farm prices because farm program payments
    decline as farm prices rise.
  • .

7
Methods Used to Encourage Bioenergy Development
  • Federal Incentives
  • Motor fuel excise tax exemption, e.g., ethanol
    receives 0.52/gal tax credit
  • Blenders Income tax credit
  • Income tax deduction on purchase of renewable
    fueled vehicles
  • Income tax credit for businesses that sell or use
    alcohol as a fuel

8
Methods Used to Encourage Bioenergy Development
  • Federal Incentives Continued
  • Production tax credit for electricity generated
    by qualified energy resources, defined as wind,
    closed-loop biomass, or poultry waste
  • The Renewable Energy Production Incentive
    provides financial incentive payments for
    electricity produced and sold by new qualifying
    renewable energy generation facilities. Eligible
    technologies include landfill gas, wind, and
    biomass
  • Guaranteed Loan Programs offered by USDAs Rural
    Business Service provides funding for ethanol
    plants
  • Source DOE, EERE http//www.eere.energy.gov/R
    E/bioenergy.html

9
Methods Used to Encourage Bioenergy Development
  • Bioenergy Research
  • Many Government agencies are involved in
    bioenergy research, including DOE, EPA, DOC, DOD,
    DOI, USDA and others
  • USDA research program focus on new uses for farm
    commodities
  • - Biofuel technology (e.g., enzyme development
    for ethanol production)
  • - Value added coproducts for biofuels (e.g.,
    lactic acid and low-calorie sweetener)
  • - Energy crops (e.g., switch grass)
  • - Finding new uses for animal fats (e.g.,
    biodiesel)
  • - Biobased packaging from wheat straw
  • - National Corn to Ethanol Pilot Plant in
    Edwardsville, IL

10
Government Regulations Increase the Demand for
Bioenergy
  • Air quality regulations have been a major stimuli
    for ethanol production
  • Ethanol first started being used as a fuel
    additive in the late 1970s when EPA began phasing
    out lead in gasoline. Removing lead from
    gasoline lowered the octane level of gasoline.
    Because of its high octane content, ethanol soon
    established a role as an octane enhancer.
  • The Clean Air Act Amendments of 1990 established
    the Oxygenated Fuels Program and the Reformulated
    Gasoline (RFG) to control carbon monoxide and
    ground-level ozone problems. Both programs
    require that certain urban areas in
    non-attainment add oxygen to their gasoline
    2.7 percent by weight for oxygenated fuel and 2.0
    percent by weight for RFG. Blending ethanol
    with gasoline is one way to meet the oxygenated
    requirements. Blending methyl tertiary butyl
    ether (MTBE) with gasoline also can be used to
    meet the requirements.

11
Alternative-Fueled Vehicle Requirements
Established to Encourage Biofuel Use
  • Energy Policy Act of 1992 requires government and
    state motor fleets to purchase alternative-fueled
    vehicles (75 of new purchases). Alternative
    fuel providers must also comply (90 of new
    purchases). DOE has the authority to implement a
    private and local government program if
    necessary.
  • The Energy Conservation Reauthorization Act of
    1998 amended EPACT to include biodiesel fuel use
    credits. The rule, effective January 2001, gives
    fleet operators one AFV credit for using 450
    gallons of biodiesel.
  • Auto industry receives Corporate Average Fuel
    Economy credits to manufacture flexible-fueled
    vehicles

12
Farm Security and Rural Investment Act of 2002
  • 2002 Farm Bill Energy Title, IX
    http//www.usda.gov/energy/
  • Section 9002 Federal Procurement of Biobased
    Products
  • Funding 1 million per year, FY 2002-2007
  • Lead Agency Office of Energy Policy and New
    Uses
  • Key Staff Contact Marvin Duncan,
    Mduncan_at_oce.usda.gov
  • Section 9003 Biorefinery Grants
  • Funding Authorized funding but no funding
    appropriated
  • Lead Agency Rural Development Agency
  • Key Staff Contact Bill Hagy, Bill
    Hagy-RBS.GW.OCE_NET

13
2002 Farm Bill Energy Title, IX
  • Section 9004 Biodiesel Fuel Education Program
  • Funding 1 million per year, FY 2003-2007
  • Lead Agency Office of Energy Policy and New
    Uses
  • Key Staff Contact Jim Duffield,
    Jduffield_at_oce.usda.gov
  • Section 9005 Energy Audit and Renewable Energy
    Development Program
  • Funding Authorized funding but no funding
    appropriated.
  • Lead Agency Rural Development Agency
  • Key Staff Contact Bill Hagy, Bill
    Hagy-RBS.GW.OCE_NET
  • Section 9006 Renewable Energy Systems and
    Energy Efficiency Improvements
  • Funding 23 million year, FY 2003-2007
  • Lead Agency Rural Development/Rural
    Business-Cooperative Service
  • Key Staff Contact Bill Hagy, Bill
    Hagy-RBS.GW.OCE_NET

14
2002 Farm Bill Energy Title, IX
  • Section 9007 Hydrogen and Fuel Cell
    Technologies
  • Funding No funds authorized
  • Lead Agency Office of Energy Policy and New
    Uses
  • Key Staff Contact Hosein Shapouri,
    HShapouri_at_oce.usda.gov
  • Section 9008 Biomass Research and Development
  • Funding 5 million in FY 2002 and 14 million,
    FY 2003-2007
  • Lead Agency Natural Resource Conservation
    Service
  • Key Staff Contact Merlin Bartz, Merlin
    Bartz-USDA.GW.OCE_NET

15
2002 Farm Bill Energy Title, IX
  • Section 9010 Continuation of the Bioenergy
    Program
  • Funding Up to 115.5 million, FY 2003 and up to
    150 million per year, FY 2004-06
  • Lead Agency Farm Service Agency
  • Key Staff Contact Jim Goff, BioenergyProgram_at_wdc
    .usda.gov
  • Background on CCC Bioenergy Program
  • Established by USDA in FY 2001 to encourage
    ethanol and biodiesel production. Cash
  • payments available from the CCC to bioenergy
    producers compensating them for a portion
  • of their increased commodity purchases
  • Under 65 million gallons, payment on 1 bushel for
    every 2.5 bushels of corn or soybeans used for
    production
  • 65 million gallons or more, payment will be 1
    bushel for every 3.5 bushels of corn or soybeans
    used for production

16
Results of FY 2001 Bioenergy Program
  • Ethanol producers received 32.7 million for
    141.3 additional gallons. The average payment
    rate was about 0.23 per gallon
  • Biodiesel producers received 7.9 million for 6.4
    million gallons. The average payment rate was
    about 1.23 per gallon
  • Results of FY 2002 Bioenergy Program
  • Ethanol producers received 66.1 million for
    219.3 additional million gallons. The average
    payment rate was about 0.30 per gallon
  • Biodiesel producers received 12.6 million for
    8.9 million gallons. The average payment rate
    was about 1.42 per gallon

17
The 2002 Farm Bill Revised the CCC Bioenergy
Program
  • 1) Extended the Program to FY 2007
  • Broadened the list of eligible feedstocks to
    include animal byproducts, e.g., lard and tallow,
    and recycled fats, oils, and greases
  • Added payments on base for biodiesel producers.
    The level of benefits paid for base production
    will be gradually phased down from 50 percent in
    2003, to 30 percent in 2002, and 15 percent in
    2005. Base payments are eliminated in 2006
  • 4) Payment rates on biodiesel made from
    non-soybean oils and fats were adjusted to be
    more equitable to biodiesel made from soybeans

18
State Regulations Affect Bioenergy Demand
  • Banning MTBE in California has Stimulated Ethanol
    Demand
  • Because of its propensity to contaminate drinking
    water, MTBE has been banned in California. The
    ban begins in January 2004, but the California
    refiners have already begun to replace MTBE with
    ethanol. This is expected to increase the annual
    use of ethanol in California by 600-900 million
    gallons. U.S. ethanol production in 2002 was 2.1
    billion gallons.
  • Altogether 16 states plan to ban MTBE and two
    other states are likely to pass a law banning
    MTBE. There also is a proposal in the Senate
    version of the Energy Bill that calls for an
    national ban of MTBE.

19
Most States Have Bioenergy Incentives
  • 16 states have tax credits and/or producer
    payments for ethanol and biodiesel
  • 11 states have grant programs, personal income
    tax credits and corporate income tax credits for
    constructing biofuel facilities, conducting
    research on renewable fuel technologies,
    developing renewable energy systems, and
    investing in alternative energy development
  • 23 states have a Renewable Energy Portfolio
    Standard or other type of renewable electricity
    program that provides incentives for biomass
    power, anaerobic digestion and other renewable
    fuels used to generate power
  • Only 14 states have no incentives for bioenergy
  • Source http//www.dsireusa.org

20
Largely due to Government policies, ethanol
production grew from about 62 million gallons in
1976 to over 2 billion gallons in 2002
Surface Transportation Assistance Act of 1983
increased ethanol tax exemption to 0.50/gal
and the blenders income tax credit to 0.50/gal
Energy Tax Act of 1978 gave ethanol a
0.40/gal credit on the Federal motor fuels tax
MTBE discovered in California drinking water in
1998
Regulations under the Clean Air Act Amendments
of 1990 started in 1992
RFG begins in 1995
Blenders Income tax credit of 0.40/gal
In 1999 California Governor banned MTBE by 12/03
Tax Reform Act of 1984 increased ethanol
tax exemption to 0.60/gal and the blenders
income tax credit to 0.60/gal
Energy policy Act of 1992 applied ethanol tax
credits to lower blends
Source U.S. Energy Information Administration
and USDA, ERS
21
Biodiesel production remained flat until the
creation of USDAs Bioenergy Program in FY 2000
that caused production to jump from about 2
million gallons to 6.5 million gallons in FY 2001
The Farm Bill extends USDAs Bioenergy Program to
2006
USDA started the Bioenergy Program under the
authority of the CCC Charter Act
Congress amends EPACT to include biodiesel
The National Soy Fuels Advisory Committee
was Established in 1992
Source Anecdotal information and USDA, Farm
Services Agency
22
Most states with higher ethanol consumption have
state incentives and/or participate in EPA clean
fuel programs that use ethanol
-Tax exemptions - Producer payments
States with incentives but little production
No current state incentives but large mandated
oxy-fuel and RFG markets encourage ethanol
production
States with significant ethanol production but no
major state incentives
Source Ethanol consumption estimated by U.S.
Department of Transportation, Federal Highway
Administration, 2000
23
Ethanol consumption more likely to grow in States
that ban MTBE
States planning to ban MTBE
24
Energy Bill Would Have Major Effect on Bioenergy
Development
  • Renewable fuel standard renewable fuel blended
    with motor fuel must increase from 2.3 billion
    gallons in 2004 to 5 billion gallons in 2012
  • Federal Government requirement to purchase
    electricity from renewable fuel sources 3 in
    FY 2003, increasing to 7.5 in 2010
  • Renewable portfolio standard for electric
    utilities increase their use of renewable
    energy from 1 in FY 2005 to 10 in FY 2020
  • Federal fleets required to increase their use of
    alternative fuels
  • MTBE would be banned in the United States within
    4 years
  • States have the authority to waive the 2-percent
    oxygen content requirement for reformulated
    gasoline
  • Appropriations for Energy research and
    development, including renewables

25
Energy Bill Would Have Major Effect on Bioenergy
Development
  • Renewable electricity production tax credit
    extended to 2007
  • Amendment to small ethanol producers tax credit
    to include farm co-ops
  • Alternative Vehicles and fuels incentives
    provides tax credits for purchasing new
    alternative fuel vehicles

26
Estimated Effect of the renewable fuels
standard (RFS) on future ethanol production
Million gallons of ethanol
RFS results in 1.4 bill gal increase
RFS
USDA baseline
Historical estimates
27
What is the effect of the renewable fuels
standard (RFS) on future biodiesel production?
  • We dont know
  • USDA doesnt have baseline for biodiesel
  • Biodiesel has not been able to get beyond niche
    markets
  • Ethanol may dominate the RFS market, particularly
    in the early years
  • Biodiesel and other renewable fuels will have to
    play catch-up with ethanol
  • - Ethanol industry already has a fuel marketing
    and distribution system
  • - Already significant demand for ethanol
    additives
  • - Consumer confidence has not been established
    for biodiesel

28
Proposed Legislation Could Increase the Future
Demandfor Biodiesel
  • S.1149 Energy Tax Incentives Act of 2003 has
    provision that proposes to provide tax credits
    for production of biodiesel fuels
  • Agri-biodiesel receives 1 cent for each whole
    percentage (not exceeding 20 percent) blended
    with diesel fuel
  • Recycled biodiesel receives 0.5 cents for each
    whole percentage (not exceeding 20 percent)
    blended with diesel fuel
  • Tax credit is applied to the Federal motor fuel
    tax of 24.4 per gallon and would reduce funds for
    the Federal Highway Trust Fund. The funds
    diverted from the Highway Trust Fund could be
    reimbursed from USDAs CCC Program

29
EPA Diesel Fuel Regulations Could Increase the
Demandfor Biodiesel as a Lubricity Additive
  • EPAs low sulfur highway diesel fuel regulations
    begin July 2006 and the Draft Nonroad Diesel Fuel
    Regulations may begin June 2010.
  • Lowering the sulfur in diesel fuel also lowers
    the fuels lubricity. As a result the demand for
    diesel fuel lubricity additives is expected to
    increase significantly. Research suggests that
    Biodiesel is an excellent fuel lubricity agent.
    Only a small amount of biodiesel (1-2 percent) is
    needed to restore the lubricity level of ultra
    low sulfur diesel fuel.
  • The lubricity additive market could provide a
    much larger market than the niche markets that
    currently exist for biodiesel.

30
The combination of both Supply and Demand
Policies Could Increase Biodiesel Production
Significantly
  • Supply Side Incentives
  • CCC Bioenergy Program
  • Energy Tax Incentives Act of 2003
  • Demand Side Incentive
  • Renewable Fuels Standard

31
Conclusions
  • Can Bioenergy Policies Meet Their Intended
    Objectives?
  • 1) Increase bioenergy production Yes NO
  • Is bioenergy production increasing?
  • 2) Enhance energy security
  • Can bioenergy help lower our dependence on
    petroleum imports?
  • 3) Provide environmental benefits
  • Can bioenergy help clean up our environment?
  • 4) Benefit farmers
  • Can bioenergy increase the demand for farm
    commodities?
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