Selected Issues Related to an Expansion of the Renewable Fuel Standard
Selected Issues Related to an Expansion of the Renewable Fuel Standard
(Source: CRS Report RL34265, Selected Issues Related to an Expansion of the Renewable Fuel Standard (RFS), by Brent D. Yacobucci and Randy Schnepf, December 3, 2007)
The Energy Policy Act of 2005 established the Renewable Fuels Standard (“RFS”) which directs that gasoline sold in the U.S. contain specified minimum volumes of renewable fuel. The Energy Independence and Security Act of 2007 (“H.R. 6”), which became law on December 19, 2007, sets a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022. Of the latter total, 21 billion gallons of renewable fuel in U.S. transportation fuel is required to be obtained from advanced biofuels.
Although most references to “advanced biofuels” involve cellulosic ethanol, the “advanced biofuels” component of the proposed RFS extension may be met by essentially any non-corn-starch-derived biofuel. News reports often refer to cellulosic ethanol as “nearing a break-through” or “just around the corner” but the reality is that there is considerable uncertainty about the speed with which this technology will become commercially viable (even with substantial government support). Many scientists still suggest that commercial realization of cellulosic ethanol is 5 to 15 years down the road. For example, the Department of Energy’s goal is to make cellulosic biofuels cost-competitive with corn ethanol by 2012. Other groups are less optimistic. Although research is ongoing, presently there are no commercial-scale cellulosic biofuel plants in the United States, and there is only one demonstration-scale plant in Canada. A major barrier to cellulosic fuel production is that production costs remain significantly higher than for corn ethanol or other alternative fuels. Currently, various production processes are prohibitively expensive, including physical, chemical, enzymatic, and microbial treatment and conversion of these feedstocks into motor fuel.
Cellulosic Biofuel Production Uncertainties
There are substantial uncertainties regarding both the costs of production for cellulosic feedstock as well as the costs of producing biofuel from them. Perennial crops are often slow to establish and can take several years before a marketable crop is produced. Crops heavy in cellulose tend to be bulky and represent significant problems in terms of harvesting, transporting, and storing. Seasonality issues involving the operation of a biofuel plant year-round based on a 4- or 5-month harvest period of biomass suggest that bulkiness is likely to matter a great deal. In addition, most marginal lands (i.e., the low-cost biomass production zones) are located far from major urban markets, bringing the plant location choice versus ethanol transportation issue into play.
Furthermore, increases in per-acre yields would be required to make most cellulosic energy crops for fuel production economically competitive. Questions remain whether high yields can be achieved without the use of fertilizers and pesticides. Another question is whether there is sufficient feedstock supply available. USDA estimates that, by 2030, 1.3 billion tons of biomass could be available for bioenergy production (including electricity from biomass, and fuels from corn and cellulose). From that, enough biofuels could be produced to replace roughly 70 billion gallons of gasoline per year (about 4.5 million barrels per day). However, this projection assumes significant increases in per-acre yields and, according to USDA, should be seen as an upper bound on what is possible. Further, new harvesting machinery would need to be developed to guarantee an economic supply of cellulosic feedstocks.
In addition to the above concerns, other potential environmental drawbacks associated with cellulosic fuels must be addressed, such as the potential for soil erosion, runoff, and the spread of invasive species (many potential biofuel crops are invasive species when introduced into non-native localities). In the near term, the obvious choice of using corn stover to fuel existing corn ethanol plants has its own set of environmental trade-offs, paramount of which is the dilemma of sacrificing soil fertility gains from no- or minimum-tillage corn production.
Energy Supply Issues
Biofuels are not primary energy sources. Energy stored in biological material (through photosynthesis) must be converted into a more useful, portable fuel. This conversion requires energy. The amount and types of energy used to produce biofuels, and the feedstocks for biofuel production, are of key concern. Because of the input energy requirements, the energy and environmental benefits of corn ethanol, particularly, may be limited.
A frequent argument for the use of ethanol as a motor fuel is that it reduces U.S. reliance on oil imports, making the U.S. less vulnerable to a fuel embargo of the sort that occurred in the 1970s. However, while corn ethanol use displaces petroleum, its overall effect on total energy consumption is less clear. To analyze the net energy consumption of ethanol, the entire fuel cycle must be considered. The fuel cycle consists of all inputs and processes involved in the development, delivery and final use of the fuel. For corn-based ethanol, these inputs include the energy needed to produce fertilizers, operate farm equipment, transport corn, convert corn to ethanol, and distribute the final product. Some studies find a significant positive energy balance of 1.5 or greater — in other words, the energy contained in a gallon of corn ethanol is 50% higher than the amount of energy needed to produce and distribute it. However, other studies suggest that the amount of energy needed to produce ethanol is roughly equal to the amount of energy obtained from its combustion. A review of research studies on ethanol’s energy balance and greenhouse gas emissions found that most studies give corn-based ethanol a slight positive energy balance of about 1.2.
An expanded RFS would certainly displace petroleum consumption, but the overall effect on fossil fuel consumption is questionable, especially if there is a large reliance on corn-based ethanol. The mandate in H.R. 6 to require an increasing amount of “advanced biofuels” would likely result in reduced fossil fuel consumption relative to gasoline. As the share of advanced biofuels grows, this effect would increase. However, by 2022, advanced biofuels will likely represent less than 10% of gasoline energy demand, so the total amount of fossil energy displaced would be less than the expected growth in fossil energy consumption from passenger transportation over the same time period.
Natural Gas Demand
As ethanol production increases, the energy needed to process the corn into ethanol, which is derived primarily from natural gas in the United States, can be expected to increase. For example, if the entire 4.9 billion gallons of ethanol produced in 2006 used natural gas as a processing fuel, it would have required an estimated 240 to 290 billion cubic feet (cu. Ft.) of natural gas. If the entire 2006 corn crop of 10.5 billion bushels were converted into ethanol, the energy requirements would be equivalent to approximately 1.4 to 1.7 trillion cu. Ft. of natural gas. This would have represented about 6% to 8% of total U.S. natural gas consumption, which was an estimated 22.2 trillion cu. Ft. in 2005. The United States has been a net importer of natural gas since the early 1980s. A significant increase in its use as a processing fuel in the production of ethanol — and a feedstock for fertilizer production — would likely increase prices and imports of natural gas.
Further, expanding corn-based ethanol production to levels needed to significantly promote U.S. energy security is likely to be infeasible. If the entire 2007 U.S. corn crop of 13.2 billion bushels were used as ethanol feedstock, the resultant 35 billion gallons of ethanol (23.6 billion gasoline-equivalent gallons (GEG)) would represent about 16.7% of estimated national gasoline use of approximately 141 billion gallons. In 2007, an estimated 86 million acres of corn were harvested (largest since 1944). Nearly 137 million acres would be needed to produce enough corn (20.5 billion bushels) and resulting ethanol (56.4 billion gallons or 37.8 billion GEG) to substitute for roughly 20% of petroleum imports. Thus, barring a drastic realignment of U.S. field crop production patterns, corn-based ethanol’s potential as a petroleum import substitute appears to be limited by crop area constraints, among other factors.
By volume, ethanol accounted for approximately 3.6% of gasoline consumption in the United States in 2006, but a gallon of ethanol yields only 67% of the energy of a gallon of gasoline.
A continued expansion of corn-based ethanol production could have significant consequences for traditional U.S. agricultural crop production and rural economies. Supporters of an expanded RFS claim that increased biofuels production and use would have enormous agricultural and rural economic benefits by increasing farm and rural incomes and generating substantial rural employment opportunities. However, large-scale shifts in agricultural production activities will likely also have important regional economic consequences that have yet to be fully explored or understood. As corn prices rise, so too does the incentive to expand corn production either by expanding onto more marginal soil environments or by altering the traditional corn-soybean rotation that dominates Corn Belt agriculture. This shift could displace other field crops, primarily soybeans, and other agricultural activities. Further, corn production is among the most energy-intensive of the major field crops. An expansion of corn area would likely have important and unwanted environmental consequences due to the increases in fertilizer and chemical use and soil erosion. The National Corn Growers Association estimates that U.S. corn-based ethanol production could expand to between 12.8 and 17.8 billion gallons by 2015 without significantly affecting agricultural markets. However, as noted below, other evidence suggests effects are already being felt in the current expansion in corn production.
Food vs. Fuel
Many critics of federal biofuels subsidies and the RFS argue that a sustained rise in grain prices driven by ethanol feedstock demand likely will lead to higher U.S. and world food prices with potentially harmful effects on consumer budgets and nutrition. As evidence they cite USDA’s estimate that the U.S. Consumer Price Index (CPI) for all food is forecast to increase 3.5% to 4.5% in 2007 compared with an increase of 2.4% in 2006 and, an average annual rate of 2.5% over the past ten years (1997-2006). However, in analyzing this critique it is important to distinguish between prices of farm-level crops and retail-level food products because most “food” prices are largely determined by costs and profits after the commodities leave the farm. Basic economics suggests that the price of a particular retail food item varies with a change in the price of an underlying ingredient in direct relation to the relative importance (in value terms) of that ingredient. For example, if the value of wheat in a $1.00 loaf of bread is about 10¢, then a 20% rise in the price of wheat translates into a 2¢ rise in a loaf of bread.
As a result of corn’s relatively small value-share in most retail food product prices, it is unlikely that the ethanol-driven corn price surge is a major factor in current food price inflation estimates. Furthermore, economists generally agree that most retail food price increases are not due to ethanol-driven demand increases, but rather are the result of two major factors — a sharp increase in energy prices which ripples through all phases of marketing and processing channels, and the strong increase in demand for agricultural products in the international marketplace from China and India (a product of their large populations and rapid economic growth).
Most corn grown in the United States is used for animal feed. From 1995 through 2005, domestic feed use accounted for 58% of U.S. corn use. As corn-based ethanol production increases, so do total corn demand and corn prices. As a result, prolonged higher corn prices likely will have significant consequences for traditional feed markets and the livestock industries — hog, cattle, dairy, and poultry — that depend on those feed markets. Corn traditionally has represented about 57% of feed concentrates and processed feedstuffs fed to animals in the United States. Persistently high feed costs will tighten profit margins and likely squeeze out marginal livestock producers. Because economies of scale tend to favor larger producers, persistently tighter profit margins suggest a potential for increased concentration in the livestock sector. The National Cattlemen’s Beef Association (NCBA) has been one of the foremost critics of an expanded RFS. Instead, the NCBA argues for a phase out of current ethanol subsidies and a more market-based approach to renewable fuels policy.
The price of corn also is linked to the price of other grains, including those destined for food markets, through competition in the feed marketplace and in the producer’s planting choices for limited acreage. The price runup in the U.S. corn market has already spilled over into price increases in the markets for soybeans and soybean oil. Supply distortions also are likely to develop in protein-meal markets related to expanded production of the ethanol processing by-product distiller’s dried grains with solubles (DDGS), which averages about 30% protein content and can substitute in certain feed and meal markets.
While DDGS use would substitute for some of the lost feed value of corn used in ethanol processing, about 66% of the original weight of corn is consumed in producing ethanol and is no longer available for feed. Furthermore, not all livestock species are well adapted to dramatically increased consumption of DDGS in their rations — dairy cattle appear to be best suited to expanding DDGS’s share in feed rations; poultry and pork are much less able to adapt. Also, DDGS must be dried before it can be transported long distances, adding to feed costs. There may be some potential for large-scale livestock producers to relocate near new feed sources, but such relocation likely would have important regional economic effects.
Domestic Food Prices
Although corn primarily is used as a livestock feed or for ethanol production, corn also is used widely as an ingredient (albeit minor) in many processed foods, e.g., soft drinks, snack foods, and baked goods. Since corn prices are a relatively small share of the price of most retail food products, their price impact is concomitantly small. Higher corn prices have their largest impact on meat prices. The feed-price effect will first translate into higher prices for poultry and hogs, which are less able to use alternate feedstuffs. Dairy and beef cattle are more versatile in their ability to shift to alternate feed sources, but eventually a sustained rise in corn prices will push their feed costs upward as well. A recent economic study estimated that a 30% increase in the price of corn, and associated increases in the prices of wheat and soybeans, would increase egg prices by 8.1%, poultry prices by 5.1%, pork prices by 4.5%, beef prices by 4.1%, and milk prices by 2.7%. The effect on all food consumed was a 1.1% increase (0.9% on at-home food and 1.3% on away-from-home food consumption). Thus, the price impact of higher corn prices is small but important for most livestock products, and probably much smaller for most other retail food products.
The overall impact to consumers from higher food prices depends on the proportion of income that is spent on food. Since food costs represent a relatively small share of consumer spending for most U.S. households (about 10%), food price increases (from whatever source) are absorbed relatively easily in the short run. However, low-income consumers spend a much greater proportion of their income on food than do high-income consumers. Their larger share combined with less flexibility to adjust expenditures in other budget areas means that any increase in food prices potentially could cause hardship. In addition, higher commodity prices combined with shrinking inventories mean that local school districts and the U.S. government will be forced to pay higher market prices for food for school lunch programs. And the automatic food price escalators built into the food stamp program mean rising expenditures as well.
The United States is the world’s leading exporter of corn. In the past decade (1997 to 2006), the United States has exported about 20% of its corn production, accounting for nearly 66% of world corn trade. Increased use of corn for ethanol production could diminish U.S. capacity for exports. In 2006, the volume of corn used for ethanol equaled exports, with a 20% share of total use. By the 2009/10 marketing year (September-August), ethanol’s share of U.S. corn production is expected to reach nearly 36%, while the export share falls to 13%. FAPRI projections clearly suggest that higher corn prices will result in lost export sales. It is unclear what type of market adjustments will occur in global feed markets, since several different grains and feedstuffs are relatively close substitutes. Price-sensitive corn importers may quickly switch to alternative, cheaper sources of feed, depending on the availability of supplies and the adaptability of animal rations. In contrast, less price-sensitive corn importers, such as Japan and Taiwan, may choose to pay a higher price in an attempt to bid the corn away from ethanol plants. There could be significant economic effects to U.S. grain companies and to the U.S. agricultural sector if ethanol-induced higher corn prices led to a sustained reshaping of international grain trade.
Ethanol-blended gasoline tends to separate in pipelines. Further, ethanol is corrosive and may damage existing pipelines. Therefore, unlike petroleum products, ethanol and ethanol blended gasoline cannot be shipped by pipeline in the United States. Another issue with pipeline transportation is that corn ethanol must be moved from rural areas in the Midwest to more populated areas, which are often located along the coasts. This shipment is in the opposite direction of existing pipeline transportation, which moves gasoline from refiners along the coast to other coastal cities and into the interior of the country. While some studies have concluded that shipping ethanol or ethanol-blended gasoline via pipeline could be feasible, no major U.S. pipeline has made the investments to allow such shipments.
There is also interest in expanding the use of E85 (85% ethanol, 15% gasoline). Current E85 consumption represents only about 1% of ethanol consumption in the United States. A key reason for the relatively low consumption of E85 is that relatively few vehicles operate on E85. The National Ethanol Vehicle Coalition estimates that there are approximately six million E85-capable vehicles on U.S. roads, as compared to approximately 230 million gasoline- and diesel-fueled vehicles. Most E85-capable vehicles are “flexible fuel vehicles” or FFVs. An FFV can operate on any mixture of gasoline and between 0% and 85% ethanol. However, owners of a large majority of the FFVs on U.S. roads choose to fuel them exclusively with gasoline, largely due to higher per-mile fuel cost and lower availability of E85.
E85 capacity is expanding rapidly, with the number of E85 stations roughly doubling between February 2006 and February 2007. But those stations still represent less than 1% of U.S. gasoline retailers. Further expansion will require significant investments, especially at the retail level. If a new E85 pump and underground tank are necessary, they can cost as much as $100,000 to $200,000 to install. However, if existing equipment can be used with little modification, the cost could be less than $10,000.
Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.