By Douglas W. Elmendorf. Director, US Congressional Budget
Office
Washington July 14, 2010 - The federal
government supports the use of biofuels-transportation fuel
produced usually from renewable plant matter, such as corn-in the
pursuit of national energy, environmental, and agricultural policy
goals.
Tax credits encourage the production and sale of biofuels in the
United States, while federal mandates specify minimum amounts and
types of biofuel usage each year through 2022. Tax credits
effectively lower the private costs of producing biofuels relative
to the costs of producing their substitutes, gasoline and diesel
fuel.
Together, the credits and mandates increase domestic supplies of
energy and reduce U.S. emissions of greenhouse gases, albeit at a
cost to taxpayers and consumers. For example, in fiscal year 2009,
the biofuel tax credits reduced federal excise tax collections by
about $6 billion below what they would have been if the credits had
not been in effect.
Roughly 11 billion gallons of biofuels were produced and sold in
the United States in 2009, and ethanol produced from corn accounted
for nearly all of that total. Blenders of transportation fuels
receive a tax credit of 45 cents for each gallon of ethanol that is
combined with gasoline and sold. Although the credit is provided to
blenders, most of it ultimately flows to producers of ethanol and
to corn farmers-in the form of higher prices received for their
products.
Most of the rest of the biofuel sold in the United States
consists of biodiesel, which is made largely from soybean oil but
is also produced from animal fats and recycled plant oils. Until
recently, the producers of such biodiesel received a tax credit of
$1 per gallon. Although that credit expired in December 2009, CBO
included it in the analysis to provide information about the value
of the credit should policymakers decide to reinstate it.
In the future, cellulosic ethanol-made from plant wastes such as
corn stalks-could account for a significant share of domestic
production of biofuels. Its producers are eligible for a tax credit
of $1.01 per gallon if it is produced and blended with gasoline;
even with that credit, however, cellulosic ethanol is not
commercially viable today and is produced in very limited
quantities.
In a study prepared at the request of the Chairman
of the Subcommittee on Energy, Natural Resources, and
Infrastructure of the Senate Committee on Finance, CBO assesses the
incentives provided by the biofuel tax credits for producing
different types of biofuels and analyzes whether they favor one
type of biofuel over others. In addition, we estimate the cost to
U.S. taxpayers of reducing the use of petroleum fuels and emissions
of greenhouse gases through those tax credits; we also analyze the
interaction of the credits and the biofuel mandates. CBO's main
conclusions are the following:
- The incentives that the tax credits provide to producers of
biofuels differ among the fuels. After adjustments for the
different energy contents of the various biofuels and the petroleum
fuel used to produce them, producers of ethanol made from corn or
other similar feedstocks receive 73 cents to provide an amount of
biofuel with the energy equivalent to that in one gallon of
gasoline. On a similar basis, producers of cellulosic ethanol
receive $1.62, and producers of biodiesel would receive $1.08 (if
that credit were extended).
- The costs to taxpayers of reducing consumption of petroleum
fuels differ by biofuel. Such costs depend on the size of the tax
credit for each fuel, the changes in federal revenues that result
from the difference in the excise taxes collected on sales of
gasoline and sales of biofuels, and the amount of biofuels that
would have been produced if the credits had not been available. The
costs to taxpayers of using a biofuel to reduce gasoline
consumption by one gallon are $1.78 for ethanol and $3.00 for
cellulosic ethanol. The cost of reducing an equivalent amount of
diesel fuel (that is, a quantity having the same amount of energy
as a gallon of gasoline) using biodiesel is $2.55, based on the tax
policy in place through last year.
- Similarly, the costs to taxpayers of reducing greenhouse gas
emissions through the biofuel tax credits vary by fuel: about $750
per metric ton of CO2e (that is, per metric ton of
greenhouse gases measured in terms of an equivalent amount of
carbon dioxide) for ethanol, about $275 per metric ton of
CO2e for cellulosic ethanol, and about $300 per metric
ton of CO2e for biodiesel. Those estimates do not
reflect any emissions of carbon dioxide that occur when production
of biofuels causes forests or grasslands to be converted to
farmland for growing the fuels' feedstocks (the raw material for
making the fuel). If those emissions were taken into account, such
changes in land use would raise the cost of reducing emissions and
change the relative costs of reducing emissions through the use of
different biofuels-in some cases, by a substantial amount.
Federal biofuel mandates require vendors of motor fuels to
produce or blend specified minimum volumes of the different fuels
with gasoline and diesel fuel; the annual targets are scheduled to
rise through 2022. In the past, those requirements have not
directly increased the quantity of biofuels sold in the United
States because the combination of underlying economic conditions
and the biofuel tax credits has caused the use of biofuels to
exceed the mandated quantities.
In the future, the scheduled rise in mandated volumes would
require the production of biofuels in amounts that are probably
beyond what the market would produce even if the effects of the tax
credits were included.
A Summary of the Report is available here
The full study is available here
The report was written by Ron Gecan of CBO's Microeconomic
Studies Division and Rob Johansson, formerly of CBO.