Survival of the Fittest: Making Sense of the Biofuel Subsidy Battle

With subsidy support for corn ethanol under attack, algae and cellulosic look to secure federal support.  The result: a subsidy battle in the Capital that could dictate the direction of the U.S. biofuel industry over the next decade.

Has the transition to advanced biofuels turned the corner?

Probably not yet, but sustainable alternatives are beginning to get their day in the sun in Washington D.C.  The result: a subsidy brawl is taking shape that will likely dictate the direction of U.S. biofuels development over the next 5-10 years.

There are a few moving elements, but here are the recent highlights:

First, the EPA’s RFS 2.0 opened up opportunities for advanced biofuels to make up an increasing portion of renewable fuels in the U.S. transportation sector when President Obama, the EPA, and USDA jointly charted a biofuel pathway in early February 2010.

The standard relies on a greenhouse gas (GHG) lifecycle analysis of renewable fuels, which represents the first time a U.S. industry has been evaluated, monitored, and regulated based on GHG performance.  In so doing, it mandates that advanced fuels play a larger role in the U.S. fuel mix — biomass-based diesel, cellulosic, and biodiesel — so long as their lifecycle GHG emissions are at least 50 percent less than the petroleum-based fuel it displaces.

Second, stories are bubbling to the surface around subsidies that suggest corn ethanol will have to fight to maintain their favored-fuel position in the Capital, while heavy criticism levied towards corn ethanol around food v. fuel and indirect land use change have undermined the effort to divert increasing portions of the U.S. corn yield to biofuel production.  The result is a growing debate about whether subsidies should be extended past 2010 for the industry.

Most recently, Holly Jessen of Ethanol Producer Magazine explains that the U.S. ethanol industry is continuing to call for an extension of the U.S. tariff on imported ethanol, following an announcement by the Brazilian government that it is eliminating its 20 percent tariff on imported ethanol.  The Brazilian Chamber of Foreign Trade said the temporary reduction will become official this week and will remain at zero until the end of 2011.

Growth Energy and the Renewable Fuels Association, however, maintain that the U.S. tariff is needed. UNICA, the Brazilian Sugarcane Industry Association, calls the removal of the subsidy a “major step forward in building a global biofuels marketplace.”  Meanwhile, UNICA continues to lobby hard for the United States also to drop its tariff on imported ethanol.

Third, algae and cellulosic upstarts are beginning to flex some muscle.  Algae groups (BIO and ABO) have stepped up their calls for a tax subsidy of their own.  In a letter urging the Senate Committee on Finance (PDF) to move on the Algae-based Renewable Fuel Promotion Act of 2009 (S. 1250), the organizations point out that the timing is optimal given that Congress currently has legislation before it to modify the Internal Revenue Code Section 40 Cellulosic Biofuel Producer tax credit.

For its part, the Cellulosic Biofuels Producer tax credit bill recently introduced by Reps. Earl Pomeroy (D-ND) and John Shimkus (R-IL) would extend subsidies by three years garnered significant praise for industry groups like BIO.

Finally, regional and state rules are starting to shape the industry as well.  California’s low carbon fuel standard (LCFS) significantly penalizes Midwest corn ethanol and soy-based diesel.  If the LCFS works its way East and is adopted by 11 Northeastern jurisdictions, Midwest corn and soy-based fuels would effectively be shut out of the population centers along the U.S. East and West coasts.

The issue thus far has been aligning commercial-ready conversion technologies that take advantage of efficiencies to keep costs low with available feedstocks.  Ethanol and biodiesel worked (albiet, through significant subsidization) because the technology was ready to go that and there was an abundance of corn and soy respectively in the United States.

The relative strength of the farm lobby in Washington played a roll as well.  Cellulosic conversion is considerably more difficult and scaling algae has proven elusive so far.  Nevertheless, look for advanced biofuels to step into the ring in a serious way with price parity inching closer.

Mackinnon is Editor & Publisher of Biomass Intel, a law and policy resource for sustainable energy, and co-author of Camelina Aviation Biofuels: Market Opportunity and Renewable Energy Report.

photo: SandiaLabs