Biofuels: Potential Effects and Challenges of Required Increases in Production and Use.

GAO-09-446 August 25, 2009

In December 2007, the Congress expanded the renewable fuel standard (RFS), which requires rising use of ethanol and other biofuels, from 9 billion gallons in 2008 to 36 billion gallons in 2022. To meet the RFS, the Departments of Agriculture (USDA) and Energy (DOE) are developing advanced biofuels that use cellulosic feedstocks, such as corn stover and switchgrass. The Environmental Protection Agency (EPA) administers the RFS. This report examines, among other things, (1) the effects of increased biofuels production on U.S. agriculture, environment, and greenhouse gas emissions; (2) federal support for domestic biofuels production; and (3) key challenges in meeting the RFS. GAO extensively reviewed scientific studies, interviewed experts and agency officials, and visited five DOE and USDA laboratories.

To meet the RFS, domestic biofuels production must increase significantly, with uncertain effects for agriculture and the environment. For agriculture, many experts said that biofuels production has contributed to crop price increases as well as increases in prices of livestock and poultry feed and, to a lesser extent, food. They believe that this trend may continue as the RFS expands. For the environment, many experts believe that increased biofuels production could impair water quality--by increasing fertilizer runoff and soil erosion--and also reduce water availability, degrade air and soil quality, and adversely affect wildlife habitat; however, the extent of these effects is uncertain and could be mitigated by such factors as improved crop yields, feedstock selection, use of conservation techniques, and improvements in biorefinery processing. Except for lifecycle greenhouse gas emissions, EPA is currently not required by statute to assess environmental effects to determine what biofuels are eligible for inclusion in the RFS. Many researchers told GAO there is general agreement on the approach for measuring the direct effects of biofuels production on lifecycle greenhouse gas emissions but disagreement about how to estimate the indirect effects on global land use change, which EPA is required to assess in determining RFS compliance. In particular, researchers disagree about what nonagricultural lands will be converted to sustain world food production to replace land used to grow biofuels crops. The Volumetric Ethanol Excise Tax Credit (VEETC), a 45-cent per gallon federal tax credit, was established to support the domestic ethanol industry. Unless crude oil prices rise significantly, the VEETC is not expected to stimulate ethanol consumption beyond the level the RFS specifies this year. The VEETC also may no longer be needed to stimulate conventional corn ethanol production because the domestic industry has matured, its processing is well understood, and its capacity is already near the effective RFS limit of 15 billion gallons per year for conventional ethanol. A separate $1.01 tax credit is available for producing advanced cellulosic biofuels. The nation faces several key challenges in expanding biofuels production to achieve the RFS's 36-billion-gallon requirement in 2022. For example, farmers face risks in transitioning to cellulosic biofuels production and are uncertain whether growing switchgrass will eventually be profitable. USDA's new Biomass Crop Assistance Program may help mitigate these risks by providing payments to farmers through multi-year contracts. In addition, U.S. ethanol use is approaching the so-called blend wall--the amount of ethanol that most U.S. vehicles can use, given EPA's 10 percent limit on the ethanol content in gasoline. Research has been initiated on the long-term effects of using 15 percent or 20 percent ethanol blends, but expanding the use of 85 percent ethanol blends will require substantial new investment because ethanol is too corrosive for the petroleum distribution infrastructure and most vehicles. Alternatively, further R&D on biorefinery processing technologies might lead to price-competitive biofuels that are compatible with the existing petroleum distribution and storage infrastructure and the current fleet of U.S. vehicles.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Mark E. Gaffigan Team: Government Accountability Office: Natural Resources and Environment Phone: [phone]

Matters for Congressional Consideration

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Recommendation: In addition to the currently required lifecycle greenhouse gas emissions analysis, the Congress may wish to consider amending the Energy Independence and Security Act of 2007 (EISA) to require the Administrator of the Environmental Protection Agency develop a strategy to assess the effects of increased biofuels production on environment at all stages of the lifecycle--cultivation, harvest, transport, conversion, storage, and use--and to use this assessment in determining which biofuels are eligible for consideration under the RFS. This would ensure that all relevant environmental effects are considered concurrently with lifecycle greenhouse gas emissions.

Status: In process

Comments: When we determine what steps the Congress has taken, we will provide updated information.

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Recommendation: Because the RFS allows rapidly increasing annual amounts of conventional biofuels through 2015 and the conventional corn starch ethanol industry is mature, the Congress may wish to consider wherevisions to the VEETC are needed. Options could include maintaining the VEETC, reducing the amount of the tax credit or phasing it out, or modifying the tax credit to counteract fluctuations in crude oil prices.

Status: In process

Comments: When we determine what steps the Congress has taken, we will provide updated information.Recommendations for Executive Action

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Recommendation: To improve EPA's ability to determine biofuels' greenhouse gas emissions and define fuels eligible for consideration under the RFS, the Administrator of the Environmental Protection Agency and the Secretaries of Agriculture and Energy should develop a coordinated approach for identifying and researching unknown variables and major uncertainties in the lifecycle greenhouse gas analysis of increased biofuels production. This approach should include a coordinated effort to develop parameters for using models and a standardset of assumptions and methods in assessing greenhouse gas emissions forthe full biofuel lifecycle, such as secondary effects that would include indirect land-use changes associated with increased biofuels production.

Agency Affected: Department of Agriculture

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Agency Affected: Department of Energy

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Agency Affected: Environmental Protection Agency

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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Recommendation: To minimize future blend wall issues and associated ethanol distribution infrastructure costs, the Secretaries of Agriculture and Energy should give priority to research and development (R&D) on process technologies that produce biofuels that can be used by the existing petroleum-based distribution storage infrastructure and the current fleet of U.S. vehicles.

Agency Affected: Department of Agriculture

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Agency Affected: Department of Energy

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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Recommendation: To address inconsistencies in existing statutory language, the Administrator of the Environmental Protection Agency should, in consultation with the Secretaries of Agriculture and Energy, review and propose to the appropriate congressional committees any legislative changes the Administrator determines may be needed to clarify what biomass material - based on type of feedstock or type of land can be counted toward RFS.

Agency Affected: Environmental Protection Agency

Status: In process

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Categories: Energy, Agricultural industry, Air quality, Alternative energy sources, Alternative fuels, Eligibility determinations, Energy consumption, Environmental monitoring, Feed industry, Fuel consumption, Fuel prices, Fuel research, Fuels, Gasoline, Grain and grain products, Greenhouse gases, Land use, Petroleum products, Prices and pricing, Raw materials, Soil erosion, Tax credit, USDA Biomass Crop Assistance Program, Volumetric Ethanol Excise Tax Credit (VEETC), Water quality