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MARKET WATCH

Policy Focus: Biofuels

Posted by Suz-Anne Kinney on January 18, 2010
When the Biofuels Tax Credit of $1.00 per gallon expired at the end of 2009, some biofuels producers discontinued production. Many of the rest are struggling to stay afloat. Into this environment, President Obama announced a comprehensive and multi-pronged approach to achieving revised renewable fuel standards (RFS2) with biofuels.

RFS2 Implementation Rules

RFS2 standards were set by Congress in the Energy Independence and Security Act (EISA). Proposed rules were released in May 2009, and in early February, the EPA announced the long-awaited rules for meeting RFS2. Changes in the final rules include :

  • Adjustments in the percentage of the standard that will need to be met by each type of renewable fuel. For 2010, cellulosic biofuels will make up only 0.004 percent, or 6.5 million gallons. Biomass-based diesel will make up 1.1 percent of the total, or 1.15 billion gallons. Advanced biofuels will make up 0.61 percent, or 950 million gallons. The rest of the standard is expected to come from other biofuels like that provide at least a 20 percent imporvement over fossil fuels in greenhouse gas emissions. Overall, in 2010, the industry is expected to meet a renewable standard of 8.25 percent of total transportation fuels used in the U.S. in 2010, or 12.95 billion gallons. The 2022 standard remains the same, with 36 billion gallons slated to be produced, 16 billion from cellulosic biofuels and the remaining 21 billion from advanced biofuels.
  • Cellulosic biofuels—derived from “forest material including eligible forest thinning and solid residue remaining from forest product production” as well as other materials—provides the most improvement in lifecycle greenhouse gas emissions over gasoline: 60 percent. As a result, cellulosic biofuels will make up a significant portion of our renewable fuel portfolio through 2022.
  • The EPA revised the way in which it calculated lifecycle greenhouse gas emissions following criticism of the rules they proposed in May 2009. The current analysis considers: 1) updated crop yield and plant efficiency models and 2) an expanded number of countries it looks at to calculate global land use changes—160 rather than 40 countries. (The model assumes if crops grown in the U.S. are being used to make biofuels instead of feeding world population, rain forests must be cleared in the developing world in order to grow replacement crops). The result is a more favorable view of corn-based ethanol, which was found to achieve a 20 percent greenhouse gas reduction over gasoline.

Biomass Crop Assistance Program (BCAP) Proposed Rules

In order to establish a biomass supply chain and make sure the supply is going to facilities that will increase the amount of renewable energy produced in the U.S., the USDA announced a revised set of rules for BCAP’s Collection, Harvest, Storage and Transportation (CHST) matching payments program. In order to accomplish the program’s intent, the new rules propose changes to the structure of how payments are made.

In the original rules, suppliers to any facility that produced energy from biomass were eligible for a dollar for dollar matching payment, up to $45/ton, for every dry ton of delivered eligible material.

In the three options provided for structuring the payments going forward, the USDA is using the payments either to incent additionality (renewable energy over and above what a facility has historically produced) or to incent a particular type of renewable energy. Here are the options in detail:

  1. A dollar for dollar per bone dry ton (BDT) matching payment EXCEPT for suppliers of facilities converting wood wastes and residues into heat or electricity for their own use. Suppliers to these facilities would receive dollar for dollar matching payments on eligible materials used to produce heat or electricity ABOVE the facilities historic baseline. This payment structure would incent the idea of "additionality," driving more renewable energy production rather than rewarding those who have been producing renewable energy for years, sometimes decades.
  2. Suppliers to biofuels facilities would receive the dollar for dollar per BDT matching payment, not to exceed $45/BDT. Suppliers to facilities producing heat, power, renewable energy or biobased products would receive a lesser amount, roughly $16 per BDT or an amount based on the value of lower carbon emissions. This payment structure would incent biofuels production over other types of renewable energy.
  3. A dollar for dollar per BDT matching payment for all facilities based on production above an historic baseline. The full payment, up to $45/BDT, would go to: 1) new facilities and facilities like schools, and public buildings that convert from fossil fuel use to renewable biomass, 2) for eligible materials showing exceptional promise and innovation, and 3)for consumption above the baseline. Payments would be reduced for facilities that do not increase production over their historic levels. This structure would incent additionality, but it would also provide some level of payment to those who have historically produced their own heat and electricity from biomass.

In addition to new rules for the implementation of the CHST matching payment part of BCAP, the USDA also laid out the proposed rules for the part of the program that provides establishment and annual payments for those growing bioenergy crops. Because these crops are ideal for producing biofuels, the startup of this part of the program will bring additional players into the market and increase the feedstock available for renewable energy production across the board.

An Umbrella Policy for Coordination and Accountability

In May of 2009, President Obama formed the Biofuels Interagency Working Group and charged them with formulating a plan to accelerate renewable fuel production. The group, made up of high-ranking officials from the USDA, DOE and EPA, set out to analyze how the system was currently working and how it could be improved. In early February, the group released its first report, “ Growing America’s Fuel: An Innovation Approach to Achieving the President’s Biofuels Target.”

The group’s report outlines a centralized approach to managing government efforts to boost biofuels production, with responsibilities and accountability assigned to appropriate governmental agencies. It recommends that an inter-agency management team oversee all biofuels initiatives, that a lead agency be assigned for each supply chain segment and that project management methodologies and outcome timelines be adhered to. The Department of Energy’s Office was named the lead agency for research, pilot scale conversion facilities and financing for innovative first time commercial technologies. The USDA will take the lead on feedstock production and development and for continuing financing for first generation and scaling of advanced biofuels. The EPA and USDA will take the lead on sustainability and regulatory compliance.

The Future of the Biofuels Tax Credit

In keeping with the spirit of these policy initiatives, Congress has recently moved to reinstate the $1 per gallon tax credit for biofuels. Senators Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa), both of the Senate Finance Committee, have proposed the extension as part of the new jobs bill, the Hiring Incentives to Restore Employment Act. In a rare act of bipartisanship, Baucus and Grassley have jointly presented a draft bill, which includes an $85 billion plan giving employers a payroll tax exemption for hiring those who have been unemployed for at least 60 days. The bill would also provide a $1,000 income tax credit for new workers retained for 52 weeks, along with other provisions. 

Renewable Fuel Standards

Topics: biofuels

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