Push For Biofuels Seen In Farm Bill

With volatility in the global oil market recently pushing gasoline prices over $3.00 per gal in some areas of the U.S., Capitol Hill lawmakers are eyeing next year's farm bill as the vehicle to provide the financial support that could help biofuels such as ethanol and biodiesel become commercially viable alternatives to conventional gasoline.

"Interest in biofuels has exploded in this country with good reason," Senate Agriculture, Nutrition & Forestry Committee Chairman Saxby Chambliss (R-Ga.) remarked as he opened a recent hearing on the sector's growth and future prospects. Chambliss and other committee members are touting biofuels as a domestic resource that could eventually reduce U.S. dependence on foreign oil.

President George W. Bush has called for a 75% reduction in oil imports from the Middle East by 2025. "Truth is, we desperately need biofuels," said Sen. Tom Harkin of Iowa, the committee's ranking Democrat. "We are, as the President admits, addicted to oil, and biofuels are our best bet for weaning America from this dangerous addiction."

The industry began to emerge after Congress provided funding for biorefineries, renewable energy development, and biodiesel education programs in the Farm Security & Rural Investment Act of 2002. That five-year measure expires in September 2007.

The fledgling biofuels sector received another boost last August with the enactment of the Energy Policy Act of 2005. The law established a national renewable fuels standard, mandating that 7.5 billion gal of ethanol for fuel be produced annually by 2012, and extended a vital federal tax incentive for biodiesel and biodiesel fuel blends.

To spur further investment in alternative fuels, lawmakers plan to include even more ambitious subsidies for biofuels when they update U.S. agricultural policy in 2007. "The energy price crisis drives home the critical need for the President and Congress all to get on the right track and make the necessary federal investment in biofuels" and in R&D for biomass-based products, Harkin declared.

Chambliss said he expects his committee "will expand the energy [section] in the farm bill that we expect to write next year." He stressed that additional incentives for biofuels projects are needed to attract more investors. "We've got to make sure folks understand that they are going to have the ability to get a decent return on their investment based upon long-term tax credits or investment tax credits," Chambliss said.

Bill Gates, the billionaire cofounder of Microsoft, signaled the investment potential of alternative fuels in November 2005 when he agreed to acquire a 25.5% stake in Pacific Ethanol for $84 million. By the end of 2008, Pacific expects to be operating five plants in the western U.S. capable of producing 200 million gal of ethanol annually.

Sen. Blanche L. Lincoln (D-Ark.) told committee members that many private entrepreneurs across the country are poised to enter the alternative fuels industry but lack venture capital to defray start-up costs. "The fact that we are in a national energy crisis has never been clearer," she remarked. "But until we encourage the development of new homegrown energy sources like biofuels, we will be vulnerable to fluctuating prices at the [gas] pump."

Lincoln called for more incentives for renewable fuels like those that she authored and were later included in the comprehensive energy bill Congress passed last year. One of those provisions extended the biodiesel federal excise tax credit to 2008. The tax incentive, established originally as part of the American Jobs Creation Act of 2004, would have expired this year.

Proponents say biodiesel, a fuel derived from soybeans or oilseed plants, is a cleaner burning fuel that improves fuel economy and engine performance and significantly cuts the release of several pollutants, including carbon monoxide and particulate matter. Biodiesel can be blended with petroleum-based diesel in any percentage and can run in any diesel engine. It is currently used in its pure form (B100) or in one of two blends: B5 (5% biodiesel) and B20 (20% biodiesel).

The major downside at present is that biodiesel still costs more than petroleum diesel and requires tax incentives to be competitive. If petroleum prices continue to rise, though, the price discrepancy may soon disappear. Availability and production capacity, while rapidly increasing, also remain problematic. Biodiesel is currently available at only 700 locations nationwide.

The excise tax credit amounts to a penny per percentage point of biodiesel blended with petroleum diesel for "agri-biodiesel," such as that made from soybean oil, and half a penny per percentage point for biodiesel made from other sources, such as recycled cooking oil. It lowers the cost of the alternative fuel to consumers.

"Farmers in Arkansas and other rural states have already begun to turn to biodiesel, and I'm proud to have helped this promising biofuel gain a place at the table so it can be more cost-competitive with petroleum diesel," Lincoln remarked. "As I've said all along, in order to create favorable market conditions for biodiesel, we must have adequate support and tax incentives to foster these conditions."

Joe Jobe, chief executive officer of Missouri-based National Biodiesel Board (NBB), told the agriculture panel that the need for increased use of biofuels has never been more pressing. "Diesel fuel prices are at an all-time high," he noted. "The majority of diesel fuel in this country is used in over-the-road trucks. The trucking industry serves as a critical part of our economy and impacts every industry, business, and consumer in America."

Jobe said biodiesel and ethanol can be the first tools to help make the country less dependent on foreign oil. "They are liquid renewable fuels that are available right now, ready to blend into our existing fuel supply and use in our existing vehicles." To underscore the role biodiesel can play in reducing petroleum imports, he said if the U.S. replaced just 5% of its on-road diesel fuel with biodiesel, it would equal the amount of diesel fuel made from imported Iraqi oil annually.

"Every gallon of biodiesel that is used to replace diesel fuel refined from imported crude reduces the need for imported crude and finished fuel, extends the diesel supply, and expands domestic refining capacity," Jobe noted. "Even a small reduction in demand has a positive effect" on relieving price pressures.

Europe has been using biodiesel for decades, but it's only been in the past several years that the fuel has caught on in the U.S. Its usage is still minimal, but the amount of biodiesel sold domestically has jumped from 500,000 gal in 1999 to 75 million gal in 2005. By comparison, the U.S. burns roughly 140 billion gal of gasoline each year and nearly 4.5 billion gal of ethanol.

Although the growth in biodiesel has been spurred in part by rising crude oil costs, three federal policy initiatives have also helped sales expand exponentially, Jobe said. In addition to the federal tax incentive, he pointed to a pair of Department of Agriculture programs to encourage biodiesel production and raise consumer awareness of the fuel.

"Because of these three policy measures, biodiesel is beginning to make a small but significant impact on our nation's energy supply," Jobe testified, noting that the industry is on track to double output in 2006 to 150 million gal. "These measures are all working extraordinarily well but are soon scheduled to expire and must be continued in order to keep the growth in biodiesel going strong."

He urged the committee to reauthorize USDA production incentive and education programs through the energy section of the 2007 farm bill and to support legislation sponsored by Senate Finance Committee Chairman Charles Grassley (R-Iowa) and Ranking Member Max Baucus (D-Mont.) that would extend the biodiesel tax credit through 2010.

"It is likely that the need for this program will go beyond 2010, but it is critical that this tax credit, which has been so effective for biodiesel, not be allowed to expire," said Jobe. Legislation to extend the credit through 2010 has also been introduced in the House by Reps. Kenny Hulshof (R-Mo.) and Earl Pomeroy (D-N.D.).

Meanwhile, the biodiesel industry received a significant boost last month when Motiva Enterprises, a joint venture between Shell Oil and Saudi Refining, began blending the alternative fuel with petroleum diesel at its terminal in Dallas. This is the first time that a major U.S. oil company has worked directly with the biodiesel industry, according to Earth Biofuels, which is supplying the terminal with BioWillie, the brand of biofuel produced by Willie Nelson Biodiesel Co., formed by country music star Willie Nelson and partners.

"We believe that this event is extremely important to our company and the entire biodiesel industry," Earth Biofuels Chief Executive Officer Dennis McLaughlin said in a statement. "By having blending equipment on the premises of a major terminal operator on an exclusive basis, we are able to minimize transportation costs of both the petroleum diesel used for blending as well as the final blended biodiesel product, because most major terminals have been strategically located to reduce logistical delivery costs."

Jobe said the arrangement with Motiva reflects a growing trend of more terminals offering preblended biodiesel at petroleum-loading racks. "The further integration of biodiesel into existing petroleum infrastructure illustrates the acceptance of biodiesel within the petroleum industry," he remarked. NBB estimates that about 25 petroleum terminals have invested in equipment to make biodiesel a significant part of their business.

Another sign that biodiesel has arrived, Sen. Kent Conrad (D-N.D.) noted, is that Archer Daniels Midland (ADM), the nation's biggest ethanol producer, has begun building its first biodiesel plant. The facility in Velva, N.D., slated to be complete in April 2007, will make 85 million gal of the fuel each year from canola oil. ADM has said the federal biodiesel tax incentive was crucial to its decision to build the facility.

"I am a firm believer that we need to look to the Midwest rather than the Middle East for our energy," said Conrad. "We need to look to American farm fields instead of overseas oil fields. This new facility in Velva will create well-paying jobs here at home and help lead the way in lessening America's dependence on foreign sources of energy."

Conrad suggested that the upcoming farm bill is a potential vehicle for advancing a plan he has proposed that calls for a massive $40 billion investment in alternative energy, oil and gas exploration, and renewable power over the next five years. The legislation would also require an increase in ethanol use from 4.7 billion gal in 2007 to 30 billion gal by 2025 and establish a new biodiesel and alternative diesel standard of 250 million gal in 2008, rising to 2 billion gal in 2015.

"Make no mistake, this is a bold plan," Conrad said. "That's what it's going to take. It is time to put politics aside and assemble our best collective ideas into a new, comprehensive energy policy."

Robert Dinneen, president of the Renewable Fuels Association, told the committee that the renewable fuels mandate Congress included in the Energy Policy Act of 2005 "has been a clarion call to the ethanol industry and the financial community that demand for ethanol and biodiesel is no longer uncertain, allowing the renewable fuels industry to grow with confidence."

Demand for corn-based ethanol is increasing rapidly as refiners phase out methyl tert-butyl ether (MTBE) as an oxygenate in gasoline, and U.S. production capacity is growing just as fast, Dinneen said. With 35 new ethanol plants and nine expansions under construction, he said, more than 2.2 billion gal of annual capacity would be added over the next 12 to 18 months, boosting the industry's combined output to approximately 6.7 billion gal per year. "There is no question that the dramatically accelerated removal of MTBE has challenged the marketplace. But most analysts now agree there will be sufficient ethanol supplies," Dinneen testified.

Today, ethanol is largely a blend component of gasoline and, as such, enhances octane number, reduces toxic emissions, and helps refiners meet Clean Air Act specifications. "But the time when ethanol will saturate the blend market is on the horizon, and the industry is looking forward to new market opportunities such as E85," Dinneen said, referring to a mix of 85% ethanol and 15% gasoline.

E85 has increasingly been viewed by ethanol proponents as the next major step in the industry's development. However, less than 2% of the total U.S. motor vehicle fleet is currently capable of running on the alternative fuel and only 600 E85 refueling stations exist across the country. "Frankly, we can and must do better," Dinneen remarked.

Robert C. Brown, director of Iowa State University's Office of Biorenewable Programs, told committee members that corn and soybeans alone won't be able to produce enough renewable fuels to displace a significant fraction of imported petroleum. That, he said, will require development of new technologies to convert switch grass, corn stalks, and other fibrous plant material into fuels and chemicals.

An acre of switch grass could produce almost twice as much fuel as an acre of corn, according to Brown. "We need to understand that converting corn to ethanol is not the goal," Brown pointed out. "It is a pathway, and possibly a transitory one, to the larger goals of reduced dependence on imported petroleum and improved environmental quality."