CRS Report for Congress

Biofuels Incentives: A Summary of
Federal Programs

Biofuels Incentives: A Summary of Federal Programs

Summary

With recent high energy prices and the passage of major energy legislation in 2005 (P.L. 109-58), there is ongoing congressional interest in promoting alternatives to petroleum fuels. Biofuels - transportation fuels produced from plants and other organic materials - are of particular interest.

Ethanol and biodiesel, the two most widely used biofuels, receive significant government support under this law in the form of mandated fuel use, tax incentives, loan and grant programs, and certain regulatory requirements. The 17 programs and provisions listed in this report have been established over the past 27 years, and are administered by five separate agencies and departments: Environmental Protection Agency, U.S. Department of Agriculture, Department of Energy, Internal Revenue Service, and Customs and Border Protection. These programs target a variety of beneficiaries, including farmers and rural small businesses, biofuel producers, petroleum suppliers, and fuel marketers. Arguably, the most significant federal programs for biofuels have been tax credits for the production or sale of ethanol and biodiesel. However, with the establishment of the renewable fuels standard (RFS) under P.L. 109-58, Congress has mandated biofuels use. In the long term, this mandate may prove even more significant than tax incentives in promoting the use of these fuels.

This report outlines federal programs that provide direct or indirect incentives for biofuels. For each program described, the report provides details including administering agency, authorizing statute(s), annual funding, and expiration date.

The Appendix provides summary information in a table format.

Contents

Biofuels Incentives: A Summary of Federal Programs

Introduction

With recent high energy prices and the passage of the Energy Policy Act of 2005 (P.L. 109-58), there is ongoing congressional interest in promoting greater use of alternatives to petroleum fuels. Biofuels — transportation fuels produced from plants and other organic materials — are of particular interest. Ethanol and biodiesel, the two most widely used biofuels, receive significant federal support in the form of tax incentives, loan and grant programs, and regulatory programs.¹ Further action on biofuels is likely as Congress takes up a new Farm Bill in the 110th Congress.²

This report outlines 17 current and expired federal programs and provisions (plus one authorized but unfunded program) that provide direct or indirect incentives for biofuels. The programs are grouped below by administering agency. The incentives for biofuels are summarized in the Appendix. This information is compiled from authorizing statutes, committee reports, and Administration budget request documents.

Environmental Protection Agency (EPA)

Renewable Fuel Standard

Administered by: EPA
Annual funding: N/A
FY2007 budget request: N/A
Established: 2005 by the Energy Policy Act of 2005, §1501 (P.L. 109-58)
Scheduled termination: None
Description: The Energy Policy Act of 2005 established a renewable fuels standard (RFS) for automotive fuels. The RFS requires the blending of renewable fuels (including ethanol and biodiesel) in gasoline.³ In 2006, fuel suppliers must blend 4.0 billion gallons of renewable fuel into gasoline, increasing annually to 7.5 billion
gallons in 2012. For subsequent years, EPA is required to set a minimum ratio for renewable content, no less than the ratio in 2012. On September 22, 2006, EPA issued a proposed rule on the RFS program detailing compliance standards for fuel suppliers, as well as a system to trade renewable fuel credits between suppliers.⁴

While this program is not a direct incentive for the construction of biofuels plants, the guaranteed market created by the renewable fuel standard is expected to stimulate growth of the biofuels industry.

Internal Revenue Service (IRS)

Volumetric Ethanol Excise Tax Credit

Administered by: Internal Revenue Service
Annual funding: N/A
Established: 2005 by the American Jobs Creation Act of 2004, §301 (P.L. 108-357)
Scheduled termination: December 31, 2010
Description: Gasoline suppliers who blend ethanol with gasoline are eligible for a tax credit of 51 cents per gallon of ethanol.
Qualified applicant: Blenders of gasohol (i.e., gasoline suppliers and marketers)
For more information: IRS Publication 510, Chapter 2: Fuel Tax Credits and Refunds [http://www.irs.gov/publications/p510/ch02.html]


Small Ethanol Producer Credit

Administered by: Internal Revenue Service
Annual funding: N/A
Established:1990 by the Omnibus Budget Reconciliation Act of 1990, §11502 (P.L.101-508); expanded by the Energy Policy Act of 2005, §1347 (P.L. 109-58)
Scheduled termination: December 31, 2007
Description: The small ethanol producer credit is valued at 10 cents per gallon of ethanol produced. The credit may be claimed on the first 15 million gallons of ethanol produced by a small producer in a given year.
Qualified applicant: Any ethanol producer with production capacity below 60 million gallons per year
For more information: IRS Publication 510, Chapter 2: Fuel Tax Credits and Refunds [http://www.irs.gov/publications/p510/ch02.html]


Biodiesel Tax Credit

Administered by: Internal Revenue Service

__________________________________________________________________________

¹ For more information on ethanol, see CRS Report RL33290, Fuel Ethanol: Background and Public Policy Issues, by Brent D. Yacobucci. For more information on biofuels in general, see CRS Report RL30758, Alternative Transportation Fuels and Vehicles: Energy, Environment, and Development Issues, by Brent D. Yacobucci, and CRS Report RL32712, Agriculture-Based Renewable Energy Production, by Randy Schnepf.

² For more information on the Farm Bill, see CRS Report RL33037, Previewing a 2007 Farm Bill, by Jasper Womach.

³ The requirement is for renewable fuel in gasoline. However, biodiesel is blended with diesel fuel, not gasoline. P.L. 109-58 requires EPA to promulgate regulations for blenders to earn and trade renewable fuel credits for biodiesel blending.

⁴ 71 Federal Register 55551-55600.

__________________________________________________________________________

Annual funding: N/A
Established: 2005 by the American Jobs Creation Act of 2004, §302 (P.L. 108-357); extended by the Energy Policy Act of 2005, §1344 (P.L. 109-58)
Scheduled termination: December 31, 2008
Description: Biodiesel producers (or producers of diesel/biodiesel blends) can claim a per-gallon tax credit. The credit is valued at $1.00 per gallon of “agri-biodiesel” (biodiesel produced from virgin agricultural products such as soybean oil or animal fats), or 50 cents per gallon of biodiesel produced from previously used agricultural products (e.g., recycled fryer grease).
Qualified applicant: Biodiesel producers and blenders
For more information: IRS Publication 510, Chapter 2: Fuel Tax Credits and Refunds [http://www.irs.gov/publications/p510/ch02.html]


Small Agri-Biodiesel Producer Credit

Administered by: Internal Revenue Service
Annual funding: N/A
Established: 2005 by the Energy Policy Act of 2005, §1345 (P.L. 109-58)
Scheduled termination: December 31, 2008
Description: The small agri-biodiesel producer credit is valued at 10 cents per gallon of “agri-biodiesel” (see Biodiesel Tax Credit, above) produced. The credit may be claimed on the first 15 million gallons of ethanol produced by a small producer in a given year.
Qualified applicant: Any agri-biodiesel producer with production capacity below 60 million gallons per year
For more information: IRS Publication 510, Chapter 2: Fuel Tax Credits and Refunds [http://www.irs.gov/publications/p510/ch02.html]


Special Depreciation Allowance for Cellulosic Biomass
Ethanol Plant Property

Administered by: Internal Revenue Service
Annual funding: N/A
Established: 2006 by the Tax Relief and Health Care Act of 2006, §209 (P.L. 109-432)
Scheduled termination: December 31, 2012
Description: A taxpayer may take a depreciation deduction of 50% of the adjusted basis of a new cellulosic ethanol plant in the year it is put in service. The accelerated depreciation applies only to cellulosic ethanol plants that break down cellulose through enzymatic processes (as opposed to gasification). Any portion of the cost financed through tax-exempt bonds is exempted from the depreciation allowance.
Qualified applicant: Any enzymatic cellulosic ethanol plant acquired after December 20, 2006, and placed in service before January 1, 2013. Any plant that had a binding contract for acquisition before December 20, 2006, does not qualify.
For more information: See Senate Finance Committee, Summary of House-Senate Agreement on Tax, Trade, Health, and Other Provisions, December 7, 2006.

Department of Agriculture (USDA)

Bioenergy Program

Administered by: Commodity Credit Corporation (CCC)
Annual funding: $100 million appropriated for FY2005, $60 million for FY2006; up to $150 million authorized annually for FY2004 through FY2006 FY2007 budget request: $0
Established: FY2001 in response to Executive Order 13134 (August 12, 1999) Developing and Promoting Biobased Products and Bioenergy, through CCC’s general authority to conduct commodity programs; extended by the Farm Security and Rural Investment Act of 2002, §9010 (P.L. 101-171)
Termination: End of FY2006
Description: The Bioenergy Program reimbursed ethanol and biodiesel producers for expanding their production capacity. Payments helped defray the purchase cost of the additional commodities needed for that expansion. The amount of each payment was based on the change in production capacity, as well as the number of applicants selected for funding. Eligible commodities included grain and oilseed crops (e.g. barley, corn, soybeans), cellulosic crops (e.g. switchgrass, rice hulls), animal fats, agricultural byproducts, and oils.
Qualified applicant: Any ethanol or biodiesel producer who expanded production capacity


Renewable Energy Systems and Energy
Efficiency Improvements

Administered by: Rural Business Cooperative Service
Annual funding: $23 million for all projects through FY2006, including biofuels projects; reduced in FY2007
FY2007 budget request: $10.2 million
Established: FY2003 by the Farm Security and Rural Investment Act of 2002, §9006 (P.L. 101-171); funding authorization for FY2007 reduced to $3 million by §1301 of the Deficit Reduction Act of 2005 (P.L. 109-171)
Scheduled termination: End of FY2007
Description: This program provides grants, loans, and loan guarantees for the development of renewable energy projects and energy efficiency improvements. The construction of a biofuel plant could be an eligible project. Grants are limited to 25% of the costs of the project; loans are limited to 50% of the cost of the project.
Qualified applicant: Farmers, ranchers, and rural small businesses
For more information: [http://www.rurdev.usda.gov]


Value-Added Producer Grants Program (VAPG)

Administered by: Rural Business Cooperative Service
Annual funding: $20.5 million appropriated for FY2006 (up from $15.5 million in FY2005); part of a $40 million total annual authorization for several value-added programs
FY2007 budget request: $20.3 million
Established: FY2001, expanded in FY2003 to include renewable energy projects by the Farm Security and Rural Investment Act of 2002, §6401 (P.L. 101-171); the Deficit Reduction Act of 2005, §1402 (P.L. 109-171), requires that all previously appropriated funds unobligated by October 1, 2006 be returned to the Treasury
Scheduled termination: End of FY2007
Description: VAPG provides grants to independent producers for the development of value-added agricultural activities, including biofuel production. The grants can be used for feasibility studies, the development of a business plan, or to acquire working capital to operate a value-added business. Grants are limited to $500,000
per recipient.
Qualified applicant: Independent producer, producer group, cooperative, or a majority-controlled producer-based business venture
For more information: [http://www.rurdev.usda.gov/rbs/coops/vadg.htm]


Biorefinery Development Grants (Unfunded)

Administered by: If funded, it would likely be administered by USDA’s Rural Development Agency
Annual funding: $0
Established: 2002 by the Farm Security and Rural Investment Act of 2002, §9003 (P.L. 101-171)
Scheduled termination: End of FY2007
Description: This program was established by the Farm Security and Rural Investment Act of 2002 (P.L. 101-171); however, no funding has been provided. If funded, the program would provide grants for the development and construction of biorefineries, including those that produce biofuels.
Qualified applicant: Virtually any non-federal entity (including a national laboratory) or group of entities that plans to build a biorefinery
For more information: N/A


Business and Industry (B&I) Guaranteed Loans

Administered by: Rural Business Cooperative Service
Annual funding: Approximately $1 billion in loans are guaranteed annually
Scheduled termination: None
Description: This program provides guarantees for up to 90% of a loan made by a commercial lender. Loan proceeds may be used for working capital, machinery and equipment, buildings and real estate, and certain types of debt refinancing.
Qualified applicant: Virtually any legal entity.
For more information: [http://www.rurdev.usda.gov/rbs/busp/b&i_gar.htm]


Rural Business Enterprise Grants (RBEG)

Administered by: Rural Business Cooperative Service
Annual funding: Approximately $40 million in each of FY2005 and FY2006
Scheduled termination: None
Description: RBEG provides grants to finance and facilitate development of small and emerging private rural business enterprises. The grant is awarded to a third party to assist a business; grant funds do not go directly to the business.
Qualified applicant: Public bodies, private nonprofit corporations, and federally recognized Indian Tribal groups.
For more information: [http://www.rurdev.usda.gov/rbs/busp/rbeg.htm]


Other USDA Programs

The following programs within the Rural Business Cooperative Service could possibly be used to assist biofuels producers indirectly:

• Rural Economic Development Loan Program;
  
• Rural Development Loan Program;
  
• Rural Economic Development Grants.
  
  
  

Department of Energy (DOE)

Biomass Research and Development Initiative

Administered by: National Biomass Coordination Office (a joint DOE-USDA program)
Annual funding: $14 million per year, decreased to $12 million in FY2006 FY2007 budget request: $12 million
Established: FY2001 by the Biomass Research and Development Act of 2000, §307 (P.L. 106-224); program extended and mandatory appropriations provided by theFarm Security and Rural Investment Act of 2002, §9008 (P.L. 101-171); program extended and funding authorization expanded by the Energy Policy Act of 2005, §941 (P.L. 109-58) — currently authorized at $200 million per year
Scheduled termination: End of FY2015
Description: Grants are provided for biomass research, development, and demonstration projects. Eligible projects include ethanol and biodiesel demonstration plants.
Qualified applicant: Wide range of possible applicants
For more information: [http://www.brdisolutions.com/default.aspx]


Biorefinery Project Grants

Administered by: Office of Energy Efficiency and Renewable Energy
Annual funding: For FY2006 $91 million appropriated for the biomass program —not all of this funding will go toward biorefinery project grants
FY2007 budget request: $150 million for entire biomass program
Established: FY2001 through funding authorized in various statutes
Scheduled termination: None
Description: This program provides funds for cooperative biomass research and development for the production of fuels, electric power, chemicals, and other products.
Qualified applicant: Varies from year to year, depending on program goals in a given year
For more information: [http://www.eere.energy.gov/biomass/]


Loan Guarantees for Ethanol and Commercial Byproducts
from Cellulose, Municipal Solid Waste, and Sugar Cane

Administered by: DOE
Annual funding: Not specified
FY2007 budget request: $0
Established: 2005 by the Energy Policy Act of 2005, §§1510, 1511, and 1516 (P.L 109-58)
Scheduled termination: Varies, depending on specific program
Description: The Energy Policy Act of 2005 authorizes several programs to provide loan guarantees for the construction of facilities that produce ethanol and other commercial products from cellulosic material, municipal solid waste, or sugar cane.
Qualified applicant: Private lending institutions, to guarantee loans for the construction of biofuels plants


DOE Loan Guarantee Program

Administered by: DOE
Annual funding: Not specified
FY2007 budget request: $2 million
Established: 2005 by the Energy Policy Act of 2005, Title XVII (P.L 109-58)
Scheduled termination: Not specified
Description: Title XVII of the Energy Policy Act of 2005 authorizes DOE to provide loan guarantees for energy projects that reduce air pollutant and greenhouse gas emissions, including biofuels projects.
Qualified applicant: Private lending institutions, to guarantee loans for clean energy projects.
For more information: [http://www.lgprogram.energy.gov/]


Cellulosic Biofuels Production Incentive

Administered by: DOE
Annual funding: $25 million total authorized for all fiscal years
FY2007 budget request: None
Established: 2005 by the Energy Policy Act of 2005, §942 (P.L 109-58)
Scheduled termination: Not specified
Description: Section 942 of the Energy Policy Act of 2005 authorizes DOE to provide per-gallon incentive payments for cellulosic biofuels until annual U.S. production reaches 1 billion gallons or 2015, whichever is earlier. DOE accepted comments on the program through July 14, 2006; DOE has yet to promulgate regulations.
Qualified applicant: Any U.S. cellulosic biofuel production facility that meets applicable permitting requirements, as well as any financial requirements set by DOE.

U.S. Customs and Border Protection

Import Duty for Fuel Ethanol

Administered by: U.S. Customs and Border Protection
Annual funding: N/A
Established: 1980 by the Omnibus Reconciliation Act of 1980 (P.L. 96-499); amended by the Tax Reform Act of 1986, §423 (P.L. 99-514; extended by the Tax Relief and Health Care Act of 2006, §302 (P.L. 109-423).
Scheduled termination: December 31, 2008
Description: A 2.5% ad valorem tariff and a most-favored-nation duty of 54 cents per gallon of ethanol (for fuel use) applies to imports into the United States from most countries; most ethanol from Caribbean Basin Initiative (CBI) countries may be imported duty-free.
Covered Entities: Fuel ethanol importers
For more information: CRS Report RS21930, Ethanol Imports and the Caribbean Basin Initiative, by Brent D. Yacobucci; Senate Finance Committee, Summary of House-Senate Agreement on Tax, Trade, Health, and Other Provisions, December 7, 2006.

Appendix. Summary of Federal Incentives Promoting for Biofuels