The promotion of alternatives to petroleum, including fuel ethanol, has been an ongoing goal of U.S. energy policy. This promotion has led to the establishment of significant federal policies beneficial to the ethanol industry, including tax incentives, import tariffs, and mandates for ethanol use. The costs and benefits of ethanol—and the policies that support it—have been questioned. Areas of concern include whether ethanol yields more or less energy than the fossil fuel inputs needed to produce it; whether ethanol decreases reliance on petroleum in the transportation sector; whether its use increases or decreases greenhouse gas emissions; and whether various federal policies should be maintained. This report provides background and discussion of policy issues relating to U.S. ethanol production, especially ethanol made from corn. It discusses U.S. fuel ethanol consumption both as a gasoline blending component and as an alternative to gasoline. The report discusses various costs and benefits of ethanol, including fuel costs, pollutant emissions, and energy consumption. It also outlines key areas of congressional debate on policies beneficial to the ethanol industry. Fuel ethanol (ethyl alcohol) is made by fermenting and distilling simple sugars. It is the same compound found in alcoholic beverages. The biggest use of fuel ethanol in the United States is as an additive in gasoline. It serves as an oxygenate, to prevent air pollution from carbon monoxide and ozone; as an octane booster, to prevent early ignition, or "engine knock"; and as an extender of gasoline stocks. In purer forms, it can also be used as an alternative to gasoline in automobiles specially designed for its use. It is produced and consumed mostly in the Midwest, where corn—the main feedstock for domestic ethanol production—is grown. The initial stimulus for ethanol production in the mid-1970s was the drive to develop alternative and renewable supplies of energy in response to the oil embargoes of 1973 and 1979. Since the 1970s, production of fuel ethanol has been encouraged through federal tax incentives for ethanol-blended gasoline. The use of fuel ethanol was further stimulated by the Clean Air Act Amendments of 1990, which required the use of oxygenated or reformulated gasoline (RFG). The Energy Policy Act of 2005 ( P.L. 109-58 ) established a renewable fuels standard (RFS), which mandates the use of ethanol and other transportation renewable fuels. Approximately 99% of fuel ethanol consumed in the United States is "gasohol" or "E10" (blends of gasoline with up to 10% ethanol). About 1% is consumed as "E85" (85% ethanol and 15% gasoline), and alternative to gasoline. Fuel ethanol is usually produced in the United States from the distillation of fermented simple sugars (e.g., glucose) derived primarily from corn, but also from wheat, potatoes, or other vegetables. However, ethanol can also be produced from cellulosic material such as switchgrass, rice straw, and sugar cane waste (known as bagasse). The alcohol in fuel ethanol is identical chemically to ethanol used for other purposes such as distilled spirit beverages and industrial products. Corn constitutes about 95% of the feedstock for ethanol production in the United States. The other 5% is largely grain sorghum, along with some barley, wheat, cheese whey and potatoes. Corn is used because it is a relatively low cost source of starch that can be relatively easily converted to simple sugars, and then fermented and distilled. The U.S. Department of Agriculture (USDA) estimates that about 3.2 billion bushels of corn will be used to produce about 6 billion gallons of fuel ethanol during the 2007/2008 corn marketing year (September 2007 through August 2008). This is roughly 25% of the projected 13 billion bushels of total corn utilization for all purposes. However, it should be noted that ethanol production capacity is expanding rapidly, and corn demand for ethanol production may exceed USDA's projection. In the absence of the ethanol market, lower corn prices probably would stimulate increased corn utilization in other markets, but sales revenue would not be as high. The lower prices and sales revenue would likely result in higher federal spending on corn subsidy payments to farmers, as long as corn prices were to stay below the price triggering federal loan deficiency subsidies. According to the Renewable Fuels Association, about 80% of the corn used for ethanol is processed by "dry" milling plants (which use a grinding process) and the other 20% is processed by "wet" milling plants (which use a chemical extraction process). The basic steps of both processes are similar. First, the corn is processed, with various enzymes added to separate fermentable sugars from other components such as protein and fiber; some of these other components are used to make coproducts, such as animal feed. Next, yeast is added to the mixture for fermentation to make alcohol. The alcohol is then distilled to fuel-grade ethanol that is 85%-95% pure. Then the ethanol is partially dehydrated to remove excess water. Finally, for fuel and industrial purposes the ethanol is denatured with a small amount of a displeasing or noxious chemical to make it unfit for human consumption. In the United States, the denaturant for fuel ethanol is gasoline. Ethanol is produced largely in the Midwest corn belt, with roughly 70% of the national output occurring in five states: Iowa, Nebraska, Illinois, Minnesota and South Dakota. Because it is generally less expensive to produce ethanol close to the feedstock supply, it is not surprising that the top corn-producing states in the U.S. are also the main ethanol producers. This geographic concentration is an obstacle to the use of ethanol on the East and West Coasts. Most ethanol use is in the metropolitan centers of the Midwest, where it is produced. When ethanol is used in other regions, shipping costs tend to be high, since ethanol-blended gasoline cannot travel through petroleum pipelines, but must be transported by truck, rail, or barge. However, due to Clean Air Act requirements, concerns over other fuel additives, and the establishment of a renewable fuels standard, ethanol use on the East and West Coasts is growing steadily. For example, in 1999 California and New York accounted for 5% of U.S. ethanol consumption, increasing to 22% in 2003, and 33% in 2004. The potential for expanding production geographically is one motivation behind research on cellulosic ethanol. If regions could locate production facilities closer to the point of consumption, the costs of using ethanol could be lessened. Furthermore, if regions could produce fuel ethanol from local crops, there could be an increase in regional agricultural income. Historically, ethanol production was concentrated among a few large producers. However, that concentration has declined over the past several years. Table 2 shows that currently, the top five companies account for approximately 42% of production capacity, and the top ten companies account for approximately 48% of production capacity. Critics of the ethanol industry in general—and specifically of the ethanol tax incentives—have argued that the tax incentives for ethanol production equate to "corporate welfare" for a few large producers. However, the share of production capacity controlled by the largest producers has been dropping as more producers have entered the market. Section 1501(a)(2) of the Energy Policy Act of 2005 required the Federal Trade Commission (FTC) to study whether there is sufficient competition in the U.S. ethanol industry. The FTC concluded that "the level of concentration in ethanol production would not justify a presumption that a single firm, or a small group of firms, could wield sufficient market power to set prices or coordinate on prices or output." Further, they concluded that the level of concentration has been decreasing in recent years. Overall, at the beginning of 2008, domestic ethanol production capacity was approximately 8 billion gallons per year, and is expected to grow to 13 billion gallons per year, counting existing plants and plants under construction. Under various federal and state laws and incentives, consumption has increased from 1.8 billion gallons per year in 2001 to 6.8 billion gallons per year in 2007. Domestic production capacity will continue increasing to meet the growing demand, including increased demand resulting from implementation of the renewable fuels standard established by the Energy Policy Act of 2005. Fuel is not the only output of an ethanol facility, however. Coproducts play an important role in the profitability of a plant. In addition to the primary ethanol output, the corn wet milling process generates corn gluten feed, corn gluten meal, and corn oil, and dry milling process creates distillers grains. Corn oil is used as a vegetable oil and is priced higher than soybean oil; the other coproducts are used as livestock feed. In 2004, U.S. ethanol mills produced 7.3 million metric tons of distillers grains, 2.4 million metric tons of corn gluten feed, 0.4 million metric tons of corn gluten meal, and 560 million pounds of corn oil. Revenue from the ethanol byproducts help offset the cost of corn used in ethanol production. The net cost of corn relative to the price of ethanol and the difference between ethanol and wholesale gasoline prices are the major economic determinants of the level of ethanol production. Higher the corn prices lead to lower profits for ethanol producers; higher gasoline prices lead to higher profits. Recently, high corn prices have cut into corn ethanol producers' profits. Approximately 7 billion gallons of ethanol fuel were consumed in the United States in 2007, mainly blended into E10 gasohol (a blend of 10% ethanol and 90% gasoline). This figure represents only 5% of the approximately 140 billion gallons of gasoline consumption in the same year. Under the renewable fuels standard, motor fuel will be required to contain 36 billion gallons of renewable fuel annually by 2022. It is expected that much of this requirement will be met with ethanol. Ethanol consumption in 2007 accounted for approximately 4% of combined gasoline and diesel fuel consumption.