The Energy Policy Act of 2005 sets a path forward for the development and commercial introduction of ethanol made from cellulosic biomass, which promises to have a profound impact on our ability to manufacture and use renewable fuels in the future. Jeff Bingaman, U.S. Senate Energy Committee 2005

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The successful marketing of alternative and renewable fuels has been encouraged for years through federal energy legislation, federal environmental policies, agricultural and transportation legislation, and state legislation. Additionally, clean air regulations have indirectly contributed to increased ethanol demand. This page summarizes policies and legislation that continue to advance ethanol production and marketing in the U.S. and in Texas.

Previous to 2007, the mandates and incentives of the Energy Policy Act of 2005 accelerated ethanol production at an unprecedented rate. Under the renewable fuels standard, gasoline was mandated to contain 7.5 billion gallons of renewable fuel annually by 2012. It is expected that most of this requirement will be met with ethanol. The 2007 RFS requires 9 billion gallons of renewable fuels in 2008, increasing steadily to 15.2 billion gallons in 2012 and to 36 billion gallons in 2022.

The Energy Independence and Security Act of 2007, signed into law in December 2007, boosts the 2005 requirements for renewable fuel use to 36 billion gallons by 2022. The act requires "advanced biofuels"-defined as fuels that cut greenhouse gas emissions by at least 50%-to provide about 60% of the total requirement. Such advanced biofuels could include ethanol derived from cellulosic biomass-such as wood waste, grasses, and agricultural wastes-as well as biodiesel, butanol, and other fuels.

For an in-depth review of government subsidies for biofuels, read Government Financial Subsidies in the Texas Comptroller's 2008 energy report.

Energy Policy Act of 2005 (H.R. 6)
Landmark Federal Incentives
Texas State Incentives
MTBE/Ethanol

Energy Policy Act of 2005 (H.R. 6)

Some day a president is going to pick up the crop report and they're going to say we're growing a lot of corn, or soybeans, and the first thing that will pop into the president's mind is that we are less dependent on foreign sources of energy. It makes sense to promote ethanol and biodiesel. President George W. Bush, upon signing the RFS into law, 2005

The Energy Policy Act of 2005 (H.R. 6) was signed into law by President Bush on August 8, 2005, the first major piece of federal energy legislation since the Energy Policy Act of 1992. Minimum renewable fuels standards (RFS) are mandated for most refiners, blenders, and importers of gasoline. They can meet these standards directly or they can qualify by buying credits from other renewable fuel blenders, producers or importers. The RFS program is based on this credit trading system that provides a flexible means for industry to comply with the annual standard by allowing renewable fuels to be used where they are most economical, and it also allows the use of various renewable fuels to meet the minimum requirements.

The RFS went into effect on September 1st, 2007, setting new reporting, registration, and compliance requirements for major refiners, fuel blenders, and fuel importers. According to the Renewable Fuels Association, the ethanol industry should easily meet the requirements of the RFS. The industry currently has the capacity to produce nearly 6.8 billion gallons of ethanol per year, and expansions at existing biorefineries and new biorefineries under construction will add another 6.6 billion gallons of annual production capacity. Once those facilities begin operating, the industry will be able to produce 13.4 billion gallons of ethanol per year, far exceeding the RFS requirements.

The RFS will build a strong foundation for the growing ethanol industry, supported by heavily financed research and development programs. The Renewable Fuels Association estimates that the the increased use of renewable fuels as required by the RFS will reduce the amount of imported oil by 2 billion barrels over the life of the program. By 2012, the program is estimated to cut petroleum use by up to 3.9 billion gallons and cut annual greenhouse gas emissions by up to 13.1 million metric tons, the equivalent of removing 2.3 million cars from the road.

NOTE: The U.S. Environmental Protection Agency (EPA) announced in February 2008 that it is raising the renewable fuel standard (RFS) for 2008 to comply with the Energy Independence and Security Act, which President Bush signed in December 2007. The RFS applies to refiners, importers, and non-oxygenate blenders of gasoline and sets a minimum percentage of the fuel that must be displaced with renewable fuels, such as ethanol. The EPA is raising that minimum percentage from 4.66% to 7.76%, a 66% increase, in order to meet the new energy act's requirement to consume 9 billion gallons of renewable fuels in 2008. The requirement will continue to ratchet up each year until it reaches 36 billion gallons in 2022. See the EPA press release and the RFS Program Web site.

Following is a summary of selected sections in the Energy Policy Act 2005 that relate to fuel ethanol and to cellulosic ethanol research and development:

		Renewable Fuels Standard (RFS) (Section 1501): creates a renewable fuels phase-in, the Renewable Fuels Standard. The RFS requires that gasoline sold by refiners, importers and blenders must contain an increasing amount of renewable fuel, such as ethanol or biodiesel, starting at 4 billion gallons in 2006, increasing each year by 700 million gallons, and reaching a level of 7.5 billion gallons in 2012. After 2012, renewable fuel production must grow at least the same rate as gasoline production.
		RFS: credit trading: credits are transferable/saleable, designed to ease refiner compliance with the RFS purchase requirements. Under the RFS, refiners can receive credits for renewable fuels blended above the baseline. This gives gasoline suppliers the flexibility to use less renewable fuel than required by the RFS and still meet the standard by purchasing credits from suppliers who choose to use more renewable fuel than required.
		RFS: cellulosic ethanol: under the RFS, one gallon of cellulosic or waste-derived ethanol counts as 2.5 gallons through 2012. After that, the ratio no longer applies and 250 million gallons of cellulosic biomass ethanol must be included in the nation's annual fuel mix.
		Oxygen requirement eliminated (Section 1506): amended the Clean Air Act to eliminate the reformatted gasoline oxygenate standard that gave the ethanol industry a major boost. However, the bill's RFS effectively mandates ethanol's use, and the section does provide for the maintenance of air quality standards. Ethanol will continue to be used as an octane enhancer to meet air quality standards and as a fuel extender.
		Alternative motor vehicle credit (Section 1341): provides a tax credit to buyers of new alternative fuel vehicles placed in service after January 1, 2006. IRS Notice 2006-54 extends the Qualified Alternative Fuel Motor Vehicle tax credit to vehicle conversions. This provision replaces the Clean Fuel Vehicle Property Tax Deduction.
		Small ethanol producer (Section 1345-1347): expands the definition of a small ethanol producer to include plants of up to 60 million gallons per year capacity; and creates a production incentive of 10 cents per gallon on the first 15 million gallons of ethanol produced each year.
		Infrastructure tax credit (Section 1342): provides a 30% tax credit for installation of alternative fuel stations, up to $30,000. Buyers of residential refueling equipment can receive a tax credit for $1,000. See IRS Form 8911.
		Regulated federal fleets (Sections 701 and 1831): requires federal fleets to use alternative fuels in dual-fuel vehicles unless a waiver is granted. A waiver may be given if an alternative fuel is not reasonably available to the fleet or the cost of alternative fuel is unreasonably more expensive that convention fuel.
		Bioenergy program (Section 932): authorizes DOE's biomass and bioproducts programs to partner with industrial and academic institutions to advance the development of biofuels, bioproducts, and biorefineries, including cellulosic ethanol.
		Biomass research and development (Section 941): expands the Biomass Research and Development Act of 2000 in conjunction with DOE, USDA and EPA; increases authorization from $54 million to $200 million per year from 2006-2015; and includes grants to state research agencies. Includes cellulosic biomass research.
		Production incentives for cellulosic biofuels (Section 942): authorizes incentives to ensure that annual production of one billion gallons of cellulosic biofuels is achieved by 2015. Authorizes $250 million for 10 years.
		Loan guarantees and grants (Section 1512): authorizes loan guarantees and grants for construction of facilities to process and convert municipal solid waste and cellulosic biomass into ethanol and other products.
		Title XVII loan guarantee program (Section 1703): this program seeks to facilitate financing for commercial projects that avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases while employing advanced technologies. Renewable energy systems, such as advanced biofuels projects are eligible for Title XVII loan guarantees.
		Advanced biofuels technologies (Section 1514): creates an Advanced Biofuels Technologies Program of $550 million.
		Sugar to ethanol: creates a $36 million Sugar Cane Ethanol Program to study the production of ethanol from sugar cane in Texas, Hawaii, Florida and Louisiana; creates a $50 million loan guarantee program for sugar cane to ethanol facilities; and creates a loan guarantee program ($250 million) for sugar to ethanol facilities.

Landmark Federal Incentives

Energy Policy and Conservation Act of 1975
Requires Corporate Average Fuel Economy (CAFE) standards for motor vehicles, originally enacted in response to the Arab oil embargo. EPCA amendments give incentives to manufacturers of alternative fuel vehicles. For each alternative fuel vehicle a manufacturer produces, the manufacturer generates credits toward meeting the CAFE standards. These credits can be used to increase the manufacturer's average fuel economy. The Energy Policy Act of 2005 (H.R. 6) extended the credits through model year 2010 as well as DOT's authority to continue the credits through 2014.

Energy Tax Act of 1978
Introduced the excise tax exemption for 10-percent alcohol blended gasoline, or gasohol. The Federal Highway Bill of 1998 extended the excise tax exemption for ethanol through 2007 with reductions from 54 cents per gallon to 51 cents in 2005.

Ethanol Import Tariff of 1980
Congress placed an import fee (tariff) on foreign-produced ethanol. Previously, foreign producers, such as Brazil, were able to ship less expensive ethanol into the United States.

The Crude Oil Windfall Profits Act of 1980
Established the first income tax credit for fuel alcohol blends of 10 percent or less in order to promote energy conservation and domestic fuel development.

Alternative Motor Fuels Act of 1988
Encouraged the use of AFVs in the private sector by offering incentives to the manufacturers of flexible-fuel vehicles able to run on 85% blended ethanol (E85). The law gave credits to automakers towards meeting their corporate average fuel efficiency (CAFE) standards. As extended in 2004, the incentive gives a credit of up to 1.2 mpg toward an automobile manufacturer's average fuel economy which helps it avoid penalties of the CAFE standards.

Budget Reconciliation Act of 1990
Created a small producers credit, an additional $0.10 per gallon income tax credit on the first 15 million gallons of ethanol and is available to producers with annual production capacity of up to 30 million gallons of ethanol. The Act also adjusted the federal tax credit to the current $0.54 per gallon (190 proof or greater).

Clean Air Act
Though indirect, federal environmental polices have had a major impact on the development and use of alternative fuels. The Clean Air Act's 1995 Reformulated Gasoline Program was a major impetus for the development of the ethanol industry. Most refiners in the oil industry chose MTBE as an oxygenate until it was discovered that it could pollute groundwater. The result was that ethanol demand accelerated rapidly.

EPAct 2005 amended the Clean Air Act to eliminate the RFG oxygenate standard, but refiners are still required to blend gasoline in a way that maintains the EPA's toxic emissions reductions standards. Under new ozone standards recently promulgated by EPA, the number of RFG areas will likely increase, and most refiners will choose to use ethanol to reduce ozone-forming vehicle emissions in these areas.

Energy Policy Act of 1992 (EPAct)
Extended the fuel tax exemption and the blender's income tax credit to two additional gasoline/ethanol blends containing less than 10% ethanol. Requires that replacement fuels comprise 10% of total U.S. motor fuel consumption by 2000 and 30% by 2010. To reach these targets, 75% of new federal and state light-duty vehicles must be AFVs. Provides tax deductions for purchasing or converting a vehicle to one that can use an alternative fuel such as E-85 and for installing equipment to dispense alternative fuels.

Farm Security and Rural Investment Act of 2002
The 2002 Farm Bill was the first farm bill to contain an energy title and include significant incentives for biomass production and use. The Act requires federal agencies to buy officially designated, bio-based products whenever possible for purchases of $10,000 or more. Numerous projects have been funded, from biomass production issues to improvements in biorefinery production processes. USDA also provides loan guarantees for production of renewable energy and biofuels through the Rural Development Business and Industry Loan Program, through section 9006 of the 2002 farm bill, and through the Rural Utilities Service.

Volumetric Ethanol Excise Tax Credit (VEETC) - $0.51 Per Gallon
The American Jobs Creation Act of 2004 (H.R. 4520) includes the provisions of the Volumetric Ethanol Excise Tax Credit (or the Blender's Credit) and extends to 2010 its effective date. The VEETC is a credit of $.51 for every gallon of pure ethanol blended into gasoline. It is an incentive not to ethanol producers, but to the petroleum industry to blend ethanol into its gasoline. Any blend of ethanol with gasoline is eligible for the credit, including E85.

An E10 blend has a credit available of $.051/gallon, and E85 has a credit available of $.4335/gallon. The Blender's Credit benefits taxpayers because the tax credit is generally passed on to the consumers at the gas pump. Consumers also benefit in that these blends offer a higher-quality, higher-octane fuel. This credit is refundable quarterly, and paid out of the General Fund of the federal budget.

Texas State Incentives

Texas Tax Code: Biofuel Tax Exemption Biodiesel or ethanol blended with taxable diesel, that is identified when sold or used as a biodiesel or ethanol fuel blend, is exempt from the diesel fuel tax. (See Texas Tax Code, Chapter 162: §162.001 and §162.204).

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