Using Biofuel Tax Credits to Achieve Energy and Environmental

Using Biofuel Tax Credits to Achieve Energy and Environmental

CBO
JULY 2010
Using Biofuel
Tax Credits to
Achieve Energy and
Environmental
Policy Goals
Pub. No. 4044
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2
Table 1.
"!"-'3-"!&/.#*-/%)*')!&*!&"."'
Credit per
Gallon
(Dollars)
Tax Expenditures
in Fiscal Year
2009b (Millions
of dollars)
Expiration
Date
Biofuel
Description
Incentivea
Ethanol
Alcohol fuel produced from
feedstocks (raw materials)
containing plentiful natural
sugars or starches that can be
converted to sugars. Commercial production in the United
States uses kernel corn as a
feedstock.
A credit for ethanol (regardless of the feedstock) blended
with gasoline for sale or use
0.45
5,160c
Dec. 31,
2010
Cellulosic
Ethanol
Ethanol produced from
feedstocks such as corn stover
(the leaves and stalks of corn
plants), switchgrass (a tall
North American grass used for
hay and forage), wood chips,
and plant wastes. In contrast to
corn ethanol, the fermentable
sugars necessary to produce
ethanol are provided by
materials in the walls of the
plants’ cells.
A credit for cellulosic ethanol
blended with gasoline for sale
or use
1.01d
50e
Dec. 31,
2012
Biodiesel
Diesel fuel made from virgin
agricultural products (such as
soybean oil and animal fats) or
recycled agricultural oils (such
as tallow)
A credit for producing
biodiesel
1.00
840f
Dec. 31,
2009g
Source: Congressional Budget Office.
a. Based on 26 U.S.C. §40, §40A, and §6426(e), or Title XI of the Omnibus Budget Reconciliation Act of 1990 (104 Stat. 1388-482); Title III
of the American Jobs Creation Act of 2004 (118 Stat. 1463); Title XIII of the Energy Policy Act of 2005 (119 Stat. 986); Title XV of the
Food, Conservation, and Energy Act of 2008 (122 Stat. 2274); and Division B of the Energy Improvement and Extension Act of 2008
(122 Stat. 3807).
A supplemental credit of 10 cents per gallon is currently available on the first 15 million gallons of ethanol made by “small producers”
(those with a total annual productive capacity not in excess of 60 million gallons). The credit is due to expire on December 31, 2010.
A 10-cent-per-gallon supplemental credit was also in place for agri-biodiesel until December 31, 2009. (Agri-biodiesel is biodiesel derived
solely from virgin plant oils or animal fats.)
b. Estimates of tax expenditures (essentially, forgone revenues) for fiscal year 2009 are detailed in Budget of the United States Government,
Fiscal Year 2011: Analytical Perspectives, Table 16-1, available at www.gpoaccess.gov/usbudget/fy11/pdf/spec.pdf.
c. Includes only the effect on excise tax receipts.
d. The cellulosic biofuel credit is $1.01 per gallon except that for cellulosic ethanol, the credit is reduced by the credits in effect for the mixture of ethanol with gasoline and for small producers. Accordingly, producers of cellulosic ethanol get the reduced cellulosic biofuel credit
but are also eligible for the ethanol tax credit of $0.45 and may also qualify for the $0.10 credit for small producers.
e. Includes the credit for cellulosic biofuel production, the credit for small producers of ethanol, and other alcohol fuel credits.
f. Of that amount, $30 million results from reduced income taxes, and the remainder, $810 million, derives from reduced excise tax
receipts.
g. Although the biodiesel tax credit expired at the end of 2009, CBO included it in the analysis to provide information about the value of the
credit should policymakers, as they have at other times, decide to reinstate it.
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Figure 1.
&./*-& '&*#0"'*).0(+/&*))!)!/".#*-0/0-"
&*#0"'."/*
(Billions of gallons)
40
35
Mandates in the
Energy Independence and
Security Act of 2007
30
25
20
15
10
5
Mandates in the
Energy Policy Act of 2005
Biofuel Consumption
0
1985
1990
1995
2000
2005
2010
2015
2020
Source: Congressional Budget Office based on Energy Information Administration, Monthly Energy Review: May 2010 (May 27, 2010),
Tables 10.3 and 10.4, available at http://tonto.eia.doe.gov/FTPROOT/multifuel/mer/00351005.pdf; the Energy Policy Act of 2005
(Public Law 109-58); and the Energy Independence and Security Act of 2007 (Public Law 110-140).
Note: Beginning in 2009, the Energy Independence and Security Act of 2007 limited the amount of corn ethanol that might count toward
fulfillment of the mandate in any given year. By 2022, the sale of advanced biofuels must total at least 21 billion gallons, effectively
restricting the eligible amount of corn ethanol to at most 15 billion gallons. (Advanced biofuels are renewable fuels, other than ethanol produced from corn, whose life-cycle greenhouse gas emissions—those from producing and distributing the fuel as well as from
burning it—are 50 percent less than the life-cycle emissions of gasoline or petroleum diesel fuel.)
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Table 2.
%"0++'4*#&*#0"'.&)/%"
)&/"!//".
(Billions of gallons)
Biofuels Supplied
Domestic ethanol
Imported ethanol
Domestic biodiesela
Total
2006
2007
2008
2009
4.9
0.7
_0.3
__
6.5
0.4
0.5
___
9.3
0.5
0.7
___
10.8
0.2
0.5
___
5.9
7.5
10.5
11.5
4.0
n.a.
4.7
n.a.
9.0
n.a.
11.1
0.6
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9>D855H39C5D1HB5F5>E5C3?<<53D54G85>29?6E5<C49C
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29?6E5<3?>CE=@D9?>D81D31>251DDB92ED54D?D85
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6?B13895F9>75>5B7I7?1<CG1CD85C1=56?B49665B5>D
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3?CD<IG9D8?>529?6E5<D81>G9D81>?D85B
Memorandum:
Mandates for Biofuel Use
All biofuels
Advanced biofuelsb
Source: Congressional Budget Office based on Energy Information
Administration, Monthly Energy Review: May 2010
(May 27, 2010), Tables 10.3 and 10.4, available at
http://tonto.eia.doe.gov/FTPROOT/multifuel/mer/
00351005.pdf.
Note: n.a. = not applicable.
a. A portion of domestic biodiesel production—on net, about
100 million gallons in 2007, 400 million gallons in 2008, and
200 million gallons in 2009—is exported.
b. Renewable fuels, other than ethanol produced from corn, whose
life-cycle greenhouse gas emissions—those from producing and
distributing the fuel as well as from burning it—are 50 percent
less than the life-cycle emissions of gasoline or petroleum
diesel fuel.
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Corn Ethanol
Cellulosic Ethanol
Biodiesela
Production Incentives After Adjusting for the
Energy Content of Each Biofuel
Federal Biofuel Tax Credit (Dollars per
gallon of biofuel)
0.45
1.01 b
1.00
Multiplied by: Gallons of Biofuel per
125,000 Btus of Energy
1.48
1.48
0.97
Equals: Adjusted Biofuel Tax Credit (Dollars per
125,000 Btus of energy)
0.67
1.50
0.97
Production Incentives After Adjusting for the
Petroleum Fuel Used to Produce Each Biofuelc
Adjusted Biofuel Tax Credit (Dollars per
125,000 Btus of energy)
0.67
1.50
0.97
Multiplied by: An Adjustment for Measuring the Tax
Credits to Reflect the Petroleum Fuel Used in
Producing the Biofuel d
1.10
1.08
1.11
Equals: Production Incentive for Increasing Liquid
Fuel Supplies by 125,000 Btus (Dollars)
0.73
1.62
1.08
Source: Congressional Budget Office based on Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and Greenhouse Gas Emission
Impacts of Different Corn Ethanol Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); Environmental Protection
Agency, Regulatory Impact Analysis: Renewable Fuel Standard Program, EPA 420-R-07-004 (April 2007); M.R. Schmer and others,
“Net Energy of Cellulosic Ethanol from Switchgrass,” Proceedings of the National Academy of Sciences, vol. 105, no. 2 (January
2008); Hong Huo and others, “Life-Cycle Assessment of Energy Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel
and Renewable Fuels,” Environmental Science and Technology, vol. 43, no. 3 (2009); and Adam J. Liska and others, “Improvements
in Life Cycle Energy Efficiency and Greenhouse Gas Emissions of Corn-Ethanol,” Journal of Industrial Ecology, vol. 13, no. 1 (2009).
Note: Btu = British thermal unit.
a. Although the biodiesel tax credit expired on December 31, 2009, CBO included it in the analysis to provide information about the value of
the credit should policymakers, as they have at other times, decide to reinstate it. (Biodiesel is diesel fuel made from virgin agricultural
products, such as soybean oil and animal fats, or recycled agricultural oils, such as tallow.)
b. Reflects the 45 cent credit for blending ethanol with gasoline, the reduced cellulosic biofuel credit that calculates to 46 cents for producing ethanol from cellulose, and the 10 cent credit available to small producers (refineries with total productive capacity that is not in
excess of 60 million gallons annually). Cellulosic ethanol is made from wood, grasses, or agricultural plant wastes; in contrast to corn ethanol, the fermentable sugars necessary to produce cellulosic ethanol are provided by materials in the walls of the plants’ cells. The biofuel
is not as yet in large-scale commercial production. As a result, it is likely that most of what is being initially produced will be eligible for
the small-producer credit.
c. The amount of energy from petroleum that is used to produce a quantity of biofuel containing 125,000 Btus of energy is estimated to
be 10,900, 9,300, and 12,400 Btus for corn ethanol, cellulosic ethanol, and biodiesel, respectively. Subtracting those amounts from
125,000 Btus gives the net energy provided by each 125,000 Btu unit of fuel produced: specifically, 114,100, 115,700, and 112,600 Btus
for corn ethanol, cellulosic ethanol, and biodiesel, respectively.
d. Because different biofuels increase liquid fuel supplies by different amounts, an adjustment is necessary to compare the production
incentives on a consistent basis. The adjustment factor for each biofuel ensures that the production incentives are measured in terms
of what biofuel producers receive for increasing total liquid fuel supplies by 125,000 Btus. (As an example, the production of corn
ethanol increases liquid fuel supplies by 114,100 Btus for every 125,000 Btus of biofuel produced. CBO thus used a ratio of 125,000 to
114,100 Btus to arrive at an adjustment factor of 1.10.)
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11
Table 4.
*.//*3+4"-.*#&.+' &)$"/-*'"0(0"'.%-*0$%."*#/%"
"!"-'&*#0"'3-"!&/.
Corn Ethanol
Cellulosic Ethanol
Biodiesela
Production Incentives After Adjusting for the
Energy Content of Each Biofuel
b
Federal Biofuel Tax Credit (Dollars per gallon of biofuel)
0.45
1.01
1.00
Multiplied by: Gallons of Biofuel per 125,000 Btus of Energy
1.48
1.48
0.97
Equals: Adjusted Biofuel Tax Credit (Dollars per
125,000 Btus of energy)
0.67
1.50
0.97
Changes in Tax Receipts per 125,000 Btus of
Energy Provided by Each Biofuel
Adjusted Biofuel Tax Credit (Dollars per 125,000 Btus of energy)
0.67
1.50
0.97
Minus: Change in Excise Tax Receipts Because of
Differences in Biofuel and Petroleum Fuel Volumesc
(Dollars per 125,000 Btus of energy)
0.09
0.09
0.02
Equals: Cost of the Biofuel Tax Credit After Adjusting for
Changes in Tax Receipts (Dollars per 125,000 Btus of energy)
0.58
1.41
0.96
Cost to Taxpayers of Displacing Petroleum Fuels After
Adjusting for the Share of Biofuel Consumption
Attributable to the Tax Credit
Cost of the Biofuel Tax Credit After Adjusting for Changes in
Tax Receipts (Dollars per 125,000 Btus of energy)
0.58
1.41
0.96
Divided by: Share of Total Biofuel Consumption Attributable to the
Tax Credit
0.32
0.47
0.38
Equals: Cost to Taxpayers of Displacing Petroleum with Biofuels
(Dollars per 125,000 Btus of energy)
1.78
3.00
2.55
Source: Congressional Budget Office.
Notes: In CBO’s calculations, corn ethanol and cellulosic ethanol are assumed to displace gasoline, and biodiesel is assumed to displace
petroleum diesel. Cellulosic ethanol is produced from feedstocks such as corn stover (the leaves and stalks of corn plants), switchgrass (a tall North American grass used for hay and forage), wood chips, and plant wastes. In contrast to corn ethanol, the fermentable sugars necessary to produce cellulosic ethanol are provided by materials in the walls of the plants’ cells. Biodiesel is diesel fuel
made from virgin agricultural products (such as soybean oil and animal fats) or recycled agricultural oils (such as tallow).
Btu = British thermal unit.
a. Although the biodiesel tax credit expired on December 31, 2009, CBO included it in the analysis to provide information about the value of
the credit should policymakers, as they have at other times, decide to reinstate it.
b. Reflects the 45 cent credit for blending ethanol with gasoline, the reduced cellulosic biofuel credit that calculates to 46 cents for producing ethanol from cellulose, and the 10 cent credit available to small producers (refineries with total productive capacity that is not in
excess of 60 million gallons annually). Cellulosic ethanol is not as yet in large-scale commercial production. As a result, it is likely that
most of what is being initially produced will be eligible for the small-producer credit.
c. Federal excise taxes on sales of petroleum fuels do not depend on the amount of energy contained in a gallon of those fuels. As a result,
selling biofuels in place of petroleum fuels affects total excise tax receipts because of differences in the energy contents of those fuels.
For a quantity of ethanol providing 125,000 Btus of energy that is sold in place of gasoline, excise tax receipts (excluding the effects of the
biofuel tax credit) would increase by 9 cents—that is, 18.4 cents multiplied by 1.48 (gallons of biofuel per 125,000 Btus of energy) minus
18.4 cents times 1.0 (gallons of gasoline per 125,000 Btus of energy). The comparable increase in excise tax receipts for biodiesel is
2 cents—24.4 cents multiplied by 0.97 (gallons of biofuel per 125,000 Btus of energy) minus 24.4 cents times 0.90 (gallons of petroleum
diesel per 125,000 Btus of energy).
&
12
Figure 2.
&#"4 '"-"")%*0.".(&..&*).#*-"/-*'"0(0"'.)!&*#0"'.
(Kilograms of carbon dioxide equivalent per 125,000 Btus of fuel)
14
12
10
8
6
4
2
0
Gasoline
Petroleum Diesel
Corn Ethanol
Cellulosic Ethanol
a
b
Biodiesel
Source: Congressional Budget Office based on Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and Greenhouse Gas Emission
Impacts of Different Corn Ethanol Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); and Hong Huo and others,
“Life-Cycle Assessment of Energy Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel and Renewable Fuels,”
Environmental Science and Technology, vol. 43, no. 3 (2009).
Note: Life-cycle emissions are those generated during production, distribution, and consumption of petroleum fuels and biofuels. Life-cycle
greenhouse gas emissions are measured as the kilograms of carbon dioxide equivalent (the amount of carbon dioxide causing an
equivalent amount of warming over 100 years) that are generated by producing, distributing, and consuming 125,000 Btus of fuel—
about 1 gallon of gasoline, 1.5 gallons of ethanol, 0.9 gallons of petroleum diesel, and about 1 gallon of biodiesel.
a. Ethanol that is produced from feedstocks such as corn stover (the leaves and stalks of corn plants), switchgrass (a tall North American
grass used for hay and forage), wood chips, and plant wastes. In contrast to corn ethanol, the fermentable sugars necessary to produce
cellulosic ethanol are provided by materials in the walls of the plants’ cells.
b. Diesel fuel made from virgin agricultural products (such as soybean oil and animal fats) or recycled agricultural oils (such as tallow).
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14
Table 5.
*.//*3+4"-.*#"!0 &)$-"")%*0.".(&..&*).%-*0$%."*#/%"
"!"-'&*#0"'3-"!&/.
Corn Ethanol
Cost to Taxpayers of Displacing Petroleum with Biofuelsb
(Dollars per 125,000 Btus of energy)
1.78
Multiplied by: Units of Petroleum Fuel (Each Having
125,000 Btus of Energy) That Would Need to Be Displaced to
Reduce Greenhouse Gas Emissions by 1 Metric Ton of
Carbon Dioxide Equivalent
424
Equals: Cost to Taxpayers of Reducing Greenhouse Gas Emissions
Through the Biofuel Tax Credits (Dollars per metric ton of
greenhouse gases measured as carbon dioxide equivalent)
754
Cellulosic Ethanol
3.00
c
92
276
Biodiesela
2.55
d
120
e
306
Source: Congressional Budget Office based on Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and Greenhouse Gas Emission
Impacts of Different Corn Ethanol Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); and Hong Huo and others,
“Life-Cycle Assessment of Energy Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel and Renewable Fuels,” Environmental Science and Technology, vol. 43, no. 3 (2009).
Notes: In CBO’s calculations, corn ethanol and cellulosic ethanol are assumed to displace gasoline, and biodiesel is assumed to displace
petroleum diesel. Cellulosic ethanol is produced from feedstocks such as corn stover (the leaves and stalks of corn plants), switchgrass (a tall North American grass used for hay and forage), wood chips, and plant wastes. In contrast to corn ethanol, the fermentable sugars necessary to produce cellulosic ethanol are provided by materials in the walls of the plants’ cells. Biodiesel is diesel fuel
made from virgin agricultural products (such as soybean oil and animal fats) or recycled agricultural oils (such as tallow).
Because individual greenhouse gases vary in their warming characteristics and persistence in the atmosphere, researchers commonly
measure emissions in kilograms or metric tons of carbon dioxide equivalent—the amount of carbon dioxide that would cause an
equivalent amount of warming over 100 years.
Btu = British thermal unit.
a. Although the biodiesel tax credit expired on December 31, 2009, CBO included it in the analysis to provide information about the value of
the credit should policymakers, as they have at other times, decide to reinstate it.
b. For details of these costs, see Table 4 on page 11.
c. For every 125,000 Btus of fuel consumed, corn ethanol is estimated to produce 2.4 kilograms fewer greenhouse gas emissions over its
life cycle (which includes emissions from its production and distribution) than gasoline produces. To reduce emissions by 1 metric ton
(1,000 kilograms), ethanol must displace 424 gallons of gasoline (1,000 divided by 2.4).
d. For every 125,000 Btus of fuel consumed, cellulosic ethanol is estimated to produce 10.9 kilograms fewer greenhouse gas emissions over
its life cycle than gasoline produces. To reduce emissions by 1 metric ton, cellulosic ethanol must displace 92 gallons of gasoline (1,000
divided by 10.9).
e. For every 125,000 Btus of fuel consumed, biodiesel is estimated to produce 8.3 kilograms fewer greenhouse gas emissions over its life
cycle than petroleum diesel produces. To reduce emissions by 1 metric ton, biodiesel must displace 120 units of petroleum diesel, each
having 125,000 Btus of energy (1,000 divided by 8.3).
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16
Table 6.
%"&("",0&-"!#*-&*#0"'."/**2"-(&..&*).%")
%)$".&))!." 0Land Converted
Years Until Net
a
Carbon Reduction
Location
Study
Corn Ethanol
Grassland
Abandoned Cropland
Mix of Forest and Grassland
Mix of Forest and Grassland
United States
United States
United States
United States
93
48
167
14
Fargione and others
Fargione and others
Searchinger and others
Environmental Protection Agency
17
15 – 39
44
3 – 10
4
45
2
Fargione and others
Renewable Fuels Agency
Lapola and others
Renewable Fuels Agency
Searchinger and others
Searchinger and others
Environmental Protection Agency
Sugarcane Ethanol
Forest
Forest
Forest
Grassland
Grazing Land
Rainforest
Grassland
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
b
Switchgrass Ethanol
Cropland
Mix of Forest and Grassland
United States
United States
Forest
Forest
Grassland
Brazil
Malaysia
Malaysia
52
1
Searchinger and others
Environmental Protection Agency
Palm Biodiesel
86
18 – 38
0 – 11
Fargione and others
Renewable Fuels Agency
Renewable Fuels Agency
Soybean Biodiesel
Forest
Forest
Grassland
Forest
Grassland
Mix of Forest and Grassland
Brazil
Brazil
Brazil
United States
United States
United States
246
319
37
179 – 481
14 – 96
9
Lapola and others
Fargione and others
Fargione and others
Renewable Fuels Agency
Renewable Fuels Agency
Environmental Protection Agency
Source: Congressional Budget Office based on Joseph Fargione and others, “Land Clearing and the Carbon Debt,” Science, vol. 319 (2008),
pp. 1235–1238; Timothy Searchinger and others, “Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change,” Science, vol. 319 (2008), pp. 1238–1240; Environmental Protection Agency, “Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis” (February 2010), Table 2.6-2; Renewable Fuels Agency, The Gallagher Review of
the Indirect Effects of Biofuels Production (study commissioned by the Secretary of State for Transport, U.K., July 2008); and David
M. Lapola and others, “Indirect Land-Use Changes Can Overcome Carbon Savings from Biofuels in Brazil,” Proceedings of the
National Academy of Sciences (February 2010).
a. These estimates, which take into account changes in land use, represent the number of years that a biofuel must be used before the lower
emissions from that consumption reduce greenhouse gas emissions relative to those that would be produced if petroleum fuels were
being used. Total emissions from biofuel consumption would be higher before that time than if petroleum fuels were used and lower in
the years following that break-even date.
b. Switchgrass is a tall North American grass used for hay and forage.
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