Stop Playing Favorites in the Biofuels Market!

By / 8.5.2010

In discussions of the energy bill this summer, talk focused on a price for carbon. This is a vital component in any legislation that would force companies to reduce emissions, either by becoming more efficient or substituting cleaner fuels. But that’s only realistic if cleaner alternatives, like biofuels, are available to replace dirty fossil fuels. Whether or not cap-and-trade passes this year, biofuels should play a key role in our new energy economy, but we need to reassess federal support to allow for more diverse and higher performing biofuels.

The biofuels industry today continues to rely on significant federal assistance to encourage investment and innovation. In the recent past, federal support has focused on pre-approved types of fuel, most prominently corn ethanol. This policy has aided the boom and bust cycle in today’s biofuels market. The government paid all its subsidies and tax credits to corn ethanol, causing the industry to expand at a faster rate than the market could accommodate. Choosing corn as the favorite resulted in a crash in ethanol prices once it became clear that supply had been propped up by federal support (rather than realistic market demand). These government policies that focus solely on corn ethanol have created both a bias in the market and a situation where investors are not willing to support alternative fuels because of federal support in favor of corn ethanol.

The biofuels market began with alternative fuel mandates in the Energy Policy Act of 1992, but these were mostly filled by conventional biofuels (ethanol derived from cornstarch). Since they were the most developed form of biofuel at the time, they received the bulk of individual tax credits (like the Volumetric Ethanol Excise Tax). Since then, Congress has adopted mandates for advanced biofuels (fuels other than cornstarch ethanol, derived from renewable biomass) and tax credits for cellulosic biofuels (a type of advanced biofuel derived from grasses, woodchips and other non-food sources). But other potential advanced biofuels (such as algae biofuel) still receive no support beyond general R&D funding. Corn ethanol’s stranglehold of the market through congressional subsidies can be seen in what would happen if current tax credits were extended through 2014: ethanol would receive more than 75 percent of the credits, while cellulosic biofuels would get less than 11 percent.

Corn ethanol production in the United States has more than tripled in the last five years, a boom that has caused other problems: diversion of corn away from food production, increased erosion, higher inputs of chemicals and water, and changes in cropping patterns and land use. Worse, these have serious repercussions, including the exhaustion of groundwater supplies, the destruction of native prairies, and the expansion of the Dead Zone in the Gulf of Mexico.

Some advocates for clean energy have pointed to these problems as reasons to stop supporting biofuel development. However, these negative consequences and the recent public backlash against ethanol mean we need a second generation of biofuels that is more diverse and market-based. Business Insights found that biofuels are estimated to account for 5-10 percent of global fuel production by 2017. It is unrealistic to think that our reliance on fuels for combustion engines will decrease anytime soon. Even if electric cars become economically feasible in the near future, it will take time to phase out existing cars. Concerns about energy security, rising oil prices and climate change will increasingly force us to change the energy mix to rely on cleaner fuels. For biofuels, this translates into a very real and growing market demand for at least the next several decades.

That’s why instead of continuing to use biofuel credits to help political constituencies like corn farmers, Congress needs to focus on forms of support that will increase performance and long-term viability for all types of biofuels. A good step toward diversifying the biofuels market is the Advanced Biofuel Investment Act of 2010, proposed by Representative Stephanie Herseth Sandlin (D-SD), which would create a new 30 percent Investment Tax Credit for investing in advanced biorefineries. This would build on existing tax credits, continuing America’s commitment to the biofuels industry.

Futhermore, if we really want to move beyond a market dominated by ethanol, Congress should approve a tax credit like the Biofuels Performance Tax Credit proposed by the Union of Concerned Scientists. All types of biofuels would be eligible for this tax credit and would receive support in proportion to their emissions reduction, rewarding performance, and fostering competition and innovation. The maximum tax credit would be $1.15 for every gallon of gasoline replaced, but to qualify for the full credit, the biofuel must have zero emissions over its lifetime. Thus, the tax credit incentivizes performance both for replacing oil and reducing global warming pollution. It would build on the current Renewable Fuel Standard by supporting producers that go beyond the Standard’s requirement of emissions reductions of at least 20 percent. This would keep incentives technology and feedstock neutral, so we wouldn’t fall into the same trap of placing overwhelming support on one fuel. It is also critical that any tax credit encourage innovation by setting a high standard for emissions reductions and allowing all companies to compete. This should lead to greater innovation and ultimately cleaner fuels.

Adopting the tax credit would be an important step towards a more even distribution of federal subsidies in the biofuels market. This would allow advanced biofuels to receive significantly more than the paltry 11 percent of tax credits that they are currently getting, which would be crucial in building a new energy economy.

The federal government has played a role in creating the ethanol market and it now it must play a stronger role in convincing investors of the potential of the biofuels market. Considerable federal support is needed to get the biofuels industry off the ground. It is essential to create policies that do not limit the market but instead allow for new developments and innovations.

Photo Credit: Kiwi Shooter’s Photostream