**TESTIMONY OF BRIAN JENNINGS, EXECUTIVE VICE PRESIDENT**

**AMERICAN COALITION FOR ETHANOL (ACE)**

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**HEARING OF THE ENERGY AND NATURAL RESOURCES COMMITTEE**

**UNITED STATES SENATE**

**THE RENEWABLE FUELS STANDARD (RFS) IN H.R. 6, THE ENERGY INDEPENDENCE
AND SECURITY ACT OF 2007**

**ENERGY MARKET EFFECTS AND IMPLEMENTATION ISSUES**

**FEBRUARY 7, 2008**

Thank you Chairman Bingaman, Ranking Member Domenici, and Members of the
Committee. My name is Brian Jennings and I am Executive Vice President
of the American Coalition for Ethanol (ACE). ACE is the largest
organization in the U.S., uniting businesses, organizations and
individuals that support ethanol production and use. Nearly 1600 ethanol
producers, prospective ethanol producers, commodity and farm
organizations, farmers and ranchers, investors, and businesses that
supply goods and services to the U.S. ethanol industry comprise the
grassroots membership of ACE.

I am honored with this opportunity to address the committee today on an
issue of critical significance to the U.S. biofuels industry:
implementing the new renewable fuels standard (RFS) provisions of H.R.
6, the Energy Independence and Security Act (EISA) of 2007 (P.L.
110-140). The RFS program set forth in the bill is historic and should
help catalyze dramatic growth in the U.S. biofuels industry in general
and the cellulosic biofuels industry in particular.

ACE is grateful for the leadership of Senators Bingaman and Domenici and
their staffs in 2007 to establish a new, more ambitious RFS schedule.
The course you charted in writing, introducing, and approving the Senate
RFS of 36 billion gallons by 2022 in June of last year established the
framework that was eventually included in the EISA 2007. Enactment of
this bill may be the most profoundly important shift toward renewable
fuels and away from our risky and expensive reliance on fossil fuels
ever taken in the U.S.

The passage of the original RFS as part of the Energy Policy Act of 2005
helped to propel the ethanol industry to extraordinary growth. At the
conclusion of 2007, 137 plants were in operation in the U.S. producing
more than 6.5 billion gallons of ethanol, far exceeding the 4.7 bgy
expected last year from the original RFS. Moreover, ethanol is now
blended with more than one-half of the nation's fuel supply. EISA 2007
amended and increased the RFS, requiring 9 billion gallons of renewable
fuel use in 2008, stepping up to 36 billion gallons by 2022.

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Under the modified RFS, corn-based ethanol (conventional biofuel) is
capped at 15 billion gallons by 2015 (approximately 5 billion bushels of
corn for ethanol), while 21 of the 36 billion gallons in 2022 must be
derived from advanced biofuel such as cellulosic and non-corn-based
ethanol. This ambitious 36 bgy RFS will unleash the promise of ethanol
as the principal alternative to gasoline in the U.S. and provide the
nation with a stable supply of clean-burning, homegrown, renewable fuel
for years to come.

**[Implications of EISA of 2007]{.underline}**

According to the National Commission on Energy Policy, the combination
of the new RFS schedule and landmark corporate average fuel economy
(CAFE) requirements in EISA 2007 will achieve numerous economic and
environmental benefits:

-   Reduction of transfer of wealth abroad of \$73 billion per year in
    2020 and \$129 billion in 2030, using current prices (\$90 per
    barrel oil, \$3 per gallon gasoline)

-   Reduction in U.S. oil use of 2.8 million barrels a day by 2020, and
    5 mbd by 2030.

-   U.S. consumer fuel savings of \$71 billion per year in 2020, and
    \$161 billion in 2030, using approximate current prices.

-   Reduction in U.S. CO2 emissions by 320 million metric tons in 2020,
    and 675 mmt in 2030.

-   Reduction in passenger vehicle emissions by 15 and 30 percent,
    respectively, under what they otherwise would be. 

-   Reduction in 2020 of approximately 4 percent of projected total net
    U.S. CO2 emissions versus what they would otherwise be.

Numerous additional positive effects will result from the 36 bgy RFS in
EISA 2007. It will attract additional investment in the production of
corn-based ethanol. Furthermore, it will drive private and public
research entities and entrepreneurs to partner and rapidly scale-up
cellulosic ethanol production technologies. And finally, it will give
confidence to the petroleum industry that ethanol will be a more
consequential component of the U.S. fuel supply, encouraging terminal
operators and others to make the infrastructure investments to off-load,
store and blend more ethanol. These infrastructure investments will
compliment the progress already made by petroleum marketers due to
ethanol's recent favorable blending economics, which have made it
profitable for petroleum marketers to make infrastructure investments
for storing and distributing ethanol.

Since the new RFS was enacted we have reviewed it thoroughly and
compared its requirements with the on-the-ground practical reality of
producing biofuels to meet its goals. The timing of today's hearing is
pivotal because EPA is beginning to consider how it will implement the
RFS, and this hearing will help inform that process.

There are a few provisions in the final bill that merit scrutiny, as
they may inadvertently undermine efforts of the industry to meet the new
RFS schedule. I wanted to take this opportunity to address one
significant issue that we have identified which, unless addressed, will
make it nearly impossible to achieve the full economic and environmental
potential of this new biofuels program: concerns about penalizing
corn-based ethanol for so-called "indirect land use changes" during
implementation of the lifecycle analysis (LCA) provisions of the RFS.
Following a comprehensive discussion of this primary concern, I will
also note other issues of importance to ACE members.

**[Lifecycle Analysis of Greenhouse Gas Emissions -- Indirect Land Use
Changes]{.underline}**

The new RFS schedule provides various carve-outs for renewable fuels
based on their ability to reduce lifecycle greenhouse gas (GHG)
emissions:

[Conventional Biofuel]{.underline} -- is ethanol from corn starch, and
conventional ethanol facilities that commence construction after the
date of enactment of EISA 2007 must achieve a 20 percent reduction in
lifecycle GHG emissions compared to gasoline.

[Advanced Biofuel]{.underline} -- is renewable fuel (other than from
corn starch) from biomass that reduces GHG emissions by 50 percent
compared to gasoline. Cellulosic ethanol and biomass-based diesel
qualify as advanced biofuel under the RFS.

[Cellulosic Biofuel]{.underline} -- is renewable fuel derived from
cellulose, hemicellulose, and lignin, and achieves a 60 percent
reduction in GHG emissions compared to gasoline.

We are concerned that the definition of lifecycle GHG emissions in the
bill may be construed by EPA in a manner that unfairly penalizes
domestic grain-based ethanol, based on dubious linkages made to land
clearing and agricultural practices in developing countries. There is a
growing effort on the part of some interests, including EPA, to argue
that the use of grain in the U.S. to produce ethanol is contributing to
land use changes in developing countries and that the resulting GHG
emissions should be counted against ethanol in determining its lifecycle
emissions.

The theory behind this indirect land use link goes as follows: First, a
flawed presumption is made that the rise in U.S. corn prices is caused
*entirely* by the demand for corn-based ethanol. Then, it is assumed
that increased demand for corn in the U.S. is causing previously
uncultivated land in developing nations, for instance rainforest in
Brazil, to be cleared for agricultural production. This is referred to
as an "indirect land use change." It calculates the GHG emissions
resulting from indirect land clearing and then assigns those estimated
emissions to the LCA of corn-based ethanol in the U.S. There is no
logical cause and effect relationship between these events. Moreover, it
is inappropriate and impractical to use indirect land use changes to
penalize grain-based ethanol in favor of other forms of biofuel. The
purpose of EISA 2007 is to substantially reduce our risky and expensive
reliance on petroleum and fossil fuel, not to drive a wedge between
various beneficial forms of biofuel. Today, corn-based ethanol is the
most important alternative available to accomplish the objective of the
legislation. In the future, advanced and cellulosic biofuel will make
more dramatic reductions in GHGs. But in the final analysis, our
nation's effort to reduce petroleum use and GHG emissions will require
both grain and cellulosic based biofuels.

We recognize that in order to conduct a thorough LCA of GHG emissions
from biofuel crops, *direct* land use changes may be considered.
Market-driven factors which signal U.S. farmers to devote more acres to
corn for ethanol and away from other crops are referred to as direct
land use changes. While these direct land use changes may be calculated
in LCA, it needs to be noted that corn and other biofuel crops reduce,
recycle, and reuse GHGs as those crops grow.

The Greenhouse gases, Regulated Emissions, and Energy use in
Transportation (GREET) model developed by Dr. Wang of the U.S.
Department of Energy, Argonne National Laboratory, establishes an
objective and reliable framework for comparing the lifecycle GHG
emissions from various fuels and feedstocks. GREET examines direct land
use changes, and recognizes that biofuel feedstock crops such as corn
recycle carbon emissions. On a per-gallon basis, GREET indicates that
dry-mill corn-based ethanol (from natural gas powered facilities)
reduces GHG emissions by 18 to 29 percent over gasoline. It is estimated
that biomass-fired dry-mill corn-based ethanol facilities can reduce GHG
emissions by as much as 54 percent compared to gasoline. According to
GREET, cellulosic ethanol can reduce GHG emissions by as much as 90
percent.

We recognize other models that can be used to analyze LCA GHG emissions
of various fuels, but if EPA were to apply arbitrary indirect land use
modeling and penalize grain-based ethanol in the RFS rulemaking, ACE
will work to oppose the rule and encourage Congress to provide a common
sense remedy. Further, ACE is going on record today to state it will
vigorously work to oppose any proposed Low Carbon Fuels Standard (LCFS)
legislation that attempts to use indirect land use changes in foreign
countries in determining the LCA GHG emissions of grain-based ethanol.

We strongly oppose the application of indirect land use changes as the
basis for determining GHG emissions for domestic, grain-based ethanol
because that method has many shortcomings.

First, land clearing has been going on in developing countries for
centuries, driven by population growth and the economic aspirations of
farmers and consumers living in those countries. Land clearing occurred
long before biofuels were a meaningful part of the energy supply.

Today, agricultural markets are affected by global factors, and land use
changes continue as a result of a wide variety of reasons, including but
not limited to:

-   Global economic growth - especially in nations such as China and
    India where citizens are acquiring wealth and desiring the lifestyle
    of Americans, eating more protein, and demanding higher quality
    foods;

-   Population growth;

-   Internal land use and land tenure policies; and

-   Weather factors

According to the Food and Agricultural Policy Research Institute
(FAPRI), the main factor driving crop prices (and as a result land use)
in any given year is weather. This is perhaps most clear today in the
recent case of wheat, where poor weather reduced yields in Europe,
Australia, and North America, caused world wheat prices to rise, and
resulted in great interest around the world to increase planted acreage
for wheat. Given all these factors that affect crop markets and land use
decisions, to base the GHG emissions of a fuel derived from a crop such
as corn upon volatile global economics and weather conditions is
bizarre, unworkable, and unfair. It is impossible to link with
confidence land clearing in any particular country to the use of grain
in the U.S. to produce ethanol.

Furthermore, ascribing GHG emissions from land clearing in developing
countries to biofuels production in the U.S. would hold the domestic
ethanol industry to a uniquely punitive standard, one that no other U.S.
industry would face under a national cap and trade program to limit GHG
emissions. Under existing cap and trade proposals pending in Congress,
including those introduced by Senators Bingaman and Specter and Senators
Lieberman and Warner, certain U.S industries such as oil companies will
be responsible for obtaining permits for the fossil fuels that they
introduce into commerce. Users of fossil fuels and products derived from
the use of fossil fuels will be indirectly affected by such regulation
as costs for those fossil fuels increases in response to annual
rationing of carbon credits under the cap. In no case would a U.S.
industry be responsible for indirect effects of its activities on GHG
emissions in other nations.

In a global economy, virtually all economic activity in the U.S. will
have direct and indirect economic and environmental impacts around the
world. Thus, to consistently apply the principle that U.S. entities
should be accountable for GHGs emitted in foreign countries, one would
need to hold U.S. businesses and individual consumers responsible for
all direct and indirect GHG emissions from foreign factories used to
produce the goods consumed in the U.S., because those businesses or
individuals create the market demand that leads to the foreign economic
activity. Similarly, we would need to demand that foreign nations that
import grain and other commodities from the U.S. be responsible for our
domestic emissions generated in the cultivation or manufacture of those
goods. This makes no sense.

In summary, ascribing indirect effects associated with land clearing in
foreign countries not only singles out the U.S. biofuels industry for
uniquely unfair treatment, it establishes an unworkable precedent for
regulation of other U.S. industries under future GHG control programs.
The consideration of land use effects in LCA of GHGs should be limited
to domestic direct impacts associated with growing grains for ethanol
production. ACE hopes that the committee will clarify in a technical
corrections bill that the calculation of lifecycle GHG emissions is
limited to domestic impacts.

**[Opportunities for Mid-level Blends of Ethanol]{.underline}**

Enactment of EISA 2007 with an ambitious new RFS guarantees that ethanol
will comprise more than 10 percent of the U.S. fuel supply, creating
opportunities for new blends of ethanol beyond those available to
motorists today; E10 and E85.

To further the probability of new mid-level blends such as E15, E20, or
E30, ACE and the U.S. Department of Energy cosponsored an Optimal
Ethanol Blend Level Investigation, conducted by the Energy and
Environment Research Center of the University of North Dakota in
conjunction with the Minnesota Center for Automotive Research of
Minnesota State University-Mankato. We released the findings of this
scientific study in this very committee hearing room on December 5,
2007, with the assistance of Senators Dorgan and Thune, Assistant
Secretary Karsner of the Department of Energy, Undersecretary Dorr of
the Department of Agriculture, and key environmental and consumer
advocates.

The purpose of the scientific investigation was to utilize EPA and
automaker test procedures to identify if mid-level blends of ethanol
could have a beneficial application in standard autos. The research
indicates that we haven't begun to recognize the value of ethanol --- in
energy conservation and environmental terms. If the U.S. were to be able
to use 20 or 30 percent ethanol, it would result in an extraordinary
reduction in our reliance on fossil fuels and dramatically extend the
nation's fuel supply.

The investigation revealed unprecedented data that E20 and E30 blends
can provide better fuel economy than regular gasoline (even in standard,
non-flex-fuel cars), with fewer harmful tailpipe emissions. That
shatters the myth about ethanol's fuel economy "penalty" that has been
based solely on the energy content of ethanol.

Even though this was a preliminary study we are encouraged that
intermediate blends of ethanol could have positive implications for fuel
efficiency, cleaner air, and energy security. ACE intends for our study
to provide a catalyst for further analysis and research to support our
results. Already, this additional research is underway with E20 in the
State of Minnesota, providing further support to our findings and effort
to make these blends a reality. Approving the use of blends such as E20
and E30 will be a top priority for ACE in the future, and we look
forward to working with Members of the Committee on creating a pathway
for the approval of these blends.

One way to help ensure the availability of mid-level blends of ethanol,
is to guarantee the rapid implementation and funding of Title II,
Section 244 of EISA 2007, which creates a new grant program within the
Department of Energy to assist petroleum marketers by installing
"blender pumps" that enable consumers to choose to fill up on blends
such as E20 or E30. We encourage the committee to help ensure this
program is implemented and funded.

**[Other Issues of Concern and Conclusion]{.underline}**

Another significant issue that I would like to raise is the need to
provide incentives for the corn ethanol industry to become more
efficient in terms of lifecycle GHG emissions in the future. Technology
innovations are driving the future of the U.S. ethanol industry. Corn
ethanol plants are becoming more efficient in their use of energy and
water, in many cases cutting use of these inputs by half compared with
rates only a few years ago. And there are dozens of new companies in the
process of commercializing technology to convert a range of cellulosic
feedstocks to ethanol and other cutting-edge biofuels. In the original
Senate-passed version of the new RFS program, there was a 1.5 credit for
every gallon of ethanol produced from plants that used at least ninety
less fossil fuel inputs than conventional plants. That provision
provided important encouragement to the ethanol industry to continue to
seek innovative ways to reduce fossil fuel inputs and GHG emissions
associated with those fuels. ACE recognizes the need for ethanol plants
to become as efficient as possible in the coming years with respect to
the use of both energy and water and we are proud of the work being
undertaken currently to the develop technical advances necessary to
achieve those goals. We hope that the committee would consider restoring
this provision in a technical corrections bill.

Finally, we are concerned that the discretion granted to EPA in
implementing the advanced biofuels portion of the RFS could be used
liberally by the agency, thus undermining the achievement of the program
milestones set by Congress. Inappropriate use of the waiver authority by
the agency could create future market uncertainty and hinder efforts by
this emerging segment of the industry to gain access to needed capital
investment.

In conclusion, I would like once again to express my profound thanks to
Senators Bingaman and Domenici and your staffs for your work to design
and enact the new RFS. Thank you also for the opportunity to offer our
views today, and, on behalf of the members of ACE, I commend your
leadership on ethanol issues. This historic program has the potential to
revolutionize the American biofuels industry, help reduce our dependence
on foreign oil and dramatically reduce emissions of greenhouse gases
from transportation sector. I look forward to your questions.

Thank you.