CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

S T U D Y

JULY 2010

Using Biofuel 

Tax Credits to 

Achieve Energy and 

Environmental 

Policy Goals

CBO
Pub. No. 4044
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Using Biofuel Tax Credits to 

Achieve Energy and 

Environmental Policy Goals

July 2010
CBO

Notes

Unless otherwise indicated, all years referred to are calendar years.

Numbers in the text and tables may not add up to totals because of rounding.

Cover photos by Scott Bauer (top), courtesy of U.S. Department of Agriculture, and Maureen 

Costantino (bottom). 
Preface

CBO

The federal government supports the use of biofuels—transportation fuels produced 

mainly from renewable plant matter, such as corn—in the pursuit of national energy, environmental, and agricultural policy goals. Tax credits encourage the production and sale of biofuels in the United States, effectively lowering the private costs of producing biofuels, such as 

ethanol or biodiesel, relative to the costs of producing their substitutes—gasoline and diesel 

fuel. In addition, federal mandates require the use of specified minimum amounts and types 

of biofuel each year through 2022. Together, the credits and mandates increase domestic supplies of energy and reduce U.S. emissions of greenhouse gases, albeit at a cost to taxpayers.

This Congressional Budget Office (CBO) study, which was prepared at the request of the 

Chairman of the Subcommittee on Energy, Natural Resources, and Infrastructure of the Senate Committee on Finance, assesses the incentives provided by the biofuel tax credits for producing different types of biofuels and analyzes whether they favor one type of biofuel over 

others. In addition, the study estimates the cost to U.S. taxpayers of reducing the use of petroleum fuels and emissions of greenhouse gases through those tax credits; it also analyzes the 

interaction of the credits and the biofuel mandates. In keeping with CBO’s mandate to provide objective, impartial analysis, the study contains no recommendations.

The report was written by Ron Gecan of CBO’s Microeconomic Studies Division and 

Rob Johansson, formerly of CBO, under the guidance of Joseph Kile and David Moore. 

Amy Petz and Zachary Epstein provided information about, respectively, the tax treatment of 

biofuel production, use, and sales, and biofuel-related forgone revenues and tariff collections. 

Paul Burnham, Terry Dinan, Mark Hadley, Dave Hull, Chayim Rosito, Frank Sammartino, 

Robert Shackleton, and Jennifer Smith, all of CBO, offered helpful comments, as did 

Joseph Cooper and William Coyle of the U.S. Department of Agriculture, Harry de Gorter 

of Cornell University, Jason Hill of the University of Minnesota, Gilbert Metcalf of Tufts 

University, and Brent Yacobucci of the Congressional Research Service. (The assistance of 

external reviewers implies no responsibility for the final product, which rests solely with 

CBO.)
CBO

PREFACE

Leah Mazade edited the study, and Kate Kelly proofread it. Maureen Costantino designed 

the cover and, with the assistance of Jeanine Rees, prepared the report for publication. 

Monte Ruffin printed the initial copies, Linda Schimmel handled the print distribution, and 

Simone Thomas prepared the electronic version for CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

July 2010
Contents

CBO

Summary vii

Introduction 1

Tax Credits 3

Mandates 4

Biofuel Tax Credits and Energy Policy Goals 5

Incentives for Producers of Biofuels 6

Costs to Taxpayers of Reducing the Use of Petroleum Fuels 7

Biofuel Tax Credits and Environmental Policy Goals 10

Effects on Greenhouse Gas Emissions When Land Use Does Not Change 12

Greenhouse Gas Emissions When Land Use Does Change 15

The Interaction of Tax Credits and Mandates 18

Figures

1. Historical Biofuel Consumption and Mandates for Future 

Biofuel Use, 1981 to 2022 4

2. Life-Cycle Greenhouse Gas Emissions for Petroleum Fuels and Biofuels 12

Tables

1. Federal Tax Credits for Ethanol and Biodiesel 2

2. The Supply of Biofuels in the United States 6

3. Production Incentives for Increasing Liquid Fuel Supplies 8

4. Cost to Taxpayers of Displacing Petroleum Fuels Through Use of the 

Federal Biofuel Tax Credits 11

5. Cost to Taxpayers of Reducing Greenhouse Gas Emissions Through 

Use of the Federal Biofuel Tax Credits 14

6. The Time Required for Biofuel Use to Lower Emissions When 

Changes in Land Use Occur 16

CBO

Summary

Proponents of federal support for biofuels, which are 

transportation fuels produced mainly from renewable 

plant matter, offer several rationales for that support. 

First, biofuels may help the nation meet energy policy 

goals by increasing the domestic production of fuels for 

transportation and reducing the United States’ dependence on fossil fuels, such as oil. Second, biofuels may 

contribute to meeting environmental policy objectives, 

such as the reduction of greenhouse gas emissions. Third, 

federal support for biofuels can increase incomes in the 

agricultural sector.

The federal government began providing tax credits for 

various biofuels in the 1970s; in addition, laws enacted in 

recent years have required producers or blenders of transportation fuels to incorporate specified minimum annual 

amounts of biofuels—amounts that rise over time—into 

the fuels that they sell. Different types of biofuels have 

been granted different tax credits, ranging from 45 cents 

per gallon to approximately one dollar per gallon. Those 

differing credits raise questions about whether federal 

policy provides equal incentives for producing different 

kinds of biofuels and imposes equal costs on taxpayers for 

achieving certain energy or environmental policy goals. 

Roughly 11 billion gallons of biofuels were produced and 

sold in the United States in 2009, and ethanol produced 

from corn accounted for nearly all (about 10.8 billion 

gallons) of that total. Blenders of transportation fuels 

receive a tax credit of 45 cents for each gallon of ethanol 

(regardless of the feedstock, or raw material) that is combined with gasoline and sold. Although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to the farmers who grow the corn—in 

the form of higher prices received for their products.

Most of the rest of the biofuel sold in the United States 

consists of biodiesel, which is made largely from soybean 

oil but is also produced from animal fats, recycled plant 

oils, and other feedstocks. Until recently, the producers of 

biodiesel made from new oils or animal fats received a tax 

credit of one dollar per gallon. Although that credit 

expired in December 2009, the Congressional Budget 

Office (CBO) included it in the analysis to provide information about the value of the credit should policymakers, 

as they have at other times, decide to reinstate it. 

In the future, cellulosic ethanol could account for a significant share of domestic production of biofuels. Cellulosic ethanol is made from plant wastes, such as corn stover (basically the leaves and stalks of corn plants) or 

woodchips, or from crops grown specifically for fuel production, such as switchgrass (a tall North American grass 

used for hay and forage). Its producers are eligible for a 

tax credit of $1.01 per gallon if it is produced and 

blended with gasoline; even with that credit, however, 

cellulosic ethanol is not viable commercially today and is 

produced in very limited quantities. 

In fiscal year 2009, the biofuel tax credits reduced federal 

excise tax collections by about $6 billion below what they 

would have been if the credits had not been in effect. 

This CBO study assesses the credits’ contributions to 

achieving energy and environmental goals in the light of 

those forgone revenues; it does not consider any impact 

on farm incomes or the agricultural sector more broadly. 

The analysis focuses specifically on the differential effects 

of the various credits in achieving two objectives: displacing the use of petroleum fuel and reducing greenhouse 

gas emissions. 
VIII USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

CBO’s main conclusions are the following: 

B The incentives that the tax credits provide to producers of biofuels differ among the fuels. After adjustments for the different energy contents of the various 

biofuels and the petroleum fuel used to produce them, 

producers of ethanol made from corn receive 73 cents 

to provide an amount of biofuel with the energy 

equivalent to that in one gallon of gasoline. On a similar basis, producers of cellulosic ethanol receive 

$1.62, and producers of biodiesel receive $1.08. 

B The costs to taxpayers of reducing consumption of 

petroleum fuels differ by biofuel. Such costs depend 

on the size of the tax credit for each fuel, the changes 

in federal revenues that result from the difference in 

the excise taxes collected on sales of gasoline and biofuels, and the amount of biofuels that would have 

been produced if the credits had not been available. 

The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol 

made from corn and $3.00 for cellulosic ethanol. The 

cost of reducing an equivalent amount of diesel fuel 

(that is, a quantity having the same amount of energy 

as a gallon of gasoline) using biodiesel is $2.55, based 

on the tax policy in place through last year.

B Similarly, the costs to taxpayers of reducing greenhouse gas emissions through the biofuel tax credits 

vary by fuel: about $750 per metric ton of CO2e (that 

is, per metric ton of greenhouse gases measured in 

terms of an equivalent amount of carbon dioxide) for 

ethanol, about $275 per metric ton of CO2e for cellulosic ethanol, and about $300 per metric ton of CO2e 

for biodiesel. Those estimates do not reflect any emissions of carbon dioxide that occur when the production of biofuels causes forests or grasslands to be 

converted to farmland for growing the fuels’ feedstocks. If those emissions were taken into account, 

such changes in land use would raise the cost of reducing emissions and change the relative costs of reducing 

emissions through the use of different biofuels—in 

some cases, by a substantial amount. 

Federal biofuel mandates require vendors of motor fuels 

to produce or blend specified minimum volumes of the 

different fuels with gasoline and diesel fuel; the annual 

targets are scheduled to rise through 2022. In the past, 

those requirements have not directly increased the quantity of biofuels sold in the United States because the combination of underlying economic conditions and the biofuel tax credits has caused the use of biofuels to exceed 

the mandated quantities. However, the mandates probably provided producers with some degree of confidence 

that a market for those fuels would exist, thereby encouraging investment in the facilities needed to produce 

them. In the future, the scheduled rise in mandated volumes would require the production of biofuels in 

amounts that are probably beyond what the market 

would produce even if the effects of the tax credits were 

included. To the extent that the mandates determine levels of production in the future, the biofuel tax credits 

would no longer be increasing production, but they 

would still be reducing the costs borne by producers and 

consumers of biofuels and shifting some of those costs to 

taxpayers.
CBO

Using Biofuel Tax Credits to 

Achieve Energy and 

Environmental Policy Goals

Introduction

Since the 1970s, policymakers have used tax credits and 

other tools to promote the production and consumption 

of biofuels—transportation fuels produced mainly from 

renewable plant matter—in pursuit of a variety of policy 

objectives. That support has generally been attributed to 

three factors: First, the use of such fuels lessens the 

nation’s reliance on imported fuel because almost all biofuels are currently produced domestically; second, the use 

of biofuels addresses environmental policy goals, such as 

reducing greenhouse gas emissions; and third, such use 

bolsters incomes in the agricultural sector. Some of those 

policy objectives have shifted in their nature or importance over time. For example, one early environmental 

rationale for promoting biofuels was that ethanol could 

be used to reduce emissions of carbon monoxide. Today, 

concern about those emissions has largely been supplanted by a focus on emissions of carbon dioxide and 

other greenhouse gases.

The energy and environmental goals that policymakers 

have sought to address through support for biofuels are 

related to the costs that the use of petroleum imposes on 

society. Researchers frequently conclude that the costs 

that individuals incur in consuming petroleum and other 

fossil fuels do not reflect the costs they impose on others. 

Those social costs arise from emissions of greenhouse 

gases that are the result of both producing and burning 

fossil fuels; from potentially detrimental effects on 

national security because of continued reliance on foreign 

producers of oil that are, in some cases, hostile to the 

United States; and from other sources.1

Federal support for biofuels consists mainly of tax credits 

for the production and use of certain types of such fuels. 

Most of that support goes to ethanol made from corn and 

blended with gasoline and to biodiesel made from soybeans or other plant matter and blended with diesel fuel 

made from petroleum.2

 Larger tax credits are available for 

ethanol made from cellulose—that is, from cornstalks 

and other fibrous plant material—but they are not widely 

used because cellulosic ethanol is not now commercially 

viable, even with the tax credits.3

 In addition to the credits, since 2006, a number of mandates have been imposed 

that require ever larger quantities of biofuels to be used 

over time. 

This Congressional Budget Office (CBO) study analyzes 

the biofuel tax credits to assess whether the individual 

credits provided for different fuels offer equal incentives 

to address energy and environmental policy goals or 

whether those credits implicitly favor some types of biofuels over others. In particular, the analysis addresses: 

B Differences in the incentives faced by domestic producers of biofuels; 

1. See, for example, Ian Parry, Margaret Walls, and Winston Harrington, “Automobile Externalities and Policies,” Journal of Economic Literature, vol. 45, no. 2 (June 2007), pp. 373–399; Paul 

Leiby, Estimating the Energy Security Benefits of Reduced U.S. Oil 

Imports, Oak Ridge National Laboratory Report ORNL/TM2007/028 (Department of Energy, Oak Ridge National Laboratory, July 2007); and Hillard G. Huntington, The Oil Security 

Problem, Energy Modeling Forum Paper EMF OP 62 (Stanford 

University, Energy Modeling Forum, February 2008).

2. The term “ethanol” in this report refers to ethanol made from 

corn unless otherwise specified. 

3. The use of that feedstock (the raw material for making the fuel) 

allows cellulosic ethanol to produce fewer greenhouse gas emissions than those produced by ethanol made from corn.
2 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Table 1.

Federal Tax Credits for Ethanol and Biodiesel

Source: Congressional Budget Office.

a. Based on 26 U.S.C. §40, §40A, and §6426(e), or Title XI of the Omnibus Budget Reconciliation Act of 1990 (104 Stat. 1388-482); Title III 

of the American Jobs Creation Act of 2004 (118 Stat. 1463); Title XIII of the Energy Policy Act of 2005 (119 Stat. 986); Title XV of the 

Food, Conservation, and Energy Act of 2008 (122 Stat. 2274); and Division B of the Energy Improvement and Extension Act of 2008

(122 Stat. 3807).

A supplemental credit of 10 cents per gallon is currently available on the first 15 million gallons of ethanol made by “small producers” 

(those with a total annual productive capacity not in excess of 60 million gallons). The credit is due to expire on December 31, 2010. 

A 10-cent-per-gallon supplemental credit was also in place for agri-biodiesel until December 31, 2009. (Agri-biodiesel is biodiesel derived 

solely from virgin plant oils or animal fats.) 

b. Estimates of tax expenditures (essentially, forgone revenues) for fiscal year 2009 are detailed in Budget of the United States Government, 

Fiscal Year 2011: Analytical Perspectives, Table 16-1, available at www.gpoaccess.gov/usbudget/fy11/pdf/spec.pdf.

c. Includes only the effect on excise tax receipts. 

d. The cellulosic biofuel credit is $1.01 per gallon except that for cellulosic ethanol, the credit is reduced by the credits in effect for the mixture of ethanol with gasoline and for small producers. Accordingly, producers of cellulosic ethanol get the reduced cellulosic biofuel credit 

but are also eligible for the ethanol tax credit of $0.45 and may also qualify for the $0.10 credit for small producers. 

e. Includes the credit for cellulosic biofuel production, the credit for small producers of ethanol, and other alcohol fuel credits.

f. Of that amount, $30 million results from reduced income taxes, and the remainder, $810 million, derives from reduced excise tax 

receipts.

g. Although the biodiesel tax credit expired at the end of 2009, CBO included it in the analysis to provide information about the value of the 

credit should policymakers, as they have at other times, decide to reinstate it.

Biofuel Description Incentivea

Credit per 

Gallon 

(Dollars)

Tax Expenditures 

in Fiscal Year 

2009b

 (Millions 

of dollars)

Expiration 

Date

Ethanol Alcohol fuel produced from 

feedstocks (raw materials) 

containing plentiful natural 

sugars or starches that can be 

converted to sugars. Commercial production in the United 

States uses kernel corn as a 

feedstock. 

A credit for ethanol (regardless of the feedstock) blended 

with gasoline for sale or use 

0.45 5,160c Dec. 31, 

2010

Cellulosic 

Ethanol

Ethanol produced from 

feedstocks such as corn stover 

(the leaves and stalks of corn 

plants), switchgrass (a tall 

North American grass used for 

hay and forage), wood chips, 

and plant wastes. In contrast to 

corn ethanol, the fermentable 

sugars necessary to produce 

ethanol are provided by 

materials in the walls of the 

plants’ cells. 

A credit for cellulosic ethanol 

blended with gasoline for sale 

or use 

1.01d

 50e Dec. 31, 

2012

Biodiesel Diesel fuel made from virgin 

agricultural products (such as 

soybean oil and animal fats) or 

recycled agricultural oils (such 

as tallow) 

A credit for producing 

biodiesel 

1.00 840f Dec. 31, 

2009g
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 3

CBO

B The costs to taxpayers of displacing petroleum-based 

fuels with biofuels and reducing greenhouse gas emissions through the use of biofuels; and 

B The interaction of tax credits and mandates for those 

fuels.

Policies that support the production of biofuels lead to 

other effects and raise other issues that are not addressed 

in this report. For example, increased production of ethanol has probably resulted in some reduction in the price 

of gasoline, an increase in farm incomes, and some 

impact on the quality of the nation’s air and water 

resources. Moreover, a complete evaluation of biofuels 

would consider alternative approaches to achieving 

energy and environmental objectives. Most economists, 

for instance, maintain that a more efficient way to reduce 

petroleum consumption and greenhouse gas emissions 

would be to impose higher taxes on petroleum products. 

A complete evaluation of different programs related to 

biofuels would examine those factors, but such an analysis is beyond the scope of this study. 

Tax Credits

The tax credits provided to producers of biofuels are 

claimed primarily on the production and blending of ethanol (which in the United States is mostly made from 

corn) with gasoline and on the production of biodiesel 

(which in the United States is mostly made from soybean 

oil; see Table 1).In addition, credits are available for the 

production of cellulosic ethanol; for the production of 

ethanol (regardless of the feedstock, or raw material) and 

agri-biodiesel made by small businesses (those operating 

refineries with a total productive capacity that is not in 

excess of 60 million gallons annually);4

 and for the production of other fuels, such as renewable diesel or biodiesel produced from cellulose.5

The tax credits provide a financial incentive to produce 

biofuels by offsetting some of the fuels’ production costs 

and thereby making them more competitive relative to 

gasoline and diesel fuel. In fiscal year 2009, tax credits for 

biofuels reduced federal revenues by about $6 billion.6

 In 

addition to those credits, the federal government and the 

states have provided other financial incentives for biofuels 

that, for example, reduce the cost of building production 

and fueling facilities for distributing the fuels.7

The federal tax credits available to producers of biofuels 

vary according to the type of biofuel (such as ethanol or 

biodiesel) produced and the feedstock used to produce 

that fuel:8

B An ethanol tax credit of 45 cents per gallon is available 

for the blending of ethanol (regardless of the feedstock) with gasoline for sale; each small producer 

receives an extra 10 cents per gallon on the first 

15 million gallons it produces. 

B In addition to corn and sugarcane, ethanol can also be 

produced from corn stover (basically, the leaves and 

stalks of corn plants), certain types of grasses, wood, 

and other plant material. That type of ethanol is 

known as cellulosic ethanol because of the feedstocks 

used to produce it and the process by which it is made, 

which involves breaking down the cellulose in the cell 

walls of plants into fermentable sugars that can then 

be made into ethanol. Currently, producers of cellulosic ethanol receive credits that may total either $0.91 

or $1.01 per gallon: They receive a reduced cellulosic 

biofuel production credit that works out to 46 cents 

per gallon and are eligible for the 45 cent credit for 

blending ethanol with gasoline and, if applicable, a 

4. Agri-biodiesel is biodiesel derived solely from virgin plant and animal fats. 

5. Renewable diesel—a substitute for petroleum diesel fuel—is commonly produced from such feedstocks as tallow or vegetable oil. 

Renewable diesel has the same chemical composition as petroleum 

diesel and as a result is distinct from biodiesel. 

6. Estimates of tax expenditures (essentially forgone revenues) for fiscal year 2009 are detailed in Budget of the United States Government, Fiscal Year 2011: Analytical Perspectives, Table 16-1, 

available at www.gpoaccess.gov/usbudget/fy11/pdf/spec.pdf. 

7. Doug Kaplow, Biofuels—At What Cost? (prepared for the Global 

Subsidies Initiative, International Institute for Sustainable Development, Geneva, October 2006), pp. 68–90. 

8. For more information, see “Fuel Tax Credits and Refunds,” Chapter 2 in IRS Publication 510: Excise Taxes (rev. April 2009), available at www.irs.gov/publications/p510/ch02.html; and Brent D. 

Yacobucci, Biofuels Incentives: A Summary of Federal Programs,

CRS Report R40110 (Congressional Research Service, January 

2010).
4 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Figure 1.

Historical Biofuel Consumption and Mandates for Future 

Biofuel Use, 1981 to 2022

(Billions of gallons)

Source: Congressional Budget Office based on Energy Information Administration, Monthly Energy Review: May 2010 (May 27, 2010), 

Tables 10.3 and 10.4, available at http://tonto.eia.doe.gov/FTPROOT/multifuel/mer/00351005.pdf; the Energy Policy Act of 2005 

(Public Law 109-58); and the Energy Independence and Security Act of 2007 (Public Law 110-140).

Note: Beginning in 2009, the Energy Independence and Security Act of 2007 limited the amount of corn ethanol that might count toward 

fulfillment of the mandate in any given year. By 2022, the sale of advanced biofuels must total at least 21 billion gallons, effectively 

restricting the eligible amount of corn ethanol to at most 15 billion gallons. (Advanced biofuels are renewable fuels, other than ethanol produced from corn, whose life-cycle greenhouse gas emissions—those from producing and distributing the fuel as well as from 

burning it—are 50 percent less than the life-cycle emissions of gasoline or petroleum diesel fuel.)

supplemental credit of 10 cents per gallon for a portion of the fuel made by small producers.9

B Until the end of 2009, producers of biodiesel received 

a tax credit of $1 per gallon. Although that credit 

expired on December 31, 2009, CBO’s analysis treats 

the biodiesel tax credit as if it were still in place, in 

order to provide information about the value of the 

credit should policymakers, as they have at other 

times, decide to reinstate it. Like the credit for small 

producers of ethanol, a tax credit of 10 cents per gallon is available for small producers of biodiesel. That 

credit, like the credit of $1 per gallon, expired on 

December 31, 2009.

Over time, certain feedstocks’ eligibility for the tax credits 

has changed. For example, the Energy Improvement and 

Extension Act of 2008 (Public Law 110-343) allowed 

biodiesel produced from camelina, or flax, to qualify as a 

biofuel. That law also restricted biofuel tax credits to supplies of those fuels produced or sold for use in the United 

States. Those restrictions effectively eliminated a practice 

known as “splash and dash,” whereby a small quantity of 

petroleum diesel is mixed with imported biodiesel to 

claim a tax credit for the entire mixture, which is subsequently exported.

Mandates

The Energy Policy Act of 2005 (P.L. 109-58) imposed socalled renewable fuel standards, which mandated that 

gasoline producers and importers blend a specified minimum volume of biofuel with gasoline to meet an annual 

standard for the use of such fuels. The standards in 

that legislation extended through 2012. Title II of the 

1985 1990 1995 2000 2005 2010 2015 2020

0

5

10

15

20

25

30

35

40

Biofuel Consumption

Mandates in the

Energy Independence and

Security Act of 2007

Mandates in the

Energy Policy Act of 2005

9. See 26 U.S.C. Sec. 40(b)(6)(B). Under the law, the cellulosic biofuel credit is $1.01 per gallon except for cellulosic ethanol, for 

which the credit is reduced by the credits in effect for the mixture 

of ethanol with gasoline and for small producers. Accordingly, 

producers of cellulosic ethanol get the reduced cellulosic biofuel 

credit (46 cents) but are also eligible for the ethanol tax credit of 

45 cents and may also qualify for the 10 cent credit for small producers. Also under the law, if the small-producer credit was eliminated, the value of the credits available to all producers of 

cellulosic ethanol would total $1.01 per gallon.
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 5

CBO

Energy Independence and Security Act of 2007, or EISA 

(P.L. 110-140), amended those standards to require that 

larger annual volumes of biofuels be used through 2012; 

it also extended the mandates to 2022 (see Figure 1). In 

addition, EISA set new requirements for the use of 

“advanced biofuels,” which are renewable fuels other than 

ethanol produced from corn that over their entire “life 

cycle” (including production and distribution) produce 

greenhouse gas emissions that are 50 percent less than the 

life-cycle emissions of gasoline and diesel fuel.10 Cellulosic ethanol, imported ethanol made from sugarcane, 

and biodiesel meet that standard. 

To comply with the mandates set forth in EISA, the Environmental Protection Agency (EPA) establishes annual 

blending requirements for each type of biofuel using projections of motor fuel use in the United States.11 Fuel 

vendors must meet those requirements by directly mixing 

biofuels with gasoline or diesel for sale or by purchasing 

credits from another vendor that has blended more biofuel with conventional fuels than the law requires. 

From 2006 to 2008, the use of domestically produced 

and imported biofuels together exceeded the annual 

amounts mandated by EISA. For 2009, the renewable 

fuel standard for qualifying biofuels was 11.1 billion gallons, of which at least 600 million gallons had to be 

advanced biofuels.12 According to preliminary estimates 

of biofuel production and consumption, the total biofuel 

mandate of 11.1 billion gallons was met in 2009, 

although the quantity of biodiesel consumed was insufficient to meet the mandate for advanced biofuels (see 

Table 2).13

Before enactment of the Energy Policy Act and EISA, 

other laws imposed regulations that spurred consumption 

of biofuels, particularly ethanol. Since the Clean Air Act 

Amendments of 1990 took effect, producers supplying 

regions of the United States that do not meet prevailing 

standards for air quality have been required to mix conventional gasoline with an oxygenate (a fuel additive that 

increases the oxygen content of motor fuels) to decrease 

tailpipe emissions of ozone-forming compounds and carbon monoxide.The two main oxygenates in use in 1990 

were MTBE (methyl tertiary butyl ether) and ethanol. In 

2000, approximately 3.2 billion and 1.6 billion gallons, 

respectively, of MTBE and ethanol were produced. The 

use of ethanol as an oxygenate remained secondary to the 

use of MTBE until leakage from storage tanks containing 

the chemical raised concerns about water quality and 

prompted several states to ban its use in fuel mixtures.14

By 2005, production of MTBE had fallen to 2 billion 

gallons, and ethanol production had increased to nearly 

4 billion gallons.15

Biofuel Tax Credits and Energy 

Policy Goals

In 2009, petroleum fuels and liquid biofuels together 

accounted for 98 percent of the total energy used in the 

transportation sector.16 Domestic supplies made up about 

40 percent of the petroleum fuel consumed. Nearly all of 

the biofuel consumed was produced domestically; however, about 2 percent is imported from countries such as 

10. See Environmental Protection Agency, EPA Lifecycle Analysis of 

Greenhouse Gas Emissions from Renewable Fuels, EPA 420-F10-006 (February 2010). 

11. EPA may relax blending requirements under special conditions. 

See Environmental Protection Agency, “Regulation of Fuels and 

Fuel Additives: Changes to Renewable Fuel Standard Program 

(40 C.F.R. Part 80)—Final Rule No. 2060-A081” (March 2010), 

available at www.regulations.gov/search/Regs/contentStreamer?

objectId=0900006480ac93f2&disposition=attachment&

contentType=pdf. 

12. See Environmental Protection Agency, EPA Finalizes Regulations 

for the National Renewable Fuels Standard Program for 2010 and 

Beyond, EPA 420-F-10-007 (February 2010), available at 

www.epa.gov/oms/renewablefuels/420f10007.htm. 

13. The biodiesel mandate under the Energy Independence and Security Act of 2007 required that at least 500 million gallons of 

biodiesel be used in 2009 once the Renewable Fuel Standard 

program was in effect. However, because the program was not 

effective until 2010, the biodiesel mandate for 2009 was not 

implemented. To address that delay, EPA combined the biodiesel 

mandates for 2009 and 2010 (500 million and 650 million gallons, respectively) into a single 1.15 billion gallon mandate for the 

2009–2010 period. See Environmental Protection Agency, “Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel 

Standard Program; Final Rule,” 40 C.F.R. Part 80, Federal Register,

vol. 75, no. 58 (March 26, 2010), pp. 14718–14720.

14. See Environmental Protection Agency, State Actions Banning 

MTBE (Statewide), EPA 420-B-07-013 (August 2007). 

15. See Energy Information Administration, “Oxygenate Production” 

(June 29, 2009), available at http://tonto.eia.doe.gov/dnav/pet/

pet_pnp_oxy_dc_nus_mbbl_a.htm.

16. Natural gas supplied the remaining 2 percent. See Energy Information Administration, Monthly Energy Review: April 2010

(April 30, 2010), Table 2.5, available at http://tonto.eia.doe.

gov/FTPROOT/multifuel/mer/00351004.pdf.
6 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Table 2.

The Supply of Biofuels in the 

United States

(Billions of gallons)

Source: Congressional Budget Office based on Energy Information 

Administration, Monthly Energy Review: May 2010

(May 27, 2010), Tables 10.3 and 10.4, available at 

http://tonto.eia.doe.gov/FTPROOT/multifuel/mer/

00351005.pdf. 

Note: n.a. = not applicable. 

a. A portion of domestic biodiesel production—on net, about 

100 million gallons in 2007, 400 million gallons in 2008, and 

200 million gallons in 2009—is exported. 

b. Renewable fuels, other than ethanol produced from corn, whose 

life-cycle greenhouse gas emissions—those from producing and 

distributing the fuel as well as from burning it—are 50 percent 

less than the life-cycle emissions of gasoline or petroleum 

diesel fuel.

Brazil, where sugarcane is used as a feedstock.17 Thus, one 

reason to encourage the production of biofuels would be 

to increase the supply of domestically produced fuels that 

can be used for transportation.

The federal biofuel tax credits offer an incentive to producers to increase the amount of biofuel they make and 

thus support the energy policy goals of increasing the 

domestic production of energy and decreasing the consumption of petroleum fuels. The amount of transportation fuel that a particular biofuel adds to the domestic 

supply varies according to its basic chemistry and the 

amount of petroleum fuel required to produce it. This 

study took those variations into account in estimating the 

effects of the tax incentives provided to producers of different types of biofuels.

CBO’s analysis considered two main questions regarding 

the effect of the biofuel tax credits on the attainment of 

energy goals. Those questions are posed from different 

perspectives—that of the producer and that of the taxpayer. However, the answers rely on the same set of facts.

B Do the tax credits provide different incentives to the 

producers of different biofuels to increase the supply 

of those fuels? In answering that question, CBO analyzed the credits on the basis of the energy content of 

the fuels and the amount of petroleum used to produce them.

B What are the costs to U.S. taxpayers of using the biofuel tax credits to encourage the consumption of biofuels in place of petroleum fuels? In answering that 

question, CBO assessed the costs of different biofuels 

on the basis of the fuels’ energy contents, the changes 

in the excise tax revenues collected when biofuels displace gasoline and diesel fuels, and the amount of total 

biofuel consumption that can be attributed to the 

credits. In particular, CBO looked at whether the cost 

for achieving energy goals was the same for different 

biofuels or whether achieving those goals was more 

costly with one biofuel than with another.

Incentives for Producers of Biofuels

The incentives that the biofuel tax credits provide to 

increase the supply of biofuels depend in part on the 

credit that producers receive for supplying an additional 

gallon of such fuel. However, the impact of those incentives also depends on two characteristics of biofuels that 

differ from one fuel to another: the amount of energy in 

each gallon of fuel and the amount of energy from petroleum that is used to produce that gallon of fuel. Therefore, to compare the incentives for adding a given 

amount to the total supply of liquid fuels by producing 

different biofuels, CBO made two adjustments to the 

value of the tax credits. First, to account for the differences in the energy content of the various fuels, CBO calculated the incentives for producing quantities of different biofuels containing an amount of energy equal to that 

in a gallon of gasoline—125,000 British thermal units 

(Btus). Second, to account for the differences in the 

amount of petroleum required to produce the different 

kinds of biofuel, CBO calculated the incentives for producing quantities of different biofuels with that same net 

17. The United States imposes a tariff of 2.5 percent plus 54 cents per 

gallon on ethanol (regardless of the feedstock) imported from 

most other nations. Those tariffs discourage the importation of 

ethanol produced in those countries.

4.9 6.5 9.3 10.8

0.7 0.4 0.5 0.2

___ ___ ___ 0.3 0.5 0.7 0.5 ___

Total 5.9 7.5 10.5 11.5

4.0 4.7 9.0 11.1

n.a. n.a. n.a. 0.6

Mandates for Biofuel Use

All biofuels

Advanced biofuelsb

Biofuels Supplied

Domestic ethanol

Imported ethanol

Domestic biodiesela

Memorandum:

2006 2007 2008 2009
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 7

CBO

increase in energy after deducting the petroleum energy 

used to produce the fuels. That analysis indicates that the 

tax credits provide larger incentives for increasing liquid 

fuel supplies through the use of biodiesel and cellulosic 

ethanol than for increasing them through the use of 

ethanol.

Blenders that mix ethanol with gasoline receive 45 cents 

for each gallon of ethanol so blended. One gallon of ethanol contains about 85,000 Btus of energy, or about twothirds the energy in a gallon of gasoline; put differently, it 

takes 1.48 gallons of ethanol to provide the same energy 

as 1 gallon of gasoline. Consequently, the 45 cent credit 

for each gallon of ethanol is the same as paying blenders 

67 cents for every 125,000 Btus of ethanol blended with 

gasoline (see Table 3).

To produce that quantity of ethanol—that is, the amount 

that will provide 125,000 Btus of energy—requires 

close to 11,000 Btus of energy from petroleum fuels. 

Thus, to yield a net increase of 125,000 Btus in the 

nation’s liquid fuel supply, ethanol containing more than 

125,000 Btus—about 10 percent more—must be produced. Consequently, the credit received by blenders is 

73 cents for increasing the supply of transportation fuels 

by 125,000 Btus, the same amount of energy provided by 

a gallon of gasoline. The corresponding amounts for 

biodiesel and cellulosic ethanol, calculated on the basis of 

the tax credits in place as of December 2009, are significantly higher—$1.08 and $1.62, respectively. 

CBO’s analysis focused on the supply of liquid fuels 

because they are the predominant source of energy used 

in transportation and because a goal of the biofuel tax 

credits is to reduce imports of petroleum (which currently 

provide most of the supply of such energy). Another issue 

of potential interest is the amount of energy from all fossil fuels—including but not limited to petroleum—that is 

used during the production of biofuels. Producing ethanol from corn requires much more energy from natural 

gas or coal than does producing petroleum fuel, cellulosic 

ethanol, or biodiesel. As a result, the incentive that producers of ethanol receive for increasing the domestic supply of energy will be larger per Btu than the incentive 

provided to producers of other biofuels.18 Because the 

production of ethanol draws so much energy from coal 

and natural gas, it can be thought of as a method for converting natural gas or coal to a liquid fuel that can be used 

for transportation. The production of cellulosic ethanol, 

in contrast, is expected to need much less energy from 

fossil fuels because wastes from feedstocks that are not 

used to produce the ethanol could be used as fuel in those 

production plants. 

Costs to Taxpayers of Reducing the Use of 

Petroleum Fuels 

The cost to taxpayers of reducing the consumption of 

petroleum fuels by using tax credits to encourage the production of biofuels depends on several factors: the cost of 

the credits for biofuels, the changes in the consumption 

of biofuels and petroleum that can be attributed to the 

credits, and the changes in excise tax receipts that result 

from the displacement of petroleum fuels by biofuels. 

CBO estimates that through those tax credits, taxpayers 

incur a cost of $1.78 for replacing 125,000 Btus of 

energy supplied by petroleum fuels with 125,000 Btus 

supplied by ethanol. Similarly, the costs to taxpayers of 

displacing a gallon of gasoline with an equivalent amount 

of cellulosic ethanol would total $3.00, CBO estimates, 

and the costs of displacing petroleum diesel with biodiesel would total approximately $2.55 for an equivalent 

amount of biodiesel (under the credit formerly in place).

Impact of the Tax Credits on the Consumption of 

Biofuels and Petroleum Fuel. Although the federal tax 

credits encourage the production of biofuels, some of that 

fuel would be produced even if those credits were not 

available. However, determining how much biofuel production would have occurred in the absence of those 

credits is not straightforward. Researchers at the Food 

and Agricultural Policy Research Institute (FAPRI) examined the impact on biofuel production of policies that 

provide incentives for the consumption of ethanol and 

biodiesel in the United States—including the federal tax 

credits, mandates requiring minimum volumes of biofuel 

18. Jason Hill and others, “Environmental, Economic, and Energetic 

Costs and Benefits of Biodiesel and Ethanol Biofuels,” Proceedings 

of the National Academy of Sciences, vol. 103, no. 30 (July 2006); 

Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and 

Greenhouse Gas Emission Impacts of Different Corn Ethanol 

Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); 

Environmental Protection Agency, Regulatory Impact Analysis: 

Renewable Fuel Standard Program, EPA 420-R-07-004 (April 

2007); Hong Huo and others, “Life-Cycle Assessment of Energy 

Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel 

and Renewable Fuels,” Environmental Science and Technology,

vol. 43, no. 3 (2009); and Adam J. Liska and others, “Improvements in Life Cycle Energy Efficiency and Greenhouse Gas Emissions of Corn-Ethanol,” Journal of Industrial Ecology, vol. 13, no. 1 

(2009).
8 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Table 3.

Production Incentives for Increasing Liquid Fuel Supplies

Source: Congressional Budget Office based on Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and Greenhouse Gas Emission 

Impacts of Different Corn Ethanol Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); Environmental Protection 

Agency, Regulatory Impact Analysis: Renewable Fuel Standard Program, EPA 420-R-07-004 (April 2007); M.R. Schmer and others, 

“Net Energy of Cellulosic Ethanol from Switchgrass,” Proceedings of the National Academy of Sciences, vol. 105, no. 2 (January 

2008); Hong Huo and others, “Life-Cycle Assessment of Energy Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel 

and Renewable Fuels,” Environmental Science and Technology, vol. 43, no. 3 (2009); and Adam J. Liska and others, “Improvements 

in Life Cycle Energy Efficiency and Greenhouse Gas Emissions of Corn-Ethanol,” Journal of Industrial Ecology, vol. 13, no. 1 (2009).

Note: Btu = British thermal unit.

a. Although the biodiesel tax credit expired on December 31, 2009, CBO included it in the analysis to provide information about the value of 

the credit should policymakers, as they have at other times, decide to reinstate it. (Biodiesel is diesel fuel made from virgin agricultural 

products, such as soybean oil and animal fats, or recycled agricultural oils, such as tallow.)

b. Reflects the 45 cent credit for blending ethanol with gasoline, the reduced cellulosic biofuel credit that calculates to 46 cents for producing ethanol from cellulose, and the 10 cent credit available to small producers (refineries with total productive capacity that is not in 

excess of 60 million gallons annually). Cellulosic ethanol is made from wood, grasses, or agricultural plant wastes; in contrast to corn ethanol, the fermentable sugars necessary to produce cellulosic ethanol are provided by materials in the walls of the plants’ cells. The biofuel 

is not as yet in large-scale commercial production. As a result, it is likely that most of what is being initially produced will be eligible for 

the small-producer credit. 

c. The amount of energy from petroleum that is used to produce a quantity of biofuel containing 125,000 Btus of energy is estimated to 

be 10,900, 9,300, and 12,400 Btus for corn ethanol, cellulosic ethanol, and biodiesel, respectively. Subtracting those amounts from 

125,000 Btus gives the net energy provided by each 125,000 Btu unit of fuel produced: specifically, 114,100, 115,700, and 112,600 Btus 

for corn ethanol, cellulosic ethanol, and biodiesel, respectively. 

d. Because different biofuels increase liquid fuel supplies by different amounts, an adjustment is necessary to compare the production 

incentives on a consistent basis. The adjustment factor for each biofuel ensures that the production incentives are measured in terms 

of what biofuel producers receive for increasing total liquid fuel supplies by 125,000 Btus. (As an example, the production of corn 

ethanol increases liquid fuel supplies by 114,100 Btus for every 125,000 Btus of biofuel produced. CBO thus used a ratio of 125,000 to 

114,100 Btus to arrive at an adjustment factor of 1.10.) 

Corn Ethanol Cellulosic Ethanol Biodiesela

gallon of biofuel) 0.45 1.01b 1.00

125,000 Btus of Energy 1.48 1.48 0.97

125,000 Btus of energy) 0.67 1.50 0.97

125,000 Btus of energy) 0.67 1.50 0.97

Credits to Reflect the Petroleum Fuel Used in 

Producing the Biofueld 1.10 1.08 1.11

Fuel Supplies by 125,000 Btus (Dollars) 0.73 1.62 1.08

Production Incentives After Adjusting for the

Production Incentives After Adjusting for the 

Energy Content of Each Biofuel

Petroleum Fuel Used to Produce Each Biofuelc

Federal Biofuel Tax Credit (Dollars per 

Multiplied by: Gallons of Biofuel per 

Equals: Adjusted Biofuel Tax Credit (Dollars per 

Adjusted Biofuel Tax Credit (Dollars per 

Multiplied by: An Adjustment for Measuring the Tax 

Equals: Production Incentive for Increasing Liquid
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 9

CBO

to be sold, and tariffs on ethanol imports—and projected 

the consumption of various fuels over a seven-year period 

beginning in 2011. On the basis of FAPRI’s results, CBO 

calculated that if no other biofuel policies were in place, 

eliminating the biofuel tax credits would reduce ethanol 

consumption by 32 percent and biodiesel consumption 

by 38 percent.19 (All calculations for biodiesel incorporated the assumption that the tax credit in place in 2009 

had been reauthorized.)

The basis for evaluating the extent to which the tax credit 

for cellulosic ethanol production will help increase 

domestic supplies of liquid fuels is limited because that 

fuel is not yet produced commercially. But production of 

cellulosic ethanol is expected to grow in coming years, 

and on the basis of FAPRI’s recent projections, CBO estimates that the tax credit for cellulosic ethanol will be 

responsible for 47 percent of projected production.20

Other analysts have also estimated the relationship 

between the tax credits and biofuel consumption, but 

those studies have not been as comprehensive as FAPRI’s. 

For example, researchers at Iowa State University estimated that the tax credit for the production of ethanol 

was responsible for about 15 percent of the biofuel’s current use in the United States.21 And, after accounting for 

gasoline blending requirements, another study found that 

the credit was responsible for about 25 percent of the 

nation’s consumption of ethanol in 2005 and 2006.22

However, neither of those assessments evaluated the 

effects of the tax credits for biodiesel and cellulosic ethanol, and neither examined the consumption of biofuels 

for longer than two years. Consequently, CBO relied on 

the FAPRI study’s estimates in its calculations. 

Determining the share of biofuel production that 

depends on the current federal biofuel tax credits is complicated by the history of support for biofuels and the 

blending mandates established by the Energy Independence and Security Act. Earlier subsidies supported the 

development of biofuel production facilities. More 

recently, EISA’s blending mandates have encouraged continued investment in such facilities by providing greater 

certainty to investors that there will be a market for their 

product. Because of those factors, the amount of biofuel 

consumption today that is attributable to the current tax 

credits is smaller than it would be if the facilities for biofuel production had not already been built—in part 

because of previous tax credits. In other words, current 

consumption of biofuels would probably be much less if 

the tax credits had never existed than if the credits were 

removed now, after the existing production capacity has 

been built.23

Tax credits that increase the supply of biofuels, everything 

else being equal, reduce the prices of liquid fuels used for 

transportation and cause producers of petroleum to 

reduce the amount they make. The decline in liquid fuel 

prices also boosts the quantity of fuel demanded; the size 

of that increase depends on how responsive demand is to 

changes in market prices. Studies have shown that the 

consumption of liquid fuels for transportation does not 

respond much to such changes. As a result, an increase 

in the supply of biofuels and the attendant decrease in 

liquid fuel prices would cause little change in the overall 

19. Food and Agricultural Policy Research Institute-University of 

Missouri, Biofuels: Impact of Selected Farm Bill Provisions and 

Other Biofuel Policy Options, FAPRI-MU Report 06-08 (June 

2008), Tables 13a and 14a, available at www.fapri.missouri.edu/

outreach/publications/2008/FAPRI_MU_Report_06_08.pdf.

20. Food and Agricultural Policy Research Institute-University of 

Missouri, U.S. Baseline Briefing Book: Projections for Agricultural 

and Biofuel Markets, FAPRI-MU Report 01-10 (March 2010), 

p. 65, available at www.fapri.missouri.edu/outreach/publications/

2010/FAPRI_MU_Report_01_10.pdf.

21. Lihong Lu McPhail and Bruce A. Babcock, Short-Run Price 

and Welfare Impacts of Federal Ethanol Policies, Working Paper 

08-WP 468 (Center for Agricultural and Rural Development, 

Iowa State University, June 2008), Table 2(1).

22. Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy 

Policy Goals,” American Economic Review: Papers and Proceedings 

2008, vol. 98, no. 2 (2008), pp. 90–94. 

23. Since the EISA mandates were instituted, domestic production 

and imports of biofuels together have exceeded the mandated 

amounts, suggesting that the tax credits and not the mandates 

have been more important thus far in determining the annual 

consumption of biofuels. Accordingly, CBO concluded that with 

the credits in place, the mandates were not binding (that is, they 

did not affect the amount of biofuels produced). Had they been 

binding, CBO’s estimates of the amount of biofuel consumption 

attributable to the tax credits would be smaller than those presented here. 
10 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

quantity of liquid fuels being consumed. 24 The primary 

effect, then, of encouraging the production of additional 

supplies of biofuels through the use of the tax credits is to 

reduce the consumption of petroleum fuels by about the 

same amount.

Cost to Taxpayers of Substituting Biofuels for 

Petroleum Fuels. The cost to taxpayers of displacing a 

gallon of gasoline with a quantity of ethanol that provides 

the same amount of energy as a gallon of gasoline is 

$1.78, by CBO’s estimate (see Table 4). That calculation 

has three steps:

B Because 1.48 gallons of ethanol are required to 

provide as much energy as a gallon of gasoline, the 

45 cent credit for each gallon of ethanol is equivalent 

to paying blenders 67 cents for each gallon of gasoline 

that ethanol displaces (see page 6).

B Substituting ethanol for petroleum increases receipts 

from the federal excise tax on motor fuels because a 

greater volume of fuel is necessary to supply the same 

amount of energy. Specifically, the government forgoes 

18.4 cents in receipts for each gallon reduction in sales 

of petroleum fuel but collects an additional 27.2 cents 

for the sale of an equivalent amount of ethanol. That 

9 cent increase in receipts reduces taxpayers’ costs for 

the biofuel credit to 58 cents per gallon of gasoline 

displaced.

B The above factors are applicable only to the portion of 

total biofuel consumption that can be attributed to 

the tax credit—but the tax credit applies to all biofuels, including the amount that would be produced if 

there were no credit. On the basis of the FAPRI 

researchers’ work, CBO concludes that about 32 percent of current consumption of ethanol is attributable 

to the biofuel tax credit. Thus, the revenue loss of 

58 cents yields a reduction of less than a third of a gallon in gasoline consumption. Adjusting the 58 cents 

by that factor results in a cost to taxpayers of $1.78 for 

replacing a gallon of petroleum fuel with an equivalent 

amount of energy (125,000 Btus) supplied by ethanol.

Similarly, CBO estimates that the costs to taxpayers of 

displacing gasoline with cellulosic ethanol will total $3.00 

per gallon and the costs of displacing petroleum diesel 

with biodiesel will total approximately $2.55 for an 

equivalent amount of biodiesel (under the credit that was 

formerly in place).

Those estimates of taxpayers’ costs are quite sensitive to 

judgments about the proportions of consumption that 

are attributable to the tax credits. If CBO had used the 

Iowa State study’s finding that about 15 percent of ethanol consumption arose from the tax credits rather than 

the finding of 32 percent derived from the FAPRI study, 

those estimated costs would be roughly twice as high—

about $4.00 per gallon rather than $1.78. However, over 

the long term, that 32 percent might be too low because 

it represents the amount of biofuel consumption today 

that is attributable to the current tax credits and is smaller 

than it would be if the facilities for biofuel production 

had not already been built—in part because of previous

tax credits. Using a higher percentage would make taxpayers’ costs for reducing petroleum consumption less 

than those CBO has estimated. For example, if the biofuel tax credit for ethanol was responsible for 45 percent 

of current consumption, the cost to taxpayers of decreasing gasoline consumption would be about 50 cents per 

gallon lower than the costs based on the findings of the 

FAPRI study. 

Biofuel Tax Credits and Environmental 

Policy Goals

Encouraging the additional consumption of biofuels can 

be a means of pursuing the environmental policy goal of 

reducing greenhouse gas emissions. The use of biofuels in 

place of petroleum fuels generally reduces emissions; the 

amount of the reduction, though, depends on the biofuel 

and on whether its production has changed how land is 

being used (whether, for instance, rangeland or forested 

land is being converted to farmland).

24. For discussions of the lack of responsiveness in transportation fuel 

consumption, see Jonathan E. Hughes, Christopher R. Knittel, 

and Daniel Sperling, Evidence of a Shift in the Short-Run Price 

Elasticity of Gasoline Demand, Research Report UCD-ITSRR-06-16 (University of California at Davis, Institute of Transportation Studies, 2006); Kenneth A. Small and Kurt Van 

Dender, “Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect,” Energy Journal, vol. 28, no. 1 (2007), 

pp. 25–51; and Martijn Brons and others, “A Meta-Analysis of the 

Price Elasticity of Gasoline Demand: A SUR Approach,” Energy 

Economics, vol. 30, no. 5 (September 2008), pp. 2105–2122.
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 11

CBO

Table 4.

Cost to Taxpayers of Displacing Petroleum Fuels Through Use of the 

Federal Biofuel Tax Credits

Source: Congressional Budget Office.

Notes: In CBO’s calculations, corn ethanol and cellulosic ethanol are assumed to displace gasoline, and biodiesel is assumed to displace 

petroleum diesel. Cellulosic ethanol is produced from feedstocks such as corn stover (the leaves and stalks of corn plants), switchgrass (a tall North American grass used for hay and forage), wood chips, and plant wastes. In contrast to corn ethanol, the fermentable sugars necessary to produce cellulosic ethanol are provided by materials in the walls of the plants’ cells. Biodiesel is diesel fuel 

made from virgin agricultural products (such as soybean oil and animal fats) or recycled agricultural oils (such as tallow).

Btu = British thermal unit. 

a. Although the biodiesel tax credit expired on December 31, 2009, CBO included it in the analysis to provide information about the value of 

the credit should policymakers, as they have at other times, decide to reinstate it.

b. Reflects the 45 cent credit for blending ethanol with gasoline, the reduced cellulosic biofuel credit that calculates to 46 cents for producing ethanol from cellulose, and the 10 cent credit available to small producers (refineries with total productive capacity that is not in 

excess of 60 million gallons annually). Cellulosic ethanol is not as yet in large-scale commercial production. As a result, it is likely that 

most of what is being initially produced will be eligible for the small-producer credit. 

c. Federal excise taxes on sales of petroleum fuels do not depend on the amount of energy contained in a gallon of those fuels. As a result, 

selling biofuels in place of petroleum fuels affects total excise tax receipts because of differences in the energy contents of those fuels. 

For a quantity of ethanol providing 125,000 Btus of energy that is sold in place of gasoline, excise tax receipts (excluding the effects of the 

biofuel tax credit) would increase by 9 cents—that is, 18.4 cents multiplied by 1.48 (gallons of biofuel per 125,000 Btus of energy) minus 

18.4 cents times 1.0 (gallons of gasoline per 125,000 Btus of energy). The comparable increase in excise tax receipts for biodiesel is 

2 cents—24.4 cents multiplied by 0.97 (gallons of biofuel per 125,000 Btus of energy) minus 24.4 cents times 0.90 (gallons of petroleum 

diesel per 125,000 Btus of energy). 

Federal Biofuel Tax Credit (Dollars per gallon of biofuel) 0.45 1.01 b 1.00

Multiplied by: Gallons of Biofuel per 125,000 Btus of Energy 1.48 1.48 0.97

Equals: Adjusted Biofuel Tax Credit (Dollars per 

125,000 Btus of energy) 0.67 1.50 0.97

Adjusted Biofuel Tax Credit (Dollars per 125,000 Btus of energy) 0.67 1.50 0.97

Minus: Change in Excise Tax Receipts Because of 

Differences in Biofuel and Petroleum Fuel Volumesc 

(Dollars per 125,000 Btus of energy) 0.09 0.09 0.02

Equals: Cost of the Biofuel Tax Credit After Adjusting for

Changes in Tax Receipts (Dollars per 125,000 Btus of energy) 0.58 1.41 0.96

Cost of the Biofuel Tax Credit After Adjusting for Changes in

Tax Receipts (Dollars per 125,000 Btus of energy) 0.58 1.41 0.96

Divided by: Share of Total Biofuel Consumption Attributable to the

Tax Credit 0.32 0.47 0.38

Equals: Cost to Taxpayers of Displacing Petroleum with Biofuels

(Dollars per 125,000 Btus of energy) 1.78 3.00 2.55

Corn Ethanol Cellulosic Ethanol Biodiesela

Energy Content of Each Biofuel

Adjusting for the Share of Biofuel Consumption 

Cost to Taxpayers of Displacing Petroleum Fuels After

Production Incentives After Adjusting for the

Attributable to the Tax Credit

Changes in Tax Receipts per 125,000 Btus of 

Energy Provided by Each Biofuel
12 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Figure 2.

Life-Cycle Greenhouse Gas Emissions for Petroleum Fuels and Biofuels

(Kilograms of carbon dioxide equivalent per 125,000 Btus of fuel)

Source: Congressional Budget Office based on Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and Greenhouse Gas Emission 

Impacts of Different Corn Ethanol Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); and Hong Huo and others, 

“Life-Cycle Assessment of Energy Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel and Renewable Fuels,” 

Environmental Science and Technology, vol. 43, no. 3 (2009).

Note: Life-cycle emissions are those generated during production, distribution, and consumption of petroleum fuels and biofuels. Life-cycle 

greenhouse gas emissions are measured as the kilograms of carbon dioxide equivalent (the amount of carbon dioxide causing an 

equivalent amount of warming over 100 years) that are generated by producing, distributing, and consuming 125,000 Btus of fuel—

about 1 gallon of gasoline, 1.5 gallons of ethanol, 0.9 gallons of petroleum diesel, and about 1 gallon of biodiesel.

a. Ethanol that is produced from feedstocks such as corn stover (the leaves and stalks of corn plants), switchgrass (a tall North American 

grass used for hay and forage), wood chips, and plant wastes. In contrast to corn ethanol, the fermentable sugars necessary to produce 

cellulosic ethanol are provided by materials in the walls of the plants’ cells. 

b. Diesel fuel made from virgin agricultural products (such as soybean oil and animal fats) or recycled agricultural oils (such as tallow). 

CBO’s analysis addressed two questions:

B Given the characteristics of the various biofuels, what 

are the costs to U.S. taxpayers of reducing greenhouse 

gas emissions through the use of the different biofuel 

tax credits?

B How does accounting for changes in land use affect 

the answers to that question?

Effects on Greenhouse Gas Emissions When 

Land Use Does Not Change

Substituting a biofuel for gasoline or petroleum diesel 

fuel reduces greenhouse gas emissions when all of the 

emissions that result from producing, distributing, and 

burning the fuels (their so-called life-cycle emissions) are 

taken into consideration. That conclusion, however, rests 

on the assumption that patterns of land use are not 

affected by increased production of the biofuel. For 

example, producing ethanol from corn and distributing 

the fuel result in more greenhouse gas emissions than 

producing and distributing gasoline made exclusively 

from crude oil, because planting, fertilizing, and harvesting corn uses more energy from fossil fuels than does 

drilling for petroleum, refining it into gasoline, and delivering it to customers. But the relationship is reversed over 

other portions of the fuels’ life cycles: The growing of 

corn removes carbon dioxide from the atmosphere, 

whereas the extraction of crude oil from the ground does 

not. And the two fuels produce similar amounts of greenhouse gas emissions in the remaining portion of their life 

cycle—that is, when they are being used. According to 

research conducted at Argonne National Laboratory 

(ANL), gasoline and petroleum diesel fuel each generate 

about 12 kilograms of greenhouse gases over their life 

cycles (measured in terms of an equivalent amount of carbon dioxide, or CO2e) for every 125,000 Btus of energy 

Gasoline Petroleum Diesel Corn Ethanol Cellulosic Ethanol Biodiesel

0

2

4

6

8

10

12

14

a b
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 13

CBO

consumed, whereas corn ethanol generates about 10 kilograms, or 20 percent less (see Figure 2).25

Taking that difference into account, CBO estimates that 

taxpayers’ costs for reducing greenhouse gas emissions 

through the ethanol tax credit are $754 per metric ton of 

CO2e (see Table 5). Taxpayers’ costs for reducing greenhouse gas emissions under the now expired biodiesel tax 

credit would total $306 per metric ton of CO2e; their 

costs for cellulosic ethanol would be somewhat lower. 

It bears emphasizing that those conclusions are based on 

the current mix of fuels used to provide the energy to 

make biofuels in the United States. The method by which 

ethanol and other biofuels are produced affects not only 

the amount of any reduction in emissions but even 

whether emissions are reduced at all. For example, ethanol produced at a plant fueled by natural gas generates 

about 30 percent fewer life-cycle greenhouse gas emissions than gasoline would have created—but ethanol produced at a similar plant that is coal fired generates about 

3 percent more.26 In fact, most ethanol plants in the 

United States are fueled by natural gas; the rest are coal 

fired or fired jointly by coal and natural gas.

Cellulosic ethanol offers the potential for greater reductions in greenhouse gas emissions, although its impact on 

emissions is more uncertain because of the limited quantities of cellulosic ethanol produced to date. Relative to 

ethanol made from corn, cellulosic ethanol would produce about one-fourth of the emissions, because cellulosic wastes (rather than fossil fuels) might be used as a 

source of energy for an ethanol plant’s operations or for 

the production of ethanol in cogeneration facilities 

(which produce electricity as well as steam from a fuel 

source). In addition, electricity produced by such facilities could be transmitted to the electric power grid, which 

might reduce the use of fossil fuels in coal-fired or natural 

gas-fired power plants and thereby cut greenhouse gas 

emissions from those plants.27

Biodiesel used as a substitute for petroleum diesel produces about 70 percent fewer life-cycle emissions of 

greenhouse gases for an equivalent amount of energy 

consumed. However, the overall reduction in emissions 

from that substitution is quite small because only about 

350 million gallons of biodiesel were consumed in the 

United States in 2009, compared with total diesel fuel 

consumption of about 60 billion gallons. Moreover, 

biodiesel’s share of total liquid fuel consumption is likely 

to remain small in coming years. The Energy Information Administration (EIA) projects that less than about 

2 billion gallons of biodiesel will be used per year through 

2020.28

Like CBO’s analysis of the costs to taxpayers of displacing 

petroleum consumption with biofuels, its assessment of 

the costs of reducing greenhouse gas emissions measures 

the cost of the tax credits relative to the reduction in 

emissions from the additional amount of biofuels produced because of the credits. In addition, CBO’s estimate 

of costs is again a net calculation that recognizes that consuming additional quantities of biofuels in place of petroleum fuels affects revenues from the excise tax on sales of 

fuels. To incorporate those factors in the estimated costs 

to taxpayers of reducing greenhouse gas emissions, CBO 

adjusted its estimates of the cost of reducing petroleum 

consumption to account for the differences among biofuels in life-cycle greenhouse gas emissions. 

Specifically, using ethanol in place of gasoline lowers 

greenhouse gas emissions by 2.4 kilograms of CO2e for 

each gallon of gasoline displaced; therefore, ethanol 

would have to displace about 424 gallons of gasoline to 

reduce greenhouse gas emissions by 1 metric ton. The

25. Wang, Wu, and Huo, “Life-Cycle Energy and Greenhouse Gas 

Emissions Impacts of Different Corn Ethanol Plant Types”; and 

Huo and others, “Life-Cycle Assessment of Energy Use and 

Greenhouse Gas Emissions.” Although a fair degree of variability 

is evident in findings that biofuels produce lower life-cycle emissions than do petroleum fuels, the estimates of the ANL researchers have been widely accepted at federal agencies and are 

consistent with a range of other recent estimates. For example, a 

2006 study by Hill and others (“Environmental, Economic, and 

Energetic Costs and Benefits of Biodiesel and Ethanol Biofuels”) 

reported that the use of ethanol reduced life-cycle greenhouse gas 

emissions by 12 percent, whereas a 2009 study by Liska and others (“Improvements in Life Cycle Energy Efficiency and Greenhouse Gas Emissions of Corn-Ethanol”) reported a reduction of 

50 percent to 60 percent. 

26. Wang, Wu, and Huo, “Life-Cycle Energy and Greenhouse Gas 

Emissions Impacts of Different Corn Ethanol Plant Types.”

27. See, for example, R.V. Morey, D.G. Tiffany, and D.L. Hatfield, 

“Biomass for Electricity and Process Heat at Ethanol Plants,” 

Applied Engineering in Agriculture, vol. 22, no. 5 (2006), 

pp. 723–728.

28. Energy Information Administration, Annual Energy Outlook 2010 

with Projections to 2035, DOE/EIA-0383(2010) (April 2010), 

Table A17.
14 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Table 5.

Cost to Taxpayers of Reducing Greenhouse Gas Emissions Through Use of the 

Federal Biofuel Tax Credits

Source: Congressional Budget Office based on Michael Wang, May Wu, and Hong Huo, “Life-Cycle Energy and Greenhouse Gas Emission 

Impacts of Different Corn Ethanol Plant Types,” Environmental Research Letters, vol. 2, no. 2 (2007); and Hong Huo and others, 

“Life-Cycle Assessment of Energy Use and Greenhouse Gas Emissions of Soybean-Derived Biodiesel and Renewable Fuels,” Environmental Science and Technology, vol. 43, no. 3 (2009).

Notes: In CBO’s calculations, corn ethanol and cellulosic ethanol are assumed to displace gasoline, and biodiesel is assumed to displace 

petroleum diesel. Cellulosic ethanol is produced from feedstocks such as corn stover (the leaves and stalks of corn plants), switchgrass (a tall North American grass used for hay and forage), wood chips, and plant wastes. In contrast to corn ethanol, the fermentable sugars necessary to produce cellulosic ethanol are provided by materials in the walls of the plants’ cells. Biodiesel is diesel fuel 

made from virgin agricultural products (such as soybean oil and animal fats) or recycled agricultural oils (such as tallow).

Because individual greenhouse gases vary in their warming characteristics and persistence in the atmosphere, researchers commonly 

measure emissions in kilograms or metric tons of carbon dioxide equivalent—the amount of carbon dioxide that would cause an 

equivalent amount of warming over 100 years. 

Btu = British thermal unit. 

a. Although the biodiesel tax credit expired on December 31, 2009, CBO included it in the analysis to provide information about the value of 

the credit should policymakers, as they have at other times, decide to reinstate it.

b. For details of these costs, see Table 4 on page 11. 

c. For every 125,000 Btus of fuel consumed, corn ethanol is estimated to produce 2.4 kilograms fewer greenhouse gas emissions over its 

life cycle (which includes emissions from its production and distribution) than gasoline produces. To reduce emissions by 1 metric ton 

(1,000 kilograms), ethanol must displace 424 gallons of gasoline (1,000 divided by 2.4). 

d. For every 125,000 Btus of fuel consumed, cellulosic ethanol is estimated to produce 10.9 kilograms fewer greenhouse gas emissions over 

its life cycle than gasoline produces. To reduce emissions by 1 metric ton, cellulosic ethanol must displace 92 gallons of gasoline (1,000 

divided by 10.9). 

e. For every 125,000 Btus of fuel consumed, biodiesel is estimated to produce 8.3 kilograms fewer greenhouse gas emissions over its life 

cycle than petroleum diesel produces. To reduce emissions by 1 metric ton, biodiesel must displace 120 units of petroleum diesel, each 

having 125,000 Btus of energy (1,000 divided by 8.3). 

cost to taxpayers of displacing gasoline with ethanol is 

$1.78 per gallon (equivalent to 125,000 Btus of energy; 

see the last line of Table 4 on page 11 and the first line of 

Table 5). As a result, by CBO’s calculations, taxpayers’ 

costs for reducing greenhouse gas emissions through the 

ethanol tax credit are $754 per metric ton of CO2e 

($1.78 per gallon multiplied by 424 gallons). 

A similar calculation shows that taxpayers’ costs for 

reducing greenhouse gas emissions under the now expired 

biodiesel tax credit total $306 per metric ton of CO2e, or 

less than half the costs under the ethanol tax credit. The 

amount of the biodiesel credit (when it was in place and 

after adjustments for the energy content of the fuel and 

the additional excise tax receipts from sales of biodiesel in 

Cost to Taxpayers of Displacing Petroleum with Biofuelsb

(Dollars per 125,000 Btus of energy) 1.78 3.00 2.55

Multiplied by: Units of Petroleum Fuel (Each Having 

125,000 Btus of Energy) That Would Need to Be Displaced to 

Reduce Greenhouse Gas Emissions by 1 Metric Ton of 

Carbon Dioxide Equivalent 424 c 92 d 120 e

Equals: Cost to Taxpayers of Reducing Greenhouse Gas Emissions 

Through the Biofuel Tax Credits (Dollars per metric ton of 

greenhouse gases measured as carbon dioxide equivalent) 754 276 306

Corn Ethanol Cellulosic Ethanol Biodiesela
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 15

CBO

place of petroleum diesel) was about 65 percent greater 

than the amount of the adjusted credit for ethanol, but 

that larger cost was offset by biodiesel’s greater capacity to 

reduce emissions—about 3.5 times greater than ethanol’s. 

Cellulosic ethanol is expected to reduce greenhouse gas 

emissions at a cost similar to that for biodiesel and about 

65 percent less than the cost for ethanol. 

Those estimates are very sensitive to the portion of biofuel consumption attributable to the tax credits. For 

example, if CBO had estimated that the ethanol tax 

credit was responsible for 15 percent of ethanol consumption—the finding of the Iowa State researchers—

the costs to taxpayers of reducing emissions through the 

credits would be about $1,700 per metric ton of CO2e, 

rather than roughly $750. However, over the long term, 

the estimate of 32 percent that CBO used might be too 

low because it represents the amount of biofuel consumption today that is attributable to the current tax credits 

and is smaller than it would be if the facilities for biofuel 

production had not already been built—in part because 

of previous tax credits. In that case, taxpayers’ costs for 

reducing greenhouse gas emissions would be less than 

those CBO has estimated.

Such estimates of the cost of using the biofuel tax credits 

to reduce greenhouse gas emissions are not comparable to 

estimates of the price of allowances under a cap-and-trade 

program for reducing emissions. 29 The costs reported 

here represent the average forgone tax revenue; the price 

of allowances under a cap-and-trade program represents 

the cost of avoiding the last, or marginal, ton of emissions 

under the specific requirements of the program.30 In general, the costs of reducing greenhouse gas emissions 

through a biofuel tax credit would be higher than the 

costs resulting from a policy that imposed a price on 

those emissions, such as a cap-and-trade system or a tax 

on emissions. With a price on emissions, the market 

would determine how to reduce emissions throughout 

the economy, and that would generally be cheaper than 

reductions resulting from a tax credit that encouraged 

specific actions in fewer sectors of the economy. Moreover, the wide variation in the cost of reducing emissions 

with the tax credits suggests that those emissions could be 

reduced more cheaply through some actions than 

through others.

Greenhouse Gas Emissions When Land Use 

Does Change

Because of uncertainty about how land-use patterns are 

affected by increased production of biofuels, CBO’s estimates of the costs of reducing emissions through the biofuel tax credits considered only the life-cycle emissions 

associated with producing and using biofuels and did not 

account for changes in land use. However, if such changes 

were substantial, the costs of reducing emissions through 

the credits would exceed those that CBO has estimated, 

possibly by a large margin.

Using biofuels produced from what had previously been 

grassland or forest in place of petroleum fuels would 

reduce greenhouse gas emissions only if the reductions in 

life-cycle emissions exceeded both the carbon released 

when that land was converted into new farmland and the 

reduction in carbon sequestration those lands would have 

provided in the future.31 The timing and magnitude of 

such effects depend critically on the feedstock that is 

grown and how the land was being used before the 

change. Overall, some researchers maintain that the 

changes in emissions from alterations in land use are large 

enough that it might take decades or even centuries 

before the reduced life-cycle emissions from the use of 

biofuels offset the emissions associated with land-use 

changes (see Table 6).32 However, other researchers 

29. A cap-and-trade program would set annual limits, or caps, on 

total emissions and require entities regulated by the program to 

hold rights, or allowances, to emit greenhouse gases. After such 

allowances were initially distributed, entities would be free to buy 

and sell them (the trade part of the program). Cap-and-trade proposals generally specify caps that gradually decrease over time in 

absolute terms; as a result, households and firms incur gradually 

rising costs for reducing emissions. For more information, see 

Congressional Budget Office, How Regulatory Standards Can 

Affect a Cap-and-Trade Program for Greenhouse Gases, Issue Brief 

(September 16, 2009), and The Costs of Reducing Greenhouse-Gas 

Emissions, Issue Brief (November 23, 2009).

30. For additional information, see, for example, Congressional Budget Office, cost estimate for H.R. 2454, American Clean Energy 

and Security Act of 2009 (June 5, 2009).

31. Compared with cropland, grasslands and forests have a greater 

capacity to sequester carbon—that is, to capture and store it.

32. See Joseph Fargione and others, “Land Clearing and the Carbon 

Debt,” Science, vol. 319 (2008), pp. 1235–1238; Renewable Fuels 

Agency, The Gallagher Review of the Indirect Effects of Biofuels Production (study commissioned by the Secretary of State for Transport, U.K., July 2008); and Timothy Searchinger and others, “Use 

of U.S. Croplands for Biofuels Increases Greenhouse Gases 

Through Emissions from Land-Use Change,” Science, vol. 319 

(2008), pp. 1238–1240.
16 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

Table 6.

The Time Required for Biofuel Use to Lower Emissions When 

Changes in Land Use Occur

Source: Congressional Budget Office based on Joseph Fargione and others, “Land Clearing and the Carbon Debt,” Science, vol. 319 (2008), 

pp. 1235–1238; Timothy Searchinger and others, “Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change,” Science, vol. 319 (2008), pp. 1238–1240; Environmental Protection Agency, “Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis” (February 2010), Table 2.6-2; Renewable Fuels Agency, The Gallagher Review of 

the Indirect Effects of Biofuels Production (study commissioned by the Secretary of State for Transport, U.K., July 2008); and David 

M. Lapola and others, “Indirect Land-Use Changes Can Overcome Carbon Savings from Biofuels in Brazil,” Proceedings of the 

National Academy of Sciences (February 2010).

a. These estimates, which take into account changes in land use, represent the number of years that a biofuel must be used before the lower 

emissions from that consumption reduce greenhouse gas emissions relative to those that would be produced if petroleum fuels were 

being used. Total emissions from biofuel consumption would be higher before that time than if petroleum fuels were used and lower in 

the years following that break-even date.

b. Switchgrass is a tall North American grass used for hay and forage. 

Land Converted Location Study

Grassland United States 93 Fargione and others

Abandoned Cropland United States 48 Fargione and others

Mix of Forest and Grassland United States 167 Searchinger and others

Mix of Forest and Grassland United States 14 Environmental Protection Agency

Forest Brazil 17 Fargione and others

Forest Brazil 15 – 39 Renewable Fuels Agency

Forest Brazil 44 Lapola and others

Grassland Brazil 3 – 10 Renewable Fuels Agency

Grazing Land Brazil 4 Searchinger and others

Rainforest Brazil 45 Searchinger and others

Grassland Brazil 2 Environmental Protection Agency

Cropland United States 52 Searchinger and others

Mix of Forest and Grassland United States 1 Environmental Protection Agency

Forest Brazil 86 Fargione and others

Forest Malaysia 18 – 38 Renewable Fuels Agency

Grassland Malaysia 0 – 11 Renewable Fuels Agency

Forest Brazil 246 Lapola and others

Forest Brazil 319 Fargione and others

Grassland Brazil 37 Fargione and others

Forest United States 179 – 481 Renewable Fuels Agency

Grassland United States 14 – 96 Renewable Fuels Agency

Mix of Forest and Grassland United States 9 Environmental Protection Agency

Years Until Net 

Corn Ethanol

Sugarcane Ethanol

Switchgrass Ethanolb

Palm Biodiesel

Soybean Biodiesel

Carbon Reductiona
USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS 17

CBO

conclude that the use of biofuels could result in net 

reductions in emissions over much shorter periods. 

The conclusions reached by different analysts about the 

consequences of land-use changes for greenhouse gas 

emissions in the United States are illustrative. One 

study implies that ethanol produced from corn grown on 

land that was previously grassland would require nearly 

100 years to compensate for the greenhouse gases emitted 

in changing grassland to farmland. Another analysis suggests that it would take from nearly 200 years to almost 

500 years before the use of biodiesel produced from soybeans grown on previously forested land reduced emissions. In contrast, the Environmental Protection Agency, 

although agreeing that emissions related to land use are 

an important concern in assessing the impact of biofuels 

on greenhouse gas emissions, concluded that, in general, 

less time might be necessary for such fuels to offset 

emissions from changes in land use and to cause overall 

emissions to decline. For example, the agency found that 

it would take 14 years for ethanol produced from corn to 

offset the impact of land-use changes; biodiesel produced 

from soybeans would require 9 years.33

Although changes in land use generally boost overall 

emissions from the production and use of a given biofuel, 

the size of that increase can be difficult for researchers to 

assess, for several reasons:

B The increased use of some biofuels is not expected to 

cause changes in land-use patterns. For example, 

biodiesel made from recycled animal or vegetable fats 

and cellulosic ethanol produced from corn stover are 

likely to result in few or no changes to land use 

because those feedstocks are by-products of other 

processes. 

B Some changes in land use are unlikely to release large 

amounts of greenhouse gases. For instance, cultivating 

algae for the production of biodiesel, a method currently being studied, could cause changes in land use, 

but those changes might produce few additional emissions because the land (if deserts were used, for example) might not have absorbed large amounts of carbon 

before being converted to algae cultivation. 

B Determining the proportion of overall changes in land 

use that are attributable to increased production of 

biofuels is difficult. Greater production may indirectly 

result in land-use changes elsewhere, but some of that 

new acreage might have been developed even if no 

such production had occurred. 

B Even if the extent of the land-use changes from added 

biofuel production was known, the effects of such 

changes on emissions would still be difficult to estimate because they would depend on the type of land 

converted and the types of crops to be farmed there, 

not only in this country but in others as well. Assessing the increase in emissions would require a detailed 

understanding of international farming practices, local 

economies in other nations, and prospective farming 

patterns at home and abroad.34

Nevertheless, emissions resulting from changes in land 

use are likely to grow in coming years as the statutory 

mandates spur increases in the production of biofuels. 

The mandates for 2015 under EISA, for instance, call for 

the use of 20.5 billion gallons of biofuels; up to 15 billion 

gallons of that amount—or about 40 percent more than 

current ethanol production—may be ethanol produced 

from corn grown in the United States. That quantity of 

fuel would require planting about 31 million acres of 

corn for the sole purpose of producing ethanol—or about 

one-fourth more than the acreage used for ethanol production today. Although a portion of that increased acreage could come from currently idle cropland or from 

the displacement of other crops—neither of which 

would directly cause a large amount of emissions to be 

33. Environmental Protection Agency, Renewable Fuel Standard 

Program (RFS2) Regulatory Impact Analysis (February 2010), 

Table 2.6-2, available at www.epa.gov/oms/renewablefuels/

420r10006.pdf. EPA’s recent assessment of the emissions from 

changes in land use illustrates the uncertainty involved in quantifying such emissions. The agency’s estimate that no more than 

14 years would be required before the use of ethanol or biodiesel 

produced from soybeans could offset emissions from land-use 

changes is about half the time that EPA had estimated less than a 

year earlier. For those earlier estimates, see Environmental Protection Agency, Draft Regulatory Impact Analysis: Changes to Renewable Fuel Standard Program (May 2009), p. 285, available at 

www.epa.gov/oms/renewablefuels/420d09001.pdf.

34. Bruce Babcock, “Measuring Unmeasurable Land-Use Changes 

from Biofuels,” Iowa Ag Review, vol. 15, no. 3 (Summer 2009), 

available at www.card.iastate.edu/iowa_ag_review/summer_09/

article2.aspx. For example, some of EPA’s findings are based on its 

estimate of fewer emissions—relative to the assumptions underlying other analyses—from domestic and international changes in 

land use.
18 USING BIOFUEL TAX CREDITS TO ACHIEVE ENERGY AND ENVIRONMENTAL POLICY GOALS

CBO

released—some of the increased acreage would result 

from devoting more land to agricultural production, 

which would lessen some of the reduction in emissions 

that would otherwise be achieved by using biofuels in 

place of petroleum fuels. In addition, the displacement of 

crops that are themselves not used to produce biofuels 

may cause changes in land use elsewhere in the world, 

causing additional releases of greenhouse gases.

The Interaction of Tax Credits and 

Mandates

The production of biofuels in the United States depends 

on the market conditions for those fuels coupled with the 

tax credits and the mandates for use of specific minimum 

amounts of biofuel. For some combinations of the prices 

of conventional fuels, the costs of producing biofuels, the 

biofuel tax credits, and the mandates, the quantity of biofuels produced will exceed the mandated amounts. That 

has been the case in the United States since the mandates 

were adopted.

For example, domestic consumption of ethanol in 2009 

totaled about 10.8 billion gallons when the mandate 

required the use of 10.5 billion gallons. Even during that 

period, however, the mandates have helped assure farmers 

and biofuel refiners that there will be a market for their 

products, which in turn has encouraged the investment 

decisions that have made significant biofuel production 

possible. In particular, the mandates have increased farmers’ incentive to grow feedstocks and producers’ incentive 

to invest in facilities and equipment.

For other combinations of conventional fuel prices, biofuel production costs, tax credits, and mandates, the 

quantity of biofuels produced will fall short of the mandated amounts. That is more likely to be the situation in 

the future, because the mandates currently in place 

require ever larger amounts of biofuels to be used over 

time. Specifically, the mandated amounts of biofuels rise 

to 36 billion gallons by 2022. Of that total, only 

15 billion gallons of conventional ethanol can be used to 

meet the renewable fuel standards; the remainder is mandated to consist of advanced biofuels (such as biodiesel 

produced from soybean oil) whose life-cycle greenhouse 

gas emissions are 50 percent less than those associated 

with burning gasoline or diesel fuel. In the future, the 

scheduled increase in mandated volumes would require 

biofuels to be produced in amounts that are probably 

beyond what the market would produce even if the 

effects of the tax credits were included. To the extent that 

the mandates determine future production levels, the biofuel tax credits would no longer be increasing production. 

However, they would still be reducing the costs borne by 

producers and consumers of biofuels and shifting some of 

those costs to taxpayers.