Now that President Obama has officially taken office, many in the biofuels industry are wondering how this change in Administration will impact their future. The industry is experiencing tough times as high corn prices and excess supply have dramatically reduced margins. And the national news media – never a friend to biofuels or frankly to any federal policy that put a dollar in the pocket of a farmer – have ratcheted up their attacks by embracing and amplifying allegations that biofuels use is responsible for high food prices, greenhouse gas emissions, food shortages, and the destruction of the rainforest.
To some extent, much of this is inevitable. As biofuels use has grown in the United States to nearly 10 billion gallons per year – slightly less fuel than we import annually from Saudi Arabia and more than we import from either Mexico or Venezuela – the industry has become a bigger target. The question now is where we go from here.
What’s at stake for biofuels?
As the 111th Congress begins, the biofuels industry is facing a number of critical challenges. How these issues get resolved will in many respects determine the industry’s success over the next two decades , by which point the United States and much of the rest of the world may well be transitioning aggressively toward at least partial electrification of the light duty fleet (hybrid FFV/plug-in vehicles, capable of 150 mpg when measured as gasoline-equivalent inputs). In fact, in the coming decades, new markets like aviation and rail may become very important for biofuels.
Two issues in particular are extremely pressing: 1) the greenhouse gas “carbon footprint” that will be established for biofuels in the Environmental Protection Agency’s rulemaking for the 36 billion gallon Renewable Fuels Standard, and 2) hitting the so-called “blend wall,” which is shorthand for the point where virtually all of the gasoline sold in the U.S. will be blended to a 10 percent level with ethanol.
Other issues that the biofuels industry will need to contend with in the near future are the extension of the existing 45 cent per gallon Volumetric Ethanol Excise Tax Credit (VEETC) and the extension of the 54 cent per gallon import duty.
Campaign pledges
Americans who follow presidential politics closely are familiar with the phenomenon whereby presidential candidates promise the moon and stars and once in office ultimately deliver very little. To some extent, it is expected that any presidential candidate make bullish pronouncements about the use of biofuels in an effort to impress Midwestern voters, particularly Iowans who play such an important early role in the selection of the candidate. In fact, few candidates are willing to follow the example of John McCain, whose biofuels policies, combined with his open disdain for fundamental Farm Bill programs, arguably led to his decisive defeats in a number of Midwestern states in the general election.
It is instructive to examine the pledges made by candidate Obama during the campaign to determine at least directionally how he intends to deploy biofuels to address the country’s energy challenges. Obama campaigned at a time when a number of interest groups, ranging from the Grocery Manufacturers Association to Friends of the Earth to Oxfam to the United Nations, were claiming that biofuels were responsible for a range of sins against humanity and the environment. Therefore, his strong campaign positions in favor of greater biofuels use should not be taken lightly. They are a harbinger of a sustainable, visionary national policy.
Obama made three basic promises during the campaign that can be found on his official website:
“Mandate All New Vehicles are Flexible Fuel Vehicles . Sustainably-produced biofuels can create jobs, protect the environment and help end oil addiction – but only if Americans drive cars that will take such fuels. Barack Obama and Joe Biden will work with Congress and auto companies to ensure that all new vehicles have FFV capability – the capability by the end of his first term in office.”
“Develop the Next Generation of Sustainable Biofuels and Infrastructure . Advances in biofuels, including cellulosic ethanol, biobutanol, and other new technologies that produce synthetic petroleum from sustainable feedstocks offer tremendous potential to break our addiction to oil. Barack Obama and Joe Biden will work to ensure that these clean alternative fuels are developed and incorporated into our national supply as soon as possible. They will require at least 60 billion gallons of advanced biofuels by 2030. They will invest federal resources, including tax incentives and government contracts, into developing the most promising technologies and building the infrastructure to support them.”
“Establish a National Low Carbon Fuel Standard . Barack Obama and Joe Biden will establish a National Low Carbon Fuel Standard (LCFS) to speed the introduction of low-carbon non-petroleum fuels. The standard requires fuels suppliers in 2010 to begin to reduce the carbon of their fuel by 5 percent within 5 years and 10 percent within 10 years. The Obama/Biden plan will incentivize increased private sector investment in advanced low-carbon fuels and has a sustainability provision to ensure that increased biofuels production does not come at the expense of environmental conservation. The LCFS is an important mechanism in ensuring that our efforts to reduce oil dependence also reduce carbon emissions.”
Taken together, these campaign pledges reveal a candidate who favors greater use of biofuels, while clearly seeking ways to produce them in ways that reduce greenhouse gas (GHG) emissions to the greatest extent possible.
Obama’s people
In Obama’s brief tenure in the United States Senate, he proved to be a strong advocate of biofuels, and along with Senators Tom Harkin and Dick Durbin, developed low carbon fuel standard legislation to promote the expanded production and use of low-carbon biofuels. The team of officials that President Obama has appointed to top jobs reveals a lineup which in the past generally has favored greater use of biofuels.
Secretary of Health and Human Services / White House Health Czar Tom Daschle spent nearly three decades in Congress promoting biofuels and was the author, along with Senator Dick Lugar, of the original RFS legislation.
Tom Vilsack, the incoming Secretary of Agriculture, was Governor of Iowa, a state that produces more ethanol than any other. And while Vilsack has called for the repeal of the biofuels import duty in the past, he is likely to be a strong advocate for the continued growth of the domestic biofuels industry, particularly as it transitions to non-starch feedstocks.
Ken Salazar, the incoming Secretary of the Interior, comes from an agricultural background in southern Colorado and was a biofuels supporter throughout his Senate career.
General Jim Jones, chair of the National Security Council, understands the need for the U.S. to wean itself off its dependence on foreign oil and is expected to recognize the role of domestically produced biofuels in meeting that goal.
Finally, Pete Rouse, Special Assistant to the President, was chief of staff to Senator Tom Daschle for many years and has been a staunch advocate for biofuels since the early 1970s.
Collectively there is a lot of biofuels expertise and support in the Obama Administration, which should lead to the establishment of thoughtful and constructive biofuels policies. In short, biofuels will be well understood in Obama Cabinet meetings.
Relationship with Congress
Much of this depends not only on President Obama, but also on Congress. Obama can propose legislation and resolve Administrative issues within the agencies. But Congress will need to decide issues like whether to enact a low carbon fuel standard or a cap-and-trade program to limit GHG emissions, and whether to extend and/or adjust the biofuels tax credits and import duty.
While Democrats in Congress seem to be enthusiastic about the prospects of an Obama presidency, they are not about to surrender their independence. Democratic Leader Harry Reid has reportedly already told Vice President Biden that he should not plan on attending the weekly Democratic Senate policy lunches, something that Vice President Cheney did on a regular basis with the GOP. The honeymoon inevitably will end, but Obama, much like Presidents Reagan and Clinton, has shown an ability use speeches and the media to generate support from the public in ways that should enable him to set the national policy agenda for years to come.
Resolving America’s thorniest biofuels issues
The draft RFS rulemaking has been completed by EPA but is being held up at the Office of Management and Budget over disputes with the Departments of Energy and Agriculture over the carbon footprint attributed to biofuels. This is an extremely important issue because the determination of the federal government in this rulemaking will set a precedent that will in many respects decide the fate of biofuels in a future carbon-constrained economy.
The lower the carbon footprint of an energy source, the more successful that source will be once the U.S. adopts a low carbon fuel standard and an economy-wide cap and trade bill to limit GHG emissions. It is therefore critically important that the federal government get this right.
There generally is widespread agreement that the GHG emissions attributed to the direct effects of producing and using biofuels are considerably lower than those of petroleum, particularly as petroleum gets dirtier and dirtier due to increasing use of oil derived from Canadian tar sands and the potential use of coal-to-liquids processes.
“Direct emissions” include the carbon emitted from the production and harvesting of corn, transportation to the ethanol plant, conversion to ethanol, and shipment to the marketplace. However, the interagency controversy holding up the RFS rulemaking relates to the GHG emissions related to so-called “indirect emissions,” which ethanol opponents claim lead to a much larger carbon footprint for ethanol.
Some want “indirect emissions” also included in the final carbon tally, which they say include the clearing of land in the tropics as a result of the diversion of grain from feeding people to a feedstock for biofuels. Though there is no scientific evidence that land use change is a direct result of biofuels and increased grain prices, ethanol opponents have developed computer models demonstrating that it will happen in the future. EPA has chosen to incorporate these speculative indirect effects into its biofuels carbon footprint analysis.
It appears that the Bush Administration will leave the controversy over the RFS carbon footprint of biofuels to the Obama Administration to resolve. Beyond that, there is little that can be said at this stage with respect to how the Obama Administration will address it. One responsible approach would be to convene an interagency process that would allow EPA, DOE, and USDA officials to sort it out. The Administration could assemble such a team, which in turn could develop a method for evaluating these indirect emission claims and compare the computer modeling results to actual on-the-ground data to determine whether there are, in fact, significant GHG greenhouse gas emissions associated with biofuels-induced land clearing.
Over time, the smoking gun of indirect emissions is likely to be shown to be much more dogma than science. How the Obama Administration handles it will reveal a great deal about whether it will be beholden to the anti-ethanol forces that are promoting such dogma or whether it will be willing to take a more courageous stance and allow this indirect emissions hypothesis to be tested with real-world data before attempting to apply to it in such a consequential rulemaking.
The blend wall issue can only be solved by 1) dramatically expanding the use of E85, and 2) increasing the amount of ethanol that can be blended into a gallon of gasoline.
The Department of Energy is undertaking a number of tests on the compatibility of the existing automobile fleet with higher blends, such as E15, E20, and E30. Preliminary results are encouraging, but the final test results will not be available for another year or two. In the meantime, it is critical that the cap be lifted, even if only to E12 or E13 (the so-called “tolerance threshold”), so that the near-term market can absorb the amount of ethanol needed to achieve the RFS targets. Not only is this important for the existing corn ethanol industry, it is imperative for the emerging cellulosic ethanol industry, which has no future without a growing biofuels market.
The Obama Administration seems firmly committed to low-carbon biofuels and I expect that they will look for ways to expand market opportunities. Clearly, his campaign pledge to ensure that all new vehicles are FFVs will help in that regard. The more difficult test will be whether the Administration works to increase the permissible ethanol blends to levels above E10. I expect it will look in earnest for ways to do this, but will take this step only if it feels convinced by the data that such a move will not jeopardize air quality or vehicle durability.
It is hard to imagine that the Obama Administration will not support an extension of the biofuels tax credit, but easy to imagine that it will ask for fundamental changes in its structure and level. Both Daschle and Vilsack have publicly urged elimination of the import duty. This could be possible without harming the domestic ethanol industry if the basic blender tax credit becomes a producer credit, or if the blender credit is extended only for domestic ethanol, which some might argue could be done using the RFS Renewable Identification Number (RIN) tracking system.
Given the clear desire of Obama to promote low carbon fuels, I would not be surprised to see him propose to tie the credit in some way to the achievement of low carbon fuel performance standards. If done in an intelligent and thoughtful manner, this could position the industry to be extremely successful in a future carbon-constrained world.
The road ahead
The broad challenges facing the industry are maintaining profitability in the face of higher feedstock costs while continuing to reduce the carbon footprint of the existing fleet of “first generation” ethanol plants, and assisting new innovative biofuels technologies with feedstocks like wood waste and algae to move from the laboratory to the commercial marketplace.
President Obama and his team appear to have the institutional knowledge and philosophical disposition to promote the policies necessary to ultimately free the United States from its harmful dependence upon imported oil.
