CRS Examines Renewable Energy Programs in 2008 Farm Bill

The Food, Conservation, and Energy Act of 2008 (P.L. 110-246, the 2008 farm bill) extends and expands many of the renewable energy programs originally authorized in the Farm Security and Rural Investment Act of 2002 (P.L. 107-171, 2002 farm bill). The bill also continues the emphasis on the research and development of advanced and cellulosic bioenergy authorized in the 2007 Energy Independence and Security Act (P.L. 110-140).

Farm bill debate over U.S. biomass-based renewable energy production policy focused mainly on the continuation of subsidies for ethanol blenders, continuation of the import tariff for ethanol, and the impact of corn-based ethanol on agriculture. The enacted bill requires reports on the economic impacts of ethanol production, reflecting concerns that the increasing share of corn production being used for ethanol had contributed to high commodity prices and food price inflation.

Title VII, the research title of the 2008 farm bill, contains numerous renewable energy related provisions that promote research, development, and demonstration of biomass-based renewable energy and biofuels. The Sun Grant Initiative coordinates and funds research at land grant institutions on biobased energy technologies. The Agricultural Bioenergy Feedstock and Energy Efficiency Research and Extension Initiative provides support for on-farm biomass energy crop production research and demonstration.

Title IX, the energy title of the farm bill, authorizes mandatory funds (not subject to appropriations) of $1.1 billion, and discretionary funds (subject to appropriations) totaling $1.0 billion, for the FY2008-FY2012 period. Energy grants and loans provided through initiatives such as the Bioenergy Program for Advanced Biofuels promote the development of cellulosic biorefinery capacity. The Repowering Assistance Program supports increasing efficiencies in existing refineries. Programs such as the Rural Energy for America Program (REAP) assist rural communities and businesses in becoming more energy-efficient and self-sufficient, with an emphasis on small operations. The Biomass Crop Assistance Program, the Biorefinery Assistance Program, and the Forest Biomass for Energy Program provide support to develop alternative feedstock resources and the infrastructure to support the production, harvest, storage, and processing of cellulosic biomass feedstocks. Cellulosic feedstocks -- for example, switchgrass and woody biomass -- are given high priority both in research and funding.

Title XV of the 2008 farm bill contains tax and trade provisions. It continued current biofuels tax incentives, reducing those for corn-based ethanol but expanding tax credits for cellulosic ethanol. The tariff on ethanol imports was also extended.

Implementation of the farm bill's energy provisions is underway. President Obama, in May 2009, directed the U.S. Department of Agriculture (USDA) and the Department of Energy (DOE) to accelerate implementation of renewable energy programs. Notices, proposed rules, and final rules have appeared in the Federal Register soliciting applications for those programs with available funding.

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Renewable energy policy in the Food, Conservation, and Energy Act of 2008 (P.L. 110-246, 2008 farm bill) builds on earlier programs, many of which were established in the Farm Security and Rural Investment Act of 2002 (P.L. 107-171, 2002 farm bill). The 2002 farm bill was the first omnibus farm bill to explicitly include an energy title (Title IX). The energy title authorized grants, loans, and loan guarantees to foster research on agriculture-based renewable energy, to share development risk, and to promote the adoption of renewable energy systems. Since enactment of the 2002 farm bill, interest in renewable energy has grown rapidly, due in large part to a strong rise in domestic and international petroleum prices and a dramatic acceleration in domestic biofuels production (primarily corn-based ethanol).¹ Many policymakers view agriculture-based biofuels as both a catalyst for rural economic development and a response to growing energy import dependence. Ethanol and biodiesel, the two most widely used biofuels, receive significant federal support in the form of tax incentives, loans and grants, and regulatory programs.²

The 2008 farm bill became law six months after the enactment of the Energy Independence and Security Act of 2007 (EISA, P.L. 110-140), and many of its provisions also build on the goals of EISA.³ The emphasis on facilitating production of biofuels derived from cellulosic feedstocks reflects the goals of the renewable fuels standard (RFS) in EISA. EISA includes a significant expansion of the RFS to 36 billion gallons by 2022, with carve-outs for biodiesel (1 billion gallons by 2012) and cellulosic ethanol (16 billion gallons by 2022) and an implicit cap on corn starch ethanol (15 billion gallons by 2015). Provisions in the 2008 farm bill reflect the increased role for biofuels mandated by the expansion of the RFS and its likely impact on the U.S. agriculture sector.⁴

The emphasis on cellulosic ethanol also reflects increasing concerns about the economic and environmental issues associated with corn starch-based ethanol.⁵ Record high commodity prices in 2007 and mid-2008, combined with high energy costs, resulted in sharp increases in livestock feed costs, export prices, and domestic food price inflation. For the first time, an agricultural commodity is directly competing with petroleum in the marketplace. Ethanol production, the profitability of which depends directly on both petroleum and corn prices, accounts for about a third of U.S. corn production. The increase in corn used for U.S. ethanol production exceeds the increase in corn produced during the three years. When petroleum prices rise, so does demand for ethanol as a substitute, which in turn increases both the demand for and price of corn. The "food versus fuel" debate intensified during the 2008 farm bill debate as food price inflation accelerated both in the U.S. and globally -- highlighting some of the potential problems associated with replacing even a small share of the nation's gasoline consumption with corn-based ethanol. In 2010, over 39% the U.S. corn crop was consumed by ethanol production.⁶

Several of the federal programs that currently support renewable energy production in general, and agriculture-based energy production in particular, are outside the purview of the U.S. Department of Agriculture (USDA) and have legislative origins outside of the farm bill. For example, the RFS mandates the inclusion of an increasing volume of biofuels in the national fuel supply. This originated with the Energy Policy Act of 2005 (P.L. 109-58) and was more recently expanded in EISA. Similarly, the federal tax credits available to biofuel blenders were initially contained in the American Jobs Creation Act of 2004 (P.L. 108-357), although they were incorporated in the farm bill. More recently, the tax credits were extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).

Major Energy Provisions in the 2008 Farm Bill

The 2008 farm bill (P.L. 110-246) significantly expands existing programs to promote biofuels. Like the 2002 farm bill (P.L. 107-171), it contains a distinct energy title (Title IX) that covers a wide range of energy and agricultural topics with extensive attention to biofuels, including corn starch-based ethanol, cellulosic ethanol, and biodiesel. Research provisions relating to renewable energy are found in Title VII and tax and trade provisions are found in Title XV.

The enacted 2008 farm bill keeps the structure of Title IX as it was in the Senate-passed version of the farm bill. Title IX serves as a substitute amendment to the 2002 farm bill Title IX and consists of 3 sections. The first section, 9001, contains 13 new provisions which effectively replace the provisions of the 2002 bill. Sections 9002 and 9003 direct studies and reports on biofuels infrastructure and renewable fertilizer, respectively. See Appendix A for a side-by-side comparison of previous law with the energy provisions of the 2008 farm bill.

Key biofuels-related provisions in the enacted 2008 farm bill include:

• emphasis on cellulosic ethanol production through new blender tax credits, promotion of cellulosic feedstocks production, feedstocks infrastructure and refinery development;

• grants and loan guarantees for biofuels (especially cellulosic) research, development, deployment, and production;

• studies of the market and environmental impacts of increased biofuel use;

• expansion of biofuel feedstock availability;

• expansion of the existing biobased marketing program to encourage federal procurement of biobased products;

• support for rural energy efficiency and self-sufficiency;

• reauthorization of biofuels research programs within the USDA and Environmental Protection Agency (EPA);

• an education program to promote the use and understanding of biodiesel;

• reduction of the blender tax credit for corn-based ethanol;

• continuation and expansion of the federal bio-products certification program;

• environmental safeguards through greenhouse gas emission requirements on new biofuel production; and

• continuation of the import duty on ethanol.

Cellulosic Biofuels

The 2008 farm bill energy title provides $1 billion in financial incentives and support to encourage the production of advanced (mainly cellulosic) biofuels.⁷ Grants and loan guarantees leverage industry investments in new technologies and the production of cellulosic feedstocks. For instance, the Biomass Crop Assistance Program (BCAP, Section 9001) supports the production of dedicated crop and forest cellulosic feedstocks and provides incentives for harvest and post-production storage and transport.⁸ Advanced biofuels refinery capacity construction is assisted under the Biorefinery Assistance program (Section 9001) through grants and loans for the development, construction, and retrofitting of commercial-scale refineries to produce advanced biofuels. These programs are supported by increased funding for advanced biofuels research under the Agricultural Bioenergy Feedstock and Energy Efficiency Research and Extension Initiative (Section 7207), and the Sun Grant Program (Section 7526) which support and coordinate advanced biofuels research, extension, and development between government agencies, universities, and research institutions.

Cellulosic ethanol is produced from cellulose, hemicellulose, or lignin derived from the structural material that provides much of the mass of plants. Besides corn, several other agricultural products are viable feedstock and appear to offer attractive long-term supply potential -- particularly cellulose-based feedstock such as prairie grasses and fast-growing woody crops such as hybrid poplar and willow trees, as well as waste biomass materials (logging residues, wood processing mill residues, urban wood wastes, and selected agricultural residues such as sugar cane bagasse and rice straw). Some cellulosic feedstock, such as native prairie grasses (e.g., switchgrass), appear to offer environmental benefits over corn-based ethanol because they thrive on marginal lands (as well as on prime cropland) and need little water and no fertilizer.

Currently, cellulosic ethanol is not produced on a commercial scale. Only a few small refineries began limited production in 2010. Industry sources anticipate that many of the plants will be fully operational by 2012. The 2010 RFS mandate of 100 million gallons set by Congress was waived by EPA and lowered to a mandate of 6.5 million gallons for 2010. EPA projects that the 2011 RFS cellulosic biofuel production mandate of 6.6 million gallons will be met primarily by four companies: DuPont Danisco, Fiberight, KL Energy, and Range Fuels.⁹ Some of these companies started producing relatively small amounts of cellulosic ethanol in 2010.

Tax Credits and Tariffs

Title XV of the 2008 farm bill contains provisions which extend and modify tax credits and tariffs on ethanol. In keeping with the promotion of cellulosic ethanol, a blender credit of $1.01 per gallon applies to ethanol produced from qualifying cellulosic feedstocks. This tax credit is intended to spur investment in cellulosic ethanol production. The ethanol blender tax credit of $0.51 per gallon (which applies to all ethanol blended, including imports) was reduced to $0.45 per gallon in January 2009. Section 15331 of the farm bill requires the reduction starting the first year following that year in which U.S. ethanol production and imports exceed 7.5 billion gallons. Production and imports in 2008 were estimated to have exceeded 9 billion gallons.

The $0.54 per gallon import tariff for ethanol benefits the U.S. ethanol industry by protecting U.S. ethanol from lower-cost imports and also keeps imported ethanol from benefitting from the blender tax credit when it is blended into gasoline in the United States. The tariff was set to expire at the end of 2008 but was extended to the end of 2010 by the farm bill (P.L. 110-246, Section 15333).

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) extended both the ethanol blender tax credit and the import tariff for ethanol. Both were set to expire at the end of 2010 under the 2008 farm bill. Section 708 of H.R. 4853 extends both provisions at the current rate of $0.45 per gallon for the ethanol blender tax credit and $0.54 per gallon for the ethanol import tariff until the end of 2011. The tariff continues to exceed the blender tax credit by nine cents, thereby more than offsetting the benefit of the blender tax credit.

Economic Impacts of Ethanol Production

The impact of increased ethanol production on agricultural and rural economies was a subject of debate during the farm bill process. As a result, the farm bill includes provisions requiring a series of reports assessing how ethanol production may be impacting the farm economy, the environment, and consumer food prices. Among these are the Comprehensive Study of Biofuels (to be conducted by the USDA, the EPA, the Department of Energy (DOE), and the National Academy of Sciences) and the Biofuels Infrastructure Study by USDA, DOE, EPA, and the Department of Transportation (DOT). The Biomass Crop Assistance Program (BCAP, Section 9001) requires an assessment of the economic impacts of expanded cellulosic biomass production on local economies and infrastructures. Likewise, the Biomass Research and Development Program (Section 9001) requires a report on the economic impacts of rural economies of biorefinery expansion and conversion by USDA.

Funding for Energy Programs

Appendix B illustrates mandatory and discretionary spending levels for renewable energy programs authorized in the 2008 farm bill. Mandatory funding is through USDA's Commodity Credit Corporation (CCC).¹⁰ Programs identified as receiving mandatory funds are funded at these levels unless Congress limits funding to a lower amount through the appropriations or legislative process. Discretionary programs are funded each year through the annual appropriations process.

Title IX authorizes $1.1 billion in mandatory funding for FY2008 through FY2012, compared with $800 million in the 2002 farm bill (FY2002-FY2007). Mandatory authorization in the 2008 farm bill includes $320 million to the Biorefinery Assistance Program, $300 million to the Bioenergy Program for Advanced Biofuels, and $255 million to the Rural Energy for America Program (REAP). Authorizations for appropriations in the 2008 farm bill total $1 billion, four times the $245 million in the 2002 farm bill. Most of the increase is for the Biorefinery Assistance Program, which has an authorization $600 million higher than in the 2002 farm bill. Table 1 provides a list of provisions in the 2008 farm bill's energy title, and selected energy programs in the research title, for FY2010 through FY2012, along with their funding levels (as requested by the President, authorized levels in the 2008 farm bill, and budget authority provided by Congress) where available.

     Table 1. 2008 Farm Bill Energy Funding by Provision, FY2009 to FY2011

Nutrient Management Research and Extension Initiative

2002 Farm Bill (FSRIA, P.L. 107-171) or Other Law (as indicated)

Sun Grant Program

Definitions

Biobased Markets Program

Biorefinery Assistance

Repowering Assistance

Energy Program for Advanced Biofuels

Biodiesel Fuel Education Program

Energy Audit and Renewable Energy Development Program

Rural Energy for America Program

Biomass Research and Development Program

Rural Energy Self-Sufficiency Initiative

Feedstock Flexibility Program

Biomass Crop Assistance Program

Forest Biomass for Energy Program

Community Wood Energy Program

Biofuels Infrastructure Study

Renewable Fertilizer Study

Study on Bioenergy Operations

Credit for Production of Cellulosic Biofuel

Comprehensive Study of Biofuels

Alcohol Fuel: Modification of Alcohol Credit

Alcohol Fuel: Calculation of Volume of Alcohol for Fuel Credits

Alcohol Fuel: Ethanol Tariff Extension

2002 Farm Bill (FSRIA, P.L. 107-171) or Other Law (as indicated)

² For a listing of federal incentives in support of biofuels production, see CRS Report R40110, Biofuels Incentives: A Summary of Federal Programs.

³ For more information, see CRS Report RL34239, Biofuels Provisions in the 2007 Energy Bill and the 2008 Farm Bill: A Side-by-Side Comparison.

⁴ For more information, see CRS Report R40155, Renewable Fuel Standard (RFS): Overview and Issues; and CRS Report R41106, Meeting the Renewable Fuel Standard (RFS) Mandate for Cellulosic Biofuels: Questions and Answers.

⁵ For more information, see CRS Report RL34738, Cellulosic Biofuels: Analysis of Policy Issues for Congress.

⁶ USDA, PSD database, December 10, 2010. For more information, see CRS Report R41282, Agriculture-Based Biofuels: Overview and Emerging Issues.

⁷ Advanced biofuels include biofuels derived from cellulosic feedstocks; sugar and starch other than corn kernel-starch; waste material including crop residue, animal, plant, or food waste; diesel fuel produced from renewable biomass including vegetable oil and animal fat; butanol or other alcohols produced through the conversion of organic matter; and other fuels derived from cellulosic biomass. For more information, see CRS Report RL34738, Cellulosic Biofuels: Analysis of Policy Issues for Congress.

⁸ For more information on BCAP, see CRS Report R41296, Biomass Crop Assistance Program (BCAP): Status and Issues.

⁹ U.S. Environmental Protection Agency, "Regulation of Fuels and Fuel Additives: 2011 Renewable Fuel Standards; Final Rule," Federal Register, December 9, 2010. For more information, see CRS Report R41106, Meeting the Renewable Fuel Standard (RFS) Mandate for Cellulosic Biofuels: Questions and Answers.

¹⁰ The CCC is the funding mechanism for the mandatory payments that are administered by various agencies of USDA, including all of the farm commodity price and income support programs and selected conservation programs.