Fuel ethanol: background and public policy issues.(Table)

Updated October 19, 2006

Summary

Ethanol plays a key role in policy discussions about energy, agriculture, taxes, and the environment. In the United States it is mostly made from corn; in other countries it is often made from cane sugar. Fuel ethanol is generally blended in gasoline to reduce emissions, increase octane, and extend gasoline stocks. Recent high oil and gasoline prices have led to increased interest in alternatives to petroleum fuels for transportation. Further, concerns over climate change have raised interest in developing fuels with lower fuel-cycle greenhouse-gas emissions.

Supporters of ethanol argue that its use can lead to lower emissions of toxic and ozone-forming pollutants, and greenhouse gases, especially if higher-level blends are used. They further argue that ethanol use displaces petroleum imports, thus promoting energy security. Ethanol's detractors argue that various federal and state policies supporting ethanol distort the market and amount to corporate welfare for corn growers and ethanol producers. Further, they argue that the energy and chemical inputs needed to turn corn into ethanol actually increase emissions and energy consumption, although most recent studies have found modest energy and emissions benefits from ethanol use relative to gasoline.

The market for fuel ethanol is heavily dependent on federal incentives and regulations. Ethanol production is encouraged by a federal tax credit of 51 cents per gallon. This incentive allows ethanol--which has historically been more expensive than conventional gasoline--to compete with gasoline and other blending components. In addition to the above tax credit, small ethanol producers qualify for an additional production credit. It has been argued that the fuel ethanol industry could scarcely survive without these incentives.

In addition to the above tax incentives, the Energy Policy Act of 2005 (P.L. 109-58) established a renewable fuels standard (RFS). This standard requires the use of 4.0 billion gallons of renewable fuels in 2006, increasing each year to 7.5 billion gallons in 2012. Most of this requirement will likely be met with ethanol. In the United States, approximately 3.4 billion gallons of ethanol were consumed in 2004. Thus, the RFS will likely lead to a doubling of the U.S. ethanol market by 2012. Some analysts believe that this program could have serious effects on gasoline suppliers, leading to somewhat higher fuel prices. Thus, the Environmental Protection Agency's implementation of the program will likely be of continuing concern to Congress.

Other issues of Congressional interest include support for purer blends of ethanol as an alternative to gasoline (as opposed to a gasoline blending component), promotion of ethanol vehicles and infrastructure, and imports of ethanol from foreign countries. This report supersedes CRS Report RL30369, Fuel Ethanol: Background and Public Policy Issues (available from author). It will be updated as events warrant.

 
Content 
 
Introduction                                                         1 
 
Ethanol Basics                                                       1 
 
Ethanol and the Agricultural Economy                                 2 
 
Ethanol Refining and Production                                      3 
 
Fuel Consumption                                                     5 
     E85 Consumption                                                 7 
 
Development of Cellulosic Feedstocks                                 9 
 
Economic Effects                                                    10 
 
Air Quality                                                         12 
          Before the Energy Policy Act of 2005                      12 
          Following the Energy Policy Act of 2005                   14 
          E85 and Air Quality                                       14 
 
Energy Consumption and Greenhouse Gas Emissions                     14 
         Energy Balance                                             14 
         Greenhouse Gas Emissions                                   15 
 
Policy Concerns and Congressional Activity                          16 
     Reformulated Gasoline and MTBE                                 16 
     Renewable Fuels Standard (RFS)                                 17 
     "Boutique" Fuels                                               19 
     Alcohol Fuel Tax Incentives                                    20 
     Ethanol Imports                                                20 
     Fuel Economy Credits for Dual Fuel Vehicles                    21 
     The 2007 Farm Bill                                             22 
 
Conclusion                                                          22 
 
List of Tables 
 
Table 1. Corn Utilization, 2005/2006 Forecast                        3 
Table 2. Top 10 Ethanol Producers by Capacity, 2006                  4 
Table 3. Estimated U.S. Consumption of Fuel Ethanol, Gasoline, 
       and Diesel                                                    8 
Table 4. Wholesale Price of Pure Ethanol Relative to Gasoline       11 
Table 5. Renewable Fuels Standard Requirements Under P.L. 
       109-58                                                       18 

Introduction

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.

Ethanol Basics

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. 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 renewable fuels in gasoline. Approximately 99% of fuel ethanol consumed in the United States is "gasohol" (1) 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. (2)

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. (3) 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. (4)

Ethanol and the Agricultural Economy (5)

Corn constitutes about 90% of the feedstock for ethanol production in the United States. The other 10% 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 1.6 billion bushels of corn will be used to produce about 4.3 billion gallons of fuel ethanol during the 2005/2006 corn marketing year (September 2005 through August 2006). (6) This is nearly 15% of the projected 10.7 billion bushels of total corn utilization for all purposes. (7)

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.

Ethanol Refining and Production

According to the Renewable Fuels Association, (8) about 75% of the corn used for ethanol is processed by "dry" milling plants (which use a grinding process) and the other 25% 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. (9) In the United States, the denaturant for fuel ethanol is gasoline.

Ethanol is produced largely in the Midwest corn belt, with roughly 80% of the national output occurring in five states: Illinois, Iowa, Nebraska, Minnesota and Indiana. Because it is generally less expensive to produce ethanol …