![](media/image1.png){width="0.7305555555555555in" height="0.5in"}
**United States Department of Agriculture---2007 Farm Bill Theme
Papers**

**Energy and Agriculture**

**Executive Summary**

**August 2006**

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. This paper describes the current role of U.S. agriculture
in energy production and efforts to conserve energy use in agriculture,
discusses and evaluates current key energy programs administered by the
Department of Agriculture (USDA), and concludes with a discussion of
policy approaches to address issues associated with energy and
agriculture. The alternatives are not recommendations but are presented
for further discussion for the 2007 Farm Bill.

**Energy and U.S. Agriculture**

Agriculture is a major user of energy, with energy consumed directly and
indirectly, through production inputs such as fertilizer. 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 farm production expenses, accounting for 15 percent of total
cash expenses. For 2006, energy-related expenses are forecast to climb
to nearly \$30 billion, up 50 percent since 2003.

Agriculture also plays a growing role in meeting our Nation's demand for
energy. Agriculture and forest products have the potential to become
increasingly important sources of renewable energy and provide
significant economic opportunities for farmers and ranchers. In 2005, 4
billion gallons of ethanol and 91 million gallons of biodiesel were
produced. While these levels represent a small share of U.S. gasoline
and diesel use, research may provide technological breakthroughs that
lead to significant opportunities for expansion.

In addition to ethanol and biodiesel, biomass and animal wastes are
being 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. Animal waste
can be turned into methane gas through anaerobic digestion.

Another emerging approach to reducing U.S. fossil energy use is to
replace petroleum-based products with products made from biomass.
Agricultural feedstocks can be used to produce non-traditional products,
such as

chemicals, plastics, hydraulic fluids, and pharmaceuticals.

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 substantial new
investment.

In the longer term, demand for energy is expected to grow. The U.S.
Department of Energy forecasts that by 2030 energy consumption in the
U.S. will increase by over 30 percent from current levels, with the
growth in energy to meet the needs of the transportation sector forecast
to increase by over 40 percent. Therefore, the supply of renewable
energy, such as ethanol and biodiesel, must also grow simply to maintain
its current share of the overall energy market, and it must grow even
faster if it is to reduce fossil-energy dependence.

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

USDA's renewable energy and energy efficiency programs span the various
activities of the Department. During FY 2001-05, USDA spending on
biobased products, bioenergy and other energy-related programs totaled
\$1.4 billion. USDA spending in FY 2006 on these programs is estimated
at \$272 million.

**Research.** USDA's Agricultural Research Service conducts research on
renewable energy and the Cooperative State Research, Education,
Extension Service funds additional research. USDA's Forest Service also
actively participates in promoting development and use of biobased
products and bioenergy through research on enhancing opportunities to
use forest biomass to produce energy and other value-added products.
Forest Service research also works with science partners in
universities, industry, other Federal agencies, and forest landowners
and managers to addresses the issues of biomass management and
utilization. Research solicitations are also carried out jointly between
USDA and the Department of Energy under the Biomass Research and
Development Act of 2000.

**Financial and Technical Support.** USDA provides financial support to
encourage renewable energy production and the adoption of energy saving
practices. The Rural Development mission area is responsible for
implementing several renewable energy-related programs. For example, the
Renewable Energy Systems and Energy Efficiency Improvements 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 Natural Resources Conservation Service provides technical and
financial assistance to help farmers adopt energy-saving technology,
such as no-till planting; improved nutrient and pest management; and
improved application, timing, and placement of nitrogen fertilizer.

From December 2000 to June 2006, the Commodity Credit Corporation (CCC)
Bioenergy Program, administered by the Farm Service Agency, made cash
payments to bioenergy producers who increased their annual bioenergy
production from eligible agricultural commodities.

**Forestry.** The Forest Service 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. These efforts include providing energy
facility corridors, making lands available for energy mineral
development and production, developing renewable energy resources such
as woody biomass, wind, solar power, and geothermal energy, and
participating in the re-licensing of hydropower facilities on National
Forest lands.

**Information.** The Office of Energy Policy and New Uses administers
the USDA Certified Biobased Product Labeling Program, implements and
provides procurement information for the Federal Biobased Products
Preferred Procurement Program, and conducts the Biodiesel Education
Program (BEP). Under BEP, grants were awarded to educate the public, and
government and private entities that operate vehicle fleets on the
benefits of using biodiesel.

**Economic and Policy Issues for Energy and Energy Efficiency Programs**

Federal and State governments have helped create markets for renewable
energy through tax incentives and mandates. Ethanol production increased
over 120 percent between 2001 and 2005. Biodiesel production increased
nine-fold over that period. In addition, the Energy Policy Act (EPACT)
of 2005 mandates that 7.5 billion gallons of renewable fuels be used in
motor vehicles by 2012, guaranteeing a future demand for the renewable
fuels. Other factors contributing to the robust growth in renewable
fuels production since 2001 include high oil prices and the phase out of
MTBE. USDA programs also contributed positively to growth in ethanol and
biodiesel production.

Rural Development grants, loans, and loan guarantees 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 energy projects have been
funded during FY 2001 to FY 2005,

at a program level of \$356 million. In addition, matching and funding
by the private sector supporting these projects totaled another \$1.3
billion.

During the period USDA rural development programs supported 132 ethanol
and biodiesel, 130 wind, 22 solar, 4 geothermal, 2 hydrogen, and 11
hybrid projects; 92 anaerobic digesters and 7 landfill gas recovery
systems; 168 energy efficiency projects; and other projects including
solid fuel and research.

The Natural Resources and Conservation Service has helped farmers adopt
no-till practices on about 62 million acres of cropland, apply nutrient
management on 2.9 million acres and pest management on 3.5 million
acres, and provided technical and financial assistance to help producers
conserve energy use and produce energy using anaerobic digesters.

From December 2000 to March 2006, the CCC bioenergy program reimbursed
bioenergy producers \$537 million for 2.5 billion gallons of increased
ethanol production, 173.1 million gallons of biodiesel production. This
program terminates in 2006, and USDA has not supported extension,
arguing that market and other policy incentives are sufficient to
encourage expansion of biofuels.

While these programs have contributed to renewable energy production,
issues for consideration for the future include the level of funding
that should be allocated in a tight budget environment, the
effectiveness of the projects funded, the impacts of renewable
production on agricultural product output and use, and the role the
public sector should play in supporting or subsidizing markets and in
conducting research, particularly when market incentives are high. In
addition, program design must consider World Trade Organization
obligations. Most 2002 Farm Bill energy programs meet the green box
criteria for general services, would not be classified as agricultural
programs, or could be classified as environmental programs.

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

In a competitive market, market prices usually provide the best stimulus
to meet consumer demand in the most cost-effective way. 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. Key benefits of
greater use 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.

**Energy security**---Renewable energy can reduce the dependency on
imported oil, making the United States less vulnerable to sudden
reductions in oil availability that would disrupt the economy and impose
costs on U.S. citizens.

**The balance and exercise of geopolitical power**---Record-high oil
prices have increased the resource value of oil exporting nations. For
some, this increase has been an incentive to expand state control of
energy resources and to support positions that run against U.S.
interests. Greater use of renewable energy could lessen the impacts of
such activities on the United States.

Two alternative approaches are presented to expand 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. Each approach
has both advantages and disadvantages, discussed in the full theme
paper. They are offered for the purpose of generating discussion and
ideas for the 2007 Farm Bill. The options are not meant to be exhaustive
or to represent specific farm bill proposals.

**Alternative 1: *Expand Federal Direct Market Intervention to Support
Renewable Energy.*** Many direct market incentives exist now. 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 agriculture committees. These ideas
are also limited to areas where USDA would likely be involved in design
or implementation. Other ideas, beyond the scope of USDA (such as CAFE
standards, etc.) are not considered. Possible expansions of direct
market intervention include:

**Raise the level of the Renewable Fuel Standard (RFS).** Because
biofuel production now far exceeds the RFS, the RFS is not expected to
be binding and thus provides limited incentive to produce biofuels. The
RFS could be raised to provide a greater production incentive. The
cellulosic requirement under the RFS could also be expanded and
accelerated so as to begin before 2012.

**Extend renewable energy tax credits to 2015 or later.** This change
would apply to biofuels and wind energy credits, thereby reducing
investment uncertainty created by the current expiration date on the
credits.

**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. Such reductions could
be accomplished by limiting tax credit eligibility for biofuel
production in excess of the RFS, because the credits are not needed to
ensure production up to the RFS level. Also, the rate of the credits
could be linked to the price of oil---the higher the price of oil, the
lower the credit rate---or 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.

**Provide a depreciation allowance on certain land.** Examples of this
suggestion are 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. Cropland used to produce biomass could also be considered
for such an allowance, or a conservation payment, to help protect
wildlife habitat or limit soil erosion.

**Use more land enrolled in the Conservation Reserve Program (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 in Iowa, New York, Minnesota,
Pennsylvania, Oklahoma and Illinois. 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, which
directly subsidizes feedstocks for biofuel production, is expiring 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. The
program could be simplified to provide a per gallon payment rate,
consider a payment limit per eligible entity, and be terminated as
cellulosic ethanol becomes commercially feasible.

**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 the national cellulosic ethanol research initiative.** 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. Such an effort could involve a substantial increase in
biological and engineering research that promotes the development of
economically viable raw materials, processing technologies, and
products. The effort could involve Federal research facilities,
competitive grants, public-private partnerships, and Federally supported
demonstration projects.

**Expand creative financial engineering to support development of the
biobased economy.** 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 need
appears 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 has been proven at 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 public
sector development assistance programs to improve the effectiveness of
current programs and recommend new financial products that could fill
financing gaps. One financing mechanism to consider is to enable Farm
Credit System institutions and commercial banks to create investment
subsidiaries to invest in non-farm rural businesses. Other ideas would
be to provide insurance to a start-up enterprise for specified losses
through its first production cycle and 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.

**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. 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.

**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 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 demands are expected.
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 the
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.