United States Government Accountability Office

GAO Report to Congressional Requesters

BIOFUELS

DOE Lacks a Strategic 

Approach to 

Coordinate Increasing 

Production with 

Infrastructure 

Development and 

Vehicle Needs 

June 2007 

 

GAO-07-713 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

BIOFUELS

DOE Lacks a Strategic Approach to 

Coordinate Increasing Production with 

Infrastructure Development and Vehicle 

Needs 

Highlights of GAO-07-713, a report to 

congressional requesters 

The U.S. transportation sector is 

almost entirely dependent on oil, a

condition that poses significant 

economic and environmental risks. 

Biofuels, such as ethanol and 

biodiesel, have the potential to 

displace oil use in transportation 

fuel. GAO was asked to describe

the status of and impediments to 

expanding biofuel production, 

distribution infrastructure, and 

compatible vehicles as well as

federal policy options to overcome

the impediments. GAO was also 

asked to assess the extent to which 

the Department of Energy (DOE)

has developed a strategic approach 

to coordinate the expansion of 

biofuel production, infrastructure, 

and vehicles and has evaluated the 

effectiveness of biofuel tax credits.

GAO interviewed representatives 

and reviewed studies and data from

DOE, states, industry, and other 

sources. 

What GAO Recommends

GAO recommends that the

Secretary of Energy (1) collaborate 

with public and private sector 

stakeholders to develop a strategic 

approach that coordinates 

expected biofuel production with 

distribution infrastructure and

vehicle production, and (2) 

collaborate with the Secretary of

the Treasury to evaluate and report 

on the extent to which biofuelrelated tax expenditures are 

achieving their goals. 

DOE reviewed a draft of this report 

and generally agreed with the

findings and recommendations.

Combined ethanol and biodiesel production increased rapidly from about 3.4 

billion gallons in 2004 to about 4.9 billion gallons in 2006, but these 

biofuels—primarily ethanol—composed only about 3 percent of 2006 U.S. 

gasoline and diesel transportation fuel use. Due to limitations on the 

production and use of corn—the primary feedstock used to produce ethanol 

in the United States—15 billion to 16 billion gallons is the generally agreed 

maximum amount of U.S. corn ethanol production. Using cellulosic 

feedstocks, such as corn stalks or other plant material, could expand the 

amount of ethanol produced, but the production costs are currently twice 

those of corn ethanol. Policies that support cellulosic ethanol research have

the potential to increase the future availability of cost-competitive ethanol. 

Existing biofuel distribution infrastructure has limited capacity to transport 

the fuels and deliver them to consumers. Biofuels are transported largely by 

rail, and the ability of that industry to meet growing demand is uncertain. In 

addition, in early 2007, about 1 percent of fueling stations in the United 

States offered E85—a blend of about 85 percent ethanol and 15 percent 

gasoline—or high blends of biodiesel, such as B20 or higher. Increasing the 

availability of E85 at fueling stations is impeded largely by the limited 

availability of ethanol for use in high blends. Several policy options, such as 

mandating their installation, could increase the number of biofuel dispensers 

in stations. However, until more biofuel is available at a lower cost, it is

unlikely that more fueling stations would lead to significantly greater 

biofuels use. 

In 2006, an estimated 4.5 million flexible fuel vehicles (FFV) capable of 

operating on ethanol blends up to E85 were in use—an estimated 1.8 percent 

of the nearly 244 million U.S. vehicles. The number of FFVs may increase 

substantially because of a recent commitment by DaimlerChrysler, Ford, and 

General Motors to increase FFV production to compose about 50 percent of 

their annual production by 2012. Several policy options, such as a tax credit 

for FFV production, could increase the number of FFVs, but would likely 

have little impact on biofuel use until E85 is less expensive and more widely

available. It is also a concern that because many FFVs are less fuel efficient 

than other vehicles and rarely use E85, they actually increase petroleum use.

DOE has not yet developed a comprehensive approach to coordinate its 

strategy for expanding biofuels production with the development of biofuel 

infrastructure and production of vehicles. Such an approach could assist in 

determining which blend of ethanol—E10, E85, or something in between— 

would most effectively and efficiently increase the use of the fuel and what 

infrastructure development or vehicle production is needed to support that 

blend level. In addition, DOE has not evaluated the performance of biofuelrelated tax credits, the largest of which cost the Treasury $2.7 billion in 2006. 

As a result, it is not known if these expenditures produced the desired 

outcomes or if similar benefits might have been achieved at a lower cost. 

www.gao.gov/cgi-bin/getrpt?GAO-07-713.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark Gaffigan 

at (202) 512-3841 or gaffiganm@gao.gov. 
Biofuels Availability and Use

Contents 

Letter 1

Results in Brief 5

Background 8

Biofuel Production Has Increased, and Federal Support Targeting 

Technology Development Could Address Some of the 

Impediments to Greater Production 13 

The Biofuel Distribution Infrastructure Has Limited Capacity to 

Transport the Fuels and Deliver Them to Consumers, and 

Expanding the Distribution System Faces a Variety of 

Impediments 23

The Number of Biofuel Compatible Vehicles Is Projected to

Increase, but Challenges, such as Limited Consumer Demand, 

Remain 31

DOE Has Not Yet Developed a Strategic Approach to Coordinate 

the Expansion of Biofuel Production with Infrastructure and 

Vehicles, and the Effectiveness of Biofuel Tax Expenditures Has 

Not Been Evaluated 39 

Conclusions 43

Recommendations for Executive Action 45 

Agency Comments and Our Evaluation 45 

GAO Contact 51 

Staff Acknowledgments 51 

Figures 

Figure 1: Location of Ethanol Production Plants in 2007 17 

Figure 2: Location of Public and Federal Fueling Stations That 

Offered E85 in 2007 25 

Figure 3: Location of Public and Federal Fueling Stations That 

Offered B20 through B100 in 2007 26 

Figure 4: Location of Public Fueling Stations That Offered E85 in 

2007 and Number of Privately Owned FFVs by State in 

2006 35

Figure 5: Location of Federal Fueling Stations That Offered E85 in 

2007 and Number of Federal Fleet FFVs by State in 2006 38 

Page i GAO-07-713
Abbreviations 

CAFE Corporate Average Fuel Economy 

DOE Department of Energy 

EIA Energy Information Administration 

EPA Environmental Protection Agency 

FFV flexible fuel vehicle 

GPRA Government Performance and Results Act 

MTBE methyl tertiary butyl ether 

NREL National Renewable Energy Laboratory 

RFS Renewable Fuels Standard 

UL Underwriters Laboratories 

USDA U.S. Department of Agriculture 

VEETC Volumetric Ethanol Excise Tax Credit 

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Page ii GAO-07-713 Biofuels Availability and Use 
United States Government Accountability Office

Washington, DC 20548 

June 8, 2007

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable Norm Coleman 

Ranking Member 

Permanent Subcommittee on Investigations 

Committee on Homeland Security 

 and Governmental Affairs 

United States Senate 

The Honorable Norm Coleman 

Ranking Member 

Permanent Subcommittee on Investigations 

Committee on Homeland Security 

 and Governmental Affairs 

United States Senate 

The Honorable Barack Obama 

United States Senate 

In 2006, the United States accounted for slightly less than 25 percent of the 

world’s oil consumption, making it the world’s largest consumer. In 

particular, the nation’s transportation sector is almost entirely dependent

on oil and accounts for nearly two-thirds of total U.S. oil consumption. To 

meet growing demand for oil in the face of limited and declining domestic 

production, the nation imported about two-thirds of its oil and petroleum 

products in 2006. Absent dramatic reductions in consumption and 

significantly increased use of alternative fuels, the nation will become 

increasingly dependent on imported oil. Because oil is a global commodity 

and because there is currently relatively little spare oil production 

capacity, even a minor disruption in the global oil supply could cause large 

increases in price and economic difficulties for tens of millions of 

Americans. In addition, there are growing concerns about the negative 

environmental impacts of oil use, including its role in greenhouse gas 

emissions that are contributing to potentially significant and damaging 

changes to the global climate system. 

In 2006, the United States accounted for slightly less than 25 percent of the 

world’s oil consumption, making it the world’s largest consumer. In 

particular, the nation’s transportation sector is almost entirely dependent

on oil and accounts for nearly two-thirds of total U.S. oil consumption. To 

meet growing demand for oil in the face of limited and declining domestic 

production, the nation imported about two-thirds of its oil and petroleum 

products in 2006. Absent dramatic reductions in consumption and 

significantly increased use of alternative fuels, the nation will become 

increasingly dependent on imported oil. Because oil is a global commodity 

and because there is currently relatively little spare oil production 

capacity, even a minor disruption in the global oil supply could cause large 

increases in price and economic difficulties for tens of millions of 

Americans. In addition, there are growing concerns about the negative 

environmental impacts of oil use, including its role in greenhouse gas 

emissions that are contributing to potentially significant and damaging 

changes to the global climate system. 

According to the Department of Energy (DOE), if certain technological

and other barriers are overcome, domestically produced biofuels made 

from renewable biomass have the potential to displace as much as 30

percent of current U.S. transportation fuel consumption by 2030, as well as 

help reduce emissions of greenhouse gases and support farm economies in 

many states. The development of alternative forms of energy, such as 

biofuels, has been a national goal since the oil crises of the 1970s, but to 

According to the Department of Energy (DOE), if certain technological

and other barriers are overcome, domestically produced biofuels made 

from renewable biomass have the potential to displace as much as 30

percent of current U.S. transportation fuel consumption by 2030, as well as 

help reduce emissions of greenhouse gases and support farm economies in 

many states. The development of alternative forms of energy, such as 

biofuels, has been a national goal since the oil crises of the 1970s, but to 

Page 1 GAO-07-713 Biofuels Availability and Use
Biofuels Availability and Use

date progress has been limited. Currently, the most commonly produced 

biofuels are ethanol and biodiesel, made primarily from corn and soybean

oil feedstocks, respectively. Ethanol is primarily blended with gasoline in

mixtures of 10 percent or less that can be used in any vehicle, but a 

relatively small volume is also blended at a higher level called E85—a 

blend of approximately 85 percent ethanol—which can only be used in 

specially designed flexible fuel vehicles (FFV).1

 Similarly, biodiesel is 

mostly blended with petroleum diesel at low levels, such as B2 (2 percent 

biodiesel), but is also commonly blended with diesel as B20 (20 percent 

biodiesel). Biodiesel in any blend level, as well as 100 percent biodiesel 

(B100), can generally be used in any diesel engine vehicle. 

Using biofuels, particularly in high-level blends as a substitute for oil in 

transportation fuels, is subject to a number of limitations. For example, 

corn and soybeans are primarily used in livestock feed and human food 

products, and therefore using these crops to produce biofuels will likely 

cause livestock feed and human food prices to rise. Moreover, ethanol is 

not a gallon-for-gallon replacement for gasoline because it contains only

about two-thirds of the energy of a gallon of gasoline. While ethanol 

combusts more efficiently than gasoline, drivers nonetheless experience 

about a 25 percent reduction in miles per gallon in vehicles using high 

blends such as E85. In addition, although DOE, the U.S. Department of 

Agriculture (USDA), and most other researchers maintain that a gallon of 

corn ethanol contains more energy than it takes to produce a gallon of the 

fuel, a small number of researchers believe that corn ethanol has a 

negative energy balance, meaning that it takes more energy to produce 

than it contains. Furthermore, because vehicle manufacturers have 

generally designed vehicles to operate primarily on gasoline or diesel, the 

use of fuels containing more than 10 percent ethanol or 5 percent biodiesel 

is not covered under the warranty of most vehicles. 

The federal government has implemented a variety of measures to support 

and promote the greater availability and use of biofuels in place of 

petroleum. For example, the Environmental Protection Agency (EPA) is 

responsible for administering the Renewable Fuels Standard (RFS), which 

mandates that transportation fuel blenders increase their use of renewable 

fuels such as ethanol and biodiesel from 4 billion gallons in 2006 to 7.5 

 1

DOE’s Energy Information Administration estimates that the actual annual average 

ethanol content of E85 is 74 percent due to the need to reduce the ethanol content in fall, 

winter and spring to avoid vehicle starting problems in cooler weather.

Page 2 GAO-07-713
Biofuels Availability and Use

billion in 2012.2 Other federal agencies, such as DOE and USDA, conduct

and fund efforts to further the development of the next generation of 

biofuels, principally ethanol from cellulosic biomass, which could be 

produced from farmed crops such as switchgrass and low-value residues 

from sources like wheat straw and corn stalks that are in abundant 

supply.3

 DOE is also responsible for monitoring compliance with the 

requirement that 75 percent of federal fleet vehicle acquisitions be capable

of using alternative fuels and that the use of the fuels be increased. In 

addition, the Department of Transportation administers the Corporate 

Average Fuel Economy (CAFE) program, which regulates fuel economy 

for passenger vehicles sold in the United States and provides incentives to 

automobile manufacturers for producing alternative fuel vehicles, such as

FFVs that can use regular gasoline or ethanol blends up to E85. 

Federal policy further encourages biofuel availability and use through 

incentives such as the Volumetric Ethanol Excise Tax Credit (VEETC), 

which provides a 51 cent per gallon tax credit to fuel blenders for ethanol

they blend with gasoline, and a tax credit for the installation of fueling 

stations to expand public access to biofuels. Tax credits are a type of tax 

expenditure that result in revenue loss for the federal government. 

Through tax expenditures, the government forgoes a certain amount of tax 

revenue to encourage specific behaviors by a particular group of 

taxpayers. The biofuel-related tax credits are in effect spending programs 

channeled through the tax system. We recently reported that according to

Office of Management and Budget officials, individual agencies should 

take responsibility for identifying tax expenditures that affect their 

missions.4

 We also reported that an evaluation of the various energy supply 

tax credits might involve both DOE and the Department of the Treasury 

(Treasury). The Government Performance and Results Act (GPRA) of 1993 

established a statutory framework for evaluating the performance of 

federal programs, including tax expenditures. The act requires federal 

agencies to, among other things, establish program performance goals, 

gather data on performance, and report the results. 

 2

The President recently announced a goal of producing 35 billion gallons of alternative 

fuels, such as biofuels, coal-to-liquids, and natural gas, by 2017. 

3

Switchgrass is a native grass that thrives on marginal lands, needs little water, and no 

fertilizer.

4

See GAO, Government and Performance Accountability: Tax Expenditures Represent a

Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 (Washington,

DC: Sept. 23, 2005). 

Page 3 GAO-07-713
Biofuels Availability and Use

In this context, you asked us to describe the status of the nation’s (1) 

biofuel production, (2) biofuel distribution infrastructure, and (3) biofuel

compatible vehicles. For each of these components of biofuel 

development, we also examined impediments to expansion and federal 

policy options that have been proposed to overcome the impediments. 

Finally, you asked us to assess the extent to which DOE has developed a 

strategic approach to coordinate the expansion of biofuel production with 

distribution infrastructure (transport systems and fueling stations) and 

vehicle needs and assess the extent to which DOE has evaluated the 

effectiveness of biofuel tax credits. 

In conducting our work, we reviewed data and analyses from DOE’s 

Energy Information Administration (EIA) and other federal, state, and 

industry sources to determine the current status and trends for ethanol 

and biodiesel production.

5

 We reviewed key scientific and economic 

studies and spoke with federal and state agency officials, biofuel 

producers, and academics to identify impediments to increasing biofuel 

production and the potential policy options that could be pursued to 

overcome the impediments. To determine the current status and trends for 

the biofuel distribution infrastructure, including fueling stations that 

provide E85 or biodiesel blends, we reviewed data from DOE’s Alternative

Fuels Data Center. We spoke with representatives of major oil companies 

regarding their biofuel policies for branded fueling stations, and spoke 

with federal and state agency officials, biofuel producers and distributors, 

and fueling equipment manufacturers and certifiers regarding challenges

to transporting biofuels and increasing the number of biofuel fueling 

stations and policy options to address those challenges. To determine the 

current status and trends for biofuel compatible vehicles, including federal 

fleet vehicles, we reviewed data and analysis from DOE and other federal 

and automobile industry sources. We spoke with major domestic and 

foreign automobile manufacturers regarding their plans for producing 

biofuel compatible vehicles as well as federal and state agency officials 

and consumer and environmental group representatives regarding the key 

barriers to increasing the number of biofuel compatible vehicles and 

policy options to mitigate those barriers. To assess the extent to which 

DOE has developed a strategic approach to coordinate the expansion of 

biofuel production with distribution infrastructure and vehicle needs and 

 5

EIA is a statistical agency of DOE that provides energy data, forecasts, and analysis to 

promote sound policymaking, efficient markets, and public understanding regarding energy

and its interaction with the economy and environment.

Page 4 GAO-07-713
Biofuels Availability and Use

evaluated the effectiveness of biofuel tax credits, we met with key officials 

at DOE and gathered documentation of how they plan, implement, 

monitor, and evaluate the performance of biofuel-related programs. 

We did not evaluate the costs and benefits of producing and using greater 

amounts of biofuels, expanding the biofuel distribution infrastructure, or 

increasing the number of biofuel compatible vehicles. Rather, we assessed 

the current status of production, distribution infrastructure, and vehicles; 

identified impediments to their further expansion; and noted steps that 

could be taken to expand the production and use of biofuels should 

Congress deem it to be in the national interest. We assessed the reliability 

of the industry and agency data that we used and found the data to be 

sufficiently reliable for the purposes of this report. We performed our 

work between June 2006 and June 2007 in accordance with generally 

accepted government auditing standards. 

Ethanol and biodiesel production is rapidly increasing, but the challenge 

of producing biofuels at a lower cost than that of petroleum fuels makes it 

unlikely that they will displace a considerable amount of petroleum in 

transportation fuels until less expensive production processes are 

developed. From 2004 to 2006, annual U.S. ethanol production increased 

from 3.4 billion gallons to about 4.9 billion gallons, and annual biodiesel 

production expanded from 28 million gallons to approximately 287 million 

gallons. Despite these rapid increases, ethanol and biodiesel together 

composed only about 3 percent of gasoline and diesel motor fuel used in 

2006. About 99 percent of the ethanol produced in 2006 was blended with 

gasoline at levels of 10 percent or less, and most biodiesel was blended 

with diesel fuel at levels of 20 percent or less. The key challenge to 

increasing biofuel production is making biofuels cost competitive with 

petroleum-based transportation fuels. Currently, the cost of biofuel is 

largely determined by the cost of feedstocks—primarily corn and 

soybeans—that are in limited supply and have increased in price due to 

high demand for biofuel production. For this and other reasons, such as 

high demand for ethanol as a fuel additive, the average wholesale price of

ethanol per gallon in 2006 was about 33 percent more than the average 

wholesale price of gasoline. Since ethanol contains one-third less energy 

than gasoline, the price differential is even more significant than this 

comparison indicates. According to DOE, producing ethanol using 

cellulosic biomass as the feedstock could greatly expand the amount of 

ethanol available, but current production costs are roughly double those of

corn ethanol. DOE has set a target of 2012 to achieve technological 

advances, such as reducing the cost of the enzymes used in the production 

Results in Brief 

Page 5 GAO-07-713
Biofuels Availability and Use

process, which would make cellulosic ethanol cost competitive with corn

ethanol. Energy experts with whom we spoke and our own analysis 

indicate that because of limitations on the amount of corn and soybeans 

that are available for biofuel production, given competition for the use of 

land to grow crops for livestock and human consumption, significant 

expansion of biofuels production will be unlikely without policies that put

a priority on support for cellulosic ethanol research and development and 

that offer enhanced incentives for its production.

The biofuel distribution infrastructure has limited capacity to transport the 

fuels and deliver them to consumers, and significant growth in the 

distribution system faces a variety of impediments. Biofuels are primarily 

transported by rail, but also by truck and barge, and limited capacity in 

this distribution system has led to supply disruptions and concerns about 

the system’s ability to effectively transport greater amounts of biofuels if 

production significantly increases. The key challenges to meeting biofuel 

transport needs are potential capacity limitations in the freight rail system 

and the cost of developing a dedicated ethanol pipeline system if one is 

needed. In addition, less than 1 percent of fueling stations offer E85 or 

high blends of biodiesel. In early 2007, approximately 1,100 fueling 

stations, primarily in the Midwest, offered E85, and approximately 400 

fueling stations throughout the country offered B20 through B100. Efforts 

to increase the number of stations offering high-level biofuel blends face 

challenges. Most significantly, absent a breakthrough in cellulosic 

technology, it is likely that little ethanol would be blended as E85. Most of 

the ethanol that is currently projected by EIA to be produced through 2030 

could be used—and would likely bring a higher price to the sellers—in low 

blends as a gasoline extender or oxygenate to reduce vehicle emissions, as 

this is the way that about 99 percent of ethanol is currently being used. 

Biofuels also require specialized storage and dispensing equipment. For 

example, because ethanol is corrosive, E85 requires separate storage 

tanks, pumps, and dispensers at fueling stations. It can cost a fueling 

station operator around $3,300 to minimally modify existing equipment or 

about $60,000 to install new equipment—which may be a significant 

impediment for many potential retailers. Several potential options have 

been proposed to increase the number of stations offering biofuels, such 

as providing enhanced tax credits for station owners to install biofuel 

compatible dispensers or mandating that station owners install them. 

While these policy options would likely result in more stations that offer 

biofuels, given the higher costs and limited availability of biofuels, it is 

unlikely that the greater number of biofuel fueling stations would lead to

significantly greater use of biofuels at this time. 

Page 6 GAO-07-713
Biofuels Availability and Use

The relatively few biofuel compatible vehicles in use in the United States 

could increase substantially in the near future because of planned 

production increases by manufacturers, but impediments to further 

production increases remain. In 2006, there were an estimated 4.5 million 

FFVs in the United States—about 1.8 percent of the nearly 244 million U.S. 

vehicles. Recently, DaimlerChrysler, Ford, and General Motors committed 

to increasing FFV production to compose about 50 percent of their annual 

production by 2012 despite limited consumer demand for FFVs and the 

additional engineering research and material costs to produce FFVs on a 

significantly larger scale. Several policy options have been proposed to 

increase the number of biofuel compatible vehicles, such as providing 

automobile manufacturers with, in addition to the CAFE credits they 

already receive, tax incentives to offset the additional costs of

manufacturing more FFVs or requiring automobile manufacturers to make

an increasing percentage of their fleet biofuel compatible until the U.S. 

automotive fleet is 100 percent FFVs. However, according to the 

Department of Transportation, DOE, and EPA, some automobile 

manufacturers have already used CAFE incentives to produce many FFVs 

that are less fuel efficient and that consumers generally do not operate 

with biofuels, resulting in increased petroleum use. While various policy 

options could increase the number of biofuel compatible vehicles, they

would likely have little impact on biofuel use unless these fuels become 

cost competitive and more widely available in higher blends. For example, 

in early 2007, there were an estimated 257,000 privately owned FFVs 

throughout California but only one publicly accessible fueling station—

located in the San Diego area—that offered E85. 

DOE has not yet developed a comprehensive strategic approach to 

coordinate the expansion of biofuel production with biofuel distribution 

infrastructure development and vehicle production, and has not evaluated

the effectiveness of biofuel tax credits. It is currently not known what 

blend of ethanol—E10, E85, or something in between—would most 

effectively and efficiently increase the use of the fuel; what level of 

distribution infrastructure development or vehicle production is needed to 

support that blend level; and when the infrastructure and vehicles will be 

needed. While DOE’s Biomass Program has a strategic approach for 

increasing ethanol production, DOE has not yet developed a 

comprehensive strategic approach for determining the distribution 

infrastructure and vehicles needed to transport and use the increased 

production that could result from the program. Such an approach could 

assist in resolving these questions and help DOE and other agencies 

determine what level and types of federal involvement in research and 

development or subsidies for infrastructure development or vehicle 

Page 7 GAO-07-713
Biofuels Availability and Use

production are needed to help meet national goals for increasing biofuels 

use. In addition, the tax credits provided under the VEETC cost the federal 

government about $2.7 billion in forgone revenue in 2006, according to the 

Treasury Department. However, DOE and Treasury have not worked 

together to define their roles and responsibilities for establishing outcomeoriented goals or evaluating and reporting on the results of these and other 

tax expenditures. Consequently, the extent to which these large tax 

expenditures have resulted in the production of more ethanol than would 

have occurred without them, or produced specific outcomes, such as 

reducing petroleum imports, is unknown. Furthermore, it is not known if 

similar benefits or outcomes might be achieved by less costly means. 

To improve biofuel-related planning and to provide Congress better 

information on the costs and benefits of biofuel tax expenditures, we are 

recommending that the Secretary of Energy (1) collaborate with public 

and private sector stakeholders to develop a comprehensive strategic 

approach to increasing the availability and use of biofuels that coordinates 

expected biofuel production levels with the necessary distribution 

infrastructure development and vehicle production, and (2) collaborate 

with the Secretary of the Treasury to evaluate and report on the extent to

which biofuel-related tax credits are effectively and efficiently achieving

their goals, as well as the extent to which they support the department’s 

comprehensive strategic approach for biofuels. In commenting on a draft 

of this report, DOE agreed with our recommendations. DOE’s comments 

appear in appendix I. 

Over the last 30 years, the United States has benefited from relatively

inexpensive and abundant oil supplies, but has also experienced periodic 

disruptions resulting in price shocks and related energy crises. In 1973, oil 

cost about $15 per barrel (adjusted for inflation) and accounted for 96 

percent of the energy used by the transportation sector. The disruption of 

oil imports caused by the 1973 oil embargo by the Organization of Arab 

Petroleum Exporting Countries led to the doubling of oil prices in the 

United States between 1973 and 1974. Prices doubled again between 1978

and 1981 during the Iranian Revolution and the Iran-Iraq war. Oil prices 

fell in the mid-1980s, and as the U.S. economy expanded and domestic 

sources of oil declined, U.S. reliance on imported crude oil grew from 40.5 

percent of the U.S. supply in 1980 to 66.1 percent in 2006. Oil now 

accounts for 98 percent of the energy consumed for transportation, 

according to EIA. Furthermore, EIA expects oil consumption in the 

transportation sector to grow by more than 40 percent, increasing from 4.8 

billion barrels annually in 2004 to 6.8 billion barrels in 2030. 

Background 

Page 8 GAO-07-713
Biofuels Availability and Use

Biofuels, such as ethanol and biodiesel, are alternative transportation fuels 

produced from renewable sources. Increasing ethanol and biodiesel 

production and use have been touted by proponents as a means to address 

energy security concerns and lower greenhouse gas emissions while 

raising domestic demand for U.S. farm products. Currently, the most 

commonly produced biofuels are ethanol and biodiesel, made primarily 

from corn and soybean oil feedstocks, respectively. The United States is 

the world’s largest corn producer—in the 2005-to-2006 marketing year, 

farmers produced over 11 billion bushels of corn and exported about 19 

percent of the harvest.6

 The United States is also the world’s largest 

soybean producer—in the 2005-to-2006 marketing year, farmers produced 

over 3 billion bushels of soybeans and exported about 31 percent of the 

harvest. 

In general, large-scale ethanol production is either corn-based or sugarbased, using feedstocks such as sugarcane. Corn, which contains starch 

that can relatively easily be converted into sugar, is the feedstock for 

about 98 percent of the ethanol produced in the United States. While Brazil 

produces large amounts of ethanol from sugarcane, according to USDA, in 

the United States, the cost of domestic sugarcane feedstock would make 

ethanol production twice as costly as using corn. Biodiesel is produced by 

chemically combining a feedstock—such as recycled cooking grease, 

animal fat, or most commonly soybean oil—with alcohol. Biorefineries not 

only produce biofuels, but the conversion processes also create valuable 

coproducts—for example, ethanol production also results in distillers 

grains that are used as livestock feed. 

Since the late 1970s, energy, environmental, and agricultural legislation 

and policies have encouraged the production and use of ethanol and 

biodiesel. The Energy Tax Act of 1978 first authorized a motor fuel excise

tax exemption for ethanol blends, which was extended in several 

subsequent statutes. A 54 cent per gallon duty on imported ethanol to 

offset the U.S. tax incentives was recently extended through the end of 

2008.

7

 The American Jobs Creation Act of 2004 established a tax credit of 

up to $1 per gallon of biodiesel produced, and the Energy Policy Act of 

2005 (EPAct 2005) extended this credit through 2008. Laws are also in 

 6

The marketing year for corn is from September 1 each year to August 31 of the following 

year, and the marketing year for soybeans is from October 1 each year to September 30 of

the following year. 

7

Tax Relief and Health Care Act of 2006 (Pub. L. No. 109-432). 

Page 9 GAO-07-713
Biofuels Availability and Use

place giving income tax credits and loan guarantees to small ethanol 

producers. Provisions of the Clean Air Act Amendments of 1990 

established programs to control carbon monoxide and ozone problems 

created by motor fuel emissions, and ethanol and methyl tertiary butyl 

ether (MTBE) were the primary oxygenates blended into gasoline to meet

the programs’ standards. Because MTBE was subsequently found to 

contaminate water, its use is currently being phased out—25 states have

banned the additive as of 2006—increasing demand for ethanol. EPA’s 

recently adopted low-sulfur diesel standards designed to help reduce 

harmful emissions could increase demand for biodiesel, which provides 

lubricity benefits when blended with regular diesel. The Farm Security and 

Rural Investment Act of 2002 contained the first energy title in farm bill 

history, authorizing a range of programs through 2007 to promote 

bioenergy production and consumption. 

In addition, some states have established laws and policies to increase 

renewable fuel availability and use through biofuel mandates, production 

incentives, and tax credits. According to the American Coalition for 

Ethanol, in 2006, 4 states had mandates for the use of renewable fuels, and 

12 states had such a mandate under consideration. In addition, 17 states 

provided ethanol production incentives, and 12 states offered incentives to 

encourage retailers to provide biofuels at their stations. One of the first 

states to actively promote biofuels was Minnesota, which currently 

mandates that 2 percent of the diesel transportation fuel consumed in the 

state be biodiesel and that 20 percent of gasoline transportation fuel be 

ethanol by 2013.8

 Minnesota state officials view their support for biofuels 

as a means to boost their farm economy by increasing demand for 

feedstock crops while also contributing to a cleaner environment. 

Despite the federal and state efforts to support and promote ethanol and 

biodiesel, the public has been slow to accept them because they have not

been cost competitive or readily available compared to relatively cheap 

 8

EPA has determined that the sale of blends of E10 or less for most vehicles and up to E85 

for FFVs is allowed under the Clean Air Act Amendments of 1990. The state of Minnesota 

and the Renewable Fuels Association are currently sponsoring research to determine the 

effects of ethanol blends up to E20 on vehicle fuel systems and emissions. The sponsors 

plan to submit the results to EPA for an evaluation of E20’s compliance with the Clean Air 

Act. If EPA rules in favor of allowing the use of blends up to E20, the ruling would apply 

nationwide. In the interim, Minnesota is attempting to meet its 20 percent goal by a

combination of E10 and E85 use. In addition, DOE plans to work with EPA to develop a 

national test program to gather the data required to facilitate the legal certification of fuel 

blends up to E15 or E20. 

Page 10 GAO-07-713
Biofuels Availability and Use

and abundant petroleum-based fuels.9 Furthermore, because biofuels 

contain less energy per gallon than their petroleum-based counterparts, 

consumers must purchase more of the fuels to travel the same distance. A 

gasoline blend containing 10 percent ethanol results in a 2 to 3 percent 

decrease in miles-per-gallon fuel economy, while in a higher blend such as

E85, the decrease is proportionally larger. The energy content of a gallon 

of biodiesel is about 8 percent lower than that of petroleum diesel, causing

vehicles running on B20, for example, to experience about a 2 percent 

decrease in miles per gallon, while for vehicles running on B100, the

decrease is proportionally larger. 

Furthermore, the net energy value of biofuels has been the subject of 

debate. Numerous studies conducted since the late 1970s have estimated 

the net energy value of corn ethanol, but variations in data and 

assumptions have resulted in a wide range of estimates, a few indicating

that it takes more nonrenewable energy to produce ethanol than is 

delivered when the fuel is consumed. In 2002, USDA conducted a study to

estimate the net energy value of ethanol and to identify the cause of 

variance among studies.10 USDA’s analysis determined that corn ethanol 

yields 34 percent more energy than it takes to produce it—considering the 

entire fuel cycle of growing the corn, harvesting it, transporting it, and

distilling it into ethanol—when using the assumption that the fertilizers 

used in growing the corn were produced by modern processing plants, the 

corn is converted in modern ethanol plants, and farmers achieve average 

corn yields. Furthermore, only about 17 percent of the energy used to 

produce ethanol comes from gasoline or diesel fuel. Therefore, for every 

gallon of petroleum fuel used to produce ethanol, about six energy 

equivalent units of ethanol can be produced. Biodiesel, according to a 1998 

 9

Some people believe that the prices U.S. consumers pay for petroleum fuels do not reflect

their true costs. For example, some researchers have concluded that petroleum fuels 

would sell at a much higher price—making biofuels more competitive—if the full 

environmental costs of producing and using petroleum fuels and the full costs of ensuring 

oil supply security worldwide were accounted for in the price. A comparison of the costs of

biofuels and petroleum fuels would also have to take into account the full environmental 

and other costs of producing biofuels, such as the impacts of potentially devoting greater 

land area to commercial agriculture and using greater amounts of fresh water for irrigation. 

10USDA, The Energy Balance of Corn Ethanol: An Update, (AER-813), Office of Energy

Policy and New Uses, July 2002. Subsequently, in a January 2006 study published in Science 

magazine, University of California, Berkeley, researchers reviewed six representative 

analyses of fuel ethanol and found that those that reported negative net energy incorrectly 

accounted for input energy and used some obsolete data. 

Page 11 GAO-07-713
Biofuels Availability and Use

joint USDA-DOE study, yields 220 percent more energy than is used in its 

production.

Research on the environmental effects of biofuels on air quality has shown 

a variety of impacts depending on how the fuels are blended and where 

they are used. Through 2005 ethanol was primarily used in blends under 10 

percent to meet a minimum oxygenate requirement for reformulated 

gasoline—in accordance with the Clean Air Act Amendments of 1990—to 

reduce vehicle emissions in certain metropolitan areas with high levels of 

ground-level ozone. Although oxygenates lead to lower emissions of 

carbon monoxide, in some cases they may lead to higher emissions of 

nitrogen oxides and volatile organic compounds, which can in some areas 

lead to increased ground-level ozone formation due to atmospheric 

conditions.11 Regarding greenhouse gas emissions, an Argonne National 

Laboratory study found that for the entire fuel cycle—from growing the 

corn to producing the ethanol—corn-based E10 generates about 1 percent 

lower greenhouse gas emissions than gasoline, while emissions are about 

20 percent lower for E85.12 Biodiesel reduces nearly all forms of air 

pollution compared to petroleum diesel, although ozone-forming nitrogen 

oxide emissions are created. According to a joint DOE and USDA study, 

biodiesel also reduces greenhouse gasses, for example, producing 78 

percent less carbon dioxide than diesel fuel for the entire fuel cycle. 

In an effort to obtain greater net energy and environmental benefits than 

with corn ethanol, DOE’s Biomass Program is leading research efforts 

toward developing a process to produce cellulosic ethanol that is cost 

competitive with gasoline. Cellulosic ethanol is chemically the same as 

corn- or sugar-based ethanol, but is produced from feedstocks that are of

lower economic value. These feedstocks include switchgrass as well as 

fast-growing woody crops such as hybrid poplar trees, and other biomass 

materials, such as logging and crop residues. Because cellulosic 

feedstocks require far less natural gas-derived fertilizer for their 

production, the overall energy balance and other benefits of cellulosic 

ethanol could be significantly greater than those of corn ethanol. For 

 11Section 1504(a) of the Energy Policy Act of 2005 (Pub.L. No. 109-58) eliminated the

reformulated gasoline oxygenate standard as of May 2006 and required EPA to revise its 

regulations for the program to allow the sale of nonoxygenated reformulated gasoline. 

12DOE, Effects of Fuel Ethanol Use on Fuel-Cycle Energy and Greenhouse Gas Emissions, 

Argonne National Laboratory, January 1999. The study analyzed emissions of three major 

greenhouse gasses—carbon dioxide, methane, and nitrous oxide. 

Page 12 GAO-07-713
Biofuels Availability and Use

example, the Argonne National Laboratory study concluded that cellulosebased E85 could reduce fossil energy consumption, such as that of natural

gas, coal, and oil, by roughly 70 percent and could reduce greenhouse gas

emissions by roughly 70 to 90 percent per vehicle mile traveled in a 

midsize car. However, while cellulosic feedstocks are abundant and 

inexpensive, currently, cellulosic feedstock conversion technology is 

rudimentary and expensive. Consequently, while pilot facilities are 

operating in the United States and Canada, there are currently no 

commercial cellulose-to-ethanol facilities operating in the United States, 

although plans to build such plants are under way. Biodiesel research is 

not a top priority for DOE, but private companies are developing 

technology, for example, to produce biodiesel from feedstocks such as 

algae. 

U.S. annual ethanol and biodiesel production increased rapidly from 2004 

to 2006, but together these fuels composed only about 3 percent of 

gasoline and diesel motor fuel used in 2006. The challenge of producing 

biofuels at a lower cost than petroleum fuels makes it unlikely that they

will displace a considerable amount of the petroleum used in 

transportation fuels until new production processes are developed. The 

higher relative cost of producing biofuels is largely due to the cost of the 

primary feedstocks—corn and soybean oil. Producing ethanol from 

alternative feedstocks such as switchgrass or other biomass materials 

could expand the geographic range of biofuel plants, but the challenge of 

producing cost competitive cellulosic ethanol is even greater than for 

conventional corn ethanol. Nevertheless, policy options exist that could 

help overcome some of these challenges, allowing biofuels to compose an

even greater proportion of the nation’s total transportation fuel supply. 

From 2004 to 2006, annual U.S. ethanol production increased about 43 

percent from 3.4 billion gallons to about 4.9 billion gallons. About 99 

percent of the ethanol produced in 2006 was used in gasoline blends of 10

percent or less, and the remaining 1 percent was blended to produce E85. 

U.S. ethanol production capacity is projected to rise rapidly. According to

the Renewable Fuels Association, in early 2007, 114 ethanol plants were 

operating, 7 of these plants were expanding, and 78 new plants were under 

construction. According to EIA, on the basis of estimates of the number of 

plants under construction, domestic ethanol production could rise to at 

Biofuel Production 

Has Increased, and 

Federal Support 

Targeting Technology 

Development Could 

Address Some of the 

Impediments to 

Greater Production 

U.S. Ethanol and Biodiesel 

Production Is Increasing, 

but These Fuels Provide 

Only a Very Small 

Proportion of the Nation’s 

Total Motor Transportation 

Fuel 

Page 13 GAO-07-713
Biofuels Availability and Use

least 7.5 billion gallons by 2008. Looking out further, EIA projects ethanol 

use of 11.2 billion gallons in 2012 and, absent significant cellulosic ethanol 

production, 14.6 billion gallons in 2030.13 However, some other projections 

are higher, such as a May 2007 Iowa State University study sponsored in 

part by USDA, which estimates 14.8 billion gallons of corn ethanol 

production by 2011.14 Nevertheless, U.S. ethanol production composed 

only 3.4 percent of the total amount of gasoline used in 2006. Moreover, on 

an energy equivalent basis, ethanol made up only 2.3 percent of gasoline 

used in 2006, because ethanol contains about two-thirds the energy of 

gasoline. EIA estimates that ethanol will likely account for only 7.6 percent 

of the volume of gasoline projected to be consumed in 2030. 

From 2004 to 2006, annual U.S. biodiesel production increased more than 

10-fold from 28 million gallons to approximately 287 million gallons. 

Biodiesel is mostly used in B20 or lesser concentrations, such as B2, in 

part due to state mandates, such as in Minnesota, that all diesel fuels 

contain 2 percent biodiesel. At the beginning of 2007, 105 biodiesel plants 

were operating, 8 plants were expanding, and 77 companies have plants 

under construction. Even with this expansion, EIA projects that domestic 

biodiesel production will likely increase to only 308 million gallons in 

2012, and only 395 million gallons in 2030, in part because some plant 

production capacity is used for other products such as cosmetics.15

Despite rapid increases in production, biodiesel composed only an 

estimated 0.6 percent of total diesel motor fuel used in 2006, and a 

somewhat smaller proportion on an energy equivalent basis due to the fact 

that biodiesel contains about 8 percent less energy than diesel does. 

The recent large increase in biofuel production has occurred for a number 

of reasons. Greater ethanol production occurred largely as a result of the 

phaseout of the fuel additive MTBE. Fuel blenders needed a replacement 

for MTBE to achieve desired performance and emissions characteristics, 

and ethanol was the best available choice. In addition, the 51 cent per 

 13DOE, EIA, Annual Energy Outlook 2007, DOE/EIA-0383(2007). EIA’s projection assumes 

that the support for ethanol provided in recently enacted federal legislation will be 

extended indefinitely. 

14Iowa State University, Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and

Livestock Markets, Center for Agricultural and Rural Development, May 2007. 

15EIA’s projection in the Annual Energy Outlook 2007 assumes that the support for

biodiesel provided in recently enacted federal legislation will not be extended beyond 2008.

However, according to EIA, should the tax credit for biodiesel be reauthorized after 2008, it 

would significantly increase biodiesel production. 

Page 14 GAO-07-713
Biofuels Availability and Use

gallon VEETC has helped to make ethanol more cost competitive with 

gasoline. While the RFS mandate has guaranteed a base level of demand 

for the fuel, according to economists with whom we spoke, it has had a 

limited role in increasing ethanol production. In 2006, the production of 

ethanol exceeded the amount of renewable fuel needed to meet the RFS 

by 21 percent and, according to our analysis of EIA data, is projected to

exceed the amount required in 2012, 3 years before then, in 2009. Current

levels of biodiesel production are largely due to the federal excise tax 

incentives provided by the American Jobs Creation Act of 2004, which was 

extended through 2008 under EPAct 2005.16 These incentives include the

$1 per gallon tax credit for biodiesel produced from virgin oils or fats and 

a 50 cent per gallon tax credit for biodiesel produced from recycled 

grease. Additionally, biodiesel production has increased, in part because 

of the RFS, which includes biodiesel as a fuel that counts toward meeting 

the program’s overall requirements for the amount of renewable content in

motor fuel. Furthermore, state-level biodiesel incentives such as 

Minnesota’s B2 mandate have encouraged biodiesel production by 

guaranteeing use of the fuel. 

Efforts to Significantly 

Increase Biofuel 

Production May Be 

Impeded by Various 

Factors That Contribute to 

High Production Costs 

Relative to Those of 

Petroleum Fuels 

A key challenge to increasing biofuel production is making biofuels cost 

competitive with gasoline and diesel fuel. The higher costs of producing 

biofuels contributes to higher biofuel wholesale prices compared to those 

for gasoline or diesel, making biofuels less desirable as a substitute. For 

example, based on a March 2007 estimate provided by USDA, the cost to 

produce a gallon of ethanol, including the cost of corn and processing, is 

about $2.51 per gallon of gasoline equivalent,17 while based on our analysis 

of EIA estimates, in January 2007, the crude oil and refining components 

of the retail price of gasoline were about $1.46 per gallon.18 In 2006, the 

average wholesale price of ethanol was 33 percent more on a per volume 

basis than the wholesale price of a gallon of regular unleaded gasoline and

 16Biodiesel production was also supported by grants from the Commodity Credit 

Commission Bio-energy Program, which was not funded beyond 2006. 

17“Gallon of gasoline equivalent” equates the energy content of a gallon of ethanol to that of 

a gallon of gasoline. 

18According to USDA, the estimated production cost for ethanol is based on the cost of the

corn feedstock and processing costs. USDA used the early 2007 corn cost of about $3.50

per bushel. The production cost for gasoline includes at a minimum, the cost of crude oil 

and refining costs. According to EIA, the crude oil cost is the average price of crude oil 

purchased by refiners. The refining costs are derived from a calculation of the difference 

between the monthly average spot market price of gasoline and the average price of crude 

oil purchased by refiners, and includes an undetermined amount of refiner profits.

Page 15 GAO-07-713
Biofuels Availability and Use

about 102 percent more expensive on a gallon of gasoline equivalent basis. 

In addition to the higher cost of production, the higher wholesale price for 

ethanol in 2006 was also attributable, to a certain extent, to the high 

demand for ethanol caused by the MTBE phaseout, as well as the general

rise in petroleum and natural gas prices. 

Feedstocks such as corn and soybean oil are the largest costs of biofuel 

production, and the high prices of these feedstocks are impediments to 

reducing ethanol and biodiesel production costs. According to EIA, the 

U.S. ethanol industry relies almost exclusively on corn, and as shown in 

figure 1, production facilities are concentrated in the Midwest, where the 

feedstock is most plentiful. According to USDA, prices for corn have risen 

sharply, likely because of increased demand for its use in ethanol. Prices 

for soybean oil have increased recently in anticipation of reduced soybean

planted area in 2007 because of increased planting of corn. For example, 

in the 2005-to-2006 marketing year corn cost $2.00 per bushel, which we 

estimate was about 62 percent of the cost of producing ethanol. According 

to USDA, corn prices are projected to average between $3.00 to $3.40 per 

bushel in the 2006-to-2007 marketing year and according to our analysis 

make up an estimated 74 percent of the cost of producing ethanol. For 

biodiesel production, in the 2005-to-2006 marketing year soybean oil cost 

on average 23 cents per pound, which we estimate was about 79 percent of

the cost of producing biodiesel in 2006. USDA projects soybean oil prices 

to rise to between an average of 27 cents per pound to 29 cents per pound 

in the 2006-to-2007 marketing year and according to our analysis make up 

an estimated 82 percent of the cost to produce biodiesel. 

Page 16 GAO-07-713
Biofuels Availability and Use

Figure 1: Location of Ethanol Production Plants in 2007 

Location of ethanol production plants

Source: Renewable Fuels Association data.

Limits on both the total production of feedstocks and the amounts of 

those feedstocks that are available for energy production are also 

impediments to significantly increasing biofuel production. For example, 

in 2006, an estimated 15 percent of the corn available in the 2005-to-2006

marketing year was used to produce about 4.9 billion gallons of ethanol, 

which composed 3.4 percent of total gasoline consumption.19 Assuming 

that ethanol production continues to expand as projected by EIA, by 2012, 

about 30 percent of the corn crop will be needed to produce 11.2 billion 

gallons of ethanol, which would constitute 7.4 percent of projected total 

gasoline consumption.20 Since corn crop yields have historically only 

 19EIA includes ethanol as a component in its calculation of total gasoline consumption. 

20This calculation is based on USDA’s projected corn supply in the 2012-to-2013 marketing

year, which is about 13.5 billion bushels. 

Page 17 GAO-07-713
Biofuels Availability and Use

increased at a rate of about 2 percent per year, the corn needed to 

significantly increase ethanol production will come from planting more 

acres of corn by putting pastureland and idle land into production, 

planting corn where other crops were previously grown, or using corn that

is currently exported or used as feed for livestock or other purposes. 

Concerns exist about the potential impacts of such actions on food prices 

and the environment. For example, using more corn for energy production

will likely exert additional upward pressure on corn prices, potentially 

influencing livestock feed markets and meat prices. Furthermore, 

environmental concerns exist regarding greater water use and impacts on 

wildlife if land set aside for purposes such as water conservation or 

wildlife habitat is put into production. Because of these limitations and 

concerns, DOE and industry experts generally agree that approximately 15 

billion to 16 billion gallons is the maximum amount of ethanol production 

that can be derived from the U.S. corn supply. Similar concerns exist 

regarding the impacts of devoting larger proportions of the soybean crop

to biodiesel production, although the impacts are likely to be smaller 

because of the smaller scale of increases to biodiesel production projected 

by EIA. 

According to DOE, producing cellulosic ethanol from alternative 

feedstocks could greatly expand the amount of ethanol produced, but 

currently the costs of facility construction and production are significantly 

greater than those of corn ethanol. According to a DOE study, there is 

sufficient biomass in feedstocks such as wood chips and corn stalks to 

potentially produce roughly 60 billion gallons of ethanol per year by 2030, 

or about 30 percent of the amount of gasoline EIA projects to be 

consumed in that year. Biomass that could be used in cellulosic ethanol 

production is plentiful and relatively inexpensive nationwide, and plants 

built in proximity to the feedstocks would help to lessen the cost of 

obtaining the feedstocks as well as distributing biofuels nationwide. 

However, according to DOE’s National Renewable Energy Laboratory 

(NREL), the total project investment for a cellulosic ethanol plant with a 

production capacity of 50 million gallons per year is estimated at about 

$250 million dollars, as compared to a total project investment of $76 

million for a corn ethanol plant of similar capacity.21 Furthermore, 

according to DOE, the cost of producing a gallon of cellulosic ethanol is 

 21Total project investment figures are in 2007 dollars and include plant construction, 

equipment, installation, site development, and other costs such as startup costs and 

permits.

Page 18 GAO-07-713
Biofuels Availability and Use

about twice the cost of corn-based ethanol. The cost to produce cellulosic 

ethanol is higher than that of corn-based ethanol because of processing 

costs, enzyme costs, and the cost to collect the feedstocks. Considerable 

research and development by NREL and its partners has significantly 

reduced the estimated cost of producing the enzyme used to break down 

cellulose into sugar to make ethanol, but according to DOE further 

successes in research and development are needed to make cellulosic 

ethanol a viable economic option for expanded ethanol production.22

Several Policy Options, 

Including Support for 

Cellulosic Ethanol 

Production Technology,

Could Help Overcome 

Some of the Impediments 

to Increasing Biofuel 

Production 

One policy option for increasing biofuel production is raising the amount 

or extending the duration of tax incentives for ethanol and biodiesel 

production. This option provides the advantage to producers of offsetting 

a greater portion of their costs. However, a disadvantage is the potential 

for significant additional federal revenue losses, depending on the level of

increase or the length of the extension. Furthermore, according to some 

economists, it is difficult to predict the effect of revised tax incentives. If 

the incentives are set too low to offset production costs, biofuel 

production will not rise significantly; if incentives are set too high, 

producers will receive windfall profits if production costs decline or oil 

prices increase significantly. 

Linking the level of biofuel tax incentives to the price of petroleum fuels 

could provide the advantage of limiting government revenue losses by 

providing tax credits only when biofuels are not cost competitive with 

petroleum fuels. For example, one proposal for a variable tax credit would 

provide 5 cents in ethanol tax credits for every $1 the price of oil is below 

the trigger price of $45 per barrel.23 However, according to some 

economists with whom we spoke, establishing a variable tax credit would 

be challenging due to the difficulty of determining the correct trigger price 

for oil as well as constructing the variable subsidy to deal with constantly 

fluctuating corn prices. Another form of variable tax credit could be based 

on the renewable energy content of the biofuel, taking into account the net 

energy balance of production. Such a credit could provide greater support 

to fuels that displace a greater amount of petroleum and yield greater 

environmental benefits. One economist with whom we spoke noted that a 

variable tax credit could also support other biofuels, in addition to ethanol 

 22NREL, managed by Midwest Research Institute and Batelle, is the principal research 

laboratory for DOE’s Office of Energy Efficiency and Renewable Energy. 

23Senate Bill 162, National Fuels Initiative, 110th Cong., 1st Sess. (2007). 

Page 19 GAO-07-713
Biofuels Availability and Use

and biodiesel, stressing the importance of not excluding other promising 

biofuels.24 However, the economists with whom we spoke noted a 

disadvantage to any production incentives for biofuels. Assuming lower 

costs are passed on to consumers, they may be encouraged to drive more 

miles or purchase less efficient vehicles, resulting in little or no reduction 

in petroleum fuel consumption. 

Another option for increasing biofuel production is raising the level of the 

RFS. This option offers the advantage of virtually guaranteeing increased

biofuel production and use to a specific predetermined level. Furthermore, 

a higher RFS could ensure a larger market for biofuels, thus mitigating 

risks for investors and encouraging expenditures for developing new 

production technology. A disadvantage of this option is that if biofuel 

prices significantly increase with an RFS mandate in place, then the price 

of fuel for consumers could also significantly increase. Corn prices have

risen sharply recently with rapid increases in ethanol production, and 

could be expected to increase further under a higher RFS as demand for 

fuel production creates greater competition with other feedstock users. If 

the costs of biofuel production increase, the costs of complying with the 

RFS for blenders who integrate biofuels into the transportation fuel supply 

will also increase, and these costs could be expected to be passed on to 

consumers. Advances in production technology that have the potential to 

lower costs—such as cellulosic ethanol production that uses lower-cost 

feedstocks—could help meet a higher RFS with cost-competitive biofuels, 

but it is currently unclear exactly when such technological advances will 

be achieved.

A third option for increasing biofuel production is to provide support for 

the development of cellulosic ethanol production technology. This could 

involve ensuring continued funding for research and development, 

increasing federal cost-sharing efforts to reduce risk to producers, and 

adding incentives for the production of biomass feedstocks. These policy 

options have the advantage of potentially resulting in a huge increase in 

cost-competitive biofuel production. The disadvantages are that such 

policies could require significant federal expenditures and there are no 

guarantees as to when or if cost-competitive cellulosic ethanol will be 

produced. According to the NREL officials with whom we spoke, DOE’s 

 24For example, biobutanol is a next-generation biofuel that can be made from corn or

cellulosic biomass, has similar energy content to gasoline, and could be distributed through

existing fuel pipelines. 

Page 20 GAO-07-713
Biofuels Availability and Use

research and development efforts for cellulosic ethanol are currently 

funded and on schedule toward the goal of making production

commercially viable by 2012.25 However, they said that technological 

uncertainties remain and it is therefore essential that research funding 

continue to meet this goal.26

According to NREL, the primary nontechnological barrier to expanding 

cellulosic ethanol production is the perceived financial risk, making it 

difficult for companies to secure funding to build facilities. To initially 

reduce financial risk, DOE provided grants in 2002 totaling $80 million 

dollars to fund six small-scale cellulosic ethanol biorefineries that support 

the technology in the demonstration phase. Then, in February 2007, DOE 

announced it would give $385 million in grants to six cellulosic ethanol

biorefineries over a 4-year period to help the industry develop larger-scale 

pilot production facilities.27 Another measure that would help producers to 

mitigate the financial risks of full-scale commercial production is a federal 

insurance program that would pay cellulosic ethanol producers a 

settlement if they did not achieve their first-year production goals. 

According to one NREL official with whom we spoke, the advantage of an

insurance program is that it can be based on well-defined performance 

metrics that limit potential government payments to specific outcomes, as 

opposed to the potentially larger losses from defaults under a loan 

guarantee program for producers. Another option suggested by NREL is a 

program to provide direct payments to growers of cellulosic feedstock, 

 25DOE established this goal to meet the objectives of the President’s 2006 Advanced Energy

Initiative, aimed at reducing the nation’s dependence on foreign sources of energy. 

26NREL recently completed a draft assessment of the market drivers and technology needs 

to achieve the goal of supplying 30 percent of 2004 motor gasoline fuel demand with 

biofuels by 2030. See NREL, A National Laboratory Market and Technology Assessment of

the 30x30 Scenario, NREL Technical Report /TP-510-40942, January 2007. 

27Cellulosic ethanol producers can also take advantage of a loan guarantee program created 

by EPAct 2005. We recently evaluated the program and reported that DOE has not 

completed key steps to ensure that the program will be well managed and able to 

accomplish its objectives, and that there are risks to the government because of DOE’s 

potential to underestimate loan guarantee subsidy and administrative costs. See GAO, The 

Department of Energy: Key Steps Needed to Help Ensure the Success of the New Loan

Guarantee Program for Innovative Technologies by Better Managing Its Financial Risk, 

GAO-07-339R (Washington, D.C.: Feb. 28, 2007). There is also a special depreciation 

deduction for cellulosic ethanol plants contracted to be acquired after December 20, 2006, 

that allows producers to take a depreciation deduction of 50 percent of the adjusted basis

of a new cellulosic ethanol plant in the year it is put in service. In addition, EPAct 2005 

authorized DOE to make per gallon incentive payments to cellulosic ethanol producers

until production reaches 1 billion gallons, or 2015, whichever comes first.

Page 21 GAO-07-713
Biofuels Availability and Use

such as switchgrass, in order to ensure that an adequate supply of those 

feedstocks is available when cellulosic ethanol plants begin full-scale 

production. The insurance and grower payment programs both have the 

potential advantage of helping to increase initial cellulosic ethanol 

production but could end up being costly. 

Other policy options, while not directly related to biofuel production, 

could nevertheless influence the availability and use of biofuels. For 

example, removing the existing 54 cent per gallon import duty on ethanol

could have the advantage of significantly increasing the availability of 

biofuels for blending into the U.S. transportation fuel supply, largely 

because of the huge potential for increased imports of low-cost biofuels 

from South America. However, this could present a threat to the continued 

development of domestic biofuel production and would no longer provide

an offset to the payment of biofuel excise tax credits to blenders of foreign 

ethanol. According to a recent survey of economists conducted by the 

Wall Street Journal, as well as several economists with whom we spoke, 

additional taxes on petroleum fuels or taxes on carbon dioxide emissions 

would be the most economically efficient means of increasing biofuel 

use.28 Taxes would allow biofuels to be used at the level where they 

provide the greatest economic, environmental, and other benefits for the 

least cost, rather than at a mandated level that is, according to an 

economist with whom we spoke, difficult to correctly determine. Such an 

approach has the potential advantages of making all biofuels more cost 

competitive with petroleum fuels, and the added cost of petroleum fuels 

could encourage conservation. The potential disadvantage of this 

approach is that it is likely to be unpopular with consumers facing higher

prices at the pump and with businesses that extract fossil fuels, such as 

the oil and coal industries. 

 28Wall Street Journal, “Politics & Economics: Economists Back Fossil-Fuel Tax To Spur 

Alternative Energies,” February 9, 2007. 

Page 22 GAO-07-713
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Currently biofuels are transported primarily on the freight rail system, and 

this system has limited capacity to transport greater amounts of biofuels if

production significantly increases. We estimate that in early 2007, about 1 

percent of fueling stations in the United States offered E85—primarily in 

the Midwest—or high blends of biodiesel (B20 through B100). Under 

current conditions, significant growth in the number of stations that offer 

high blends of biofuels beyond the regions where the fuels are produced 

appears unlikely. Increasing the availability of biofuels at fueling stations 

is impeded in large part by the limited supplies of ethanol and biodiesel 

and the cost of storage and dispensing equipment for biofuels. Several 

policy options could help to increase the number of stations that offer 

biofuels, but until a larger supply of cost-competitive biofuels is available, 

it is doubtful that a greater number of stations would lead to greater use of 

biofuels. 

According to DOE, biofuels are not transported through the petroleum 

product pipeline system because of concerns that, for example, ethanol 

will attract water in the pipes, rendering it unfit to blend with gasoline, and 

no dedicated biofuel pipeline system exists. Furthermore, according to 

DOE, the existing petroleum product pipelines are generally not 

configured to transport ethanol from regions where it is currently 

produced to regions where it is consumed. Therefore, ethanol is 

transported primarily by rail, but also by truck and barge, and biodiesel is 

transported by rail and truck—a distribution system that is more 

complicated than for petroleum fuels and has contributed to regional 

supply shortages. For example, while ethanol production is concentrated 

in the Midwest largely because of the proximity of large corn feedstock 

supplies, demand for ethanol as a blend component to replace MTBE in 

gasoline is high on the east and west coasts. In California gasoline is 

blended with about 5.7 percent ethanol. According to EIA, limited rail and 

truck capacity complicated the delivery of ethanol between April and June 

2006, contributing to regional ethanol supply shortages and price spikes. 

The Biofuel 

Distribution 

Infrastructure Has 

Limited Capacity to 

Transport the Fuels 

and Deliver Them to 

Consumers, and 

Expanding the 

Distribution System 

Faces a Variety of 

Impediments 

Limited Capacity Exists to 

Transport Biofuels, and the 

Costs Are Higher than for 

Petroleum Fuels 

The current biofuel transport system is also more costly than for 

petroleum fuels. According to NREL, the overall cost of transporting 

ethanol from production plants to fueling stations is estimated to range 

from 13 cents per gallon to 18 cents per gallon, depending on the distance 

traveled and the mode of transportation. In contrast, the overall cost of 

transporting petroleum fuels from refineries to fueling stations is 

estimated on a nationwide basis to be about 3 to 5 cents per gallon. 

Page 23 GAO-07-713
Biofuels Availability and Use

The key challenges to meeting biofuel transport needs are potential 

capacity limitations in the freight rail system and the cost of developing a 

dedicated ethanol pipeline system if one is needed. Looking to the future,

DOE and ethanol industry experts are concerned about transporting 

greater amounts of biofuels if production significantly increases. 

Substantial increases in overall freight traffic are forecast, and as we 

recently reported, the freight railroad industry’s ability to meet the 

growing demand is largely uncertain.

29 Replacing, maintaining, and 

upgrading the existing aging rail infrastructure are extremely costly, and 

while railroads told us that they plan to make substantial investments in 

infrastructure, the extent to which these investments will increase 

capacity as freight demand increases is unclear. Alternatively, existing 

petroleum pipelines could be used in certain areas to transport ethanol if 

ongoing efforts by operators to identify ways to modify their systems to 

make them compatible with ethanol or ethanol-blended gasoline are 

successful. Building dedicated pipelines to transport ethanol would be 

extremely expensive, according to a 2006 NREL report, which estimates 

the current costs of constructing pipelines at roughly $1 million per mile, 

although the cost can vary dramatically based on right-of-way issues, the 

number of required pumping stations, and other considerations. 

The Relatively Small 

Number of Fueling 

Stations Offering E85 Are 

Concentrated in the 

Midwest, while Stations 

Offering Biodiesel Are 

More Widely Dispersed 

In early 2007, approximately 1,100 public and federal fueling stations 

offered E85, concentrated largely in the Midwest, as shown in figure 2. The

number of fueling stations that offered E85 increased by an average of 

about 350 per year between 2004 and 2006. Despite this rapid increase, we 

estimate that the number of fueling stations that offered E85 was only 

about 0.6 percent of the total number of all fueling stations. According to

industry experts, most fueling stations with E85 are located in proximity to 

ethanol plants in order to minimize distribution costs. For example, in 

early 2007, 55 percent of the fueling stations that offered E85 were 

concentrated in five midwestern states—Minnesota, Illinois, Iowa, South 

Dakota, and Nebraska—where about 75 percent of the nation’s ethanol is 

produced (see fig. 2). Of the total number of fueling stations that offered 

E85, in early 2007, 57 were federally operated for use by government fleet 

vehicles and were distributed nationwide. 

 29See GAO, Freight Railroads: Industry Health Has Improved, but Concerns about 

Competition and Capacity Should Be Addressed, GAO-07-94 (Washington, D.C.: Oct. 6,

2006). 

Page 24 GAO-07-713
Biofuels Availability and Use

Figure 2: Location of Public and Federal Fueling Stations That Offered E85 in 2007 

Sources: Congressional Research Service and DOE’s Alternative Fuels Data Center data.

Public and federal fueling

stations that offered E85

States where about 75

percent of the nation’s

ethanol is produced

In early 2007, approximately 400 public and federal fueling stations across 

the country offered biodiesel blends of B20 through B100, as shown in 

figure 3.30 The number of fueling stations that offered biodiesel increased 

by an average of about 186 per year between 2004 and 2006. Despite this 

rapid increase, we estimate that the number of fueling stations that offered 

biodiesel was only about 1 percent of the total number of fueling stations 

that offered diesel. Biodiesel fueling stations are dispersed nationwide 

because production facilities are not concentrated in any specific region. 

Biodiesel is commonly used in low blends—B20 is a popular blend 

because it provides better mileage than pure biodiesel yet still provides 

 30DOE collects full data on stations that offer B20 through B100, and limited data on 

stations that offer lower blends of biodiesel. Many stations offer a low blend. For example, 

all diesel fuel sold in Minnesota is 2 percent biodiesel by law.

Page 25 GAO-07-713
Biofuels Availability and Use

some of its benefits, such as good lubricity. In addition, B20 is common 

because federal fleet vehicles that use the blend earn credits toward 

meeting the statutory requirements for the acquisition of alternative fuel 

vehicles by federal agencies.31 Of the approximately 400 public and federal

fueling stations that offered biodiesel in early 2007, 75 were federally 

operated, and were for use by the government fleet of vehicles. 

Figure 3: Location of Public and Federal Fueling Stations That Offered B20 through B100 in 2007 

Public and federal fueling stations that offered biodiesel

Source: DOE’s Alternative Fuels Data Center data.

According to DOE and officials from state governments, the increase in 

the number of fueling stations that offered E85 is due in part to federal 

 31The Energy Conservation Reauthorization Act of 1998 amended the Energy Policy Act of

1992 to allow federal fleets to generate one alternative fuel vehicle acquisition credit for 

every 450 gallons of pure biodiesel (equivalent to 2,250 gallons of B20) purchased for use in 

diesel vehicles with a gross vehicle weight rating of more than 8,500 pounds.

Page 26 GAO-07-713
Biofuels Availability and Use

grants to states and private businesses distributed through DOE’s Clean 

Cities Program. This program was established in 1993 as part of the 

department’s efforts to advance the nation’s economic, environmental, and 

energy security by supporting local decisions to adopt practices that 

contribute to reduced petroleum consumption and is the department’s 

only program aimed at expanding the biofuel infrastructure. Between 1999 

and 2006, Clean Cities provided $11 million in grants to 33 states to install 

biofuel infrastructure. Clean Cities’ criteria for awarding the grants 

include, for example, the ability of the grantee to (1) access and dispense a 

significant amount of biofuel, and (2) share at least 50 percent of the 

project costs, as well as the grantee’s record of past success with 

alternative fuel infrastructure development. The $7.2 million in 2006 

grants, with private and state or local cost sharing, will result in biofuel 

dispensers in 210 locations—primarily for E85—being installed in 21 

states, such as California, Colorado, Georgia, and Iowa, and biofuel 

blending infrastructure being added in 9 states. According to a Clean Cities

official, the program has successfully targeted grants to locations where 

grantees have a high probability of increasing biofuel use. However, 

significant increases in ethanol production would create the need for 

greater infrastructure expansion, thus placing much greater demands on 

this program. 

In addition, certain states have provided significant funding to install E85 

fuel dispensers at stations. For example, from 2005 to 2006, at least 29 E85 

dispensers were added to stations in Iowa, partially funded with grants 

provided by a 2-year state program, and 64 E85 dispensers were added in

Illinois, partially funded with grants from a private foundation, but 

administered by the state Department of Commerce and Economic 

Opportunity. According to a Clean Cities official, the increase in the 

number of fueling stations that offered biodiesel was due in part to federal 

grants to states and private businesses distributed by the Clean Cities 

Program and significant additional funding provided by state governments. 

Furthermore, the state mandate in Minnesota that all diesel fuel contain at 

least 2 percent biodiesel by volume required that all stations provide 

biodiesel as B2, and in future years, B2 mandates in the states of 

Washington and Louisiana will likely contribute to increased availability of 

biodiesel blends in those states. While EPAct 2005 provided a tax credit of 

up to $30,000 toward the cost of installing biofuel dispensers and related 

equipment, the impact of this tax credit on the number of biofuel 

dispensers installed in 2006 is not yet known. 

Page 27 GAO-07-713
The limited amount of ethanol made available for use in E85 is the primary 

impediment to significantly expanding the number of stations that offer 

the fuel. According to EIA, in 2006, about 1 percent of the ethanol 

produced in 2006 was used in E85. Little ethanol was available for E85 

because producers prefer to sell ethanol at a higher price for use in low 

blends rather than selling ethanol at a discount for use in E85. High 

demand for ethanol in low blends as an oxygenate and fuel extender has 

contributed to wholesale ethanol prices that are significantly higher than 

the wholesale price of gasoline. An additional incentive to selling ethanol

in blends of 10 percent or lower, according to one major fuel blender with 

whom we spoke, is that the fuel economy reduction at that level is too 

small for consumers to notice; hence, the fuel can be sold at the same 

price as conventional gasoline at fueling stations. On the other hand, to 

attract customers, fueling stations must generally sell E85 at a discount to

conventional gasoline to offset the noticeably lower miles per gallon that

drivers experience when using the fuel. For example, in 2006, according to

DOE’s Alternative Fuel Price Reports, E85 sold for 11 percent less on 

average than regular gasoline at a sample of fueling stations nationwide. 

However, few producers are willing to discount ethanol so that fueling 

stations can price E85 lower than gasoline. Consequently, EIA projects 

that use of ethanol for E85 will continue to be limited until the market for 

blends of 10 percent and under is nearly saturated.

The Limited Supply of 

Ethanol Available for Use 

as E85 and the Need for 

Specialized Storage and 

Dispensing Equipment Are 

among the Key 

Impediments to Providing 

Biofuels at More Fueling 

Stations 

For biodiesel, the low overall production levels are the primary 

impediment to significantly expanding the number of fueling stations that 

offer biodiesel blends. According to our estimate, in 2006, the approximate 

amount of biodiesel produced was only 0.6 percent of the amount of diesel

fuel used and, according to EIA, by 2030 is projected to remain at 0.6 

percent of the amount of diesel used, or 395 million gallons. Furthermore, 

according to EIA, if production reaches 300 million gallons to 600 million 

gallons annually, competition with food and feed markets for soybeans 

may make biodiesel production more expensive and further reduce its 

competitiveness with diesel. Even without additional competition over 

soybeans, according to DOE’s Alternative Fuel Price Reports, in 2006, pure 

biodiesel sales prices were on average 26 percent higher than those of 

diesel fuel at a sample of biodiesel fueling stations nationwide. According

to EIA, the higher price of biodiesel relative to diesel contributes to low 

demand for biodiesel. Finally, using biodiesel can result in clogged fuel 

filters—the solvent properties of biodiesel can loosen accumulated 

settlements in fuel tanks left by diesel—and performance problems under 

certain conditions, such as gelling in cold weather, which are further 

impediments to increasing the number of stations that sell biodiesel. 

Page 28 GAO-07-713 Biofuels Availability and Use
Biofuels Availability and Use

The cost of specialized storage and dispensing equipment is an 

impediment to further expanding the number of fueling stations that offer 

biofuels. While this is a lesser impediment for biodiesel, it may be a 

significant impediment for potential E85 retailers because the corrosive 

characteristics of ethanol in high concentrations may, for example, cause 

metal equipment parts made of zinc and aluminum to degrade and 

contaminate the fuel over time, potentially harming the engines of vehicles 

that use the fuel.32 Station owners may modify equipment at relatively little 

cost or may spend significantly more for new specialized equipment due to 

concerns about equipment safety and liability. For example, Illinois state 

officials told us that the costs to convert existing gasoline storage tanks 

and dispensers to E85 at 64 fueling stations from 2005 to 2006 averaged a

relatively low $3,354. This generally involved simply replacing some 

dispenser parts, although it sometimes included cleaning the storage tank. 

According to a major manufacturer of fuel-dispensing equipment, the cost 

to purchase a new dispenser designed for E85 is about $13,000—about 

$7,000 more than for a regular gasoline dispenser. Further, according to a 

study commissioned by DOE, a completely new installation including 

items such as an underground tank, a dispenser, associated piping, and

concrete work costs up to about $62,400. An associated impediment is the 

lack of a dispenser that has been certified for E85 use by Underwriters 

Laboratories (UL).33 According to representatives of Wal-mart, BP, and 

Marathon Petroleum, the lack of a UL-approved E85 dispenser has been a 

greater barrier than the potential cost of the equipment and has caused 

them to defer plans to offer the fuel at their respective company-owned 

stations until such a dispenser is available. According to UL, the 

organization is in the process of developing safety requirements for E85 

dispensers and components, although initial results of a survey it 

conducted indicate that E85 fuel exposures have not resulted in significant 

safety or maintenance problems for existing equipment. 

Finally, the marketing policies of some major oil companies may limit the 

availability of biofuels at fueling stations. According to our estimate, 

roughly 37 percent of the 169,000 fueling stations in the United States—

including company and franchise operations—are under the brand of one 

of the five major oil companies we spoke to—BP America, Chevron 

 32In cold climates the tanks and lines used for higher biodiesel blends need to be warmed to 

prevent gelling of the fuel. 

33UL is an independent, not-for-profit product safety certification organization that tests 

products and writes standards for safety. 

Page 29 GAO-07-713
Biofuels Availability and Use

Products Company, ConocoPhillips, ExxonMobil, and Shell Oil Products 

US. However, according to information provided by DOE’s Alternative 

Fuels Data Center, in early 2007, only about 9 percent of the fueling 

stations that offered E85 and about 8 percent of the stations that offered 

higher blends of biodiesel were under the brand of one of the five oil 

companies. According to representatives of the five major oil companies, 

while no stations are prohibited from selling biofuels, none of the 

companies offer E85 to their stations as a branded product and none of the 

companies offer biodiesel except where required to by state mandate. 

Industry experts with whom we spoke told us that branded stations that 

offer E85 procure their own supply of the fuel from other sources. For this 

reason, officials from one of the five oil companies told us that their 

company policy prohibits branded stations from advertising E85 on their

marquees. All five of the companies require E85 to be labeled to 

differentiate it from branded fuels. Company representatives said that they

require labeling E85 fuel dispensers to protect their brand name, since the 

company does not control product quality, and to ensure that consumers 

do not misfuel vehicles that are not designed to operate on E85. 

A Number of Policy 

Options Could Help 

Increase the Number of 

Stations That Offer 

Biofuels, but Increased 

Use Is Unlikely without a 

Larger Supply of CostCompetitive Biofuels 

Members of Congress have proposed various policy options to increase 

the number of fueling stations that offer biofuels, including the following:

• Mandating major oil companies to install at least one E85 dispenser at 

their fueling stations. Such a mandate could also require the percentage

of company-owned properties with an E85 dispenser to gradually 

increase over time, eventually to 50 percent. 

• Increasing the amount of the alternative fueling infrastructure tax 

credit to greater than the current limit of 30 percent of the cost of any 

qualified alternative vehicle refueling property or $30,000. 

• Allowing the public to access biofuel dispensers located on federal 

properties. 

• Using fines from CAFE penalties paid by automobile manufacturers to 

provide grants for biofuel dispensers.34

• Prohibiting biofuel marketing restrictions on fueling station franchisees 

and restrictions on selling biofuels only in certain areas of their 

property. 

 34Automobile manufacturers are required to pay penalties for not complying with CAFE 

standards. According to the Department of Transportation, in 2005 these penalties 

amounted to $27,472,539. 

Page 30 GAO-07-713
Biofuels Availability and Use

While any one of these mandates, incentives, or other strategies would 

likely increase the number of stations that offer biofuels to the public, 

absent the availability of a large supply of cost-competitive biofuel where 

they are located, it is unlikely that they would significantly increase 

biofuel use. Efforts to increase the number of stations that provide 

biofuels have primarily been successful in areas where large amounts of 

biofuels are produced, and the fuel is more likely to be sold for less than 

gasoline. For example, in Minnesota, which in early 2007 had about 28 

percent of the nation’s E85 stations and almost 10 percent of the nation’s

ethanol production capacity in-state, cost-competitive E85 is provided 

largely as a result of local ethanol producers’ willingness to sell ethanol 

below its market price for E85 blending, the state’s 13 cents per gallon 

ethanol production incentive payment, and the state’s 5.8 cents per gallon 

excise tax exemption for stations that sell E85. Minnesota has already 

saturated its E10 market, making the state’s excess supply of ethanol 

available for use in higher blends, such as E85. Outside of the Midwest, 

few regions have an available supply of cost-competitive ethanol to allow 

for E85 price discounts, and blenders generally choose to use available 

ethanol in E10 or lower blends because it is more profitable than higher 

blends. Until other regions of the United States have large supplies of costcompetitive ethanol or biodiesel, it is unlikely that increasing the number 

of stations that offer biofuels in those regions will result in significantly 

greater biofuel use. 

The relatively few biofuel compatible vehicles in use in the United States 

could increase substantially in the near future because of planned 

production increases by major automobile manufacturers. Nonetheless, 

according to some manufacturers with whom we spoke, further 

production increases are impeded by limited consumer demand for FFVs 

and the additional costs of producing them. Increasing the number of 

diesel vehicles is impeded by the additional costs to make the vehicles 

compliant with emissions regulations. Several policy options have been 

proposed to address these challenges. These may increase the number of 

biofuel compatible vehicles but would be unlikely to increase biofuel use 

until the fuels are less expensive and more widely available. 

The Number of 

Biofuel Compatible 

Vehicles Is Projected 

to Increase, but 

Challenges, such as 

Limited Consumer 

Demand, Remain 

Page 31 GAO-07-713
According to data provided by the Alliance of Automobile Manufacturers 

and DOE, in 2006, there were an estimated 4.5 million FFVs in use capable 

of operating on ethanol blends up to E85. We estimate that this number 

accounts for about 1.8 percent of the 244 million U.S. vehicles. EIA’s most 

recent estimate projects FFV sales to increase from about 600,000 in 2006 

to about 1.8 million per year in 2012 and compose about 10 percent of 

sales of new light duty vehicles.35 EIA projects FFV sales to reach about 2 

million per year by 2030 and remain at about 10 percent of total light duty 

vehicle sales. However, these numbers could increase significantly due to 

a March 2007 commitment by DaimlerChrysler, Ford, and General Motors 

to increase FFV production to compose about 50 percent of their annual 

production by 2012. 

The Relatively Small 

Number of Biofuel 

Compatible Vehicles in Use 

May Increase Substantially 

in the Near Future 

According to data provided by the Alliance of Automobile Manufacturers 

and DOE, in 2006, there were an estimated 4.9 million diesel vehicles 

generally capable of operating on biodiesel blends. We estimate that this 

number accounts for about 2 percent of the total number of vehicles in the 

United States. EIA’s most recent estimate projects diesel vehicle sales to 

increase from about 360,000 in 2006 to about 424,000 per year in 2012 and 

make up about 2.4 percent of sales of total light duty vehicles. EIA projects 

diesel vehicle sales to reach about 1.2 million per year by 2030, which is 

about 6 percent of total light duty vehicle sales. 

The federal fleet of vehicles contains large numbers of FFVs and diesel 

vehicles. According to the General Services Administration, in fiscal year 

2006, federal fleet FFVs numbered 96,229, composing about 15 percent of 

the total number of federal fleet vehicles and about 99 percent of the 

alternative fuel vehicles acquired by federal agencies.36 In fiscal year 2006, 

diesel vehicles numbered 79,954, composing nearly 13 percent of the total 

federal fleet of vehicles. 

According to EIA, automakers produced virtually all FFVs since 1992 for

the sole purpose of acquiring credits toward the fuel economy 

requirements of the Department of Transportation’s CAFE program. Under 

 35Light duty vehicles have a gross vehicle weight of 8,500 pounds or less. Common 

examples include cars, pickup trucks, and sport utility vehicles. 

36Federal alternative fuel vehicles in fiscal year 2006 included vehicles that can operate on 

compressed natural gas, E85, electricity, liquefied natural gas, or liquefied petroleum gas. 

However, in fiscal year 2006, alternative fuel vehicles acquired by federal fleets only 

included FFVs and compressed natural gas capable vehicles.

Page 32 GAO-07-713 Biofuels Availability and Use
Biofuels Availability and Use

this program FFVs are treated as though they attain higher fuel economy 

than they necessarily would for the purpose of encouraging manufacturers 

to produce them. The Energy Policy Act of 1992 (EPAct 1992) required 

federal agencies to purchase FFVs. Specifically, it required that at least 25 

percent of federal vehicle purchases be alternative fuel vehicles in 1996, 

increasing to 75 percent by 1999.37 The Energy Conservation and 

Reauthorization Act of 1998, which amended EPAct 1992, encouraged 

federal agencies to use biodiesel by allowing them to partially meet the 

EPAct 1992 vehicle acquisition requirements by using biodiesel in federal 

fleet diesel vehicles. 

Limited Consumer 

Demand and Additional 

Production Costs Are 

Impediments to Increasing 

the Number of Biofuel 

Compatible Vehicles 

According to some automobile manufacturer representatives with whom 

we spoke, consumers have limited awareness of FFVs. As a result, few 

potential vehicle purchasers visit dealerships looking for FFVs. 

Furthermore, according to some manufacturers and EIA, consumers who 

purchase FFVs are often unaware that their vehicles are capable of using 

E85. According to a manufacturer representative with whom we spoke, 

awareness is increasing in part because of increased advertising in 2006 

designed to educate potential buyers about FFVs. Accordingly, a survey of 

new vehicle buyers by Harris Interactive and Kelley Blue Book found that

buyer awareness of FFVs increased from 42 percent in January 2006 to 63 

percent in November 2006. 

However, consumers looking for an FFV to purchase have a relatively 

narrow range of vehicles to select from. Currently, few models of smaller, 

more fuel efficient vehicles are flex-fuel capable. According to EPA and 

DOE, only 3 FFVs available in model year 2007 were compact or midsize 

cars, while 23 were large cars, pickup trucks, vans, minivans, or sport 

utility vehicles. Some automobile manufacturer representatives with 

whom we spoke said that they have limited the models and total numbers 

of FFVs they make because of the additional production cost per vehicle, 

ranging between $30 and $300, depending on the manufacturer. In 

addition, one automobile manufacturer representative with whom we 

spoke told us that the significant research and development costs 

associated with designing flexible fuel systems for different engines and

model types limited the models of FFVs the company makes.

 37EPAct 1992 also required certain state government and alternative fuel provider fleets to 

acquire alternative fuel vehicles. 

Page 33 GAO-07-713
Biofuels Availability and Use

Despite increasing consumer awareness and commitments from 

manufacturers to produce more FFVs, consumer demand may continue to

be limited by the lack of E85 fueling stations in areas where the largest 

numbers of vehicles are located, as shown in figure 4. For example, 

according to data provided by the Alliance of Automobile Manufacturers, 

in 2006, the largest numbers of privately owned FFVs were located in 

Texas, Florida and California. While there were about 415,000 privately 

owned FFVs in Texas, in early 2007 only 18 publicly accessible fueling 

stations offered E85. In Florida there were about 307,000 privately owned 

FFVs but only 2 publicly accessible fueling stations offered E85 in early 

2007, and in California, there were an estimated 257,000 FFVs but only 1 

publicly accessible fueling station—located in the San Diego area—offered 

E85. 

Page 34 GAO-07-713
Biofuels Availability and Use

Figure 4: Location of Public Fueling Stations That Offered E85 in 2007 and Number of Privately Owned FFVs by State in 2006 

Sources: DOE’s Alternative Fuels Data Center and Alliance of Automobile Manufacturers data.

Public fueling stations that

offered E85

Number of private FFVs

More than 150,000

50,001 to 150,000

50,000 or fewer

Page 35 GAO-07-713
Biofuels Availability and Use

Increasing the availability of diesel vehicles is impeded by the additional 

costs to make the vehicles compliant with emissions regulations. Biodiesel 

contains oxygen, which aids in combustion but results in emissions of 

nitrogen oxides that can lead to increased ground-level ozone. According 

to an industry expert with whom we spoke, the compliance cost of 

meeting current emissions standards for diesel vehicles adds about $3,000 

to the cost of the vehicles. 

Several Policy Options 

Could Help Address 

Impediments to Increasing 

the Number of Biofuel 

Compatible Vehicles, but 

the Effect on Biofuel Use 

Is Unknown 

A number of policies to increase the production of biofuel compatible 

vehicles have been proposed by members of Congress. The proposals 

include the following: 

• providing a production cost tax credit of about $100 per vehicle to 

automobile manufactures for each FFV they produce; 

• mandating that automobile manufacturers produce FFVs, for example, 

by requiring the percentage of vehicles that are biofuel compatible to 

gradually increase over time to eventually 100 percent of the 

manufacturer’s fleet; 

• and taxing conventionally fueled vehicles. 

On the basis of the impediments we have identified, it is unlikely that 

increasing the number of biofuel compatible vehicles would increase 

biofuel use until there is a large enough supply of cost-competitive fuel 

that is readily available to drivers. Regarding FFVs, increasing the number 

of such vehicles may actually increase gasoline usage if E85 is not readily

available because the FFVs currently on the road—and potentially those 

that are added in the future—are larger vehicles that get relatively poor 

gas mileage and are operating mainly on gasoline. According to a report 

from the Department of Transportation, DOE, and EPA, automobile 

manufacturers have used CAFE incentives to produce less fuel efficient 

FFVs that consumers generally do not operate with biofuels, resulting in 

increased petroleum use. The report projected in 2003 that 9 billion 

gallons of additional gasoline would be used between 2005 and 2008 as a 

result of the CAFE credit for FFVs. We have also reported that the CAFE 

program’s effectiveness in reducing oil consumption is hampered by the 

provision that grants credits to manufacturers for selling FFVs because 

these vehicles often run on regular gasoline.38

 38See GAO, Passenger Vehicle Fuel Economy: Preliminary Observations on Corporate 

Average Fuel Economy Standards, GAO-07-551T (Washington, D.C.: Mar. 6, 2007). 

Page 36 GAO-07-713
Biofuels Availability and Use

The lack of access to E85 for federal fleet FFVs illustrates the potential 

pitfalls of putting FFVs on the road without a sufficient number of stations 

to provide the fuels. While there were about 96,000 FFVs in the federal

fleet in fiscal year 2006, there are only 57 fueling stations dedicated to 

supplying them with E85 in early 2007. Federal fleet FFVs were distributed 

nationwide, but the largest numbers were in the states of California, 

Texas, and Florida, as shown in figure 5. In California, there were 8,146

federal fleet FFVs, but only 3 stations—2 federal and 1 public—that 

provide E85. Similarly, there are only 24 E85 stations in Texas to serve 

6,810 federal FFVs, and only 8 stations in Florida to serve 6,606 federal 

FFVs. This situation can lead to greater petroleum fuel usage by federal 

agencies. As we reported in February 2007, the U.S. Postal Service was 

required to purchase FFVs even though the available vehicles had larger 

engines than were needed. Because the Postal Service found that E85 was 

generally 17 percent more expensive than gasoline, and that E85 stations 

were sometimes too far away to justify the travel costs, it chose to fuel 

these vehicles with regular gasoline, resulting in increased use of 

petroleum fuels.39 The agency’s FFV fleet failed to create enough E85 

demand to spur investment in the installation of E85 dispensers at fueling 

stations, even in areas where there were large numbers of Postal Service 

FFVs. 

 39See GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices Requires

Improved Tracking and Monitoring of Consumption Information, GAO-07-244

(Washington, D.C.: Feb. 16, 2007). 

Page 37 GAO-07-713
Biofuels Availability and Use

Figure 5: Location of Federal Fueling Stations That Offered E85 in 2007 and Number of Federal Fleet FFVs by State in 2006 

Sources: DOE’s Alternative Fuels Data Center and DOE’s and General Services

 Administration’s (GSA) Federal Automotive Statistical Tool data.

Virginia, 4 stations

Maryland, 3 stations

District of Columbia, 

1 station

Federal fueling 

stations that offered E85

Number of federal FFVs

More than 3,000

1,001 to 3,000

1,000 or fewer

Page 38 GAO-07-713
Biofuels Availability and Use

Currently DOE lacks a comprehensive strategic approach to coordinate 

the expansion of biofuels production with biofuel distribution 

infrastructure development and vehicle production. While DOE’s Biomass 

Program has a strategic approach to increasing ethanol production, DOE 

has not yet developed a comprehensive strategic approach for determining 

the infrastructure (transport system and fueling stations) and vehicles 

needed to distribute and use the increased production that could result 

from the program. A strategic approach could assist in resolving important 

questions, such as which blend level of ethanol—E10, E85, or something in 

between—would most effectively and efficiently increase the use of the 

fuel and which elements of the biofuel infrastructure should receive 

government support. In addition, federal agencies have not evaluated the 

performance of biofuel-related tax expenditures, making it impossible to 

determine their impacts on the economy, environment, or energy security. 

DOE has a strategic approach for increasing ethanol production, which it

developed in collaboration with other federal agencies and the private 

sector. The agency’s approach is spelled out in the multiyear plan for its 

Biomass Program, which describes the agency’s approach to the research 

and development of cellulosic biomass-to-fuel technologies; provides 

analysis of the markets involved in each technology; lists relevant 

accomplishments; outlines specific goals, milestones, and barriers; and 

describes what the role of the federal government should be. For example, 

the Biomass Program focuses on technologies that have a high level of 

technical and economic risk but also offer significant potential rewards for 

the nation. In addition, Congress established the Biomass Research and

Development Board (Biomass Board) to help ensure a coordinated 

strategic approach to research and development spending at DOE, USDA, 

EPA, the National Science Foundation, and other agencies. The goal of the 

Biomass Board is to bring coherence to federal strategic planning and to

maximize the benefits from federal grants and assistance. Members of the 

Biomass Board, with advice from private sector stakeholders, identify 

gaps in fuel production technology that need to be addressed by research 

and development and seek to coordinate efforts in order to avoid 

duplication of effort. 

DOE Has Not Yet 

Developed a Strategic 

Approach to 

Coordinate the 

Expansion of Biofuel 

Production with 

Infrastructure and 

Vehicles, and the 

Effectiveness of 

Biofuel Tax 

Expenditures Has Not 

Been Evaluated 

DOE’s Strategy for 

Increasing Ethanol

Production Is Not 

Coordinated with a 

Comprehensive Strategic 

Approach for Distribution 

Infrastructure 

Development and Vehicle 

Production 

However, DOE has not yet developed a comprehensive strategic approach

to coordinate the significantly larger volume of biofuel production that 

Page 39 GAO-07-713
Biofuels Availability and Use

could result from the Biomass Program with distribution infrastructure 

development and vehicle production. DOE officials told us they recognize 

the importance of developing a strategic approach and have taken an

initial step in that direction. According to a DOE official with whom we 

spoke, in March 2007, officials from DOE’s Biomass Program drafted a 

position paper that supported moving nationwide ethanol blends beyond

E10 to E15 or E20 in order to achieve the most efficient expansion of 

ethanol use. DOE would continue to support E85 only in areas with high 

ethanol production levels. However, the position paper has not yet been 

approved, and according to one DOE official with whom we spoke, it is 

still unclear how this position will affect future DOE activities and 

priorities related to ethanol infrastructure. After DOE finalizes its decision 

on ethanol blend levels, the official told us that it would then need to 

coordinate with other agencies to develop a strategic approach to biofuel

infrastructure expansion. In that regard, DOE has recently begun working 

with USDA and other federal agencies through the Biomass Board to 

develop a plan to achieve the President’s goal of displacing 20 percent of 

U.S. gasoline consumption in the next 10 years. According to DOE, private 

sector stakeholders involved in biofuel production, delivery infrastructure, 

and vehicles will also have a key role in the development of successful 

strategies for expanding biofuel production and use. 

In the absence of a strategic approach, important questions—such as what 

distribution infrastructure and vehicles are needed to support DOE’s 

chosen blend level, when they are needed, or what government support is 

needed and what will develop through market forces—remain 

unanswered. For example, if cellulosic ethanol production begins on a 

commercial scale, the expansion of biofuel infrastructure to meet the 

President’s target level of 35 billion gallons by 2017 may be achieved 

through the use of E10 nationally and E85 regionally, or with the use of 

E20 nationally. Determining which fuel blend strategy to pursue is critical

in guiding the development of distribution infrastructure because, 

according to several industry officials, a national E20 approach may not 

require much investment in new dispensers, and depending on the results 

of current fuel system testing, it might be accomplished with the existing

automobile fleet. However, using E20 nationally may not be feasible if 

transportation limitations prevent the large-scale distribution of ethanol 

beyond its regional production centers, in which case regional expansion 

of E85 may make sense. For example, rail industry representatives with 

whom we spoke indicated that there is currently no spare capacity in the 

rail system to transport higher levels of biofuels. As a result, achieving 

even relatively small increases in biofuel use may be difficult with the 

current transportation infrastructure. It is also not known what roles the 

Page 40 GAO-07-713
Biofuels Availability and Use

government and private sector should play in the development and 

expansion of the nation’s biofuel infrastructure and fleet of biofuel 

compatible vehicles. For example, DOE has not determined the extent to

which the federal government needs to be involved in supporting the 

expansion of the E85 fueling station infrastructure or whether the needed 

infrastructure will continue expanding largely as a result of market forces 

and state support in areas that produce large amounts of ethanol. 

DOE Has Not Evaluated 

the Performance of 

Biofuel-Related Tax 

Expenditures 

Federal biofuel tax expenditures are composed of excise tax credits for 

ethanol and biodiesel blenders, tax credits for small ethanol and biodiesel 

producers, a tax credit for alternative fueling infrastructure development,

and a special depreciation deduction for cellulosic ethanol facilities.40

Through these tax expenditures, the government forgoes a certain amount 

of tax revenue to encourage biofuel use because of the presumed benefits, 

such as reducing greenhouse gases and improving energy security and 

rural economies. The largest of the biofuel tax expenditures is the VEETC, 

which according to the Department of the Treasury, cost about $2.7 billion 

in forgone tax revenue in 2006. 

The Government Performance and Results Act provides an impetus for 

executive branch agencies to evaluate tax expenditures that affect their 

missions. However, as we previously reported, one of the key impediments 

to moving forward in evaluating tax expenditure outcomes is the 

continuing lack of clarity about the roles of the Office of Management and 

Budget (OMB), Treasury, and the departments or agencies with program 

responsibilities, such as DOE.41 We also reported that OMB officials said 

the agency did not have the expertise or resources to conduct its own 

comprehensive analyses of tax expenditures and that individual agencies 

should take responsibility for identifying tax expenditures that affect their 

missions, with Treasury’s Office of Tax Analysis leading efforts to evaluate

tax expenditures. To help evaluate whether tax expenditures are achieving

the desired results, our work related to GPRA and the experience of 

leading organizations have shown the importance of establishing outcome-

 40Volumetric Ethanol Excise Tax Credit §301 (Pub.L. No. 108-357), Biodiesel Tax Credit 

§1344 (Pub. L. No. 109-58), Small Ethanol Producer Credit §11502 (Pub. L. No. 101-508), 

Small Agri-Biodiesel Tax Credit §1345 (Pub. L. No. 109-58), Alternative Fuel Infrastructure

Tax Credit §1342 (Pub. L. No. 109-58), Special Depreciation Allowance for Cellulosic 

Biomass Ethanol Plant Property §209 (Pub. L. No. 109-432). 

41See GAO-05-690. 

Page 41 GAO-07-713
Biofuels Availability and Use

oriented performance goals and measures. However, DOE and Treasury 

have not worked together to define their roles and responsibilities for 

evaluating biofuel tax expenditures, nor has either agency established the 

performance goals or measures needed to conduct an evaluation, or 

gathered and reported any performance data. Consequently, there is no 

reporting on whether biofuel tax expenditures are achieving their desired 

goals. 

It is important to evaluate the outcomes of biofuel tax expenditures so that 

the government can determine if spending on biofuels has positive results. 

Evaluating the outcomes of biofuel tax expenditures consists of 

comparing the level of forgone tax revenue to the outcomes or benefits. 

The outcomes or benefits would be the dollar savings resulting from 

improved energy security or the improvements to rural economies, for 

example, and should be greater than the amount of forgone tax revenue

for there to be a positive result.42 In addition, knowing the level of benefits 

on a measurable basis, such as per gallon of biofuel, would allow 

policymakers to determine the level of tax expenditure that would ensure 

a positive result. Being able to determine the proper level of tax 

expenditure per gallon is important because if it is set too high, then 

biofuel use would be more costly to taxpayers than the benefit it provides, 

and likewise, if tax expenditures are too low, not enough biofuel would be 

used and the potential benefits from increased biofuel use would remain 

unrealized. Because neither DOE nor any other executive branch agency

has conducted an analysis of the benefits of the VEETC, it is impossible to 

know whether the 51 cent tax expenditure for every gallon of ethanol 

blended with gasoline is too high, too low, or at the proper level. 

It is also important to evaluate the outcomes of biofuel tax expenditures 

so that the government can determine if there are more cost-effective 

means to achieve the same outcomes. Tax expenditures are not the only 

means to increase the production and use of biofuels. Taxes on gasoline 

and a RFS that requires a specified level of biofuel use are other policy 

options that have been implemented and could be expanded to achieve the 

same outcome as the VEETC is assumed to achieve, but at a lower cost to 

the government. For example, according to analysis conducted by DOE 

and USDA and some economists with whom we spoke, the current 

 42Setting targets for and monitoring the number of gallons of biofuel produced and used 

(outputs) does not measure the benefits of biofuels (outcomes) and therefore cannot be 

used to measure the performance of biofuel tax expenditures.

Page 42 GAO-07-713
Biofuels Availability and Use

approach of using both an RFS and an excise tax credit, such as the 

VEETC, may be largely redundant because biofuel use can never be lower

than the level mandated by the RFS. Consequently, most of the benefits 

that accrue to society from the levels of biofuel use mandated by the RFS 

could have been achieved without the need for any forgone tax revenue.

Although executive branch agencies have not evaluated the performance 

of biofuel tax expenditures, other organizations have conducted limited 

evaluations that have raised questions about the effectiveness of these tax 

expenditures. For example, in 2006, the Congressional Research Service 

analyzed the VEETC and biodiesel tax credits and issued a report stating 

that tax expenditures are generally an inefficient way to deal with 

environmental or energy security concerns and this was the case with 

biofuel tax expenditures, which do not directly address the external costs 

of petroleum motor fuels production, use, or importation, such as the 

costs of greenhouse gas emissions.43 The report also found that with the 

RFS in place, the VEETC has caused substantial and unnecessary losses in 

federal tax revenue without providing a significant incentive for additional 

production. These losses could increase in the future if production 

increases. For example, at the current rate of subsidy, if 15 billion gallons 

of ethanol were produced annually, it would cost the Treasury an 

estimated $7.6 billion annually. In addition, a study by the Global Subsidies 

Initiative estimated that the government provided a total subsidy of $1.80 

for each gallon of gasoline displaced with ethanol in the United States 

transportation sector.44 To a large extent, this subsidy came from tax 

expenditures, particularly the VEETC. Because outcome goals for biofuel 

tax expenditures have not been established and performance data have 

not been gathered, it is impossible to determine if the $1.80 per gallon cost 

resulted in an equal or greater amount of benefits.

Congress and the President have made commitments to support the 

development of domestically produced biofuels, biofuel fueling stations, Conclusions 

 43U.S. Senate. Committee on the Budget. Tax Expenditures: Compendium of Background

Material on Individual Provisions (S. PRT. 109-072, pp. 91). Prepared by the 

Congressional Research Service. Washington: 2006. 

44See Doug Koplow, Biofuels—At What Cost?: Government Support for Ethanol and

Biodiesel in the United States, the Global Subsidies Initiative of the International Institute 

for Sustainable Development, October 2006. The $1.80 estimate includes all government

support for ethanol and corn, including state-level ethanol incentives and other federal 

nontax expenditures such as direct payments to corn producers. 

Page 43 GAO-07-713
Biofuels Availability and Use

and FFVs because of the expected benefits for rural economies, energy 

security, and the environment. However, the nation can and should think 

more strategically about these commitments. Because there are limits on 

the amount of corn ethanol that can be produced as well as market 

conditions that favor selling ethanol for blending as E10, it is unlikely that 

ethanol producers will make significant quantities of corn ethanol 

available for blending as E85. Without a sufficient volume of competitively

priced ethanol for E85, federal investments in E85 fueling station 

infrastructure and FFVs would result in additional costs and yet would not 

likely be effective at increasing the use of the fuel. To date, DOE’s Clean 

Cities program has made a relatively small investment in expanding the

number of E85 fueling stations, but it is questionable whether even this 

limited federal expenditure was necessary or whether any additional 

federal funds should be devoted to further expansion unless ethanol 

production dramatically increases. Likewise, because most FFVs are 

larger, less fuel efficient vehicles that generally use gasoline, there are 

environmental costs associated with providing incentives through the 

CAFE program for increasing the production of these vehicles in the 

absence of an available, cost-competitive supply of E85. 

Currently the nation lacks a comprehensive strategic approach to 

coordinate the expansion of biofuels production with distribution 

infrastructure development and vehicle production. Because such an 

approach does not exist, fundamental questions remain unanswered. For 

example, it has not yet been determined whether conventional vehicles 

can run on blends of more than E10 without damaging the vehicles and 

still meet EPA Clean Air Act requirements. The answer to this question 

will have a significant impact on when or if biofuel-specific infrastructure 

or vehicles are needed. Absent a coordinated, strategic approach, the 

nation runs the risk of unnecessarily investing in fueling stations or FFVs 

that cannot be effectively utilized or of producing significant quantities of

ethanol but not having an effective way to deliver the fuel to stations and 

consumers. Finally, as biofuel production increases, biofuel tax 

expenditures will become increasingly expensive. However, because DOE 

and Treasury have not defined their roles and responsibilities or evaluated 

and reported on the performance of biofuel tax credits, policymakers have

little basis for evaluating whether the benefits of these tax expenditures 

outweigh the costs. 

Page 44 GAO-07-713
Biofuels Availability and Use

To improve biofuel-related planning and to provide Congress better 

information on the costs and benefits of biofuel tax expenditures, we are 

recommending that the Secretary of Energy: 

• Collaborate with public and private sector stakeholders to develop a 

comprehensive strategic approach to increasing the availability and use 

of biofuels that coordinates expected biofuel production levels with the 

necessary distribution infrastructure development and vehicle

production.

• Collaborate with the Secretary of the Treasury to evaluate and report 

on the extent to which biofuel-related tax expenditures are effectively 

and efficiently achieving their goals, as well as the extent to which they 

support the department’s comprehensive strategic approach for 

biofuels. As a first step, the Secretaries will need to define their roles 

and responsibilities for conducting the evaluation.

We provided a copy of our draft report to the Department of Energy for its 

review and comment. In its written response DOE agreed with both of our 

recommendations and described its key initiatives to promote cellulosic 

ethanol development and deployment, as well as its efforts with other 

federal agencies and the private sector to coordinate increased biofuels 

production, infrastructure development, and vehicle technology. DOE also 

provided technical comments, which we incorporated into the report as 

appropriate. DOE’s comments and our detailed responses are presented in 

appendix I. 

We are sending copies of this report to the Secretary of Energy, 

appropriate congressional committees, and other interested members of 

Congress. We also will make copies available to others upon request. In 

addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

Recommendations for 

Executive Action 

Agency Comments 

and Our Evaluation 

Page 45 GAO-07-713
Biofuels Availability and Use

If you or your staff have any questions about this report, please contact me 

at (202) 512-3841 or gaffiganm@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix II. 

Mark E. Gaffigan 

Acting Director, Natural Resources 

 and Environment 

Page 46 GAO-07-713
Appendix I: Comments from the Department Appendix I: Comments from the Department of Energy 

of Energy 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Page 47 GAO-07-713 Biofuels Availability and Use
Appendix I: Comments from the Department 

of Energy 

Biofuels Availability and Use

See comment 1. 

Page 48 GAO-07-713
Appendix I: Comments from the Department 

of Energy 

Biofuels Availability and Use

See comment 2. 

Page 49 GAO-07-713
Appendix I: Comments from the Department 

of Energy 

The following are GAO’s comments on the Department of Energy’s letter 

dated May 25, 2007. GAO Comments 

1. While a detailed discussion of all federal programs related to biofuels 

and bioproducts is beyond the scope and objectives of this report, we 

believe that the report sufficiently recognizes the key efforts under way by 

DOE and other federal agencies. 

2. We revised the report to indicate that private sector stakeholders will 

play a key role in the investment and implementation of a successful 

strategy for biofuels commercialization. 

Page 50 GAO-07-713 Biofuels Availability and Use
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 51 GAO-07-713

Appendix II: GAO Contact and Staff 

Acknowledgments 

Mark E. Gaffigan, (202) 512-3841or gaffiganm@gao.gov

In addition to those named above, Stephen D. Secrist, Assistant Director; 

Brad C. Dobbins; Winchee Lin; Robert J. Marek; and Bryan G. Rogowski 

made key contributions to this report. Also contributing to the report were 

Catherine A. Colwell, John W. Delicath, Franklin W. Rusco, MaryLynn 

Sergent, James A. Stack, and Barbara R. Timmerman. 

Biofuels Availability and Use

GAO Contact 

Staff 

Acknowledgments 

(360708) 
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