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Corn+Soybean Digest

The Fuels Fight: Biofuels battle for their place in domestic energy

Biofuels, long a back-row player on the domestic agenda, has now been thrust to the front lines.

Growing concerns about dependence on foreign oil, California's energy crisis and last year's price spikes in natural gas, and rising gasoline prices have brought energy policy — and agriculture's role in it — front and center, says Krysta Harden, American Soybean Association's (ASA) Washington representative.

“We don't get a chance to influence energy policy often,” says Harden, who believes biofuels are gearing up to make a big impact. “Other than the Energy Policy Act of 1992 — which dealt primarily with energy conservation and efficiency — there hasn't been a serious debate on energy since the 70s.”

The two big players in the biofuels fight are the Congressional Energy Bill and the Farm Bill. Here are key elements from both provisions and where they stand as of press time.

Congressional Energy Bill

The House and Senate have each passed their own version of the energy bill and were in conference committee as of press time to work out a unified version for approval.

The House version, passed in August 2001, contains few ag-related provisions, although it does call for some research into biofuels.

However, several stand-alone bills have been introduced in the House to try and gather support for some of the Senate action, passed in April, such as the Renewable Fuels Standard (RFS).

The Senate's defense of the RFS will likely be the biggest conference committee battleground for biofuels. It calls for the use of 2.3 billion gallons of renewable fuels beginning in 2004, increasing to 5 billion gallons by 2012 and continuing on a percentage ratio thereafter.

In return, the petroleum industry gets some flexibility in fuel regulations. “They get to decide where, when and how to use ethanol and biodiesel the best, but we get the assurance of knowing that there's going to be a growing market for ethanol and biodiesel for the next 10 years,” says Trevor Guthmiller, executive director of American Coalition for Ethanol (ACE). “It has the support of the ethanol industry, the biodiesel industry and the American Petroleum Institute.”

The Senate RFS also eliminates the current oxygenate requirement, part of the 1990 Clean Air Act, aimed at solving pollution problems in major U.S. cities. The only two oxygenates for gasoline are MTBE and ethanol. MTBE, a petroleum-based oxygenate, has been found to contaminate groundwater. According to the American Petroleum Institute, 15 states have already limited or banned the use of MTBE. The Senate version calls for its total elimination by 2004.

“Overall, these are big fights,” says Guthmiller. “We've battled for years to get people to see that this is something that wasn't just an agricultural issue, that this was something that has value to the country as a whole.”

The Senate has also proposed an exemption for biodiesel similar to the excise tax exemption for ethanol. There is one critical difference: the National Highway Trust Fund (NHTF) will be reimbursed by the Commodity Credit Corporation (CCC) on biodiesel usage.

The ethanol industry periodically comes under fire because its excise tax exemption means less money for the NHTF — used to repair roads and bridges. The biodiesel industry has decided to forgo that fight by reimbursing the NHTF. Biodiesel supporters and USDA expect initial savings in the soybean marketing loan program due to surplus soybean oil being removed from the market, thus higher soybean prices and lower outlays in the loan program.

And that flexibility could provide marketing gains in the future for soybeans.

“One of the biggest factors that is leading to depressed global agricultural commodity prices right now is the global glut of vegetable oils and animal fats,” says Joe Jobe, director of the National Biodiesel Board (NBB). “The biodiesel tax provision directly addresses the utilization of vegetable oil and existing agricultural resources to meet current energy needs.”

Another provision in the Senate version of the bill that would have a big impact on small ethanol plants is the small producer tax credit.

Under the provision, ethanol plants with production under 65 million gallons could receive an income tax credit of 10¢/gallon on the first 15 million gallons of production. The current provision is 30 million gallons or less. The provision would also make farmer-owned coops eligible for the tax credit — a current hiccup in the law.

“You're having plants start off at a much larger production capacity than they were eight to 10 years ago. So revising these provisions really makes a lot of sense given the number of farmer co-ops that are involved or want to get involved with ethanol production,” says John McClelland, director of energy and analysis for the National Corn Growers Association (NCGA).

The Farm Bill

The Farm Bill, officially known as the Farm Security and Rural Investment Act of 2002, contained several provisions that were important for both biodiesel and ethanol.

A good indication that Congress is looking to farmers for food and fuel production is that this year's Farm Bill, signed by President Bush in May, included a title within it that's specific to energy for the first time.

The biggest news for biodiesel out of the Farm Bill is $5 million in funding over the next five years for biodiesel education.

“We're looking to educate fuel distributors, refiners, consumers, whoever needs to know the facts and get information about low-cost ways to introduce this into our existing fuel system,” says NBB's Jobe.

In addition, the bioenergy program, created in 2000 under the CCC, was continued. Biodiesel and ethanol plants are reimbursed for a portion of the bushels used to increase capacity over the previous year.

Other notable provisions include biorefinery development grants and funding — $75 million over six years for biomass research and development.

Looking Ahead:

The next federal battle will likely be over the transportation bill in the 2003 Congressional session. The ethanol industry is looking to extend the ethanol excise tax exemption past 2007 when it expires.

Overall, ASA's Harden is optimistic about the future for biofuels, but the struggle will still be on the front burner for some time. “I remain positive that the timing is right for this. The liability and problems of MTBE are forcing the issue and consumers and citizens are concerned about our dependence on foreign oil,” she says. “I think that those issues will win the day, but it will not be an easy fight.”

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