Renewable Energy Programs in the 2008 Farm Bill
Released: 2011-09-07T00:00:00

Background

Renewable energy policy in the Food, Conservation, and Energy Act of 2008 ( P.L. 110-246 , 2008 farm bill) builds on earlier programs, many of which were established in the Farm Security and Rural Investment Act of 2002 ( P.L. 107-171 , 2002 farm bill). The 2002 farm bill was the first omnibus farm bill to explicitly include an energy title (Title IX). The energy title authorized grants, loans, and loan guarantees to foster research on agriculture-based renewable energy, to share development risk, and to promote the adoption of renewable energy systems. Since enactment of the 2002 farm bill, interest in renewable energy has grown rapidly, due in large part to a strong rise in domestic and international petroleum prices and a dramatic acceleration in domestic biofuels production (primarily corn-based ethanol). Many policymakers view agriculture-based biofuels as both a catalyst for rural economic development and a response to growing energy import dependence. Ethanol and biodiesel, the two most widely used biofuels, receive significant federal support in the form of tax incentives, loans and grants, and regulatory programs.

The 2008 farm bill became law six months after the enactment of the Energy Independence and Security Act of 2007 (EISA, P.L. 110-140 ). Provisions in the 2008 farm bill reflect the increased role for biofuels mandated by the expansion of the renewable fuels standard (RFS) in EISA and its likely impact on the U.S. agriculture sector, especially the emphasis on facilitating production of biofuels derived from cellulosic feedstocks. EISA includes a significant expansion of the overall RFS to 36 billion gallons by 2022, with carve-outs for biodiesel (1 billion gallons by 2012) and cellulosic ethanol (16 billion gallons by 2022) and an implicit cap on corn starch ethanol (15 billion gallons by 2015).

The emphasis on cellulosic ethanol also reflects increasing concerns about the economic and environmental issues associated with corn starch-based ethanol. Escalating commodity prices since 2007, combined with high energy costs, have resulted in sharp increases in livestock feed costs, export prices, and domestic food price inflation. For the first time, an agricultural commodity is directly competing with petroleum in the marketplace. In 2010 ethanol production used nearly 40% of U.S. corn production. The increase in corn used for U.S. ethanol relative to corn produced has helped to draw down U.S. corn stocks and drive up prices. Ethanol's profitability depends on both petroleum and corn prices. When petroleum prices rise, so does demand for ethanol as a substitute, which in turn increases both the demand for and price of corn. The "food versus fuel" debate intensified during the 2008 farm bill debate as food price inflation accelerated both in the U.S. and globally—highlighting some of the potential problems associated with replacing even a small share of the nation's gasoline consumption with corn-based ethanol.

Several of the federal programs that currently support renewable energy production in general, and agriculture-based energy production in particular, are outside the purview of the U.S. Department of Agriculture (USDA) and have legislative origins outside of the farm bill. For example, the RFS, which mandates the inclusion of an increasing volume of biofuels in the national fuel supply, originated with the Energy Policy Act of 2005 ( P.L. 109-58 ) and was more recently expanded in EISA. Similarly, several of the federal tax credits available to biofuel blenders were initially contained in the American Jobs Creation Act of 2004 ( P.L. 108-357 ). More recently, the tax credits were extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ).

Major Energy Provisions in the 2008 Farm Bill

The 2008 farm bill ( P.L. 110-246 ) significantly expands both the number and type of programs to support biofuels production and use. Like the 2002 farm bill ( P.L. 107-171 ), it contains a distinct energy title (Title IX) that covers a wide range of energy and agricultural topics with extensive attention to biofuels, including corn starch-based ethanol, cellulosic ethanol, and biodiesel. Research provisions relating to renewable energy are found in Title VII and tax and trade provisions are found in Title XV.

The enacted 2008 farm bill keeps the structure of Title IX as it was in the Senate-passed version of the farm bill. Title IX serves as a substitute amendment to the 2002 farm bill Title IX and consists of 3 sections. The first section, 9001, contains 13 new provisions which effectively replace the provisions of the 2002 bill. Sections 9002 and 9003 direct studies and reports on biofuels infrastructure and renewable fertilizer, respectively. See Appendix for a side-by-side comparison of previous law with the energy provisions of the 2008 farm bill.

Key biofuels-related provisions in the enacted 2008 farm bill include

establishment of a new cellulosic ethanol production tax credit (Sec. 15321), and promotion of cellulosic feedstocks production (Sec. 9011), marketing infrastructure (Sec. 9007), and refinery development (Sec. 9003); grants and loan guarantees for biofuels (especially cellulosic) research (Sec. 9008) and production (Sec. 9005); a new program to incentivize production of cellulosic ethanol feedstock (Sec. 9011); studies of the market and environmental impacts of increased biofuels use (Sec. 15322); expansion of the existing bio-based marketing program to encourage federal procurement of bio-based products (Sec. 9002); expansion of the federal bio-products certification program (Sec. 9002); support for rural energy efficiency and self-sufficiency (Sec. 9007); reauthorization of biofuels research programs (Sec. 9008) within the USDA and the Department of Energy (DOE); an education program to promote the use and understanding of biodiesel (Sec. 9006); reduction of the blender tax credit for corn-based ethanol (Sec. 15331); and continuation of the import duty on ethanol (Sec. 15333).

Energy Policy Issues in the 2008 Farm Bill

Emphasis on Cellulosic Biofuels

The 2008 farm bill energy title provides $1 billion in financial incentives and support to encourage the production of advanced (mainly cellulosic) biofuels. Grants and loan guarantees leverage industry investments in new technologies, infrastructure, and the production of cellulosic feedstocks. For instance, the Biomass Crop Assistance Program (BCAP, Section 9001) supports the production of dedicated crop and forest cellulosic feedstocks and provides incentives for post-production collection, harvest, storage, and transport (CHST). Advanced biofuels refinery capacity construction is assisted under the Biorefinery Assistance program (Section 9001) through grants and loans for the development, construction, and retrofitting of commercial-scale refineries to produce advanced biofuels. These programs are supported by increased funding for advanced biofuels research under the Agricultural Bioenergy Feedstock and Energy Efficiency Research and Extension Initiative (Section 7207), and the Sun Grant Program (Section 7526) which support and coordinate advanced biofuels research, extension, and development between government agencies, universities, and research institutions.

Cellulosic ethanol is produced from cellulose, hemicellulose, or lignin derived from the structural material that provides much of the mass of plants. Besides corn, several other agricultural products are viable feedstock and appear to offer attractive long-term supply potential—particularly cellulose-based feedstock such as prairie grasses and fast-growing woody crops such as hybrid poplar and willow trees, as well as waste biomass materials (logging residues, wood processing mill residues, urban wood wastes, and selected agricultural residues such as sugar cane bagasse and rice straw). Some cellulosic feedstock, such as native prairie grasses (e.g., switchgrass), appear to offer environmental benefits over corn-based ethanol because they thrive on marginal lands (as well as on prime cropland) and need little water or fertilizer.

Currently, cellulosic ethanol is not produced on a commercial scale. Only a few small refineries (mostly pilot or demonstration in scope) began limited production in 2010. Due to the slow progress in cellulosic ethanol production, the Environmental Protection Agency (EPA) has been compelled to waive and substantially reduce the cellulosic biofuel RFS mandates set by Congress for the years 2010 through 2012—from 100 million gallons per year (mgpy) in 2010 to a mandate of 6.5 million gallons, from 250 mpgy for 2011 to 6.6 million gallons, and from 500 mgpy for 2012 to a preliminary 3.5 to 12.9 mgpy.

Modification and Extension of Tax Credits and Tariffs

Title XV of the 2008 farm bill contains provisions which extend and modify tax credits and tariffs on ethanol. In keeping with the promotion of cellulosic ethanol, a producer tax credit of $1.01 per gallon (less the amount of small-producer ethanol credit and the alcohol mixture credit claimed) applies to ethanol produced from qualifying cellulosic feedstocks. This tax credit is intended to spur investment in cellulosic ethanol production. The ethanol blender tax credit of $0.51 per gallon (which applies to all ethanol blended, including imports) was reduced to $0.45 per gallon in January 2009.

The ethanol import tariff of $0.54 per gallon was set to expire at the end of 2008, but was extended to the end of 2010 by the farm bill ( P.L. 110-246 , Section 15333). Ethanol proponents argue that the tariff benefits the U.S. ethanol industry by protecting U.S. ethanol from lower-cost imports and also to offset the blender tax credit which is available to any ethanol (including imports) when it is blended into gasoline in the United States.

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( H.R. 4853 ) extended both the ethanol blender tax credit and the import tariff for ethanol. Both were set to expire at the end of 2010 under the 2008 farm bill. Section 708 of H.R. 4853 extends both provisions at the current rate of $0.45 per gallon for the ethanol blender tax credit and $0.54 per gallon for the ethanol import tariff until the end of 2011. The tariff continues to exceed the blender tax credit by nine cents, thereby more than offsetting the benefit of the blender tax credit and imposing a punitive duty on imported ethanol.

Reports and Studies on the Economic Impacts of Ethanol Production

The impact of increased ethanol production on agricultural and rural economies was a subject of debate during the farm bill process. As a result, the farm bill includes provisions requiring a series of reports assessing how ethanol production may be impacting the farm economy, the environment, and consumer food prices. Among these are the Comprehensive Study of Biofuels (Sec. 15322) to be conducted by the USDA, the EPA, the Department of Energy (DOE), and the National Academy of Sciences, and the Biofuels Infrastructure Study (Sec. 9002) by USDA, DOE, EPA, and the Department of Transportation (DOT). The Biomass Crop Assistance Program (BCAP, Section 9001) requires an assessment of the economic impacts of expanded cellulosic biomass production on local economies and infrastructures. Likewise, the Biomass Research and Development Program (Section 9001) requires a report on the economic impacts of rural economies of biorefinery expansion and conversion by USDA.

Funding for Energy Programs

The 2008 farm bill authorizes over $1 billion in mandatory funding for FY2008 through FY2012 ( Table 1 ), compared with $800 million in the 2002 farm bill (FY2002-FY2007). Mandatory authorization in the 2008 farm bill includes $320 million to the Biorefinery Assistance Program, $300 million to the Bioenergy Program for Advanced Biofuels, $255 million to the Rural Energy for America Program (REAP), $118 million to the Biomass Research and Development Act (BRDA), and potentially unlimited funding (such sums as necessary) for the Biomass Crop Assistance Program (BCAP). Discretionary funding (i.e., authorizations for appropriations) for energy-related provisions in the 2008 farm bill total over $1.7 billion, nearly seven times the $245 million in the 2002 farm bill. Most of the increase is for the Biorefinery Assistance Program, which has an authorization $600 million higher than in the 2002 farm bill.

Mandatory funding is through USDA's Commodity Credit Corporation (CCC). Programs identified as receiving mandatory funds are funded at these levels unless Congress limits funding to a lower amount through the appropriations or legislative process. Discretionary programs are funded each year through the annual appropriations process. Table 2 provides a list of provisions in the 2008 farm bill's energy title, and selected energy programs in the research title, for FY2010 through FY2012, along with their mandatory and discretionary funding levels—as requested by the President, authorized levels in the 2008 farm bill, and eventual availability as measured by budget authority provided by Congress—where available.

Appendix. Comparison of the Enacted 2008 Farm Bill (P.L. 110-246) with Previous Law