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**United States Department of Agriculture---2007 Farm Bill Theme Paper**

**Energy and Agriculture**

**August 2006**

**I. Introduction**

This paper is the fourth in a series of briefing papers that assess
general themes advanced at the 2007 Farm Bill Forums held during 2005 by
Secretary Mike Johanns as well as related issues that have emerged in
recent months. Energy has been selected for a 2007 Farm Bill theme paper
because of the relationship between energy, agriculture, and rural
areas. This paper describes the current role of U.S. agriculture in
energy production and efforts to conserve energy use in agriculture,
discusses and evaluates energy programs administered by the Department
of Agriculture (USDA), and concludes with a discussion of general policy
approaches associated with energy and agriculture. The alternatives
represent generalized approaches to addressing the key issues that have
been raised with regard to energy and agriculture. The alternatives are
not recommendations but are presented to further discussion on the 2007
Farm Bill.

**II. Background: Energy and U.S. Agriculture**

Agriculture is a major user of energy, with direct energy consumption
and indirect energy use through production inputs, such as fertilizer,
accounting 15 percent of total farm cash production expenses. In
addition, agriculture has the potential to become an increasingly
important source of renewable energy and provide significant economic
opportunities for farmers and ranchers. Renewable energy production
stimulates the agricultural and rural economy, improves the environment,
and enhances national energy security. The most effective government
policies that have expanded renewable energy production are
non-agricultural policies. (i.e., Energy Tax Act of 1978 and the Energy
Policy Act of 2005). Most agriculture-related policy has centered on
food and feed supply availability. This section discusses recent trends
in energy use in agriculture, renewable energy production opportunities,
the policies that have helped foster those opportunities, and the
prospects for renewable energy markets.

**Trends in Energy Use in Agriculture**

Number range CHAPTERAgriculture uses energy directly for operating
machinery and equipment on the farm and indirectly in the fertilizers
and pesticides produced off the farm. Energy use by agriculture peaked
in 1978. However, rapidly rising energy prices caused by oil price
shocks in the early 1980s forced farmers to become more energy
efficient. Since 1978, the total energy use by the agricultural sector
has fallen. Even though energy use has decreased, agricultural output
has increased since the late 1970s. One measure of energy efficiency,
the ratio of energy use to agricultural output, has fallen by about 50
percent since 1978 (Figure 1).

**Figure 1. Energy Use Per Unit of Farm Output**

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While both agricultural and fertilizer production have made significant
improvements in energy efficiency over time, energy-related expenditures
(electricity, fuels and oils, and fertilizers) make up an important
share of total production expenses. Energy-related expenses rose from
about 5 percent of total farm cash expenses in 1910 to over 17 percent
of total farm cash expenses in the early 1980s. Since the early 1980s,
improvements in efficiency and relatively stable nominal energy prices
caused the share of energy-related expenses as a share of total farm
cash expenses to fall to about 11 percent by 2003. However, due to
increasing energy prices, the share of energy-related expenses as a
share to total farm cash expenses rose in 2005 and is forecast to
increase again in 2006. For 2005, energy-related expenses are estimated
to account for 14 percent of total farm cash expenses, or \$27.4
billion, including expenses of \$12.8 billion for fertilizer, \$11.2
billion for fuels and oils, and \$3.4 billion for electricity. With
expenses for fertilizer, fuels and oils, and electricity continuing to
increase, energy-related expenses are forecasted to climb to \$29.9
billion in 2006, 15 percent of total farm cash expenses and 50 percent
above the level in 2003.

From the mid-1960s through 1981, commercial fertilizer use doubled,
reaching a peak of over 23 million nutrient tons. Since the early 1980s,
commercial fertilizer use has remained at about 22 million tons. In the
short run, farmers may be able to reduce energy use by switching from
conventional tillage practices to reduced or no-till, reducing
fertilizer application rates, improving nutrient management practices
that reduce nutrient losses, increasing the use of animal manure as a
substitute for commercial fertilizers, or switching to crops that use
less fertilizer and other energy-related inputs. Over the long term,
farmers have considerable flexibility in reducing their energy use by
acquiring more energy efficient equipment and making other changes to
their farming operation. The adoption of precision farming practices
(yield monitoring global positioning systems and calibrated application
of pesticides and fertilizers) enable producers to use less fertilizer
and other production inputs without adversely affecting crop yields. The
combined effects of more energy efficient equipment and practices along
with changes in crops produced and yields has allowed agriculture to
become more energy efficient over the past 50 years.

**Renewable Energy Production Today**

Since the energy crisis of the 1970s, developing new energy sources from
the agricultural sector has been viewed as a way to expand the domestic
energy supply and help mitigate our growing dependence on imported oil.
Including hydropower, renewable energy accounted for six percent of U.S.
energy consumption in 2004, with energy from biomass contributing almost
half of that total (Figure 2). Biomass energy is primarily produced from
wood (70 percent) followed by waste (20 percent) and alcohol fuels (10
percent). While wood has provided most of the biomass energy over the
years, ethanol has been the fastest growing renewable energy source over
the past 10 years. Ten years ago ethanol's share of biomass energy was
less than 4 percent.

**Figure 2. The Distribution of Renewable Energy Consumption in the
United States, 2004.**

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height="2.126388888888889in"}

Source: Department of Energy, Energy Information Administration

Government incentives encouraged investment in the ethanol industry and
production grew rapidly throughout the 1980s and 1990s (Figure 3). In
2005, the ethanol industry produced 4 billion gallons of ethanol which
is blended in 30 percent of the Nation's gasoline.

**Figure 3. U.S. Annual Ethanol Production, 1980-2005.**

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Biodiesel, which is just beginning to establish a market in the United
States, is a biofuel substitute for petroleum diesel (Figure 4).
Biodiesel is most commonly blended with diesel fuel at levels of 20
percent or lower. The majority of the 91 million gallons of biodiesel
produced in 2005 came from soybean oil, although it can also be made
from other oilseed crops, animal fats, and grease.

**Figure 4. U.S. Annual Biodiesel Production, 1999 -- 2005.**

The U.S. Department of Energy's (DOE) Energy Information Administration
(EIA) estimates that the United States consumes about 140 billion
gallons of gasoline and 60 billion gallons of diesel fuel per year.
Therefore, in terms of their relative contribution to meet our
transportation fuel needs, ethanol production met about 3 percent of
gasoline consumption in the United States while biodiesel production met
0.15 percent of diesel fuel consumption in 2005.

In addition to ethanol and biodiesel, biomass and animal wastes can be
used to produce renewable energy. Biomass is used to generate electric
power by direct burning, using gasification systems, or mixing biomass
with coal in coal-fired electrical generation facilities. The primary
feedstocks include wood waste used by the pulp and paper industry for
industrial heat and steam production. In addition, forest residues and
municipal solid waste are used to generate electricity. Another
potentially large source of renewable energy is animal waste which can
be turned into methane gas through anaerobic digestion. Anaerobic
digesters are being adopted by commercial livestock operations not only
to produce energy, but also to meet new state and Federal regulations
for controlling animal waste. Currently, there are over 90 anaerobic
digester projects, either in operation or under construction, located
throughout the United States. Nearly all the anaerobic digesters are
associated with dairy operations, with a few associated with swine or
poultry operations.

Another emerging approach to reducing U.S. fossil energy use is to
replace petroleum based products with products made from biomass. There
are many industrial and consumer products that have been traditionally
made from biomass, including yarns and fabrics, soaps and detergents,
pulp and paper, lubricants and greases, and adhesives and paints.
However, agricultural feedstocks can be used to produce non-traditional
products such as chemicals, plastics, hydraulic fluids, and
pharmaceuticals. There are many agricultural feedstocks that can be used
to make bioproducts, including a variety of crops, wood and plant oils,
and agricultural and forestry residues. Bioproducts often require less
energy to produce than the fossil and inorganic products they replace.
With the increasing costs of fossil fuels, U.S. industries have an
increased incentive to consider and produce alternative bioproducts. As
examples of new biobased technology, corn starch is being used to
produce bioplastic products, and soybeans are being used to produce a
polymer used to manufacture carpet backings. The chemical industry could
potentially offer a large market for numerous high-value biobased
chemicals and other materials made from agriculture.

Progress is also being made in developing energy from solar, wind, and
geothermal resources although the amount of energy from these sources is
relatively small. Small-scale solar applications are already
commercially available that provide electricity for lighting, battery
charging, water pumping, and electric fences. There also has been an
emergence of large-scale solar technology that is being used in homes
and in the industrial sector. Small-wind systems are currently being
developed to generate electricity in remote areas and utility-size
turbines have been increasing in numbers, especially on farms in areas
with consistently high wind speeds. More geothermal resources are being
tapped to produce electrical or thermal energy in local areas. There are
many agricultural applications for geothermal energy, including heating
greenhouses, providing warm water for aquaculture operations, and drying
produce.

Although ethanol growth has been impressive in recent years, ethanol
accounts for about 3 percent of total annual gasoline consumption. About
14 percent of the U.S. corn crop was used for ethanol in 2005/06 and
USDA projects 20 percent of U.S. corn production will be converted into
ethanol in 2006/07. Clearly, the supply of corn is relatively small
compared to gasoline demand, so other domestic sources of renewable
energy must be developed to replace oil imports if the U.S. is to
greatly reduce its dependence on imported oil. Biodiesel can extend the
diesel fuel supply, but the supply of oil crops, animal fats, and other
feedstocks are also relatively small compared to the diesel fuel market.
Research may provide technological breakthroughs leading to a
significant expansion in ethanol production. In the near future,
ethanol's feedstock base could expand significantly with the advancement
of technology that could economically convert switchgrass and other
low-valued biomass into cellulosic ethanol.

**Legislative and Regulatory Incentives**

Growth in renewable energy over the past two decades is largely due to
government legislation and regulations. There have been several
motivations behind renewable energy legislation, including enhancing
national energy security, improving the environment, and stimulating the
agricultural economy.

***Energy Policy.*** Much of the growth in corn ethanol production can
be attributed to government incentive programs that began in the 1970s.
The Energy Tax Act of 1978 authorized the motor fuel excise tax
exemption for ethanol blends, providing ethanol blends of at least 10
percent ethanol by volume a \$0.40 per gallon exemption from the Federal
motor fuels tax. Since then, several statutes have extended the tax
exemption for ethanol. Currently, Federal law authorizes a tax credit of
\$0.51 per gallon for ethanol through 2010. Legislation has also been
passed to give income tax credits and loan guarantees to small ethanol
producers.

TNumber range CHAPTERhe American Jobs Creation Act of 2004 granted
biodiesel blenders a tax credit of \$1.00 per gallon of biodiesel made
from oil crops and animal fats and a \$0.50 per gallon tax credit for
biodiesel made from recycled fats and oils. Largely due to this tax
credit and other government incentives, biodiesel production has grown
from about 500,000 gallons in 1999 to 91 million gallons in 2005.
Legislation has also created tax credits for biomass, wind energy, and
other renewable energy sources used to generate electricity.

The Energy Policy Act (EPACT) of 2005 included several provisions to
help diversify domestic energy production through the development of
renewable fuels. EPACT mandates a renewable fuel phase-in called the
renewable fuels standard (RFS), requiring U.S. fuel production to
include a minimum amount of renewable fuel each year, starting at 4
billion gallons in 2006 and reaching 7.5 billion gallons in 2012. EPACT
also created the Cellulosic Biomass Program to encourage the production
of cellulosic ethanol and fund research on conversion technology. Under
this program, every one gallon of ethanol made from biomass, such as
switchgrass, crop residues, and tree crops, counts as 2.5 gallons
towards satisfying the RFS. EPACT also extended the biodiesel fuel
excise tax credit through 2008 and authorized a \$0.10 per gallon income
tax credit to small biodiesel producers.

***Environmental Policy.*** There is a significant opportunity to reduce
air pollution and greenhouse gas (GHG) emissions by replacing fossil
energy with renewable energy. Ethanol was first used as a fuel additive
in the late 1970s when the Environmental Protection Agency (EPA) began
phasing out lead in gasoline and ethanol replaced lead as an octane
enhancer. Provisions of the Clean Air Act Amendments of 1990 (CAA)
established the Oxygenated Fuels Program and the Reformulated Gasoline
(RFG) Program to control carbon monoxide and ozone problems created by
motor fuels. Refiners blended cleaner burning oxygenates into gasoline
to meet the new standards. Ethanol and a petroleum-based additive called
methyl tertiary butyl ether (MTBE) became the two oxygenates most
commonly used to meet the requirements mandated by the CAA. The use of
MTBE is currently being phased out and replaced with ethanol after MTBE
was found to contaminate drinking water. Recently adopted EPA diesel
fuel standards that require refiners to remove most of the sulfur from
diesel fuel could increase biodiesel demand. Since biodiesel contains no
sulfur and is an excellent lubricity agent, refiners could blend
biodiesel with petroleum diesel to help meet the new standards.

***Agricultural Policy.*** Agricultural policy has only recently been
directed at energy conservation and renewable energy production. USDA's
FY 2000 Appropriations Act authorized the establishment of pilot
projects for harvesting biomass on lands enrolled in the Conservation
Reserve Program (CRP). In 2000, USDA also initiated the Commodity Credit
Corporation (CCC) Bioenergy Program to alleviate crop surpluses and
stimulate production of biofuels. The Agricultural Risk Protection Act
of 2000 included the Biomass Research and Development Act, which
directed the USDA and DOE to cooperate and coordinate polices to promote
research and development leading to the production of bioproducts.

The Farm Security and Rural Investment Act of 2002 (2002 Farm Bill)
contained the first energy title in Farm Bill history. The 2002 Farm
Bill energy title authorized a range of programs through 2007 to promote
bioenergy and bioproduct production and consumption. Key provisions
include the Federal Biobased Products Preferred Procurement Program
(FB4P), which requires Federal agencies to procure biobased products.
Another program, the Biodiesel Fuel Education Program, awards
competitive grants to educate government and private entities with
vehicle fleets about the benefits of biodiesel fuel use. The Renewable
Energy Systems and Energy Efficiency Improvements Program authorizes
loans, loan guarantees, and grants to assist eligible farmers, ranchers,
and rural small businesses in purchasing renewable energy systems and
making energy efficiency improvements. The Value Added Grant Program
(VAGP) was amended to make funds available to farm families and rural
businesses to help them develop new value-added products, such as
ethanol and biodiesel. The 2002 Farm Bill extended the CCC Bioenergy
Program through FY 2006, expanded the CRP pilot biomass authority to a
nationwide general authority, and authorized placement of wind turbines
on land enrolled in CRP.

***State Programs.*** There are also many State programs that encourage
renewable energy use through tax credits, production incentives, and
biofuel mandates. One of the first states to actively promote biofuels
was Minnesota, which has consumption mandates for ethanol and biodiesel.
Minnesota's two-percent biodiesel mandate, that became effective in
2004, created a 16 million gallon market for biodiesel. Almost every
State has at least one renewable energy promotion program in place, and
most have several.

Another important policy tool at the State level is a Renewable
Portfolio Standard (RPS). A RPS is a policy that obligates a retail
electricity supplier to include renewable resources in its
electricity-generation portfolio and creates a demand for renewable
energy sources. Retail suppliers can meet the obligation by constructing
or owning eligible renewable resources or purchasing the power from
eligible generators. To date, 20 States plus Washington, D.C., have
adopted RPS policies or renewable purchase obligations, while several
other States have adopted nonbinding renewable energy goals. A number of
States have increased their renewable energy standards in recent years.
The Union of Concerned Scientists projects that State RPS laws and
regulations will provide support for nearly 31,100 megawatts (MW) of new
renewable power by 2017---an increase of 230 percent over total 1997
U.S. levels (excluding hydroelectric).

**Market Prospects**

Over the years, government incentives have been necessary to help
ethanol and biodiesel compete with less costly petroleum-based fuels.
However, the recent surge in oil prices has made biofuels much more cost
competitive and these industries are attracting new investment. The
number of biodiesel plants is growing rapidly due to government
incentives and high diesel fuel prices -- the number of plants increased
from less than 10 in 2000 to 65 plants in 2006, with an annual industry
capacity of 395 million gallons. Another 58 plants are under
construction or in the process of expansion, adding another 318 million
gallons of capacity upon completion. Ethanol production has also been
growing rapidly. In 2000, there were 54 plants with capacity of about
1.75 billion gallons per year. Currently, there are over 100 ethanol
plants with a combined production capacity of over 4.5 billion gallons a
year. An additional 30 ethanol plants under construction are expected to
add annual capacity of more than 2 billion gallons.

Ethanol and biodiesel production will continue to expand as long as
government incentives continue and world petroleum prices remain high.
World oil prices have increased sharply since 1999, when the annual
average nominal price of West Texas Intermediate (WTI) oil jumped from
\$19.25 per barrel in 1999 to \$30.29 in 2000 (Figure 5). Between 2000
and 2003, the

**Figure 5. Annual Average and Forecasted U.S. Crude Oil Prices,
1971-2007.**

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average WTI price ranged from about \$26 per barrel to \$31 per barrel.
In 2004, the WTI price increased to over \$41 per barrel and the 2005
average WTI price increased to over \$56 per barrel. EIA short-term
projections indicate that the average WTI price for a barrel will climb
to \$69 in 2006 and remain at that level in 2007.

Higher crude oil prices have translated into higher wholesale and retail
prices for gasoline and diesel fuel. EIA estimates that the average
wholesale price for gasoline increased from \$1.28 per gallon in 2004 to
\$2.04 per gallon in 2006. With cash and net feedstock costs for ethanol
at about \$1.00 per gallon, ethanol was not competitive with gasoline at
2004 prices without the income tax credit. However, with the recent
increase in gasoline prices, corn-based ethanol is competitive with
gasoline without the income tax credit.

Under EIA's long-term forecast, the real price of imported oil is
expected to level-off after 2007 and perhaps show a slight decline by
2010. Nevertheless, world oil supplies are expected to remain tight as
the demand for oil remains strong, keeping pressure on oil prices
through 2030. If future oil prices reflect EIA projections, biodiesel
and ethanol production will continue to grow with the rate of growth
depending on the level of oil prices, feedstock costs, and changes in
technology.

In the longer term, EIA expects domestic energy consumption to continue
to grow (Table 1). By 2030, EIA forecasts that U.S. energy consumption
will increase by over 30 percent, from 100 quadrillion Btus currently to
134 quadrillion Btus in 2030. Therefore, the supply of renewable energy
must also increase by 30 percent over the same time just to maintain its
current share of the overall energy market and expand further to reduce
fossil-fuel dependence. The growth in energy consumption to meet the
needs of the transportation sector is expected to increase by over 40
percent from 2005 to 2030.

**Table 1. Projected Energy Consumption 2005-30.**

  --------------------------- ------------- ------- ------- ------- ------- ------
                              2005          2010    2015    2020    2025    2030

  Energy Consumption (by      Quadrillion                                   
  Sector)                     Btu                                           

  Residential                 22            23      24      25      26      27

  Commercial                  18            20      21      23      25      27

  Industrial                  33            35      36      37      39      41

  Transportation              28            31      33      36      38      40

  Total                       101           108     114     121     127     134
  --------------------------- ------------- ------- ------- ------- ------- ------

Source: Department of Energy, Energy Information Administration. Totals
may not add due to rounding.

While domestic energy production will also increase over time, EIA
forecasts that imported energy will rise more rapidly (Table 2). While
domestically produced energy is projected to increase by about 25
percent, from 71 quadrillion Btus in 2005 to 89 quadrillion Btus in
2030; energy imports are projected to increase by almost 50 percent,
rising from 30 quadrillion Btus in 2005 to 44 quadrillion Btus by 2030.
As a result, the share of U.S. energy use met by imported sources is
projected to rise from 30 percent currently to 33 percent by 2030.

**Table 2. Projected Energy Supply, 2005-30.**

  --------------------------- ------------- ------- ------- ------- ------- ------
                              2005          2010    2015    2020    2025    2030

  Energy Supply               Quadrillion                                   
                              Btu                                           

  Domestic Production         71            77      81      84      87      89

  Net Imports                 30            30      33      36      40      44

  Total                       101           108     114     121     127     134
  --------------------------- ------------- ------- ------- ------- ------- ------

Source: Department of Energy, Energy Information Administration. Totals
may not add due to rounding.

**III. USDA's Renewable Energy and Energy Efficiency Programs**

**USDA's Natural Resources Conservation Service (NRCS)** has several
programs that affect energy use on farms and ranches. These programs
include the Conservation Security Program (CSP), the Environmental
Quality Incentives Program (EQIP), Conservation Technical Assistance
(CTA), as well as other programs.

Energy conservation and the conservation of natural resources by farmers
and ranchers are complementary and many conservation measures
significantly reduce fuel and other energy-related costs. Conservation
practices such as crop residue management, irrigation water management,
nutrient management, wind breaks, contour farming, and rotation grazing,
among others, can contribute to protecting soil and water resources and
reduce energy use. In addition, the growing availability of precision
agriculture has the potential to reduce energy use significantly as well
as protect and enhance water quality and other environmental amenities.

During the past couple of decades, NRCS has helped farmers adopt no-till
practices on about 62 million acres of cropland. Assuming an average
savings of 3.5 gallons per acre in diesel fuel, this amounts to a
savings of 217 million gallons of diesel fuel per year with a cost
savings to farmers of about \$500 million per year.

In FY 2004, with technical and financial assistance from NRCS, farmers
and ranchers applied nutrient management on 2.9 million acres and pest
management on 3.5 million acres. Improved application, timing, and
placement of nitrogen fertilizer can save farmers from \$10 to \$20 per
acre. Assuming average savings in nitrogen fertilizer costs of \$15 per
acre, the cost savings to farmers from the nutrient management practices
adopted in FY 2004 would amount to just over \$43 million per year.

Air quality concerns associated with agricultural production include
odors, ozone precursors, ammonia, particulate emissions, and greenhouse
gases. Addressing these concerns is an area of increasing emphasis in
USDA's conservation programs. Livestock producers enrolled in EQIP can
receive cost-share assistance for installing anaerobic waste digesters.
These technologies significantly reduce odors associated with large
animal feeding operations and, in many cases, can result in
significantly lower methane emissions. NRCS has provided technical and
financial assistance to help producers install at least 40 anaerobic
digesters. Although some produce electricity either for on-farm use or
for sale to electric utilities, there is a growing interest in using the
methane directly on the farm to power equipment, heat buildings, and
other on-farm uses.

Under EQIP, NRCS also offers innovation grants to accelerate the
development, transfer and adoption of innovative technologies and
approaches, including those related to energy. In FY 2006, NRCS awarded
\$20 million in Conservation Innovation Grants (CIG), of which \$7.4
million (37 percent) was awarded to proposals that addressed energy
conservation or the production of renewable fuels. Another \$750,000 was
awarded to assess the creation and delivery of carbon credits to private
sector markets.

EQIP also provides farmers with payments to adopt nutrient management
practices that reduce nitrogen fertilizer use and thus nitrous oxide
emissions and to adopt crop residue management practices that increase
the organic content of soils and sequester carbon. Wetlands restored by
the Wetland Reserve Program also sequester substantial amounts of
carbon. In addition, EQIP and CSP increase the adoption of conservation
tillage and other practices that sequester carbon in cropland soils. CSP
provides energy enhancement payments to producers who substitute their
petroleum-based liquid fuels with ethanol or biodiesel fuels. In FY
2006, CSP obligated about \$22 million to energy management
enhancements.

**USDA's Rural Development (RD) Mission Area** is responsible for
implementing several renewable energy related programs. The 2002 Farm
Bill established the Renewable Energy Systems and Energy Efficiency
Improvements Program. This program provides grants and loan guarantees
to agricultural producers and rural small businesses to assist with
purchasing renewable energy systems and make energy efficient
improvements. The purpose of the program is to help farmers, ranchers,
and small rural businesses reduce energy costs and to support and
stimulate rural economic development by helping agricultural producers
and rural small businesses create new sources of income, create new
jobs, and create new uses for agricultural products and wastes. Grants
may not exceed 25 percent of the eligible project costs and guaranteed
loans may not exceed 50 percent of the eligible project costs.

Eligible project costs include:

-   Post-application purchase and installation of equipment, except
    agricultural tillage equipment and vehicles;

-   Post-application construction or project improvements, except
    residential;

-   Energy audits or assessments;

-   Permit fees;

-   Professional service fees, except for application preparation;

-   Feasibility studies;

-   Business plans;

-   Retrofitting; and

-   Construction of a new facility only when the facility is used for
    the same purpose, is approximately the same size, and based on the
    energy audit will provide more energy savings than improving an
    existing facility, with costs limited to those identified in the
    energy audit.

During the first three years of the program, USDA awarded a total of 435
grants totaling \$66.8 million to agricultural producers and rural
businesses in 36 States. These funds leveraged an additional \$850
million in private sector funds. In addition, the first two loan
guarantees were awarded at the end of FY 2005 for \$10.1 million. In FY
2005, grants were awarded to recipients in 32 States.

The Value Added Producer Grants Program (VAPG) was initially authorized
by the Agriculture Risk Protection Act of 2000 and extended through FY
2007 by the 2002 Farm Bill. Under the VAPG, grants may be provided for
planning activities and working capital for marketing value-added
agricultural products and for farm-based renewable energy. Grants may be
used to develop business plans and strategies for creating marketing
opportunities. Grants may also be used for feasibility studies and to
provide capital to establish alliances or business ventures that allow
producers of value-added agricultural products to better compete in
domestic and international markets. Priority in the program is given to
applicants who have at least 51 percent of project costs dedicated to
activities for a bioenergy project.

Funding available for the VAPG totaled \$32.78 million in FY 2006. Since
the start of the program \$20.5 million was allocated to projects to
develop and market over 100 renewable energy projects in 29 States. This
funding leveraged over \$200 million in private sector resources.
Renewable energy projects include biodiesel, ethanol or wind energy
production, or the use of biomass to generate energy.

Projects to convert biomass into biobased products and produce bioenergy
are eligible for financing under the Business and Industry (B&I)
Guaranteed Loan Program. The overall purpose of the B&I Guaranteed Loan
Program is to help create jobs and stimulate rural economies by
providing financial backing for rural businesses. Providing financial
support for projects related to biobased products and bioenergy
production is viewed as a way to create new market opportunities for
farm and forestry resources.

During FY 2001-05, the B&I Guaranteed Loan Program supported 10 biomass
projects of which 7 were for ethanol production facilities. Another four
ethanol projects were funded under USDA's Rural Economic Development
Loan Program and a biodiesel project was supported under the Energy
Guaranteed Loan Program. In addition, several more biomass projects were
supported by direct grants.

The Biomass Research and Development Program is operated jointly by USDA
and DOE. This program supports research and development of biomass based
products, bioenergy, biofuels, and related processes. Eligible entities
are institutions of higher learning, national laboratories, Federal or
State research agencies, private sector entities, and nonprofit
organizations. FY 2006 funding for the Biomass Research and Development
Program is \$12 million.

Several other RD programs can be used to fund and support energy-related
projects, although they are not directed specifically to that goal. For
example, funding in several re-lending programs may ultimately be used
to fund energy-related projects as part of a general business or
community development effort. Utility programs, particularly for
electric utilities, comprise a substantial part of the RD programs. Such
programs directly or indirectly advance the development of energy
conservation and distribution.

**USDA's Agricultural Research Service (ARS)** is USDA\'s primary
research agency. Specific energy-related work being conducted by ARS
follows:

-   **Better understanding of ethanol-producing bacteria.** The process
    of cellulose degradation is not well understood. This research
    provides new information on the regulation of cellulose degradation
    by an organism that shows particular promise for converting
    cellulosic biomass.

-   **Improved organisms for ethanol production.** Inhibitors formed
    during pretreatment of lignocellulosic material reduce the
    performance of ethanol-producing fermentation organisms. ARS
    scientists are using a method called directed adaptation, developing
    strains of organisms that have enhanced ability to convert toxic
    compounds into less toxic compounds. Development of these more
    tolerant organisms is a significant step toward achieving the
    technology necessary for commercial production of ethanol from
    cellulosic plant material.

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-   **Key gene in cell wall biosynthesis identified.** There is a need
    to identify genes that regulate cell wall composition of alfalfa so
    that new varieties can be developed that have greater potential as
    biofuel feedstocks. ARS scientists identified and characterized a
    gene, UDP-sugar pyrophosphorylase (USP), which plays an important
    role in cell wall biosynthesis in plants. The isolation of the USP
    gene and new knowledge learned about the protein it produces will
    allow cell walls of alfalfa plants to be modified to improve the
    value of this crop as a bioenergy feedstock.

**USDA's Cooperative State Research, Education, Extension and Service
(CSREES)** leverages the nationwide expertise housed at land grant
universities. CSREES provides funding for about 60 projects that include
an energy-related objective. The goals of these projects include:

-   Reducing costs associated with the conversion of biomass to energy
    and industrial products,

-   Increasing biobased product inventories to replace petroleum based
    products,

-   Developing technologies for effectively converting agricultural
    (including forestry) residuals into energy and products,

-   Developing cost effective biocatalysts capable of converting
    lignocellulosic materials economically, effectively and with low
    environmental impact, and

-   Identifying unique biomass feedstocks for the sustainable production
    of bioenergy and industrial products.

**USDA's Farm Service Agency (FSA)** administers the Conservation
Reserve Program (CRP) and the CCC Bio-Energy Program. The CRP was
established by the Food Security Act of 1985 to assist owners and
operators in conserving and improving soil, water, and wildlife
resources on their farms and ranches by converting highly erodible and
other environmentally sensitive cropland and marginal pasture to
long-term resource conserving covers. Participants enroll cropland in
the CRP for a period from 10 to 15 years in exchange for annual rental
payments and cost-share assistance for installing certain conservation
practices. Enrollment of up to 39.2 million acres is authorized, and
there are currently about 36 million acres under contract.

CRP lands sequester significant amounts of carbon dioxide in soils and
vegetative cover and many CRP lands have the potential to be used for
the production of bioenergy crops, such as switchgrass, willows, and
poplars. A 2003 analysis, for example, estimated that 13 million acres
of cropland enrolled in the CRP could produce an average of about 4 tons
of biomass per acre (dry matter) or over 50 million tons of biomass
annually. The 2002 Farm Bill specifies the conditions under which CRP
enrolled acreage can be utilized for biomass production. First,
harvesting must be consistent with conservation of soil, water quality,
and wildlife habitat, and second, payments must be reduced commensurate
with the economic value of the biomass produced.

Under CRP's Biomass Pilot Program established in 2000, USDA approved the
use of CRP land in 4 projects located in 4 States. The programs approved
include one each in Minnesota (hybrid poplars), New York (willows), Iowa
(switchgrass), and Pennsylvania (switchgrass). Projects were also
approved in Oklahoma and Illinois.

The CCC Bioenergy Program began on December 1, 2000, and ended on June
30, 2006. Under the program, cash payments were made to bioenergy
producers who increase their annual bioenergy production from eligible
agricultural commodities. Eligible commodities included barley, corn,
grain sorghum, oats, rice, wheat, soybeans, other oilseeds, cellulosic
crops, and animal fats and oils. From December 2000 through March 2006,
the program reimbursed bioenergy producers \$537 million for 2.5 billion
gallons of increased ethanol production, 146.4 million gallons of
increased biodiesel production, and 26.7 million gallons of base
biodiesel production.

**USDA's Office of Energy Policy and New Uses** administers the Federal
Biobased Preferred Products Procurement Program (FB4P), the USDA
Certified Biobased Product Labeling Program and Biodiesel Education
Program (BEP). All three programs were created by the 2002 Farm Bill.

Under the FB4P, Federal agencies will be required to give procurement
preference to qualified biobased products if the products are available,
meet performance standards, and are available at costs similar to their
non-biobased counterparts. Biobased products are defined as commercial
or industrial products that are composed, in whole or in significant
part, of biological products or renewable domestic agricultural
materials (including plant, animal, and marine materials) or renewable
forestry materials. The first in a series of rules to designate items
for preferred procurement was published as a final rule in March 2006.
Six items were designated for preferred procurement by this rule: mobile
equipment hydraulic fluids; biobased roof coatings; water tank coatings;
diesel fuel additives; penetrating lubricants and; bedding, bed linens
and towels. The 2002 Farm Bill also provides for a voluntary program
authorizing producers of qualified biobased products to use a "USDA
Certified Biobased Product" label and logo to identify qualified
products.

The 2002 Farm Bill authorized funding of \$1 million per year from FY
2003-07 for education grants under the BEP. Under BEP, two competitive
grants were awarded to the National Biodiesel Board and the University
of Idaho to educate the public, and government and private entities that
operate vehicle fleets on the benefits of using biodiesel. Program funds
have been used for organizing national conferences, conducting technical
workshops, and distributing educational materials, including manuals on
quality control. Many partnerships with other groups and government
agencies have been formed to share information, leverage resources,
coordinate activities, and avoid program redundancies.

**USDA's Forest Service (FS)** also plays a major role in energy
production and conservation. The FS is working to increase production of
all energy sources in an environmentally sound manner, capitalizing on
the potential of woody biomass as a renewable energy resource, and
contributing to the improvement of infrastructure for transmitting
energy across the country. Increasing domestic energy supply includes
providing energy facility corridors, ensuring that lands are available
for energy mineral development and production, developing renewable
energy resources such as woody biomass, wind, solar power, and
geothermal energy, and re-licensing hydropower facilities.

Nearly 50 percent of the nation's geothermal energy production comes
from Federal lands. There are currently 354 federal geothermal leases,
116 on National Forest lands, covering nearly 360,000 acres. At the
present time, there are 5 producing leases on National Forest lands
contributing to a 12 mega-watt plant and a 45 mega-watt power plant
that, combined, have resulted in more than \$12 million in royalties.

The FS actively participates in a government-wide initiative aimed at
promoting development and use of biobased products and bioenergy.
Programs include research on enhancing opportunities to use forest
biomass to produce energy and other value-added products; developing
economical, environmentally acceptable woody cropping systems to produce
energy and other value-added products; exploring new processes to
convert wood into ethanol; and identifying ways to increase energy
conservation through changes in manufacturing technologies, harvesting
technologies, building construction practices, and designed landscapes.

The focus of the FS Biomass and Bioenergy efforts is woody materials
that are not part of the commercial forest product material flows. Woody
biomass includes forest vegetation treatment residuals (tree limbs,
tops, needles, leaves and other woody parts) that are by-products of
forest management and ecosystem restoration. Currently these materials
are underutilized, commercial value is low, and markets are small to
non-existent.

A recent joint USDA and DOE report, *Biomass as Feedstock for a
Bioenergy and Bioproducts Industry: The Technical Feasibility of a
Billion-Ton Annual Supply*, commonly known as the "Billion Ton Report,"
projects that there are over 1.3 billion dry tons per year of biomass
potential, enough to produce biofuels sufficient to meet more than
one-third of the nation's current demand for transportation fuels by
2030. About one-quarter of that total, roughly 380 million dry tons of
biomass could be produced in a sustainable manner from residues from
private, State, Tribal and Federal forest lands and from forest wood
wastes.

The Healthy Forest Restoration Act (HRRA) authorized the use of \$5
million to help "...establish small-scale business enterprises to make
use of biomass and small-diameter material." These funds were to be used
to: (1) help reduce forest management costs on National Forest System
lands by increasing the value of biomass and other forest products
generated from hazardous fuel treatments; (2) create incentives and/or
reduce business risk for increased use of biomass from or near national
forestlands; (3) institute projects that target and help remove economic
and market barriers to using small-diameter trees and wood biomass.

The EPACT authorized up to \$50 million for grants to improve the
commercial value of forest biomass for electric energy, useful heat,
transportation fuels, and other commercial purposes. In FY 2006, 88
applications were received, totaling almost \$18 million in requests.
Eighteen proposals were funded at a Federal cost of \$4.2 million. These
projects leveraged approximately \$9 million in non-Federal funds.

**IV.** **Economic and Policy Issues for Renewable Energy and Energy
Efficiency Programs**

This section provides a general discussion of the support provided by
current programs using several evaluation criteria: increase in
production of renewable fuels and energy efficiency, program cost,
effects on farms and rural areas, and implications for U.S. commitments
under the World Trade Organization (WTO).

**Effects on Renewable Energy Production and Energy Efficiency**

Federal and State governments have helped create markets for renewable
energy through tax incentives and mandates. Ethanol production has
increased sharply since the late 1990s, to 4 billion gallons in 2005 up
from 1.8 billion gallons in 2001. Biodiesel production has grown to over
90 million gallons in 2005, a nine-fold increase from 2001. The EPACT
mandates that 7.5 billion gallons of renewable energy be used in motor
vehicles by 2012, guaranteeing a future demand for the renewable fuels.
In addition to Federal and State programs, high oil prices and the phase
out of MTBE have contributed to the growth in renewable fuels production
since 2001. While modest in size compared with tax incentives, USDA
programs have contributed to this growth.

RD grants, loans, and loan guarantee programs supported the planning and
construction of new production facilities and energy conservation
projects, creating jobs and additional wealth-enhancing opportunities in
rural America. In total, 650 renewable energy and energy efficiency
projects have been funded between FY 2001-05 at a Federal cost of \$356
million. In addition, matching and funding by the private sector
supporting these projects totaled another \$1.3 billion. Included in
these programs are 132 ethanol and biodiesel, 130 wind, 20 solar, 4
geothermal, 2 hydrogen, and 11 hybrid projects; 92 anaerobic digesters
and 7 landfill gas recover systems; 168 energy efficiency projects; and
other projects including solid fuel research.

In 2005, additional conservation practices applied with the assistance
of USDA that improved energy efficiency on farms and ranches included:

-   Residue management on 4.5 million acres,

-   Irrigation water management on 1.2 million acres,

-   Nutrient management on 4.1 million acres, and

-   Pesticide management on 3.9 million acres.

There is a significant opportunity to realize immediate economic and
environmental gains through energy conservation activities. Preliminary
estimates of the potential national savings from implementing the
following five conservation measures could be greater than \$2 billion
per year. The measures include:

-   Doubling of no-till acreage (from 62 to 124 million acres), saving
    217 million gallons of diesel fuel and \$500 million each year;

-   Switching from high or medium pressure systems to low pressure
    systems, lowering electricity use, and saving \$100 million in
    pumping irrigation water costs;

-   Increasing diesel irrigation pump efficiency by 10-percent, reducing
    diesel consumption by almost 26 million gallons, and saving farmers
    and ranchers almost \$60 million each year;

-   Doubling manure-based nitrogen use to replace fertilizer produced
    from natural gas valued at \$825 million and 100 billion cubic feet
    of natural gas annually; and

-   Using precision agriculture on more acres to reduce application
    overlap on 250 million acres of cropland, saving up to \$825 million
    in fertilizer and pesticide costs each year.

**Program Costs**

USDA has more than 300 program areas and leverages an extensive network
of Federal, State, and local cooperators in serving the public. Biobased
products, bioenergy, and other energy-related work spans across the
various activities of the Department. During FY 2001-05, USDA funds
expended on biobased products, bioenergy and other energy-related
programs totaled \$1.4 billion. USDA outlays in FY 2006 on biobased
products, bioenergy and other energy-related programs is estimated at
\$272 million (Appendix Table 1). In addition, Federal and State income
tax credits and other tax incentives that promote the use of ethanol and
biodiesel reduce tax collections by over \$2 billion annually.

A primary issue for the future is the role the public sector should play
in supporting or subsidizing markets and in conducting research. The
primary argument against public sector involvement is that if an
economic incentive exists for renewable energy then economic forces
should bring forth the appropriate resources, research, and development
necessary to build the market infrastructure. In theory, this may be
true, but there are often barriers to entry, for example, there are
relatively few players in the petroleum industry that dominate the
production and distribution systems. In addition, there are public
benefits of renewable energy that do not have an explicit market value,
such as environmental and energy security attributes. These positive
externalities are often ignored in the marketplace, causing renewable
energy to be undervalued, resulting in a lack of private investment. In
cases where there is underinvestment in a desirable product from the
public point of view, the government will often step-in and provide
public investment for research and development.

**Economic Impacts on Farms and Rural Areas**

A USDA study conducted in 2000 estimated the economic effects on the
farm economy from increasing annual ethanol production to 5 billion
gallons by 2010. The increase in ethanol production was projected to
increase the price of corn by \$0.32 per bushel and annual net farm
income by almost \$3 billion in 2010. In addition, the increase in
ethanol production lowered the U.S. trade deficit and higher corn prices
resulted in lower farm program payments.

A 2001 USDA analysis of increasing biodiesel production found that an
increase in biodiesel demand sufficient to increase soybean oil use by
an average of 1.5 billion pounds per year, over a 10-year period, would
increase the average soybean oil price by 22 percent. The average farm
price for soybeans would increase by 3 percent. The study also showed a
0.7-percent increase in annual net farm income over the 10-year period.

Studies show that increasing ethanol and biodiesel production has a
mixed effect on the livestock sector. Increased ethanol demand leads to
higher prices for feed grains that initially may result in increased
costs for some livestock producers. However, higher feed prices will be
partially offset by increased supplies of distillers' dried grain (DDG),
which is a coproduct of ethanol production. The response by the
livestock sector to changes in feed prices depends on the relative
importance of protein (primarily soybean meal) versus energy (primarily
corn) and the size of the price changes associated with these feed
components. Because protein is relatively more important in the feed
ration for poultry, feed costs for broilers and turkeys decline due to
lower protein prices. On the other hand, the feed costs for beef and
dairy cattle, and hogs would increase because their feed rations depend
more on the energy content of the feed. These cost changes lead to small
price declines in broilers and turkeys and small price increases in
other livestock products. Since these production and price adjustments
are small, increases in biofuels production over the next couple of
years are not expected to have a major effect on the livestock sector.

USDA's Economic Research Service (ERS) conducted a study in 2002
assessing the employment effects of implementing a renewable fuels
standard (RFS) requiring about 4.5 billion gallons of renewable fuel by
2012 (USDA, ERS, 2002). The authors assumed that the RFS would be
satisfied mostly by ethanol from corn and a small amount of biodiesel
from soybean oil. Model simulations were developed for two production
scenarios that generated 12,600 to 31,400 new jobs. Since the EPACT
created a RFS requiring 7.5 billion gallons by 2012, the employment
effects could be greater.

Some have argued that increased renewable energy production from
agriculture products diverts production away from food at a time when
food supplies are needed to meet the needs of the rapidly growing world
population. Up to this time, strong trend growth in agricultural
productivity, chronic periods of excess production, and periodic low
prices suggests that the U.S. farm production sector is not stressing
its capability to produce a sufficient and affordable supply of food for
its customers. However, it is apparent that if renewable fuels are to
capture a significant share of the transportation fuels market, biomass
feedstocks other than corn and soybean oil will have to be economically
and technically feasible to convert to biofuels.

**WTO Consistency**

The Uruguay Round Agreement on Agriculture (URAA) of the WTO established
criteria for classifying programs that provide benefits to agriculture
by how much they distort production and trade. This classification is
important because programs that are deemed to be minimally or non-trade
distorting (so-called green box) are not subject to annual limits on
support, as are programs that are classified as trade-distorting
(referred to as amber box).

**Green Box criteria.** To be classified as green box support, a program
must meet two sets of criteria. The first are fundamental requirements
that the program must be publicly funded, not involve transfers from
consumers, and not have the effect of providing price support to
producers. In addition to these fundamental requirements, a program has
to meet specific policy criteria, which are contained in Annex 2 to the
URAA (the green box). If a program does not meet both sets of criteria,
it must be reported to the WTO as amber box (or possibly blue box, but
that option is not considered here). The most relevant policy-specific
criteria for bioenergy programs are:

-   **Paragraph 2: General services.** This paragraph covers a wide
    range of government activities that provide services or benefits to
    agriculture or rural communities. Such support includes research;
    pest and disease control; training; extension and advisory services;
    inspection; marketing and promotion; and infrastructure. Support
    cannot involve direct payments to producers or processors, provide
    on-farm facilities or inputs, such as provision of irrigation water,
    or provide for preferential user charges.

-   **Paragraph 6: Decoupled income support.** To be eligible for green
    box status, payments must be determined by clearly defined criteria
    such as income, landowner, factor use, or production level in a
    defined and fixed base period. Payments cannot be related to any
    production, prices, or factor of production after the base period.
    Finally, no production can be required to receive a payment.

-   **Paragraph 10: Structural adjustment provided through resource
    retirement programs.** To be eligible for green box status, payments
    must be part of a well-defined government program that removes land
    or other resources from marketable agricultural production for a
    minimum of three years (permanently for livestock). Payments shall
    not require or specify an alternative use for the retired resources
    that involves the production of marketable agricultural products.
    Payments cannot relate to type or quantity of production, or to
    prices, applying to production using the land or any other resource
    remaining in production.

-   **Paragraph 12: Payments under environmental programs.** To be
    eligible for green box status under this paragraph, payments must be
    part of a clearly-defined government environmental or conservation
    program and must fulfill specific conditions under the program,
    including those related to production or inputs. In addition,
    payments must be limited to the extra costs or loss of income
    involved in complying with the program.

WTO member countries are obligated to notify, or report, programs under
the various domestic support categories. The last U.S. notification was
made in 2004 for the crop years 2000 and 2001. No programs under the
2002 Farm Bill have been reported. Current and future programs should
strive for consistency between bioenergy programs and WTO green box
criteria. Issues in achieving this consistency can be illustrated by
examining current USDA programs.

The CCC Bioenergy Program has not been notified to the WTO. The program
does not meet any policy-specific criteria in the green box, so it would
not qualify for green box status. Paragraph 2 does not allow for direct
payments to be made to processors, which is the payment mechanism for
this program. While payments under the CCC Bioenergy Program go to
bioenergy processors, commodity producers benefit to the extent
commodity prices are enhanced by increased demand. Annex 3, paragraph 7
of the URAA states, "Measures directed at agricultural processors shall
be included to the extent that such measures benefit the producers of
basic agricultural commodities." This suggests that payments under the
CCC Bioenergy Program could be viewed as an amber box subsidy to the
commodity on which the bioenergy producer received a payment.

With the possible exception of the Renewable Energy Systems and Energy
Efficiency Improvements Program, the programs authorized by the 2002
Farm Bill either meet the criteria of Paragraph 2 for general services
(green box) or would not be classified as agricultural programs. For
example, to the extent that the energy systems under the Renewable
Energy Systems and Energy Efficiency Improvements program help meet
environmental goals (cleaner water or air), the grants could be viewed
as environmental payments. Because the grants are limited to 25 percent
of the costs of a project, they would be consistent with Paragraph 12 of
the green box. But to the extent the program provides an interest
subsidy on farm production inputs, the loans and guarantees could be
viewed as an amber box input subsidy.

The 2002 Farm Bill permits harvesting biomass from land enrolled in the
CRP. With respect to this program, Paragraph 10 requires that enrolled
land must be removed from marketable agricultural production for a
minimum of three years to be considered a green box program. Whether
biomass is considered marketable agricultural production has not been
determined.

In addition to specific USDA initiatives, general incentives to
encourage bioenergy use have existed for many years. These incentives
were recently addressed in The American Jobs Creation Act of 2004 (Jobs
Act), which replaced the ethanol excise tax exemption with new tax
credits for blending ethanol or using ethanol directly. The Jobs Act
also initiated new tax credits for biodiesel. These new tax provisions
do not distinguish between domestic and imported bioenergy. Any subsidy
that is contingent upon domestic use of a product would be a violation
of WTO rules.

The U.S. has historically notified the (prior) excise tax exemption/tax
credit provisions as a subsidy (income tax concession) to the WTO
Committee on Subsidies and Countervailing Measures (SCM). In its most
recent notification in October 2003 for FY 2002, the U.S. notified the
annual tax revenue loss due to the tax provisions of \$1.07 billion in
FY 2002, and an annual revenue loss of \$30 million from the (prior)
small ethanol producer credit. No part of the subsidy has been notified
as an agricultural subsidy because the benefit goes directly to the
blender or producer of the ethanol. To receive the tax benefits, ethanol
and biodiesel must be made from renewable sources, but these are not
exclusively agricultural products, and the tax provisions do not specify
any particular agricultural product(s) be used to produce the biofuel
(with the exception of the additional incentive for agri-biodiesel).

EPACT established a renewable fuel standard (RFS) of 7.5 billion gallons
by 2012. Production of renewable fuel is allowed from such traditional
sources as corn and other crops or from plants, grasses, agricultural
residues and waste products. Imported and domestically produced biofuels
can be used to meet the mandate. There is no known precedent in the WTO
for notification of a *de facto* subsidy as a result of a mandated use
or consumption requirement, and the mandate itself has not been
questioned under the WTO rules.

**VI. Alternative Approaches to Enhancing Renewable Energy and Energy
Efficiency**

Afforable energy is essential for the American economy. This section
suggests two alternative approaches to expanding renewable energy
production and energy conservation. One approach is to expand the use of
direct government intervention to change market incentives. Direct
market approaches include the use of taxes, subsidies, or mandates on
energy market participants to change their behavior. The second approach
is to expand the use of indirect government support, such as research
and demonstration projects, technology transfer activities, access to
credit, outreach and education, and similar activities. These
alternative approaches are not being advocated by USDA. Each approach
has both advantages and disadvantages. They are offered for the purpose
of generating discussion and ideas for the 2007 Farm Bill.

In a competitive market, market prices usually provide the best stimulus
to meet consumer demand in the most cost-effective way. Oil selling for
\$75 per barrel in mid-2006 provides substantial incentives to develop
fossil and renewable energy supplies and conserve energy. Even so, there
is a strong economic rationale for increased government support for the
development of domestic alternative energy supplies. The rationale is
based on several benefits of increased use of renewable fuels that are
not reflected in the market price of renewable fuels. By not accounting
for these positive externalities, the market is "underpricing"
renewables and thus limiting their production. The rationale for
government support is to "monetize" the nonmarket benefits to augment
the market incentives. Care must be taken to create incentives that are
commensurate with expected external benefits, so as not to distort
markets. Key benefits of renewable energy that are not reflected in
price include:

-   **Environmental benefits.** Renewable energy provides a range of
    environmental benefits compared with fossil energy, including
    reduced emissions of toxic chemicals and greenhouse gases.

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-   **Energy security.** As described in the first section of this
    paper, DOE projects the United States will become increasingly
    dependent on oil imports in future years. Under this dependency, the
    United States is vulnerable to terrorism directed at foreign oil
    production, foreign political actions that withhold oil from the
    world market, and competition for limited global oil supplies from
    rapidly advancing developing countries. Sudden reductions in oil
    available to the United States would disrupt the U.S. economy
    imposing costs on U.S. citizens. Another cost not reflected in the
    price of oil is the U.S military and diplomatic costs of securing
    foreign oil supplies. A related cost of import dependency and the
    large import share of the United States is the "monopsony effect,"
    or an increase in the global oil price and U.S. oil costs caused by
    an increase in U.S. oil imports. Reducing oil import dependency
    would reduce these various costs imposed on the United States.

-   **The balance and exercise of geopolitical power.** As oil prices
    continue to set record highs, the resource value of oil exporting
    nations increases. The rising oil prices have increased the
    resources and leverage for some oil countries to pursue anti-U.S.
    interests. . Moreover, some oil exporting nations have weak free
    enterprise and democratic foundations, and record-high oil revenues
    have been used as justification for nationalizing energy resources
    and other anti-free enterprise actions. Increasing the supply of
    alternative energy to the point that it materially reduces U.S. oil
    imports and global oil prices would reduce the leverage and
    opportunity of global bad actors to pursue anti-free enterprise and
    undemocratic actions.

One cautionary note associated with increased biofuels production is
that without the adoption of appropriate conservation practices, there
is a potential for unintended adverse environmental impacts. For
example, corn production may expand into environmentally sensitive areas
and the excess removal of biomass for cellulosic ethanol production may
adversely affect soil quality.

Although the following alternatives address direct and indirect support
of renewable energy production, USDA will continue to emphasize energy
efficiency and conservation through existing natural resource
conservation programs. Items of interest in the 2007 Farm Bill
discussion include EQIP authorities for NRCS to cost share on energy
related activities including energy audits.

**Alternative 1: Expand Federal Direct Market Intervention to Support
Renewable Energy**

Many direct market incentives exist now. Some of these policy tools have
been created in legislation that is unrelated to a Farm Bill or to the
jurisdiction of the agriculture committees. It is unclear how expansive
energy provisions could be in the 2007 Farm Bill. Thus, this alternative
offers a range of ideas for public consideration, with the understanding
that jurisdiction for any suggestions requiring legislation may not be
the under the jurisdiction of the agriculture committees. Some of the
ideas listed here are currently under public discussion, and all
represent areas where USDA might be expected to have a role in design or
implementation. Thus, options that are unrelated to USDA are not
considered (such as oil taxes or CAFE standards).

Possible expansions of direct market intervention include:

-   **Raise the level of the Renewable Fuel Standard (RFS).** Because
    biofuel production currently exceeds the amount of renewable fuels
    required under the RFS, the standard is not expected to be binding
    and thus provides little incentive to produce additional biofuels.
    The RFS could be raised to provide a greater production incentive.
    The cellulosic requirement under the RFS could also be expanded and
    accelerated to begin before 2012.

-   **Extend renewable energy tax credits to 2015 or later.** With
    credits expiring in 2008 and 2010, this change would reduce
    investment uncertainty created by the current expiration dates.

-   **Reduce biofuel tax credits when they are not effective in
    increasing biofuel supply or are not needed.** This change
    would.avoid excessive use of credits and save Federal budget
    resources by making credits variable. Reductions could be
    accomplished a number of ways: limiting eligibility for credits to
    biofuel production in excess of the RFS, because the credits are not
    needed to ensure production up to the RFS level; linking the size of
    the credit to the price of oil, for example, the higher oil price,
    the lower the credit rate; or linking the credit to the cost of
    producing ethanol.

-   **Provide accelerated depreciation on renewable energy equipment and
    facility investment.** This preferential tax treatment could help
    spur new investment in specialized production, handling, and
    processing equipment and facilities for biopower, biofuels, and
    bioproducts. The preference could be expansive or limited, for
    example, only for facilities using biomass for cellulosic
    conversion, and it could be temporary.

-   **Provide a depreciation allowance on certain land.** Examples
    include lands on which high voltage transmission, wind or solar
    generation, geothermal generation, land fill gas, and coal field
    methane development occurs. This allowance could be considered
    similar to the oil industry depletion allowance and would help
    increase the return on investment. The depreciation allowance should
    reflect any economic loss in the value of land due to degradation,
    which in the case of some uses, may be minimal. Similarly, a
    depreciation or depletion allowance, or alternatively a conservation
    payment, could be considered for cropland used to produce biomass to
    help protect wildlife habitat and limit soil erosion.

-   **Use more land enrolled in the CRP for biomass harvesting and wind
    energy.** CRP land was used for pilot programs in the late 1990s,
    when farmers were allowed to harvest biomass for energy use with a
    reduced rental rate. The 2002 Farm Bill allowed the Secretary to
    permit the managed harvesting of biomass and the installation of
    wind turbines, consistent with the conservation of soil, water,
    water quality, and wildlife habitat.

-   **Refocus the CCC Bioenergy Program.** The CCC Bioenergy Program
    expires in 2006. With the RFS and tax credits, the program is no
    longer needed. However, the CCC Bioenergy program could be recast to
    support only cellulosic ethanol feedstocks, including dedicated
    energy crops or agricultural/forestry residues to be made into
    cellulosic ethanol. A larger program could support biomass used for
    bioproduct processing. Consideration could be given to simplifying
    the program to provide a payment rate per unit of output (such as
    per gallon), examining the issue of a payment limit per eligible
    entity, and terminating the program as cellulosic ethanol or
    bioproducts become commercially feasible.

**Economic Impacts.** The list of approaches under this alternative
would have a range of impacts. Expanding the RFS beyond the levels in
current legislation could increase biofuel production. That production
would likely come initially from corn, resulting in increased prices for
corn and higher farm income. However, depending on the size of the
increase in the RFS, there would likely be increased risk of tighter
commodity markets, especially if weather or unforeseen export demand
caused sharp corn price increases as was the case in 1996. Any resulting
price spikes could disrupt the livestock, poultry, and processed product
industries. Feedstock shortages could be addressed with a wavier of the
RFS, but the use of a waiver may reduce confidence in the ethanol
industry's ability to provide a reliable supply of biofuels.

Tax preferences, such as extended credits, accelerated depreciation, and
related allowances, would increase the return on investment in renewable
energy and thus increase its supply. A supply increase would be positive
for energy security, rural development, and producers of renewable
energy feedstocks. However, there are some concerns to consider. First,
tax preferences reduce Federal revenues and increase the budget deficit.
Second, using tax preferences to encourage production in a mandated
market, such as the RFS, may have little effect on production and result
in a transfer of income from taxpayers to biofuel consumers. Third, in
an environment of \$75 a barrel oil, tax preferences are not currently
needed to expand biofuel production. In light of these concerns, tax
preferences should be structured to ensure that they generate new
investment and are not excessive in relation to the price of oil and the
cost of producing renewable energy. Making credits variable based on oil
prices or biofuel costs could reduce taxpayer costs but would lessen
investment incentives in renewable energy when oil prices are high and
would likely be administratively complex.

Ethanol made from cellulosic feedstocks is viewed as potentially the
most cost-effective way to provide large-scale ethanol production
without creating commodity market shortages. Many groups have advocated
specific targets for renewable fuels in the future. For example, in his
State of the Union speech, President Bush stated the goal of replacing
more than 75 percent of U.S. oil imports from the Middle East by 2025.
His statement recognized that to achieve such a goal would require
breakthroughs in technology that enabled ethanol to be produced not only
form corn but from materials such as wood chips and switch grass.
Refocusing the CCC Bioenergy Program on cellulosic ethanol would avoid
subsidies where they would have limited effect and provide financial
assistance to an industry that is not yet commercial and has feedstock
production, handling, transportation, and processing barriers to
overcome to make it economically feasible.

**WTO Consistency.** The components of this alternative have mixed
implications for U.S. WTO obligations. Provided the RFS does not
discriminate against imported ethanol or biodiesel in favor of
domestically-produced biofuels, the RFS is not expected to be a WTO
issue. The various tax preferences suggested would not be agricultural
subsidies but would result in tax revenue changes that would be reported
to the WTO as general subsidies (income tax concessions). A CRP payment
made to a producer who is permitted to use CRP acreage for energy
production could raise issues as to whether such a payment is a green
box land retirement payment. However, if the CRP is viewed as an
environmental program under WTO criteria, such a payment could be a
green box payment, provided the CRP rental rate was reduced to reflect
the value of the biomass and any remaining CRP payment on that acreage
reflected compensation for the cost of environmental practices. The
current CCC Bioenergy Program could be viewed as amber box, and a
redefined CCC Bioenergy Program that made payments to biofuel or
bioproduct processors for production specifically from biomass risks
being viewed as amber box.

**Alternative 2: Expand Federal Indirect Support for Renewable Energy**

Indirect support for renewable energy would help overcome research and
technology barriers, problems with access to credit, increase public
awareness, and other measures that do not involve direct taxes,
subsidies, or mandates.

Possible expansions of indirect Federal support include:

-   **Expand agricultural support on the national research initiative
    for cellulosic ethanol.** Some have suggested that the public
    benefits of large-scale, cost-effective cellulosic ethanol
    production are so great that a major research and development
    initiative between the government and private sector is warranted.
    This effort would substantially build on existing programs and the
    President's Advanced Energy Initiative. It could focus on biological
    and engineering research that promotes the development of
    economically viable raw materials, processing technologies, and
    products. The effort would involve Federal research facilities,
    competitive grants, public-private partnerships, and
    Federal-supported demonstration projects.

-   **Expand creative financial engineering to support development of
    the biobased economy.** (See also the 2007 Farm Bill Theme Paper on
    Rural Development, Alternative 2.) Private sector firms engaged in
    development of the bioeconomy indicate the need for public sector
    support beyond grants, loans, and loan guarantees, such as some form
    of equity funding that could be leveraged with their own equity and
    debt financing. This funding is important when starting the first
    generation of commercial-scale demonstration or production plants
    using a technology without a proven record of commercial operation,
    such as cellulosic ethanol plants and biorefineries. Until the
    technology is proven economically and technically viable on a
    commercial scale, equity financing may be difficult to obtain, and
    debt financing alone is insufficient to launch most projects. A
    first step to developing new financing approaches is to evaluate the
    existing government development assistance programs to improve their
    effectiveness and recommend new financial products that could fill
    financing gaps. One financing mechanism to consider is to enable and
    assist Farm Credit System institutions and commercial banks to
    create investment subsidiaries to invest in non-farm rural
    businesses. Another idea is to provide insurance to a start-up
    bioenergy or bioproduct enterprises for specified losses through
    their first production cycle. Yet, another idea is to create a
    development program for new products and markets that provides data
    bases, forums for interaction between entrepreneurs and financing
    entities, and business start-up counseling.

-   **Fund development, demonstration, and pre-commercial activities
    that will bridge the gap between federally-funded basic research and
    industry-funded applied research and development.** This funding
    gap, the so-called "Valley of Death," often involves proving a
    concept at a sufficient scale to encourage full-scale production,
    which is necessary to attract private investment. One approach is
    public-private partnerships as exemplified by the Advanced
    Technology Program (ATP) of the National Institute of Standards and
    Technology. Another approach is to use Federal facilities (or
    develop joint public-private facilities) to establish the
    proof-of-concept. Such facilities would contain large-scale
    processing equipment and qualified personnel. Examples of existing
    public-sector facilities that could play such a role are the DOE
    Alternative Fuel User Facility in Golden, Colorado and the USDA
    Laboratory for Agricultural Utilization Research in Peoria,
    Illinois.

-   **Expand education and outreach for the bioeconomy.** Educating the
    public on the bioeconomy would facilitate the transition to greater
    use of biofuels and other bioproducts. There is still limited public
    understanding of economic, environmental, sustainable development,
    and energy security value of biofuels and other biobased products.
    Issues and benefits need to be better defined in consumer terms. An
    outreach and education program that expands beyond the current
    Biodiesel Education Program, with clearly defined and measurable
    goals could increase interest in renewable and biobased products and
    support new biomass products and applications. Integration into
    schools could help to stimulate support for future bioproducts as
    well as interest young people in careers in this area. The pool of
    trained people is limited in areas such as natural products
    chemistry and carbohydrate chemistry.

-   **Meet expected new demands for rural electric generation and
    transmission.** Demand for new electric power generation capacity is
    building, after many years of little or no new base load capacity
    being added. Substantial increases in loan guarantee authority are
    expected to be necessary to assure the required debt capital. While
    USDA loan guarantees typically are for 95-100 percent of the loan,
    consideration may be given to develop a more traditional loan
    guarantee program for private lenders and use partial loan
    guarantees or create a mechanism for lenders to bid for the level of
    guarantee they would require to provide financing. Loan guarantees
    and planning grants could be targeted to support the development of
    distributed generation facilities using biobased fuel, wind, solar,
    or geothermal resources. Often the distribution grid must be
    augmented to accommodate renewable or distributed generation power.
    Loan guarantee authority to support projects to upgrade the grid
    would help build renewable energy capacity. High voltage
    transmission capacity to move renewable energy from its source to
    demand locations is a serious constraint to renewable power
    development. Clarifying access rights and pricing for high voltage
    transmission could also be helpful in facilitating needed
    transmission development.

**Economic Impacts.** The essence of this alternative---research and
development, creative financing, and education---avoids direct
distortion of market incentives. These actions would reduce the risks
currently faced by potential investors in bioproduct technologies.
Commercialization of cellulosic ethanol has not yet begun; capital costs
and the conversion process costs for the initial facilities are high.
Several apparently effective technologies have been developed for
cellulosic ethanol and other bioproducts and appear only to require the
sufficient investment capital to become commercialized. Once these
industries become established, improved production efficiencies are
expected to reduce product cost, and along with that, the need for
continued government assistance.

While avoiding direct market intervention, these approaches still affect
market outcomes by reducing production costs through efficiency gains
and through credit subsidies. Because these approaches use Federal
support for specific technologies and firms, there is a risk that the
government will support activities that in the long run are not cost
effective. While having the government pick "winners" risks dissipating
taxpayer dollars, the government can support a portfolio of technologies
and firms to increase the probability of bringing an investment to
economic success. On the down side, this approach would likely raise the
costs of this alternative. All approaches require careful analysis of
the role of public support versus private market incentives.

An expanded national research initiative to provide large volumes of
cost-effective cellulosic ethanol would need to focus on a range of
economic and technological barriers. The National Academy of Sciences
(NAS) identified three priorities in biological research supporting a
biobased industry: (1) the genetics of plants and bacteria that lead to
an understanding of genes that control plant pathways and cellular
processes, (2) the physiology and biochemistry of plants and
microorganics directed toward improving bioconversion processes and
modification of plant metabolism, and (3) protein engineering methods to
allow the design of new biocatalysts and novel plant polymers. To
maximize economic efficiency in designing the Federal initiative and the
use of Federal labs, the government should try to ensure that it does
not support research that would otherwise be done by the private sector,
and that development and use of any facilities for precommercial work
should obtain a significant fraction of the needed funds from the
private sector.

If efforts to commercialize cellulosic ethanol and other bioproducts
succeed on a large scale, there is a potential for substantial changes
in the farm economy. A recent joint USDA and DOE study implied that to
generate a supply of biomass to achieve 30 percent replacement of U.S.
petroleum consumption by 2030 would require shifting of production to
biomass from current crops, cropland pasture, and the CRP. The effects
of a large-scale bioproduct industry are not well understood and further
economic analysis is needed to investigate the potential inter-commodity
affects. For example, there would be implications for the supply, types,
and prices of available animal feeds. Along with the engineering and
science research on feedstocks and processing, more information is
needed on land use and availability and on co-production systems,
including the use and availability of new protein feeds from biobased
products. There would also likely be widespread environmental effects.
Production of agricultural and forest feedstocks can have positive,
negative, or neutral consequences on wildlife, soil, air, and water
quality. These results depend on many factors, such as previous use of
land and crop management practices.

The suggestion that greater support should go to renewable electricity
projects and grid improvements to accommodate renewable energy is based
on the potential economic benefits of distributed electric power
generation. Distributed generation can more easily be scaled to local
demand, reducing the need for large scale base load generation
development. Distributed generation can also reduce the need for
developing new high voltage transmission lines.

**WTO Consistency.** Most of the ideas for discussion presented here
would not be considered agricultural subsidies, although the research
and development programs may be considered green box programs consistent
with paragraph 2, General Services, under Annex 2 of the URAA. The
various credit and financing suggestions (loans, loan guarantees, and
equity investments) for rural businesses would not be payments for using
specific agricultural products. These programs would not be viewed as
agricultural subsidies but as general subsidies, similar to the current
treatment of such programs.

**VII. Suggestions for Further Reading**

Baker,A., and S. Zahniser, \"Ethanol Reshapes the Corn Market\" Amber
Waves, April 2006.

Brinkman, M., M. Wang, T. Weber and T. Darlington, May, 2005.
Well-to-Wheels Analysis of Advanced Fuel/Vehicle Systems -- A North
American Study of Energy Use, Greenhouse Gas Emissions, and Criteria
Pollutant Emissions. U.S. Department of Energy, Argonne National
Laboratory, Transportation Technology R&D Center.
<http://www.transportation.anl.gov/pdfs/TA/339.pdf>

De La Torre Ugarte, H. Shapouri, M.E. Walsh and S.P. Slinsky, February,
2003. The Economic Impacts of Bioenergy Crop Production on U.S.
Agriculture. AER Report No. 816. U.S. Department of Agriculture, Office
of the Chief Economist, Office of Energy Policy and New Uses, Washington
, D.C.

Duffield, J.A., H. Shapouri, M. Graboski, R. McCormick and R. Wilson,
September, 1998. Biodiesel Development: New Markets for Conventional and
Genetically Modified Agricultural Products. AER Report No. 770. U.S.
Department of Agriculture, Economic Research Service, Washington D.C.

Gallager, P., M. Dikeman, J. Fritz, E. Wailes, W. Gauther and H.
Shapouri, March 2003.

Biomass From Crop Residues: Cost and Supply Estimates. AER Report No.
819. U.S. Department of Agriculture, Office of the Chief Economist,
Office of Energy Policy and New Uses, Washington D.C.

Gallager, P., and H. Shapouri, July, 2005. USDA's 2002 Ethanol
Cost-of-Production Survey.

AER Report No. 841. U.S. Department of Agriculture, Office of the Chief
Economist, Office of Energy Policy and New Uses, Washington D.C.

Gielecki, M., E. Mayes and L. Prete, 2001. Incentives, Mandates, and
Government Programs for

Promoting Renewable Energy. U.S. Department of Energy, Energy
Information Administration.
<http://www.eia.doe.gov/cneaf/solar.renewables/rea_issues/incent.html>

Fischer, J.R., J.A. Finnell and B.D. Lavoie, 2006. Renewable Energy in
Agriculture: Back to the Future. Biofuels: Developing New Energy Sources
from Agriculture, Guest Editor, J.A. Duffield, Choices, The Magazine of
Food, Farm, and Resource Issues, 1st Quarter 2006, pp 27-31.

McCloy, B.W. and D.V. O\'Connor. 1999. Wood-Ethanol Opportunities and
Barriers. Report prepared for Forest Sector Table.
<http://www.nccp.ca/NCCP/pdf/Wood_Ethanol_Report.pdf>

National Agricultural Statistics Service, July, 2005. Farm Production
Expenditures 2004 Summary. U.S. Department of Agriculture, NASS,
Washington D.C.
http://usda.mannlib.cornell.edu/usda/current/FarmProdEx/FarmProdEx-07-15-2005.pdf

Natural Resources Defense Council. Ethanol: Energy Well Spent \-- A
Survey of Studies Published Since 1990. February 2006.
<http://www.nrdc.org/air/transportation/ethanol/ethanol.pdf>

National Research Council, 2000. Biobased Industrial Products:
Priorities for Research and Commercialization. National Academy Press,
Washington D.C.

National Renewable Energy Laboratory. Ethanol: Separating Fact from
Fiction. DOE/GO-10099-736. April 1999.
<http://www.eere.energy.gov/afdc/pdfs/factfict.pdf>

North Carolina Solar Center, (2006). Data Base of State Incentives for
Renewable Energy. A Project of the North Carolina Solar Center and the
Interstate Renewable Energy Council.

[http://www.dsireusa.org](http://www.dsireusa.org/)

Outlaw, J., K.J. Collins and J.A. Duffield, 2005. Agriculture as a
Producer and Consumer of Energy. CABI Publishing, Cambridge, MA.

Perlack, R. D., L. L. Wright, A. F. Turhollow, R. L. Graham, B. J.
Stokes and D. C. Erbach. April, 2005. Biomass as Feedstock for a
Bioenergy and Bioproducts Industry: The Technical Feasibility of a
Billion-Ton Annual Supply. Oak Ridge National Laboratory.
DOE/GO-102005-2135. 59p.
<http://www1.eere.energy.gov/biomass/pdfs/final_billionton_vision_report2.pdf>

Vogel, S.J., K. Hanson, J.M. Price and G. Schluter, (2003). Putting
Bounds on Estimating Economywide Impacts from Adopting the Renewable
Fuels Standard. AgBioForum, 5(3), pp. 101-104.
<http://www.agbioforum.org/v5n3/v5n3a04-vogel.htm>

**Appendix Table 1. USDA Outlays for Biobased Products/Bioenergy
Programs**

<table>
<colgroup>
<col style="width: 35%" />
<col style="width: 10%" />
<col style="width: 10%" />
<col style="width: 1%" />
<col style="width: 8%" />
<col style="width: 1%" />
<col style="width: 8%" />
<col style="width: 1%" />
<col style="width: 8%" />
<col style="width: 1%" />
<col style="width: 10%" />
</colgroup>
<thead>
<tr class="header">
<th><strong>Biobased Products/Bioenergy Details</strong></th>
<th><strong>2001 Actual</strong></th>
<th colspan="2"><strong>2002 Actual</strong></th>
<th colspan="2"><strong>2003 Actual</strong></th>
<th colspan="2"><strong>2004 Actual</strong></th>
<th colspan="2"><strong>2005 Actual</strong></th>
<th><strong>2006 Est.</strong></th>
</tr>
<tr class="odd">
<th></th>
<th colspan="10"><strong>(1,000s of dollars)</strong></th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td colspan="11"><strong>Agricultural Research Service</strong></td>
</tr>
<tr class="even">
<td>Biobased Products</td>
<td>$41,480</td>
<td>$46,236</td>
<td colspan="2">$49,623</td>
<td colspan="2">$51,294</td>
<td colspan="2">$49,529</td>
<td colspan="2">$49,879</td>
</tr>
<tr class="odd">
<td>Bioenergy</td>
<td>6,867</td>
<td>17,475</td>
<td colspan="2">19,341</td>
<td colspan="2">19,820</td>
<td colspan="2">19,587</td>
<td colspan="2">20,052</td>
</tr>
<tr class="even">
<td>Federal Procurement of Biobased Products</td>
<td>506</td>
<td>506</td>
<td colspan="2">536</td>
<td colspan="2">591</td>
<td colspan="2">608</td>
<td colspan="2">627</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Total ARS</p>
</blockquote></td>
<td>48,853</td>
<td>64,217</td>
<td colspan="2">69,500</td>
<td colspan="2">71,705</td>
<td colspan="2">69,724</td>
<td colspan="2">70,558</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="odd">
<td><strong>Commodity Credit Corporation</strong></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td>Bionenergy Incentive Payments</td>
<td>40,684</td>
<td>78,744</td>
<td colspan="2">147,211</td>
<td colspan="2">149,440</td>
<td colspan="2">90,006</td>
<td colspan="2">60,000</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td colspan="11"><strong>Cooperative State Research, Education, and
Extension Service</strong></td>
</tr>
<tr class="odd">
<td>Biobased Products</td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Formula Programs</p>
</blockquote></td>
<td>4,012</td>
<td>4,047</td>
<td colspan="2">3,349</td>
<td colspan="2">3,152</td>
<td colspan="2">3,192</td>
<td colspan="2">3,202</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>National Research Initiative</p>
</blockquote></td>
<td>4,003</td>
<td>2,654</td>
<td colspan="2">4,985</td>
<td colspan="2">4,600</td>
<td colspan="2">6,601</td>
<td colspan="2">6,601</td>
</tr>
<tr class="even">
<td><blockquote>
<p>Special Research Grants</p>
</blockquote></td>
<td>4,217</td>
<td>5,484</td>
<td colspan="2">3,732</td>
<td colspan="2">3,607</td>
<td colspan="2">3,740</td>
<td colspan="2">3,731</td>
</tr>
<tr class="odd">
<td>Bioenergy</td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Formula Programs</p>
</blockquote></td>
<td>Above</td>
<td>Above</td>
<td colspan="2">366</td>
<td colspan="2">1,263</td>
<td colspan="2">1,261</td>
<td colspan="2">1,086</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>National Research Initiative</p>
</blockquote></td>
<td>Above</td>
<td>Above</td>
<td colspan="2">1,010</td>
<td colspan="2">4,097</td>
<td colspan="2">1,238</td>
<td colspan="2">1,238</td>
</tr>
<tr class="even">
<td><blockquote>
<p>Special Grants</p>
</blockquote></td>
<td>Above</td>
<td>Above</td>
<td colspan="2">1,539</td>
<td colspan="2">2,217</td>
<td colspan="2">2,212</td>
<td colspan="2">2,223</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Total, CSREES</p>
</blockquote></td>
<td>12,428</td>
<td>12,185</td>
<td colspan="2">14,981</td>
<td colspan="2">18,936</td>
<td colspan="2">18,244</td>
<td colspan="2">18,081</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="odd">
<td colspan="11"><strong>Forest Service</strong></td>
</tr>
<tr class="even">
<td>Biobased Products Research</td>
<td>12,000</td>
<td>12,000</td>
<td colspan="2">12,000</td>
<td colspan="2">12,000</td>
<td colspan="2">10,000</td>
<td colspan="2">10,000</td>
</tr>
<tr class="odd">
<td>Bioenergy Research</td>
<td>450</td>
<td>450</td>
<td colspan="2">450</td>
<td colspan="2">444</td>
<td colspan="2">2,450</td>
<td colspan="2">2,450</td>
</tr>
<tr class="even">
<td><blockquote>
<p>Total, FS Research</p>
</blockquote></td>
<td>12,450</td>
<td>12,450</td>
<td colspan="2">12,450</td>
<td colspan="2">12,444</td>
<td colspan="2">12,450</td>
<td colspan="2">12,450</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td colspan="11"><strong>Natural Resource Conservation
Service</strong></td>
</tr>
<tr class="odd">
<td>Conservation Operations</td>
<td>20</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="even">
<td>Forestry Incentives Program</td>
<td>6,311</td>
<td>6,811</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="odd">
<td>RC&amp;D Bioenergy Demonstration Projects</td>
<td>728</td>
<td>728</td>
<td colspan="2">723</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="even">
<td><p>Biomass R&amp;D</p>
<p>(Section 9008, Farm Bill)</p></td>
<td>0</td>
<td>5,000</td>
<td colspan="2">13,909</td>
<td colspan="2">13,525</td>
<td colspan="2">12,627</td>
<td colspan="2">11,650</td>
</tr>
<tr class="odd">
<td>CCC Section 11 Administrative Costs  Biomass R&amp;D</td>
<td></td>
<td></td>
<td colspan="2">200</td>
<td colspan="2">351</td>
<td colspan="2">350</td>
<td colspan="2">350</td>
</tr>
<tr class="even">
<td><blockquote>
<p>Total, NRCS 1/</p>
</blockquote></td>
<td>7,059</td>
<td>12,539</td>
<td colspan="2">14,832</td>
<td colspan="2">13,876</td>
<td colspan="2">12,977</td>
<td colspan="2">12,000</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td colspan="11"><strong>Office of the Chief Economist</strong></td>
</tr>
<tr class="odd">
<td>Biobased Products and Bioenergy</td>
<td>612</td>
<td>612</td>
<td colspan="2">630</td>
<td colspan="2">630</td>
<td colspan="2">635</td>
<td colspan="2">628</td>
</tr>
<tr class="even">
<td>Preferred Procurement and Labeling Program for Biobased
Products</td>
<td>0</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">1,540</td>
<td colspan="2">1,525</td>
</tr>
<tr class="odd">
<td>Federal Procurement of Biobased Products (Section 9002, Farm
Bill)</td>
<td>0</td>
<td>1,000</td>
<td colspan="2">1,000</td>
<td colspan="2">1,000</td>
<td colspan="2">1,000</td>
<td colspan="2">1,000</td>
</tr>
<tr class="even">
<td>Biodiesel Fuel Education Program (Section 9004, Farm Bill)</td>
<td>0</td>
<td>0</td>
<td colspan="2">1,000</td>
<td colspan="2">1,000</td>
<td colspan="2">1,000</td>
<td colspan="2">1,000</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Total, OCE</p>
</blockquote></td>
<td>612</td>
<td>1,612</td>
<td colspan="2">2,630</td>
<td colspan="2">2,630</td>
<td colspan="2">4,175</td>
<td colspan="2">4,153</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="odd">
<td colspan="11"><strong>Office of Procurement and Property
Management</strong></td>
</tr>
<tr class="even">
<td>Alternative Fuels and Preferred Products</td>
<td>65</td>
<td>67</td>
<td colspan="2">69</td>
<td colspan="2">69</td>
<td colspan="2">78</td>
<td colspan="2">78</td>
</tr>
<tr class="odd">
<td>Federal Procurement of Biobased Products</td>
<td>0</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">720</td>
<td colspan="2">187</td>
<td colspan="2">193</td>
</tr>
<tr class="even">
<td><blockquote>
<p>Total, OPPM</p>
</blockquote></td>
<td>65</td>
<td>67</td>
<td colspan="2">69</td>
<td colspan="2">789</td>
<td colspan="2">265</td>
<td colspan="2">271</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td colspan="11"><strong>Rural Development</strong></td>
</tr>
<tr class="odd">
<td>RCAP/DOE Matching Grant</td>
<td>0</td>
<td>2,820</td>
<td colspan="2">133</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="even">
<td>Value-Added Grants <u>2</u>/</td>
<td>0</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">500</td>
<td colspan="2">1,946</td>
<td colspan="2">2,500</td>
</tr>
<tr class="odd">
<td>Renewable Energy Programs: <u>3</u>/</td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Grants</p>
</blockquote></td>
<td>0</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">22,812</td>
<td colspan="2">22,238</td>
<td colspan="2">11,385</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Loans</p>
</blockquote></td>
<td>0</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">579</td>
<td colspan="2">11,385</td>
</tr>
<tr class="even">
<td>Renewable Energy Grants and Loans (Section 9006, Farm Bill)</td>
<td>0</td>
<td>0</td>
<td colspan="2">21,707</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="odd">
<td>Other RD grant programs</td>
<td>474</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="even">
<td>Other RD loan programs</td>
<td>1,550</td>
<td>0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Total, RD</p>
</blockquote></td>
<td>2,024</td>
<td>2,820</td>
<td colspan="2">21,840</td>
<td colspan="2">23,312</td>
<td colspan="2">24,763</td>
<td colspan="2">25,270</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="odd">
<td><strong>Total, USDA Biobased Products/Bioenergy</strong></td>
<td><strong>124,175</strong></td>
<td><strong>184,634</strong></td>
<td colspan="2"><strong>283,513</strong></td>
<td colspan="2"><strong>293,132</strong></td>
<td colspan="2"><strong>232,604</strong></td>
<td colspan="2"><strong>202,783</strong></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="odd">
<td><strong>Other Energy Related Programs</strong></td>
<td>57,237</td>
<td>31,298</td>
<td colspan="2">55,543</td>
<td colspan="2">68,867</td>
<td colspan="2">60,287</td>
<td colspan="2">69,048</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
</tr>
<tr class="odd">
<td><strong>Total Biobased Products, Bioenergy and Energy
Programs</strong></td>
<td><strong>181,412</strong></td>
<td><strong>215,932</strong></td>
<td colspan="2"><strong>339,056</strong></td>
<td colspan="2"><strong>361,999</strong></td>
<td colspan="2"><strong>292,891</strong></td>
<td colspan="2"><strong>271,831</strong></td>
</tr>
</tbody>
</table>

1/ In FY 2005, of the \$14 million authorized to NRCS for the Biomass
program, \$540,525 was obligated for grants. The remaining was committed
in FY 2005, and obligated in FY 2006.

2/ Only the portion of the program funding awarded for bioenergy is
shown.

3/ Loans and grants are made to all renewable energy and energy
efficiency projects.