Major Federal Policies Promoting

Transportation Biofuels

John Stolzenberg and Larry KonopackiWisconsin Legislative Council

September 16, 2008

Special Committee on Domestic Biofuels

2

Main Messages of the Briefing

• US government has adopted a number of significant policies to encourage the development and use of transportation biofuels◦ Regulations, incentives, R&D, studies,

etc.

• Thus, the Committee is not starting in a policy vacuum◦ How should Wisconsin respond to these

initiatives?

3

2 Parts to the Briefing

• Overview of major initiatives◦ Especially from the 2007 Energy Act

and the 2008 Farm Bill

• Detailed review of the renewable fuel standard (RFS)

4

Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

5

Introduction to Federal Legislation

◦ Energy Independence and Security Act of 2007 (2007 Energy Act)

◦ Food, Conservation, and Energy Act of 2008 (2008 Farm Bill)

◦ Energy Policy Act of 2005 (2005 Energy Act)

◦ Funding terminology‣ mandatory funding ‣ discretionary funding / appropriations

process.

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Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

7

Tax Incentives

Volumetric tax credit for ethanol-blended gasoline

◦ $0.51 per gallon◦ Soon reduced to $0.45 per gallon

Small ethanol producer credit◦ $0.10 per gallon of ethanol produced◦ May be claimed on first 15 M gal of

ethanol from a producer with capacity below 60 MGY

8

Tax Incentives

Credit for production of cellulosic biofuel

◦ Tax credit of $1.01 per gallon ◦ US producers, cellulosic biofuel◦ For ethanol producers - reduced by volumetric

ethanol credit & small ethanol producer credit◦ Fuel produced after December 31, 2008

Biodiesel tax credit◦ $1.00 per gallon credit - “agri-biodiesel” ◦ or $0.50 per gallon – biodiesel from previously

used agricultural products like fryer grease.

9

Tax Incentives

Small agri-biodiesel producer credit◦ $0.10 per gallon produced◦ May be claimed on first 15 M gal of ethanol

from a producer with capacity below 60 MGY

Renewable diesel tax credit◦ $1.00 per gallon tax credit ◦ Biomass-based diesel fuel produced through

a thermal depolymerization process

10

Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

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Tariffs

Ethanol Import Tariffs ◦ $0.54 per gallon tariff◦ 2.5% ad valorem tariff ◦ Exception: Caribbean basin Initiative (CBI)

imports (can be up to 7% of US ethanol markets)

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Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

13

Funding - Production

Bioenergy program for advanced biofuels

◦ Production payments for advanced biofuels◦ Mandatory $300 million for 2009-2012 plus

authorization for appropriation of $25 million per year in 2009-2012

Grants for production of advanced biofuels

◦ Prioritizes greatest lifecycle GHG reductions◦ must be at least an 80% GHG reduction over

2005 fuel◦ Authorized appropriation of $500 million from

2008-2015

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Funding - Production

Biorefinery Assistance◦ Commercial-scale biorefineries

‣ Advanced biofuels (not corn starch ethanol)‣ Loan guarantees ‣ Development, construction, and retrofitting

◦ Demonstration-scale biorefineries‣ Convert renewable biomass into advanced

biofuels

◦ Mandatory $320 million for loan guarantees in 2009-2010 plus authorization for appropriation of $150 million per year in 2009-2012

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Funding - Production

Biomass crop assistance program◦ Support establishment and production of

eligible crops for conversion to bioenergy◦ Assist agricultural and forest land owners

and operators with collection, harvest, storage, and transportation of biomass

◦ 1:1 matching federal funds, up to $45 per ton

Repowering assistance◦ For converting existing biorefineries from

fossil fuel to biomass power◦ Mandatory $35 million for 2009 plus

authorization for appropriation of $15 million per year in 2009-2012

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Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

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Funding - Other

Renewable fuel infrastructure grants

◦ DOE grant program - $ to motor fuel dealers for storage and dispensing infrastructure

◦ Applies to: ‣ Gasoline with 11-85% renewable fuel ‣ diesel fuel with at least 10% renewable fuel

◦ Limits:‣ 33% of cost of project‣ $180,000 for any one retail location

◦ May include retail technical and marketing assistance

◦ Large, vertically integrated oil companies not eligible

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Funding - Other

Refueling infrastructure corridors◦ DOE competitive grant pilot program ◦ Will provide up to 10 project grants to

establish refueling infrastructure corridors◦ $20 million cap per grantee / no less than

20% cost share◦ Appropriations authorized up to $200

million per year from 2008-2014

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Funding - Other

New Era Rural Technology Program◦ Grants for rural community colleges &

technical centers ◦ Support training a workforce in bioenergy,

renewable energy, and pulp and paper manufacturing

Biodiesel fuel education program◦ Competitive grants to educate on the

benefits of biodiesel use◦ Mandatory funding of $1 million per year

for 2008-2012

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Funding - Other

Rural Energy for America Program◦ To promote energy efficiency and

renewable energy development ◦ For agricultural producers and rural small

businesses‣ Energy audits‣ Energy efficiency improvements ‣ Renewable energy systems

◦ Mandatory funding of $255 million from 2009 through 2012 plus appropriations authorized up to $25 million per year from 2008-2012

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Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

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Research, Development, Demonstration and

ExtensionCellulosic ethanol and biofuels

research◦ Educational institutions eligible to compete

for 10 grants ◦ For ethanol and biofuels R & D◦ Authorization for appropriation of $50 million

Forest biomass for energy◦ Competitive R & D program to encourage use

of forest biomass for energy◦ Prioritizes low-value forest biomass◦ $15 million authorized for appropriation per

year for 2009-2012

23

Research, Development, Demonstration and

ExtensionBiorefinery energy efficiency◦ DOE to establish a program of R & D,

demonstration, and commercial application ◦ For increasing energy efficiency in the

operation of biorefinery facilities

Biofuels distribution and advanced biofuels infrastructure

◦ DOE, DOT, and EPA to establish a program of R & D and demonstration

◦ transportation fuel distribution infrastructure‣ Focus on corrosion, sediments, filter clogging,

contamination, poor flow, instability, etc

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Research, Development, Demonstration and

ExtensionAgricultural bioenergy feedstock and

energy efficiency research and extension

◦ USDA competitive grant program ◦ Purpose: enhance production of biomass energy

crops & energy efficiency of ag operations ◦ Focus: improve ag biomass production, biomass

conversion in biorefineries, and biomass use, and on-farm energy-efficiency research

◦ 1:1 matching funds required◦ $50 million/year for 2008-2012 authorized for

appropriation

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Research, Development, Demonstration and

ExtensionPilot projects to develop biobased

products with commercial potential

◦ public-private cooperative agreements◦ extended until 2012 by the 2008 Farm Bill◦ authorized appropriation – such sums

necessary

Grants for rural biobased energy development & diversification

◦ Six regional centers ◦ Grants for research, extension, and

education programs on technology development and implementation

◦ $75 million authorized for appropriation from 2008-2012

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Research, Development, Demonstration and

ExtensionBiomass Research and Development

Initiative◦ USDA & DOE – R & D programs through the

Biomass Research and Development Initiative ◦ Establishes a Biomass Research and

Development Board◦ Establishes the Biomass Research and

Development Technical Advisory Committee◦ Non-federal cost-share required◦ Mandatory funding of $118 million from 2009

through 2012 plus appropriations authorized up to $35 million per year from 2008-2012

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Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

28

Studies and Support

Biofuels infrastructure study◦ USDA, DOE, EPA, DOT to conduct an

assessment of infrastructure needs for expanding domestic biofuels

Comprehensive study of biofuels◦ National Academy of Sciences to produce

an analysis of current scientific findings to determine:‣ biofuels production, production capacity,

domestic effects of increased production, a comparison of corn ethanol and other biofuels, and specific areas for future research

29

Studies and Support

Biodiesel study◦ DOE, in consultation with EPA, to submit a

report to Congress ◦ Report on “any research and development

challenges inherent in increasing” biodiesel sale.

Ethanol pipeline feasibility study◦ DOE and DOT to study the feasibility of

dedicated ethanol pipelines◦ $2 million appropriations authorized

30

Studies and Support

Biodiesel engine study◦ DOE and EPA to study the effects of varying

concentrations of biodiesel on performance and durability of engines

Flex-fuel vehicle optimization study◦ DOE, DOT and EPA to study fuel efficiency

effects of optimizing flex-fuel vehicles for E-85

E-85 pump study◦ DOE and DOT to study requiring motor fuel

retailers to install E-85 dispensers ◦ Regions with at least 15% flex-fuel vehicle

penetration.

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Studies and Support

Renewable fuel transportation study

◦ DOE and DOT to study the transportation of renewable fuels by railroad and other modes of transportation

◦ Consider whether inadequate competition leads to unfair price or service problems

Study of algae as a potential biofuel feedstock

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Studies and Support

EPA Biofuels and Biorefinery Information Center

◦ Intended to serve all “interested parties”◦ Include information on:

‣ Renewable fuel feedstocks‣ Processing techniques‣ Infrastructure necessary for transport and

use‣ Fed / state laws and incentives related to

RF production and use‣ RF R&D advancements

◦ Authorization for “sums as are necessary to carry out this section”

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Overview of Major Federal Initiatives

• Introduction• Tax Incentives• Tariffs• Funding – Production• Funding – Other • R & D, Demonstration, and

Extension• Studies and Support• Regulations

34

Regulations

Biodiesel Standard◦ American Society for Testing and Materials

must adopt B5 and B20 biodiesel standards, or EPA must adopt a standard

◦ EPA to establish an annual inspection and enforcement program

◦ $3 million authorized for appropriation for each fiscal year from 2008-2010

35

Regulations

E-85 / renewable fuel sale◦ Service station franchise agreements –

cannot bar renewable fuel

Forest resources state-wide assessment

◦ States must develop a long-term assessment of forest resources

◦ Assessment must include multiple factors including “production of renewable energy”

◦ Appropriations authorized up to $10 million per year through 2012

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Renewable Fuel Standard (RFS) Briefing

• Components

• Post 2022

• Application and enforcement

• Waivers and permanent modifications

• Low carbon biofuel standard

• Studies

37

Caveats

• Focus on RFS as amended by 2007 Energy Act◦ Effective January 1, 2009

• EPA has not yet promulgated its rules on the expanded RFS in the 2007 Energy Act

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RFS Briefing

• Components

• Post 2022

• Application and enforcement

• Waivers and permanent modifications

• Low carbon biofuel standard

• Studies

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Amount of RFS

• Not 1 but 4 standards• Specifies total annual volume of:

◦ Aggregate amount of “renewable fuel”

◦ 3 types of “renewable fuel” ‣“Advanced biofuel”

–“Cellulosic biofuel”–“Biomass-based diesel”

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Total Renewable Fuels

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“Renewable Biomass”

• Includes a variety of biomass material,◦ e.g., crops, tress, crop and tree

residues, animal waste materials, algae, yard and food wastes

• Slash, trees and tree residues may not be from federal forestlands or certain protected forests

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Advanced Biofuels

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Advanced Biofuels

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Total = Advanced + Conventional

orConventional = Total -

Advanced

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Conventional Advanced Biofuels

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Cellulosic

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Cellulosic

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Biomass-Based Diesel

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Biomass-Based Diesel

End of Statutory Schedule

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All Advanced Biofuels

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Cellulosic Biomass-Based Diesel Other Advanced Biofuels

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Total Renewable Fuels By Type

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10152025303540

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Conventional Cellulosic Biomass-Based Diesel Other Advanced Biofuels

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RFS Briefing

• Components

• Post 2022

• Application and enforcement

• Waivers and permanent modifications

• Low carbon biofuel standard

• Studies

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Post 2022 RFS

• Set by EPA based on statutory factors◦ e.g., energy security, fuel and food

prices

• Applies after 2022 for 3 standards • Applies after 2012 for biomass-

based diesel standard◦ Minimum of 1.0 billion gal/yr (2012 standard)

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RFS Briefing

• Components

• Post 2022

• Application and enforcement

• Waivers and permanent modifications

• Low carbon biofuel standard

• Studies

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Applicability

• RFS’ 4 annual volumes must be

contained in “transportation fuel”

◦ Sold or introduced into commerce

◦ In the continental US

◦ By refineries and importers

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Limits on EPA’s Implementation

Regulations• Can’t restrict geographic areas in

which renewable fuel may be used

• Can’t impose any per gallon

obligation for the use of a

renewable fuel

◦ e.g., an E10 requirement

53

Application of the RFS

• EPA converts the national annual volume

of a renewable fuel in the standard to %

of transportation fuel projected to be

sold in the US

• A refinery’s renewable fuel obligation is

this % multiplied by its annual

production of transportation fuel in the

US

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Enforcement, Credits and Trading

• Every gallon of renewable fuel produced in the US is assigned a unique “Renewable Identification Number” (RIN)

• RINs transferred with fuel as ownership of the fuel is transferred through the distribution system

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Enforcement, Credits and Trading, con’t.

• Once fuel is obtained by a refinery or blended into a motor vehicle fuel, the RIN may be separated from the batch of renewable fuel and then used for◦ Compliance purposes, ◦ Held, or ◦ Traded

• Credits for “additional renewable fuel”

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RFS Briefing

• Components

• Post 2022

• Application and enforcement

• Waivers and permanent modifications

• Low carbon biofuel standard

• Studies

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Waivers of the 4 annual standards

• General waivers

• Cellulosic biofuel waivers

• Biomass-based diesel waivers

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Permanent Modification of Applicable Standards

• Starting in 2016, EPA must reduce the applicable standard going forward, if EPA waives◦ At lease 20% of the applicable

standard for two consecutive years

◦ At least 50% of the applicable standard for a single year

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RFS Briefing

• Components

• Post 2022• Application and enforcement• Waivers and permanent

modifications• Low carbon biofuel standard• Studies

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Low Carbon Biofuel Standard

For many renewable fuelsto be used to meet the RFS:

The fuel’s “lifecycle greenhouse gas emissions” must be less than the “baseline life cycle greenhouse gas emissions” by at least the specified %

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Lifecycle Greenhouse Gas Emissions Reductions Beneath

Baseline

0

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Conventional - No LCBS Conventional - LCBS Cellulosic

Biomass-Based Diesel Other Advanced Biofuels

20%

60%

50%

50%

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“Lifecycle Greenhouse Gas Emissions”

Aggregate quantity of greenhouse gas emissions

“(including direct emissions and significant indirect emissions such as significant emissions from land-use changes),”

as determined by EPA,

related to the full fuel lifecycle from feedstock generation to ultimate customer

63

Direct Emissions

http://web2.uwindsor.ca/courses/physics/high_schools/2007/AlternateFuels/co2cycle.jpg

64

Examples of Indirect Emissions (No consensus on magnitude or offsetting

effects) Example #1

• High price of corn due to corn ethanol

• Leads to land taken out of CRP and used to grow corn for ethanol

• Thus, attribute carbon debt from land conversion to corn ethanol production

Example #2

• High price of corn due to corn ethanol

• Leads to higher feed costs, more corn acres and fewer soybean acres in US

• Leads to grassland or rain forest conversion in Brazil to grow more soybeans

• Thus, attribute carbon debt from land conversion in Brazil to corn ethanol production in US

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Modification of Greenhouse Gas

Reduction Percentages• EPA can lower any of the 4

percentages by up to 10% based

on specified criteria (e.g., 20% to

10%)

• Once EPA adjusts a percentage, it

must review and revise the

adjusted level within 5 years

66

Implications of These Requirements

• Current uncertainty in methodology, up to EPA rules◦ Treatment of indirect land-use, etc.

◦ Interplay with California rules

• Regulatory risk for feedstock and fuel producers and investors

• Harbinger of linkage of energy and environmental (esp. GHG) policy

67

RFS Briefing

• Components

• Post 2022

• Application and enforcement

• Waivers and permanent modifications

• Low carbon biofuel standard

• Studies

68

Mandated Studies Re RFS

• FTC annual ethanol market concentration analysis

• Studies of the impact of the RFS on:◦ Production of feed grains, livestock, food,

forest products, and energy by NAS◦ Environmental and resource

conservation impacts by EPA every 3 years

◦ Impact on air quality due to changes in vehicle and engine emissions by EPA