[Senate Hearing 109-1079]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1079

                    FEDERAL RENEWABLE FUELS PROGRAMS

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 6, 2006

                               __________

  Printed for the use of the Committee on Environment and Public Works


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                               __________

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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                       ONE HUNDRED NINTH CONGRESS
                             SECOND SESSION

                  JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia             JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri        MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio            JOSEPH I. LIEBERMAN, Connecticut
LINCOLN CHAFEE, Rhode Island         BARBARA BOXER, California
LISA MURKOWSKI, Alaska               THOMAS R. CARPER, Delaware
JOHN THUNE, South Dakota             HILLARY RODHAM CLINTON, New York
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
JOHNNY ISAKSON, Georgia              BARACK OBAMA, Illinois
DAVID VITTER, Louisiana
                Andrew Wheeler, Majority Staff Director
                 Ken Connolly, Minority Staff Director

                                  (ii)

  
                            C O N T E N T S

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                                                                   Page

                           SEPTEMBER 6, 2006
                           OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California...    22
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..    33
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     1
Isakson, Hon. Johnny, U.S. Senator from the State of Georgia.....     5
Jeffords, Hon. James M., U.S. Senator from the State of Vermont..     3
Lautenberg, Hon. Frank R., U.S. Senator from the State of New 
  Jersey.........................................................     7
Lieberman, Hon. Joseph, U.S. Senator from the State of 
  Connecticut, prepared statement................................    37
Obama, Hon. Barack, U.S. Senator from the State of Illinois......    30
Thune, Hon. John, U.S. Senator from the State of South Dakota....    16

                               WITNESSES

Collins, Keith, Chief Economist, U.S. Department of Agriculture..    12
    Prepared statement...........................................    48
    Responses to additional questions from:
        Senator Boxer............................................    54
        Senator Carper...........................................    57
        Senator Jeffords.........................................    58
Karsner, Alexander, Assistant Secretary, Office of Energy 
  Efficiency and 
  Renewable Energy, U.S. Department of Energy....................    10
    Prepared statement...........................................    43
    Responses to additional questions from:
        Senator Inhofe...........................................    45
        Senator Jeffords.........................................    47
Wehrum, William, Acting Assistant Administrator, Office of Air 
  and Radiation, U.S. Environmental Protection Agency............     9
    Prepared statement...........................................    38
    Responses to additional questions from:
        Senator Inhofe...........................................    39
        Senator Lautenberg.......................................    41
        Senator Jeffords.........................................    42

                          ADDITIONAL MATERIAL

Reports:
    National Ethanol Vehicle Coalition (NEVC)....................    31
    Department of Energy, Energy Information Administration......    27

 
                    FEDERAL RENEWABLE FUELS PROGRAMS

                              ----------                              


                      Wednesday, September 6, 2006

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in room 
406, Dirksen Senate Office Building, Hon. James Inhofe 
(chairman of the committee) presiding.
    Present: Senators Inhofe, Jeffords, Lautenberg, Thune, 
Isakson, Boxer, Carper, Obama.

 OPENING STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 
                     THE STATE OF OKLAHOMA

    Senator Inhofe. The hearing will come to order. As usual, 
we will start our meeting right on time. We appreciate everyone 
being here.
    Before we get into opening statements, I do want to 
introduce Steven Rhines, who is the VP and General Counsel of 
the Noble Foundation. There you are, back there, Steven. 
Welcome, and I'm sure you'll enjoy this.
    The purpose of today's oversight hearing is to review 
Federal renewable and biofuels programs. Our witnesses come 
from three key agencies. We have the USDA, DOE and EPA. All 
three have some level of jurisdiction in this subject.
    This is the first of what will be a series of hearings on 
renewable fuels, especially given the level of bipartisan 
interest in the topic and EPA's continued work on renewable 
fuel standards implementation. We were joking around up here, 
this is something that even Senator Jeffords and I have some 
areas of agreement in.
    [Laughter.]
    Senator Inhofe. It seems that in recent months, traditional 
opponents to renewable fuels, particularly those on the other 
side of the aisle, have had a change of heart and can now be 
found on the stump exclaiming ethanol's virtues. I'm hopeful 
that they will be able to take the time to study the issue 
fully and not just declare populist and politically expedient 
messages, with regard for the reason. I am pleased to see that 
they have chosen to support the President's biofuels 
initiatives.
    This committee has principal jurisdiction over motor fuels 
policy, including renewable fuels. I would like to remind my 
colleagues that the bill that was passed in this committee, S. 
606, provided the foundation for the fuels title in the Energy 
bill, the Energy bill of course which passed. Similarly, any 
future changes to the renewable fuels standard must come 
through our committee to ensure consistent, flexible and 
efficient national policy.
    In preparing for the 2007 Farm bill, USDA issued a theme 
paper last month on agriculture and energy. In listing possible 
options, the USDA acknowledged, and this is a quote, they said 
``It is unclear how expansive energy provisions could be in the 
Farm bill, since suggestions require legislation may not be 
under the jurisdiction of the agricultural committees.'' And 
USDA is correct, it's largely in the jurisdiction of this 
committee.
    It's also critical that we consider the effects on other 
industries before legislating in the renewable fuels arena. 
Using corn for fuel and feed impacts other agricultural 
interests, like hog and cattle producers. Further, it could 
also have serious impacts on consumers. Some proponents have 
suggested increasing the current 7.5 billion gallon renewable 
fuels standard to 10 to 12 billion gallons or more.
    However, a recent study, and this is pretty fascinating, 
Senator Jeffords, a recent study showed that food prices would 
cost consumers an additional $14.5 billion a year at the 10 
billion gallon standard or $20.3 billion a year at the $12 
billion standard. Several politicians, including the President 
and other interested groups have stressed the security 
implications of importing oil from unstable parts of the world. 
Yet, corn cannot be the answer.
    Even under the most extreme hypothetical, if the entire 
2005 corn production of 11.1 billion bushels were dedicated to 
ethanol, the resulting 30 billion gallons of ethanol would 
represent only 14.5 percent of gasoline use. This came from the 
Congressional Research Service. Corn ethanol proponents must 
understand that natural gas is a key feedstock in an ethanol 
production. Therefore, policy makers could de facto substitute 
foreign oil for foreign natural gas.
    Continuing my earlier example, processing the entire 2005 
corn crop of 11.1 billion bushels into ethanol would be 
approximately 1.5 trillion cubic feet of natural gas. Total 
current natural gas consumption was 22 TCFs in 2005.
    That said, there are certain bright spots in the horizon 
when it comes to the renewable fuels: cellulosic, biomass 
ethanol an important part of addressing the domestic 
transportation fuel needs. If commercially developed, this 
technology could produce new bioenergy crops that do not 
compete with food and feed, not compete with those components 
that make up fertilizer, as well as those components that are 
used for consumption.
    Further, many of the crops are perennials and can grow on 
marginal lands. I'm proud that some of the research is 
conducted in my home State by Samuel Roberts Noble Foundation, 
represented here today, in Ardmore, OK, an organization founded 
by oil man and philanthropist Lloyd Noble. The foundation is 
involved in vital research to both increase potential energy 
crop yield and reduce the biological barriers that increase 
costs for bio-refiners.
    This committee is familiar with the cellulosic biomass 
ethanol. Again, S. 606, the bill that became renewable fuels 
standards included in the loan guarantee provisions to build 
commercial scale facilities. So I look forward to the hearing 
and listening to our distinguished panel of guests.
    [The prepared statement of Senator Inhofe follows:]

         Statement of Hon. James M. Inhofe, U.S. Senator from 
                         the State of Oklahoma
    The purpose of today's oversight hearing is to review Federal 
renewable and biofuels programs. Our witnesses come from the three key 
agencies--USDA, DOE, and EPA--that have jurisdiction over the subject.
    This is the first of what will be a series of hearings on renewable 
fuels, especially given the level of bi-partisan interest in the topic 
and EPA's continued work on the renewable fuel standard implementation.
    It seems that in recent months traditional opponents to renewable 
fuels, particularly those on the other side of the aisle, have had a 
change of heart and now can be found on the stump exclaiming ethanol's 
virtues. I am hopeful that they will take the time to study the issues 
fully and not just declare populist and politically expedient messages.
    Without regard for the reason, I am pleased to see that they have 
chosen to support the President's biofuels initiatives.
    This committee has principle jurisdiction over motor fuels policy 
including renewable fuels. I would like to remind my colleagues that 
the bill that passed this committee, S. 606, provided the foundation 
for the fuels title in the Energy bill. Similarly, any future changes 
to the renewable fuel standard must come through our committee to 
ensure consistent, flexible, and efficient national policy.
    In preparing for the 2007 Farm bill, USDA issued a theme paper last 
month on Agriculture and Energy. In listing possible options, the USDA 
acknowledged ``it is unclear how expansive energy provisions could be 
in the Farm bill'' since ``suggestions requiring legislation may not be 
under the jurisdiction of the agriculture committees.''
    It is also critical that we consider effects on other industries 
before legislating in the renewable fuels arena. Using corn for fuel 
and feed impacts other agricultural interests like hog and cattle 
producers.
    Further, it could also have serious impacts on consumers. Some 
proponents have suggested increasing the current 7.5 billion gallon 
renewable fuel standard to 10 or 12 billion gallons or more. However, a 
recent study showed that food prices would cost consumers an additional 
$14.5 billion per year at the 10 billion gallon level and $20.3 billion 
per year at the 12 billion gallons.
    Several politicians, including the President, and other interest 
groups have stressed the security implications of importing oil from 
unstable parts of the world. Yet, corn cannot be the answer.
    Even under the most extreme hypothetical - if the entire 2005 corn 
production of 11.1 billion bushels were dedicated to ethanol, the 
resulting 30 billion gallons of ethanol would represent only 14.5 
percent of gasoline use (Congressional Research Service).
    Corn ethanol proponents must understand that natural gas is a key 
feedstock in ethanol production. Therefore, policymakers could de facto 
substitute foreign oil for foreign natural gas. Continuing my earlier 
example, processing the entire 2005 corn crop of 11.1 billion bushels 
into ethanol would be approximately 1.5 trillion cubic feet of natural 
gas. Total U.S. natural gas consumption was 22 tcf in 2005 (CRS).
    That said, there are certain bright spots on the horizon when it 
comes to renewable fuels. Cellulosic biomass ethanol could be an 
important part of addressing domestic transportation fuel needs.
    If commercially developed, this technology could produce new 
bioenergy crops that do not compete with food and feed. Further, many 
of these crops are perennials and can grow on marginal lands across the 
country.
    I am proud to say that some of this research is conducted in my 
home State by the Samuel Roberts Noble Foundation of Ardmore, 
Oklahoma--an organization founded by oilman and philanthropist Lloyd 
Noble. The Foundation is involved in vital research to both increase 
potential energy crop yield and reduce the biological barriers that 
increase costs for bio-refiners.
    This committee is familiar with cellulosic biomass ethanol--again, 
S. 606, the bill that became the renewable fuel standard included a 
loan guarantee provision to build commercial scale facilities.
    I look forward to hearing from our distinguished panel of experts 
and asking questions.

OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Senator Jeffords. Thank you, Mr. Chairman.
    I want to extend a welcome to the witnesses. I appreciate 
the time they have taken to appear before us today. I deeply 
appreciate it. Today's hearing examines the State of Federal 
renewable fuels programs. It is an important and needed 
examination. Though pump prices have eased somewhat in the last 
month, America has seen record gasoline prices this year. Our 
lifestyle and economy in this Country is based on an abundant 
supply of gasoline and diesel.
    However, nothing lasts forever. And we are seeing 
plentiful, secure global trade in oil and low prices disappear. 
What we need is a future based upon the abundant supply of 
domestically produced clean and low carbon fuel. What's more, 
our Federal policy needs to directly shape that future. We need 
to push for the development of stable, clean, domestic 
transportation fuel supplies at affordable prices.
    I have worked toward this goal throughout my entire 
Congressional career. Nearly two decades ago, I introduced 
legislation that would have required the Secretary of Energy to 
establish a program to replace gasoline as a motor fuel with 
renewable fuels. That bill, the Replacement Water Fuels Act of 
1979, would have directed the Secretary to find the most 
suitable raw materials and set a goal of replacing 20 percent 
of the gasoline with renewable fuels by 1992.
    I introduced similar legislation in nearly every Congress 
since, until we adopted the renewable fuels standards as part 
of last year's Energy Law. I regard the RFS as the first step 
and one that only produces transition fuel on our way to more a 
climate-friendly future.
    There are incredible complexities involved in forming a 
well- rounded and flexible approach to meeting the Nation's 
fuel requirements while at the same time protecting our 
environment. But I know we can do the job if we have the 
national will to do so. When I visited Iceland in 2004, I rode 
on a fuel cell bus and saw first-hand the promise of this 
technology. That bus contained hydrogen from water.
    The fuel cell holds the possibility of marrying low or non- 
polluting engines with renewable fuels. This opens the 
possibility of a future that is free of the constraints of 
limited fuel and pollution. It is exactly this kind of 
environment-friendly solution I have always advocated. These 
innovations have the potential to move us into an era when 
driving a car or truck will no longer mean causing dangerous, 
global-warming pollution or using up scarce resources.
    Thank you again, Mr. Chairman, and I look forward to 
hearing from our witnesses.
    [The prepared statement of Senator Jeffords follows:]

        Statement of Hon. James M. Jeffords, U.S. Senator from 
                          the State of Vermont
    Thank you, Mr. Chairman. I want to extend a welcome to the 
witnesses. I appreciate the time they have taken to appear before us 
today.
    Today's hearing examines the State of Federal renewable fuels 
programs. It is an important and needed examination.
    Though pump prices have eased somewhat in the last month, America 
has seen record gasoline prices this year. Our lifestyle and economy in 
this country is based on an abundant supply of gasoline and diesel. 
However, nothing lasts forever, and we are seeing plentiful, secure 
global trade in oil and low prices disappear.
    What we need is a future based upon the abundant supply of 
domestically produced clean and low-carbon fuel. What's more, our 
Federal policy needs to directly shape that future. We need to push for 
the development of stable, clean domestic transportation fuel supplies 
at affordable prices.
    I have worked toward this goal throughout my entire Congressional 
career. Nearly two decades ago, I introduced legislation that would 
have required the Secretary of Energy to establish a program to replace 
gasoline as a motor fuel with renewable fuels. That bill, the 
Replacement Motor Fuels Act of 1979, would have directed the Secretary 
to find the most suitable raw materials and set a goal of replacing 20 
percent of the gasoline with renewable fuels by 1992. I introduced 
similar legislation in nearly every Congress since, until we adopted 
the Renewable Fuels Standard as part of last year's Energy law.
    I regard the RFS as the first step, and one that only produces a 
transition fuel on our way to a more climate-friendly future. There are 
incredible complexities involved in forming a well-rounded and flexible 
approach to meeting the nation's fuel requirements, while at the same 
time protecting our environment. But I know we can do the job if we 
have the national will to do so.
    When I visited Iceland in 2004, I rode on a fuel cell bus and saw 
first-hand the promise of this technology. That bus obtained hydrogen 
from water. The fuel cell holds the possibility of marrying low or 
nonpolluting engines with renewable fuels. This opens the possibility 
of a future free of the constraints of limited fuel and pollution. It 
is exactly the kind of environment-friendly solution I have always 
advocated.
    These innovations have the potential to move us into an era when 
driving a car or truck will no longer mean causing dangerous global 
warming pollution or using up scarce resources.
    Thank you, again, Mr. Chairman, and I look forward to hearing from 
the witnesses.

    Senator Inhofe. Thank you, Senator Jeffords.
    Senator Isakson.

OPENING STATEMENT OF HON. JOHNNY ISAKSON, U.S. SENATOR FROM THE 
                        STATE OF GEORGIA

    Senator Isakson. Thank you, Mr. Chairman, and thanks very 
much for calling this hearing.
    My State, Georgia's number one industry is agriculture, and 
we are a huge consumer of energy and not a producer of energy. 
But I noticed in my travels during the last month that those 
things are changing. In Mitchell County, Georgia, the local 
community there, a number of local business people in the past 
year have raised $66 million, $60 million of which locally, to 
build our State's first ethanol plant, which obviously is 
appropriate to discuss at this particular hearing. So I think 
next year's Ag bill is probably going to be the Ag-Energy bill.
    Recognizing your point, Mr. Chairman, about the cost impact 
on food as you use corn and other agricultural products for 
renewable energy, we have to have a diversified energy program. 
I'm so pleased that in my State also we have a company with a 
process which provides power generators with cost effective, 
efficient methods of renewable energy requirements. This high 
efficiency biomass gasification process converts biomass, waste 
and renewables into clean energy by producing a fuel capable of 
directly replacing natural gas.
    It's very important that as a Congress and as leaders that 
we emphasize the importance for us to get our dependence on 
foreign oil as minimum as possible and diversify to the maximum 
extent the sources of energy in this Country. And although not 
a renewable energy, one last point relevant to Georgia, and 
since the Department of Energy is represented today, I join 
with Senator DeMint, Senator Graham and Senator Chambliss in 
continuing to work to see to it that we do the recycling and 
processing of spent nuclear fuels of the Savannah River Plant 
on the Savannah River between Georgia and South Carolina. 
Because nuclear energy, although not renewable in the sense of 
this hearing, is equally important to see to it that we have a 
diversified, efficient and cost- effective resources of energy 
for our Country.
    And I would ask, Mr. Chairman, unanimous consent that my 
entire statement be submitted for the record.
    Senator Inhofe. Without objection, so ordered.
    [The prepared statement of Senator Isakson follows:]

          Statement of Hon. Johnny Isakson, U.S. Senator from 
                          the State of Georgia
    Thank you Mr. Chairman for holding this hearing. As I traveled my 
State during the recess listening to my constituents, one of the things 
they told me was that we've got good news on the economic front, the 
economy of our State is growing, but we risk losing all that with the 
high price of energy.
    And the recent high prices, although they have come down some in 
Georgia, that people are paying at the gas pumps reflect our dependence 
on oil. Today we get about 60 percent of our oil from foreign countries 
whereas 20 years ago about 25 percent of our oil came from foreign 
countries.
    Some of the nations we rely on for oil have unstable Governments, 
or agendas that are in opposition to the United States which puts our 
Nation in a bind because these unstable countries know we need their 
oil
    And so I have always viewed energy supply as a matter of national 
security and also a matter of economic security.
    What people are seeing at their gasoline pumps reflects the global 
economy in which we live. When demand for oil goes up in China or India 
or other fast growing economies it affects the price of oil worldwide.
    And when the price of crude oil goes up, because it's such an 
important part of the price of gasoline, the average citizen sees the 
price of gasoline go up at the pump. Gasoline price increases are a 
burden on our farmers, small businesses, and all the American people.
    Which leads us to why we are meeting today. We need to ask 
ourselves, what can we do?
    I believe we need to encourage conservation, to expand domestic 
production, and to develop alternative sources of energy like bio 
fuels.
    And the truth of the matter is our nation's long-term strategy 
should be to commit to power our automobiles with some energy source 
other than gasoline, which is derived from oil.
    Investment in biofuels like ethanol and other renewables are 
starting to pay off and become a reality for American consumers. In my 
State of Georgia, in Mitchell County, $67 million in equity to finance 
an ethanol plant has been obtained. The facility will be on 268 acres 
between the cities of Camilla and Pelham. Construction is expected to 
begin in October, with production of ethanol slated for spring 2008. 
The facility will produce 100 million gallons a year of fuel-grade 
ethanol. The plant will also be able to produce 320,000 tons of dry 
distillers grains, which are a high protein feed that can enhance 
livestock, dairy and poultry production. Additionally, the plant can 
capture 160,000 tons of raw carbon dioxide gas annually that will be 
converted to dry ice and other products.
    Another company in my State has a process which provides power 
generators with a cost-effective and efficient method to meet renewable 
energy requirements. This high-efficiency biomass gasification process 
converts biomass waste and renewables into clean energy by producing a 
fuel capable of directly replacing natural gas.
    The president has set an ambitious goal in reducing our Nation's 
dependence on foreign oil, and I believe the best way and the fastest 
way to do so is to expand the use of ethanol and other comparable 
biofuels.
    In his State of the Union, The President announced his Advanced 
Energy Initiative which is focused on three promising ways to reduce 
gasoline consumption.
    One is increasing the use of biofuels.
    The second is improving hybrid vehicles.
    Third is developing hydrogen technology.
    All three go hand-in-hand; all three are an important part of a 
strategy to help us diversify.
    And while ethanol may have the largest potential for immediate 
growth, we shouldn't limit our research to ethanol alone.
    It is vitally important that we explore all potential biofuels.
    We need to invest in researching the potential use of alternative 
feed-stocks such as wood byproducts, grasses, and byproducts from 
peanut, cotton, and municipal wastes to generate energy.
    I also support biodiesel fuel, which is a viable alternative to 
regular diesel in cars, trucks, buses and farm equipment.
    I have seen technology which uses waste products like recycled 
cooking oil and grease to manufacture biodiesel.
    This is one of many examples of how we can address our energy 
security needs on a variety of fronts. The goal of the United States 
should be to have a comprehensive strategy to help us diversify away 
from oil.
    We owe it to not only to ourselves but our future generations to 
promote alternative ways to drive their car so as to make us less 
dependent on foreign sources of energy, as well as using technology so 
we can diversify away from the hydrocarbon society.

    Senator Inhofe. Senator Lautenberg.

  OPENING STATEMENT OF HON. FRANK R. LAUTENBERG, U.S. SENATOR 
                  FROM THE STATE OF NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman.
    This is a timely hearing, obviously, because as we sit here 
probably for 2 hours, in that time Americans will pump about 32 
million gallons of gas into their cars at an average price of 
$2.85 a gallon that's worth over $90 million during the course 
of our hearing. But in addition to price, we also need to think 
about energy in terms of our health, our environment and our 
security. To address these challenges, we need clean, 
alternative fuels to power our vehicles. I agree that we ought 
to build ethanol into this foundation of our alternative fuels 
portfolio.
    But I believe that we have to move beyond corn-based 
options and toward cleaner and more efficient options like bio-
diesel and P-series fuels. Developed by researchers at 
Princeton University, the P-series fuel is a product that is 
mostly renewable, non-petroleum and can help to eventually 
replace gasoline. And as we are likely to hear today, the 
technology we need to create and deploy to get these 
alternative fuels in place in the not-too-distant future, not-
too-distant being a few years. But it's an essential factor 
that we move on this.
    So in the meantime, we've got to improve the fuel 
efficiency standards for cars and trucks. And we've got to do 
that now. We also need to promote mass transit from buses to 
subways to trains, light rail choices that get more cars off 
the roads. For every mile traveled, public transportation uses 
about half of the fuel consumed by automobiles, according to 
the American Public Transportation Association.
    Mr. Chairman, Brazil, like America, used to rely a great 
deal on foreign crude oil. But then Brazil turned sugar, one of 
its biggest crops, into ethanol, that fuels either pure or 
mixed with gasoline now accounts for a third of what goes into 
Brazilian gas tanks. So we can learn a lot from our South 
American neighbors by looking at what they've already done. 
Sugar may not be our specific answer. But demanding alternative 
fuels, increasing fuel efficiency and increasing transit 
options must be part of the equation here in the United States.
    Mr. Chairman, once again, I thank you for calling this 
hearing and I look forward to hearing from our witnesses.
    [The prepared statement of Senator Lautenberg follows:]

       Statement of Hon. Frank R. Lautenberg, U.S. Senator from 
                        the State of New Jersey
    Mr. Chairman, thank you for holding this hearing.
    My guess is that we'll be here for about 2 hours. In that time, 
Americans will pump more than 33 million gallons of gas into their 
cars. Those cars and trucks will cough pollutants into the air that 
will create smog, give people asthma attacks and contribute to global 
warming. And we all pay for those new pollutants--in higher health care 
premiums and greater ruin to our natural world.
    People most often think about energy in terms of their wallet--
which they should. The average price for a gallon of gas is $2.85, 
which forces workers to choose between filling their tanks and paying 
their bills. But we also need to think about energy in terms of our 
health, our environment and our security.
    To address these challenges, we need clean, alternative fuels to 
power our cars and trucks. Our objective isn't just to save Americans 
money and improve their security by using less foreign oil, but to save 
our environment by belching fewer greenhouse gases and other pollutants 
into our air.
    We won't find a single fuel to work in every region, for every 
engine and abundant enough to cover all of our needs. But with our 
commitment, adequate investment and the right technology, we can 
develop the best and cleanest options quickly, efficiently and cost-
effectively.
    I believe we should build ethanol into the foundation of our 
alternative fuels portfolio--and we should move beyond corn-based 
options towards cleaner and more efficient cellulosic options. But also 
I believe we should support research, development and funding for other 
fuels, like biodiesel and p-series fuels. Developed by researchers at 
New Jersey's Princeton University, p-series fuels are mostly renewable, 
non-petroleum and can help to replace gasoline.
    As we're likely to hear today, the technology we need to create and 
deploy cellulosic ethanol and other fuels are several years away. And 
even if we had the technology at-hand, deploying it won't be enough to 
end America's dependence on oil.
    While we develop new fuels, we must improve fuel efficiency 
standards for our cars and trucks--and we must do this now. We also 
need to promote mass transit, from bus to subway, to train and trolley, 
choices that get gas-burning, pollution-creating cars off the streets. 
For every mile traveled, public transportation uses about one half of 
the fuel consumed by automobiles, according to the American Public 
Transportation Association.
    Last year's energy bill did include some provisions to advance 
alternative fuels, like fuel standards and tax incentives for ethanol 
and biodiesel development. But it also--and unfortunately--continues 
the Bush administration's backwards policies of billions in subsidies 
and tax breaks for the oil industry and other fossil fuel sectors. At 
the same time, they've provided little leadership on fuel efficiency 
standards. They've failed to provide rail and other mass transit with 
sufficient funds. And their environmental record hurts our natural 
world more than helps it.
    Brazil used to be a lot like America--reliant on foreign crude. But 
then Brazil turned sugar, one of its biggest crops, into ethanol. The 
fuel, either pure or mixed with gas, now accounts for a third of what 
goes into Brazilian gas tanks, according to the New York Times. We can 
learn a lot from what our South American neighbors have already done. 
Sugar may not be our answer. But alternative fuels, increased fuel 
efficiency and better transit options are.
    I look forward to hearing from today's panel about the progress 
we've made in the last year. Mr. Chairman, I thank you again for 
holding this hearing.

    Senator Inhofe. Thank you, Senator Lautenberg.
    Well, we'll start with William Wehrum. You've appeared 
before us several times before, and this is a different type of 
business that we conducted before, and we're very happy to have 
you. Mr. Wehrum is the Assistant Administrator of the Office of 
Air and Radiation of the United States Environmental Protection 
Policy. Mr. Wehrum, you may proceed, and your entire statements 
will be made a part of the record. Try to confine your remarks 
to five or six minutes if you could.
    Mr. Wehrum.

 STATEMENT OF WILLIAM WEHRUM, ACTING ASSISTANT ADMINISTRATOR, 
  OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION 
                             AGENCY

    Mr. Wehrum. Thank you, Mr. Chairman, members of the 
committee.
    I appreciate the opportunity to come before you today to 
testify on the status of EPA's efforts to develop the 
comprehensive rulemaking implementing the Energy Policy Act's 
renewable fuels standard. The Energy Policy Act of 2005, or 
EPACT, as we call it, required EPA to take a significant number 
of specific actions that directly affect our Nation's fuel 
supply and quality. Some of these actions have already been 
proposed or have taken effect, including the removal of the 
oxygen standard from the Federal Reformulated Gasoline program, 
proposal of a new gasoline benzene content standard to control 
mobile source air toxics, and the proposed listing of State 
boutique fuel requirements. However, a lot of work remains.
    As the agency continues to work on all these actions, the 
most important and significant fuels requirement established in 
EPACT is the national Renewable Fuels Standard, or RFS. Since 
increasing the amount of domestically produced renewable fuels 
is a key element of the President's energy initiatives and 
supports his goal of reducing the Country's dependence on 
imported oil, the agency has placed the highest priority on 
preparing this major rulemaking.
    Under EPACT, the RFS program requires that increasing 
volumes of renewable fuels be blended into gasoline in the 
continental United States beginning in 2006. EPACT establishes 
the years for which the RFS is in effect and the required 
minimum annual volumes of renewable fuel. The renewable volume 
begins at 4 billion gallons in 2006 and increases to 7.5 
billion gallons in 2012. EPACT requires that EPA annually 
establish the percentage requirement which will apply to 
individual refiners, blenders and importers, to ensure the 
total volume of renewable fuel specified for that year in EPACT 
is achieved.
    The Act provided the agency with less than five months to 
develop and implement the RFS program by regulation. With the 
close cooperation and support of our stakeholders, including 
renewable fuel producers and oil refiners, EPA was able to 
accomplish this by making use of a default requirement provided 
in the Act that only applies to 2006. Last December, we 
promulgated a direct final rule to implement the default 
standard that allowed the program to operate without all the 
credit trading and compliance provisions that the full program 
requires.
    Under the 2006 RFS default rule, refiners, importers and 
gasoline blenders are collectively responsible for ensuring 
that the amount of renewable fuel volume use nationwide is at 
least 2.78 percent of the total gasoline used in the United 
States.
    Although the Act prescribed many aspects of the program, 
including the required renewable fuels volumes, it did not 
specify certain critical elements, such as defining a renewable 
fuel credit and what parties can generate credits. Further, 
unlike past fuels programs in which credit trading was simply 
used as a cost savings measure or a way to increase compliance 
flexibility, for the RFS program it will be a critical aspect 
of demonstrating compliance. Credit trading also differs under 
the RFS program because those parties that produce renewable 
fuels are not typically the same parties that must demonstrate 
compliance.
    To implement a rulemaking of this magnitude, it was 
imperative for the agency to promptly enter into close dialogue 
with affected parties to understand how the RFS program would 
impact the stakeholders in real world applications. EPA 
directly engaged all the major stakeholders, including the 
refining industry, renewable fuels providers and fuel marketers 
and distributors, to gather information and suggestions which 
were incorporated into drafting the various compliance and 
credit trading provisions. Completion of a proposed rulemaking 
in an expeditious fashion was only possible by working closely 
with these stakeholders on the critical elements. Through close 
collaboration and cooperation, we believe the proposal will 
have broad stakeholder support, allowing EPA to move forward 
quickly with the final rule.
    In closing, I'm pleased to report that tomorrow, September 
7th, Administrator Steve Johnson will sign this landmark 
proposal. A press announcement is planned from Meade, Nebraska 
tomorrow morning. We will be pleased to brief Congressional 
staff on the details of the proposal over the course of the 
next few days if requested. Following public review and comment 
on the proposal, our goal is to promulgate the final RFS 
regulations early in 2007.
    Thank you, Mr. Chairman and members of the committee, for 
your interest in the agency's progress in developing this 
important rule. This concludes my statement and I'm happy to 
answer whatever questions you may have.
    Senator Inhofe. Thank you, Mr. Wehrum.
    Next we have Alexander Karsner, Assistant Secretary for 
Energy Efficiency and Renewable Energy, U.S. Department of 
Energy. Mr. Karsner.

STATEMENT OF ALEXANDER KARSNER, ASSISTANT SECRETARY, OFFICE OF 
  ENERGY EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF 
                             ENERGY

    Mr. Karnser. Thank you, sir.
    Mr. Chairman, members of the committee, thank you for 
having me. I appreciate the opportunity to testify today on the 
subject of bioenergy and biofuels.
    To paraphrase President Bush in his State of the Union 
address this year, addressing America's addiction to oil is an 
imperative for our time, and the need for a diverse supply of 
domestic energy sources has never been greater. Biofuels are 
amongst the most promising near-term replacements for liquid 
transportation fuels, since they offer a renewable, essentially 
carbon neutral energy source that can help meet a portion of 
our transportation fuel needs with domestic production. 
Biofuels play a significant role in the President's Advanced 
Energy Initiative, or AEI, a broad program designed to change 
the way we power our homes, businesses and vehicles by 
developing cleaner, more affordable and more reliable domestic 
alternative energy sources and technologies. The biofuels 
initiative, a key component of the President's AEI, seeks to 
accelerate research and development to make cellulosic ethanol 
commercially competitive by 2012 and to engage industry to 
increase production of biofuels that will reduce the Nation's 
dependence on foreign oil.
    Today I'd like to give you an overview of the Department of 
Energy's programs in biofuels, specifically research and 
development of cellulosic ethanol. While almost all ethanol 
produced in America today is derived from corn and other starch 
based feedstocks, corn represents only a small fraction of 
biomass feedstock that may be used for ethanol. Ethanol can 
also be produced from cellulose, lignin and hemi-cellulose, the 
non-starch components of many plants.
    Many materials currently regarded as waste, such as corn 
stalks, straw, wood chips, could be converted to ethanol with 
dedicated energy crops, including a number of fast-growing 
trees and grasses. However, while making cellulosic ethanol 
would dramatically expand the types and amount of available 
biomass feedstock that can be used to make ethanol, it is more 
technically challenging and consequently, presently more 
expensive than producing ethanol from corn.
    The Department of Energy is working in several key areas 
under the biofuels initiative to accelerate our ability to 
produce cost effective cellulosic ethanol. First, we're 
creating regional biomass feedstock partnerships to evaluate 
and work with localized feedstocks all over the Country. 
Different regions of the Country could potentially support 
different feedstock crops, for example, switch grass in the 
south central region, and willow in the northeast. Second, 
together with the DOE's Office of Science, we're addressing the 
basic research challenges in developing biomass feedstocks that 
are more amenable to ethanol production. Secretary Bodman 
recently announced, for example, that DOE will spend $250 
million to establish and operate two new bioenergy research 
centers to accelerate basic research on biofuels.
    Third, a component of our ongoing work is the broad range 
of collaboration with stakeholders as we pursue the best ideas 
and strategies to accelerate the production and distribution of 
cellulosic ethanol. For example, to obtain key industry and 
academic stakeholder input for successful strategies to develop 
biofuels, Energy Efficiency and Renewable Energy, our office 
within DOE's biomass program last month held a 30x'30 workshop. 
The 30x'30 refers to the possibility of replacing 30 percent of 
current U.S. gasoline consumption with ethanol or producing 
about 60 billion gallons of ethanol by the year 2030.
    Over 130 experts from agriculture, the automotive industry, 
fuels, chemicals and other related industries came together to 
map out R&D and policy strategies for achieving the biomass 
program's 2012 cellulosic ethanol cost goal and to consider 
pathways to maximize biomass usage by 2030. The results will be 
integrated into a planning tool with input from other Federal 
agencies involved in biomass R&D, describing the technical and 
infrastructure challenges that need to be overcome and to map 
out each agency's role across the Federal Government in 
addressing them.
    To this end, our biomass program co-chairs with USDA a 
multi- agency initiative. This initiative supports DOE's 
biomass program R&D activities as well as some of the DOE's 
Office of Science and USDA's bioenergy related R&D in 
accordance with the Biomass Research and Development Act of 
2000.
    Consistent quality standards for biofuels, such as those 
that might be developed through the American Society for 
Testing and Materials, ASTM International, will also enhance 
consumer acceptance and market penetration. DOE is interested 
in working with others in Government and across the private 
sector to accomplish these ends. The Department is working 
diligently to meet the President's goals for 2012 and beyond, 
fostering biofuels technology with a balanced yet focused 
program of research and development and deployment. We will 
continue to work collaboratively with our partners in Congress, 
partners in academia, in the national labs across the Federal 
agencies and in private industry, putting our research dollars 
into the most promising areas to address critical technical and 
economic barriers.
    With clear goals and strategies to achieve them, we believe 
that greater quantities of cost competitive liquid biofuels are 
today in sight. My complete testimony will be entered into the 
transcript of the hearing, and I would be pleased to respond to 
any questions the committee may have. Thank you again for 
having me.
    Senator Inhofe. Thank you, Mr. Karsner.
    Dr. Keith Collins is the Chief Economist for the U.S. 
Department of Agriculture, and you're recognized.

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF 
                          AGRICULTURE

    Mr. Collins. Thank you very much, Mr. Chairman and Senator 
Jeffords, committee members. Thanks for the invitation to 
discuss the implications of the growing biofuels industry on 
U.S. agriculture.
    This year, ethanol production is expected to rise three-
fold over what it was in 2000. Biodiesel production is expected 
to be up over 100-fold from 2000. Even with such growth, as the 
Chairman noted in his comments, biofuels remain a small share 
of U.S. transportation fuels. However, ethanol's economic 
importance for agriculture is very significant.
    In 2000, about 6 percent of our corn production was used to 
produce ethanol. Last year that was up to 14 percent. This year 
we think nearly 20 percent of corn production will be used for 
ethanol. For the first time, corn used in ethanol is expected 
to equal the amount of corn expected by the United States.
    Similarly, the oil in about 8 percent of this year's 
soybean production is expected to be used for biodiesel, up 
from negligible levels in 2000. The increase in crop production 
used for biofuels is expected to have a major impact on the 
farm economy. The rising demand for corn to supply ethanol 
plants will have implications for all over our major commodity 
markets.
    Because of these potential significant effects, we've been 
monitoring the amazing pace of ethanol plant construction, 
based on reported construction and the expectation that ethanol 
will remain profitable over the next couple of years. It 
appears likely that ethanol production would exceed 7.5 billion 
gallons during the next couple of years and could reach more 
than 10 billion gallons by the 2010 crop year. With relatively 
high ethanol prices, ethanol plants can pay high prices for 
corn and still remain profitable. For example, with ethanol 
prices at $2.25 a gallon, which has been a typical Chicago 
futures price this summer, a dry mill plant could pay up to $5 
a bushel for corn and still cover operating costs. That's well 
above the all time record high corn price of $3.24 a bushel set 
back in 1995.
    As new ethanol plants come online, higher demand for corn 
will likely lead to higher corn prices as corn for ethanol must 
be bid away from other uses like feed and exports and land for 
corn must be bid away from other crops. Expanding ethanol 
production over the next several years is likely to push corn 
prices to record highs, especially if weather is adverse. 
Substantial increases in corn acreage will likely be needed to 
prevent exports from declining and livestock profitability from 
falling.
    Fortunately, several factors could ease the market 
transition to tighter corn supplies. First is corn yield or 
production per acre. That trends up every year. And the trend 
appears to have gotten stronger over the last 3 years.
    Second, acreage can shift to corn from other crops, like 
soybeans, where there are other nations that can provide 
exports to the growing demand in the world marketplace.
    Third, about 30 percent of the corn used in ethanol can 
return to the livestock sector as animal feed as distilled or 
dried grains or other co-product feeds.
    And fourth, we currently have about 36 million acres set 
aside from production in the long term Conservation Reserve 
Program, some of which could return to production in future 
years.
    Even so, with corn prices increasingly tight and corn 
prices higher, ethanol plants and other corn users will likely 
be operating in a riskier environment in the future. It seems 
clear that corn ethanol alone cannot greatly reduce U.S. 
dependence on crude oil imports. Cellulosic ethanol production 
appears to be the best renewable alternative for achieving 
sizeable reduction in crude oil imports and its successful 
commercialization would allow many other feedstocks besides 
corn to be used for ethanol.
    USDA sees renewable energy as an opportunity to stimulate 
economic growth and agriculture in rural areas. We have a range 
of grant, loan and research programs supporting renewable 
energy. This year we will spend over $250 million under these 
programs. For example, we have 60 USDA scientists working in 14 
USDA laboratories on biofuels research, including genetic 
research on biomass such as switch grass. We also coordinate 
joint biomass research with the Department of Energy and other 
agencies and work closely with them on their program 
implementation and our own.
    We're optimistic that biofuels will create many new 
opportunities for rural America and make an important 
contribution to diversifying the Nation's fuel supplies. Thank 
you, Mr. Chairman.
    Senator Inhofe. Thank you, Dr. Collins.
    Mr. Wehrum, in your opening statement, you announced, is it 
tomorrow in Nebraska you will be announcing the rule 
implementing RFS?
    Mr. Wehrum. Yes, Mr. Chairman.
    Senator Inhofe. All right. Could you tell us to what extent 
does the EPA consider price to consumers and the cost to 
stakeholders during the development of this rule?
    Mr. Wehrum. As is usually the case, the proposed rule will 
be accompanied by a regulatory impact analysis, in which we 
attempt to estimate the cost impacts of the regulation and the 
benefits derived by implementing the regulation.
    But I would say at the end of the day this regulation is 
very closely prescribed by the Energy Policy Act. It specifies 
how much renewable fuel must be blended into the fuel supply in 
any given year and it specifies the mechanism by which that 
should be accomplished. So our regulation largely is an 
exercise in implementing what the statute pretty clearly 
provides.
    Senator Inhofe. Do you think tomorrow that will be 
discussed during the announcement?
    Mr. Wehrum. I'm sorry, Mr. Chairman?
    Senator Inhofe. Some of the extent to, as I asked you about 
considering the price to consumers, to stakeholders, is that 
going to be discussed tomorrow?
    Mr. Wehrum. I expect that it would be, Mr. Chairman, yes.
    Senator Inhofe. All right. Mr. Wehrum, we hear quite often 
the proponents State that ethanol is good for air quality, 
noting that it reduces some toxics, such as benzene, and then 
others say, well, while it does reduce some of that, while 
that's accurate, it promotes other toxics. Would you address 
this?
    Mr. Wehrum. Yes, Mr. Chairman. The effect of blending 
renewables or ethanol into the gasoline supply depends on the 
pollutant that you focus on. For instance, for pollutants such 
as carbon monoxide, which is a typical component of exhaust 
gases from motor vehicles, we would expect ethanol in the 
gasoline supply to reduce the amount of CO or carbon monoxide 
that's emitted.
    As you point out, the same would be true for benzene, which 
currently is a significant component of most gasolines in this 
Country. Increasing the amount of ethanol blended into the 
gasoline supply will reduce the amount of benzene that's 
emitted for motor vehicles. Also, blending ethanol or other 
renewables into the gasoline supply would have the effect of 
increasing the emissions of other hazardous air pollutants and 
primarily a compound called [inaudible]. And again, our 
proposed rule, which will be available tomorrow, includes a 
rough assessment of what that balance would be. But our sense 
is that the balance is a favorable one as it relates to air 
toxics, because benzene is a known human carcinogen and 
reducing benzene emissions is certainly a favorable aspect of 
the regulation.
    Senator Inhofe. Good. Mr. Karsner, would you agree that the 
cellulosic biomass ethanol offers a better long term option for 
domestic renewable fuel products production than traditional 
sources that compete with fuel and feed crops?
    Mr. Karnser. Yes, sir, I would. I think that cellulosic 
ethanol is superior over the long term just by the very nature 
that there would be more dispersed and widespread availability 
of feedstocks that at present wouldn't be calculated to be any 
competition in the food supply.
    Senator Inhofe. And considering that natural gas is the 
second most important feedstock in ethanol production, just 
second to corn, would you agree that opposing policies to 
increase domestic gas production while claiming to support 
increased renewable fuels is inconsistent?
    Mr. Karnser. Well, by nature, supporting renewable fuels is 
about supporting domestic production of American energy. And so 
it's entirely consistent that one should support all supplies 
of domestic energy resources.
    Senator Inhofe. I would agree with that, and I know that 
sometimes this has been discussed. It's been debated. In fact, 
you can't really have one without the other. I just think it's 
important that we kind of hold that together.
    Senator Thune, did you come here with an opening statement? 
Would you like to be recognized for an opening statement?
    Senator Thune. I will wait until I have a chance to ask 
questions. I want to thank you for holding the hearing. I think 
it's important to evaluate where we are relative to the 
policies we put in place last year. In my State of South 
Dakota, this is a great success story, obviously. I'd be happy 
to speak to that.
    But I'm happy to yield until such time as I have a chance 
to ask questions.
    Senator Inhofe. All right. We'll go ahead, the first round, 
we'll probably have two rounds of questions. Senator Jeffords, 
you're recognized.
    Senator Jeffords. Thank you. Mr. Wehrum, a major challenge 
facing EPA is securing the resources needed to successfully 
develop and implement the renewable fuels standard, or RFS. I 
have a few questions on that topic.
    I have heard anecdotally that in fiscal year 2006, EPA has 
deferred or delayed work on several other Clean Air Act 
regulatory programs in order to reduce these funds to 
implementing the RFS. Is that the case?
    Mr. Wehrum. That's true, Senator Jeffords.
    Senator Jeffords. Again for Mr. Wehrum, I understand that 
fiscal year 2007, the President's budget proposal for EPA 
contains a request for $11.8 million in contract dollar support 
for the RFS program and associated reporting requirements. The 
House recently passed its version of the EPA 2007 
appropriations bill and this funding was not included in the 
House bill.
    I understand that the Senate bill fails to provide this 
funding also. What will be the effect of the RFS if EPA does 
not receive these funds?
    Mr. Wehrum. Senator, the President's 2007 budget request 
did in fact include a request for funding that would be 
directly associated with our efforts to implement the various 
responsibilities that we now have under the Energy Policy Act. 
The figures in the President's budget were based on our 
realistic assessment of the time and the effort required to 
satisfy all our responsibilities according to the time 
provided. And if Congress chooses not to fully fund the amount 
that we have asked for, then we would have to prioritize our 
activities and our actions in an effort to satisfy all of our 
obligations. But it would certainly make it much more difficult 
for us, Senator, there's no doubt about that.
    Senator Jeffords. As you may know, International Paper is 
seeking a permit to burn tires at its facility in upstate New 
York. This facility, located just a mile downwind of Vermont, 
could become a dangerous source of air pollution if it burns 
so-called ``tire-derived fuel.'' IP refuses to put on the same 
pollution controls that it has installed in other facilities 
around the Country.
    I have introduced legislation to require EPA to establish 
uniform standards and controls for such facilities. An EPA 
decision on this permit is pending in less than one week.
    My question is this. Will EPA fulfill its responsibilities 
to protect public health and the environment by making an 
active an informed decision regarding the permit before 
September 11th? Hopefully you will agree with me that the other 
members of the Vermont delegation, Douglas and the Governor and 
thousands of our constituents, that the permit should not be 
issued. But in any event, would you report back to me in 
writing by the end of this week?
    Mr. Wehrum. Senator, I would be pleased to report back to 
you on our progress in working on the permit. This is an issue 
that you and I have discussed many times in the past.
    Senator Jeffords. Yes.
    Mr. Wehrum. What I would say today, and I'm sure you well 
know is that we currently are in the process of reviewing a 
draft proposed permit that's been developed by the State. And 
our strategy in this for a while has been to proceed in a step-
wise fashion. So the purpose of this proposed permit would be 
to allow what we call a test burn, a short term test. Our goal 
as the agency would be to allow that to proceed, but in a way 
that doesn't create environmental detriment.
    So our intent is to look at the permit closely to, if the 
permit is approved, follow the test burn very closely so that 
we gather good information that allows all of us to know 
whether this fuel can be burned in an environmentally 
appropriate manner.
    Senator Jeffords. Thank you. That's very nice to hear.
    Mr. Wehrum, let me ask you a question about climate change. 
The Administration released a fact sheet on the Asia Pacific 
Partnership. It contains the following statement, and I quote: 
``We know the surface of the earth is warmer and an increase in 
greenhouse gases caused by human activity is contributing to 
the problem.'' Do you disagree in any way with that statement?
    Mr. Wehrum. No, Senator. I agree with that statement.
    Senator Inhofe. All right, thank you, Senator Jeffords. 
Senator Thune.

  OPENING STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM THE 
                     STATE OF SOUTH DAKOTA

    Senator Thune. Thank you again, Mr. Chairman, for holding 
the hearing. I appreciate the opportunity to, after we've had a 
year now since the passage of the renewable fuels standard, 
take a look at what's going on out there in the marketplace. As 
I said earlier, South Dakota is a great success sorry when it 
comes to ethanol production. We currently have ten plants, 
three more under construction, and we're number one in the 
Nation in terms of farmer-owned plants, which is a great story 
in and of itself, because it enables farmers to have ownership 
in an industry that I think is growing and gives them an 
opportunity to add value to their income and to create jobs in 
rural areas like South Dakota and other States around the 
Country where ethanol production is a very viable opportunity.
    I'm also very excited about the prospects for producing 
ethanol from other biomass products, cellulosic ethanol. I had 
the opportunity this last week to tour a lab in Rapid City, 
South Dakota, under the supervision of the South Dakota School 
of Mines and Technology, that is currently look at making 
cellulosic ethanol from the slash piles and that sort of thing 
that are out in the Black Hills of South Dakota, being able to 
convert those types of materials into energy as well.
    So I think there is tremendous up side in this industry, 
and so many different uses. I know they are making it in other 
places in the Country. California has now entered the ethanol 
business as well, bringing in corn from the midwest to do it.
    I guess what I would like to do is perhaps ask a couple of 
questions of our panelists today, and I thank you for your 
testimony and observations about this as well. But Dr. Collins, 
there are a number of what I think are inaccuracies floating 
around about the so-called food versus fuel debate in the 
Country. You stated in your testimony that USDA has projected a 
farm sector that adjusts fairly readily to higher corn demand. 
Could you elaborate on USDA's analysis on how growers will 
continue to supply markets for corn in the future?
    Mr. Collins. Sure, Senator Thune. I think if you look at 
agricultural markets over their long history, there have often 
been supply events or demand events that have caused big 
changes in the market. The historical adjustment has been a 
return to generally average or even low prices in many cases. 
That's because of the productivity and the flexibility that 
exists in agriculture. Surpluses have been the rule more so 
than scarcity.
    But because of the rapid growth in ethanol, there has been 
concern that this time will be different and the demand will 
outstrip production and will lead to some kind of a crisis 
event. I don't particularly see that. I think it's a situation 
that bears watching closely and that's why I identified and 
walked through it in some detail in my witness statement.
    But I think first of all, looking at corn, which is the 
vehicle for the concern that people have, because so much of 
it's going into ethanol, productivity is growing about two 
bushels a year. We know from seed companies that they believe 
we're on the threshold of some very bigger changes in corn 
yields in coming years. Our typical yield right now is about 
150 bushels per acre. Theoretically, corn could produce 300 
bushels per acre. Genetic engineering and biotech varieties, 
particularly stacked varieties, have resulted in higher than 
expected yields the last 2 or 3 years. Very hard to project 
this in the future. We tend to use trends, long term trends. 
But if you look at what's going on in the last couple of years, 
I think there is some cause for optimism.
    Secondly, I would point to the Conservation Reserve Program 
that I mentioned in my opening statement. We do have 36 million 
acres in the United States set aside from production for 
environmental reasons. We only farm about 325 million acres in 
principal crops. So we're talking about 10 percent of our crop 
land is set aside in the Conservation Reserve Program. Some of 
that land can be farmed economically and sustainably. We have 
about 22 million acres of that land under contracts that will 
mature between 2007 and 2012. So if agricultural markets start 
to rise in price because of demand for biofuels, for producers 
it will be more economic to take that land out of the CRP and 
return it to crop production and farm it sustainably with the 
techniques that we know can be done.
    So I think that's one of the reasons why, those are a 
couple of the reasons why I think I have been under the belief 
that markets will adjust, markets can adjust. There will be 
some cost. There's no question about that. But I think they can 
be manageable, given the objective of trying to reduce crude 
oil imports.
    I want to, if I can, just zero in on the comment you made 
in your testimony that you just alluded to about CRP providing 
a source of additional crop acreage. You mentioned, I think, 
that corn ethanol alone cannot greatly reduce U.S. dependence 
on foreign oil. I would like to get to the point, I think all 
of us would in this Country, where we have American energy and 
we get rid of our addiction to foreign energy.
    I know that one of the things you talked about is being 
able to put that into corn production. Is it also possible that 
some of that CRP acreage could be converted into cellulosic 
ethanol, producing acres like switch grass which is, we're not 
there yet, but the whole, I think, arena of alternative types 
of materials, biomass and materials that could be included in 
the production of ethanol, like switch grass, may even open a 
lot of other additional doors in States where we have those 
types of grasses in abundance.
    We don't want to take everything out of CRP because we have 
to keep a pheasant population in South Dakota. Obviously there 
are going to be a lot of competing and conflicting demands. But 
it seems to me at least, as you said, 36 million acres in CRP 
today, some of which could be used, whether it's for corn 
production or other types of biomaterials, like switch grass. 
Is that a possibility as well?
    Mr. Collins. Absolutely. I think cellulosic ethanol is the 
relief valve for a tightening corn market. As you probably 
know, we already have a six pilot projects in the CRP program 
in which biomass is being harvested for various uses. Those 
projects have been pretty successful. The producers have to 
take a reduced rental rate in CRP when they harvest the biomass 
for its use. But I think that would be something that we ought 
to take a hard look at in the 2007 Farm bill, to see if we can 
expand that kind of access to the CRP. Because of course, 
closely cropped perennial grasses do provide substantial 
environmental benefits. So you can get a lot of the 
environmental benefits you get in the CRP and still be able to 
produce biomass and harvest it.
    Senator Thune. Thank you.
    Mr. Chairman, my time has expired. I have a question for 
Mr. Wehrum I can either get to on a later round or I can 
submit.
    Senator Inhofe. There will be a second round. If you'd like 
to go ahead and use part of that second round now, feel free to 
do so.
    Senator Thune. Thank you.
    Mr. Wehrum, on May 8th of 2006, this year, EPA issued or 
started to begin a comment period, should say ended the comment 
period on the proposed rule regarding the treatment of corn 
milling ethanol facilities. I understand that you're currently 
evaluating those comments and that a final determination can be 
expected later this year.
    I of course weighed in on that process, along with a whole 
large number of members of Congress from both the House and the 
Senate, both sides of the political aisle, in support of moving 
in the direction that I think that this rule is headed, and the 
way that dry mill ethanol plants are treated relative to the 
way wet mill ethanol plants are treated. Of course, as you are 
familiar, the issue goes back to the Clean Air Amendments of 
1977, when at that time, EPA arbitrarily classified dry mill 
ethanol plants similar to chemical processing plants that are 
subject to 100 ton per year major source threshold without 
statutory direction or through a formal rulemaking process.
    I guess what I would like to do is just get your assessment 
of where that process is and when we might expect some final 
determination from the EPA.
    Mr. Wehrum. Senator, the final rule in our regulatory 
schedule is queued up for early next year. But this issue is a 
priority for us. We appreciate your support in allowing us to 
understand the importance of the issue and support in getting 
the proposed rule out. So my goal is to move that rule along as 
quickly as we can and hopefully get it out before the end of 
the year, but certainly no later than its scheduled issuance, 
which is early next year.
    Senator Thune. I appreciate that. The proposed rule change 
would have a big impact and lead to a lot more efficient 
operation of dry mill ethanol plants when it comes to a per 
gallon basis. So you know my views on this and I appreciate 
your consideration of it. As I said, there is a lot of 
Congressional support up here for moving in the direction that 
you are. So we welcome your speedy consideration of that and a 
final decision as soon as possible.
    Thank you. Mr. Chairman, I yield back.
    Senator Inhofe. Thank you, Senator Thune. Senator 
Lautenberg, we are going to be having two five minute rounds. 
If you'd like to take them all at once, you may do that.
    Senator Lautenberg. How about if I consolidate three or 
four?
    [Laughter.]
    Senator Inhofe. No, just 10 minutes.
    Senator Lautenberg. Thank you very much, Mr. Chairman.
    Mr. Wehrum, California as we all know has requested a 
waiver from EPA to allow its limits on greenhouse gas emissions 
from cars to take effect. My State, New Jersey, is one of a 
dozen States that is seeking to adopt California's tailpipe 
standards. Does EPA intend to grant California's request?
    Mr. Wehrum. Senator, as I think you know, we have not begun 
the process of formally considering the waiver request. And the 
process would start with a request for public comment and an 
opportunity for hearing, and then it would be followed by 
deliberation by the agency on what we heard during the hearing 
and a public comment period and then a final action at some 
future point.
    So we have been considering the waiver request for some 
time now. We have not formally begun the process. But----
    Senator Lautenberg. Why, Mr. Wehrum?
    Mr. Wehrum. Senator, the issues are complex, frankly. One 
of the primary issues related to the waiver request and 
greenhouse gas emissions generally in this Country is the 
authority that we have or don't have under the Clean Air Act 
ourselves as the agency to regulate in that area. And then by 
extension, what effect that determination may have on the 
request from the State of California with regard to the wavier.
    So that's a very complex question, one that's been 
litigated in the D.C. Circuit already and is queued up for 
consideration by the Supreme Court. We're focusing a lot of our 
time and resources----
    Senator Lautenberg. Well, would EPA make public 
recommendations before the Supreme Court hears the case?
    Mr. Wehrum. I can tell you, Senator, we've spoken with the 
Administrator very recently on this topic, and at least for 
now, we continue to deliberate the proper course of action.
    Senator Lautenberg. Well, we would hope that there is some 
energy put into this review and even as it waits for the court 
hearing that EPA I think ought to show its cards, to use the 
expression, and tell us what they see thus far in the process, 
or as quickly as possible.
    If EPA's New Source Review proposal to measure hourly 
emissions instead of annual emissions had been in place 10 
years ago, how many of the existing enforcement cases against 
power plants could have been brought?
    Mr. Wehrum. I can't offer you an exact figure today, 
Senator. As you know, the enforcement cases were based on the 
regulations as they stood at the time and the particular 
activities and maintenance projects or other types of projects 
that were engaged in. So it's been our position since the 
beginning of the Administration that we'll continue to pursue 
those cases vigorously, and we have, all the way up to the 
Supreme Court. One of the primary cases is being heard by the 
Supreme Court later this year.
    But at the same time, it's been our position since the 
beginning of the Administration that there is an opportunity to 
improve the New Source Review program and we've tried very hard 
to improve it in a way that makes it more efficient, more cost 
effective and more environmentally effect. And we feel like 
we've made a lot of progress in those areas.
    Senator Lautenberg. How long has the program been under 
review by EPA?
    Mr. Wehrum. There have been debates and discussions about 
New Source Review since its inception. A fairly formal process 
of assessing the program and considering some changes was begun 
in the Clinton Administration.
    Senator Lautenberg. Right.
    Mr. Wehrum. There was a proposed rule and a supplemental 
proposal before the end of that Administration. Some of our 
early actions in this Administration were based on what was 
proposed previously. So it's been many, many years that these 
issues have been in debate and question.
    Senator Lautenberg. Yes, and as the years pass, so does the 
quality of our air worsen. I would hope that there is some 
force put behind these reviews instead of constantly reminding 
us about how complex these issues are. We've got to resolve 
them. We know that the environmental conditions, the air 
quality, worsens as the weeks and the years go by. And it's 
time to come out and say that we are devoting the resources 
that we have to resolving the New Source problem, or at least 
dealing with it in a way that tells us that we are really 
serious about it.
    Dr. Collins, thank you for your comments earlier. Would 
reducing our, lifting the tariff on imported ethanol likely 
lower ethanol prices for consumers?
    Mr. Collins. I think very marginally, at best. We've looked 
at that issue repeatedly over the past year. There just simply 
hasn't been enough ethanol on the world market here in 2006, 
particularly Brazilian ethanol, to make a big difference. I 
just noticed yesterday or the day before, Iowa State University 
put out a study on the effects of lifting the tariff on 
ethanol. And they showed imports from Brazil going up by a 
couple of hundred percent. But our imports from Brazil run 
about 80 million gallons a year, compared with our production 
of now closing in on 5 billion gallons a year. So that's a 
fairly modest increase. It would help, particularly on the 
coasts. But I don't think overall it would have much of an 
impact on ethanol price.
    Senator Lautenberg. Well, if the production of ethanol has 
been so small relative to our needs, why wouldn't the economic 
stimulant bring their energy, the decision to produce more, to 
come into the American market? Is there a limit on how much 
they can produce?
    Mr. Collins. I'm Brazil, you're talking about?
    Senator Lautenberg. Yes, Brazil specifically.
    Mr. Collins. Well, they have a limit like we have a limit, 
only that it takes higher prices to expand their sugar cane 
acreage. I think my comment was really directed more toward the 
short and near term. Over the long term, if oil prices were to 
stay high, if we were to eliminate the tariff, then I think you 
would see some expansion. That would be an additional 
incentive, as you point out, to expand sugar cane acreage in 
Brazil.
    The problem that Brazil faces is their sugar cane goes 
about half into the world sugar market rather than into 
ethanol. And they have significant competition for their 
ethanol. They have their own domestic blend mandate of 20 to 25 
percent. They actually ran their stocks of ethanol down close 
to zero in the spring time trying to meet their own mandate. 
That left very little available to go to the world market. Then 
there's been increasing demand from Europe and Asian countries 
for their ethanol, particularly from Kyoto signatory countries.
    So there's been a limited supply available. But over time, 
I agree with you, if the price incentive is there, they could 
expand production and they could augment our supplies.
    Senator Lautenberg. I would hope that we would apply the 
traditional rule of economics and try to encourage, if it's as 
beneficial as it appears to be, just looking at Brazil itself, 
to try to do whatever we can. And we don't want to limit the 
corn producers' opportunity. But there is room for both. And 
what we ought to do is try and do what we can to make supplies 
available. I think the demand certainly is there, demand for 
improvement is there. And we ought to get on with it.
    Mr. Collins. As an economist, I believe in the benefits of 
trade liberalization. And so I do agree with you that a longer 
term goal ought to be freer global trade in ethanol.
    Senator Lautenberg. Good.
    Mr. Wehrum, can you comment on the relative amount of 
greenhouse gas tailpipe emissions that might result from 
cellulosic ethanol as compared to coal to liquid fuels?
    Mr. Wehrum. Yes, Senator. The greenhouse gas emissions on 
what we call a life cycle basis, meaning not only the emission 
from the tailpipe but also emissions associated with production 
of the crop and production of the ethanol.
    By way of comparison between cellulosic ethanol and a 
gallon of gasoline, the greenhouse gas emission from the 
cellulosic ethanol would be about 85 percent less than 
conventional gasoline.
    Senator Lautenberg. That tells us that we ought to get on 
with the task of increasing the supply, increasing the use of 
cellulosic materials.
    Mr. Wehrum. Senator, Chairman Inhofe asked the question 
about environmental impact earlier. And to complete the answer, 
from a greenhouse gas standpoint, whether using corn based 
ethanol or cellulosic based ethanol, fuels with ethanol derived 
by either of those methods has less of a greenhouse gas impact 
than conventional gasoline. So that would be one of the 
environmental benefits of implementing the RFS.
    Senator Lautenberg. Thanks, Mr. Chairman. Thank you very 
much.
    Senator Inhofe. Thank you, Senator Lautenberg.
    Senator Boxer, if you would like to use part of your time 
for an opening statement, that would be fine.

OPENING STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM THE 
                      STATE OF CALIFORNIA

    Senator Boxer. Thanks. I will take my full 10 minutes. And 
I want to thank you for this hearing. On Tuesday mornings, we 
have leadership meetings at 9:00, so I can't get here until 
10:00. I really apologize, because I didn't want to miss your 
words, but so be it.
    Mr. Chairman, this is so important. There are very few 
things we can do, it seems to me, as legislators, that could be 
so beneficial as turning to cellulosic fuel. We reduce 
pollution, we lower gas prices, we strengthen national 
security. It's very hard to find any other thing that we could 
do, any other policy we could embrace, that has such a good 
payoff. So I'm very much in favor of this. And working with 
some of you, I wrote the amendment in the Energy Act that gives 
2.5 to 1 credit for cellulosic fuel in terms of the Sates 
meeting the mandates.
    So starting off, I know we have to jump start this whole 
issue. I wonder whether that 2.5 to 1 credit is having any 
impact out there. Does anybody know who's on the panel? Are 
States saying, well, this makes it more beneficial for us to 
pursue?
    Mr. Wehrum. Senator, I'd be happy to at least start the 
answer.
    Senator Boxer. Sure.
    Mr. Wehrum. Earlier I testified, and as you well know, the 
Renewable Fuels Standard basically requires specified amounts 
of renewable fuels to be blended into the domestic gasoline 
supply on a yearly basis. Our projection, based on information 
from EIA, is that in fact the amount of ethanol or other 
renewables blended into the gasoline supply will exceed the 
amount mandated by the Renewable Fuels Standard, at least for 
the next few years. And the reason for that is that the 
economics of ethanol are very favorable right now, given the 
cost of crude oil and the cost of gasoline.
    Senator Boxer. And so you think that the 2.5 to 1 should 
spur on the development of switch grass and rice straw and all 
the other things, sugar cane, et cetera?
    Mr. Wehrum. Yes, Senator, I'm sorry I took so long to get 
to the point.
    Senator Boxer. That's okay. I just don't have a lot of 
time. So you think that is helping out there?
    Mr. Wehrum. The short answer, Senator, is no. The value of 
the credits under a renewable program will be minimal over the 
first few years of implementation because of what I just 
described. So there will be some additional value to those who 
use cellulosics, because of the one trade-off. And we hope that 
certainly is a spur for additional development and innovation. 
But my estimation is it would be minimal over the next few 
years because of the----
    Senator Boxer. So what does it have to be in order for it 
to be maximized? Because the trouble is, we don't have enough 
corn to do what needs to be done. So we need to look at these 
other ways. So what do you think it should be, 10 to 1, 8 to 1, 
in order to----
    Mr. Wehrum. I will defer to my colleagues here in a moment, 
but I guess the other thing that I would say is the Energy 
Policy Act said more about research and development and 
cellulosic and other forms of renewable fuels.
    Senator Boxer. What does it have to be, in other words, to 
spur this on? Because it's a new industry. I think Senator 
Lautenberg talked about Brazil, how they're going to be energy 
independent soon because they've gone to sugar cane. Dr. 
Collins talked about the problems they face. It seems to me, 
I'm reading Lester Brown's book, there's just not enough corn 
out there. So we do need to jump start these others. And if 2.5 
to 1 doesn't help make it more attractive, does anyone else 
have an answer to this question? At what level would it help? 
Or is it better to just give direct help into the whole 
development of cellulosic fuel?
    Mr. Collins. I think the credit would take on a value if 
the mandate for cellulosic ethanol were binding. If someone had 
to buy cellulosic ethanol, then the credit would take on a 
value. As Mr. Wehrum said, at the current point, it looks as if 
we can meet the 250 million gallon requirement, not just 
ethanol from switch grass or wood, but even conventional 
ethanol, because there is provision in the law that allows us 
to meet the cellulosic requirement if animal manures or other 
waste are used to replace 90 percent of the energy----
    Senator Boxer. But doesn't the requirement go up year after 
year, sir?
    Mr. Collins. It does go up. Eventually ethanol----
    Senator Boxer. So looking out, then you're saying it's 
possible that this will have an impact. But right now it 
doesn't have an impact?
    Mr. Collins. In my view, that's correct.
    Senator Boxer. Thank you.
    Mr. Karsner, I believe we should do more to increase the 
use of cellulosic ethanol. We know it can reduce greenhouse 
gases, provide valuable income for our farmers, and increase 
our energy independence. I just wonder whether or not the 
Administration is going to ask for all the funds that we in 
Congress authorize for research and building cellulosic ethanol 
plants in fiscal years 2006 and 2007? Are there plans to do 
that?
    Mr. Karnser. Plans to?
    Senator Boxer. To utilize the authorization that Congress 
gave for research and building cellulosic ethanol plants in 
fiscal year 2006 and 2007. Are there plans on the books to 
utilize that authorization?
    Mr. Karnser. There are currently multiple implementations 
of the authorization for that use, Senator. There's the Section 
932----
    Senator Boxer. Well, I'm just asking about those two 
things. I don't have time to hear about the other ways. Do you 
plan to use the authorization for research in building 
cellulosic ethanol plants in fiscal years 2006 and 2007?
    Mr. Karnser. To the extent they're appropriated, yes, 
ma'am.
    Senator Boxer. Thank you. In your testimonies, Mr. Karsner 
and Dr. Collins, you noted that there's a limited supply of 
corn grown in this Country, and therefore corn-based ethanol 
alone cannot be the whole solution. So would you support 
legislation that would take us further in the direction of 
commercial production of cellulosic ethanol? For example, a 
bill that might provide grants for research and development of 
cellulosic ethanol and fund pilot programs for the installation 
of ethanol pumps at gas stations? Would you support such a 
bill?
    Mr. Collins. I would say that's a policy call that I would 
rather leave to Secretary Johanns.
    Senator Boxer. All right, that's fair. Have any of you 
visited Brazil to see what they're doing with their sugar cane, 
with their cellulosic? No? No, no. Okay.
    Mr. Wehrum, I authored a provision in the Energy Policy Act 
of 2005 that required the EPA to study the health effects of 
the increased use of substitutes to MTBE, including health 
impacts on children, pregnant women, minority or low income 
communities and other vulnerable populations, as well as on air 
and water quality. EPA has until August 8th, 2007 to complete 
the study. What is the status of this study and will you meet 
that deadline?
    Mr. Wehrum. Senator, work on the study is underway. I would 
have to check on the status to answer the second part of your 
question as to what our estimated completion date is.
    Senator Boxer. Would you do that, and would you write to 
us? It would be very, very helpful.
    Mr. Wehrum. Yes, Senator.
    Senator Boxer. I also authored a provision in the Energy 
Act that required the EPA to study the amount of evaporation 
through rubber and plastic car parts with fuels that contain 
ethanol. And again, this study is supposed to be completed by 
August 8th, 2007. Could you give me the status of that study 
and let us know whether you plan to meet that deadline?
    Mr. Wehrum. I would be happy to respond to you as well on 
that, Senator.
    Senator Boxer. Thank you. Mr. Wehrum, I authored a 
provision in the Energy Policy Act that required the EPA to 
study the health effects of the increased use----oh, I asked 
you about substitutes of MTBE. Let me just finally ask you 
about the GAO study. In June of this year, the Government 
Accountability Office reported that ``While EPA has made some 
progress in implementing its air toxics program, most of its 
regulatory actions were completed late and major aspects of the 
program have still not been addressed. And EPA lacks a 
comprehensive strategy for completing the unmet requirements or 
estimates of resources necessary to do so.''
    The GAO found that ``As a result of EPA's limited progress, 
the agency has not addressed health risks from air toxics to 
the extent or in the time frames envisioned in the Clean Air 
Act.'' Mr. Wehrum, air toxics such as benzene are known to 
cause cancer. Please explain how EPA is ensuring that required 
reductions in levels of air toxics are being met, especially 
from mobile sources of pollution.
    Mr. Wehrum. Senator, we as an agency in this Administration 
and prior Administrations spend a tremendous amount of time and 
effort in implementing the air toxics program, including the 
mobile source provisions. We've established technology-based 
standards for well over 150 source categories at this time, and 
we're now embarking on the next round of significant 
regulation, which is assessing the remaining risk after 
imposition of those standards and making decisions as to 
whether more is necessary to protect human health and the 
environment.
    Senator Boxer. Okay, so you do not agree with the General 
Accounting Office, which is a non-partisan arm, that says as a 
result of EPA's limited progress, the agency has not addressed 
health risks from air toxics to the extent or in the time 
frames envisioned in the Clean Air Act? Mr. Wehrum, does EPA 
have a plan that incorporated all five GAO recommendations in 
that study?
    Mr. Wehrum. My understanding, and again I'd have to get 
back to you on this, is that we're developing a response to the 
GAO report, Senator.
    Senator Boxer. I would greatly appreciate it. When do you 
expect that response to be ready?
    Mr. Wehrum. I'll figure that out and get back to you, 
Senator.
    Senator Boxer. Well, you've got a lot of work to do, 
because you don't seem to know about a lot of these issues, and 
I'm looking forward to your written responses ASAP.
    Mr. Chairman, thank you very much.
    Senator Inhofe. Thank you, Senator Boxer. I have to observe 
that before you came in, I talked about the fact there are many 
areas of this hearing that you and I find in agreement, which 
is kind of scary.
    [Laughter.]
    Senator Inhofe. But I think that in fact this is true, 
however----
    Senator Boxer. I'm petrified, as a matter of fact.
    [Laughter.]
    Senator Inhofe. But it is amusing to me that no matter what 
hearing we have, and I'm not referring to you, Senator Boxer, 
that there are members who want to turn everything that we do 
into a hearing on greenhouse gases. It's just amazing how this 
always comes up, it's become such a religion in this Country. 
Yet people fail to look at the reality of recent science and 
the changes that are taking place of the most recent finding 
that the ice cap in the Antarctic is actually thickening and we 
have the Canadians, the 60 Canadian scientists up there now 
with the statement which was, if we had known in 1997 what we 
know today and how science has revealed today, we would not 
have signed the Kyoto Treaty, how the greatest in any period of 
history of our Country in terms of release of greenhouse gases 
took place, or CO2 took place in the late 1940s, and 
of course that didn't precipitate a warming period, it 
precipitated a cooling period that everyone said, another ice 
age is coming, we're all going to die.
    So anyway, that wasn't the purpose of this hearing, 
however, I did at least want to respond to that. I'm sorry that 
Senator Lautenberg left, because I wrote down the statement 
that he made. He said air quality worsens as the years go by. I 
quickly sent for this chart that we used in a previous hearing, 
it's just not true, if you look at what's happened since 1970 
in the case of gross domestic product has increased by 176 
percent, vehicle miles traveled, 155 percent, energy 
consumption, 45 percent increase, population, 40 percent 
increase, and yet it has resulted in 50 percent cleaner air 
than we had in 1970. It's a success story, you just look at it, 
these are the facts that are incontrovertible.
    So I don't think it's really necessary to get into a lot of 
these things. My preference would be to study those issues that 
are in the area of the agenda of the meetings.
    Senator Jeffords, you would have another five minutes, if 
you have more questions.
    Senator Jeffords. Yes, I do.
    Senator Jeffords. Mr. Wehrum, do you believe that the 
ruling proposed tomorrow will increase the price of gasoline?
    Mr. Wehrum. Senator Jeffords, our regularly impact analysis 
for the proposed rule includes a prediction on the impact of 
the price of fuel. In our estimation, our estimation will be it 
likely will increase the cost of production by a fraction of a 
cent upwards of a penny. I'm answering your question in terms 
of the cost of production. In our analysis, we don't attempt to 
estimate the impact on price. Price is influenced by many 
factors that go beyond the bounds of this regulation.
    Senator Jeffords. Thank you. Mr. Karsner, last week your 
office at DOE issued a press release, calling the RFS moot 
because of the rapid growth in ethanol production. While 
ethanol volumes are growing, they surpass what Congress 
mandated, isn't it the case that the standard was the catalyst 
for that rule?
    Mr. Karnser. I think that's correct, Senator. It was a 
useful catalyst and baseline. It stimulated this latest boom 
that we are experiencing in ethanol and the market has 
presently outpaced what the standard was set for, so the 
market's performing very well on its own at this juncture.
    Senator Jeffords. Mr. Karsner, I applaud your efforts for 
the advance of renewable energy. Currently non-hydro renewables 
account for a small percentage of the electricity production. 
What percentage of our electric power supply will non-hydro 
renewables account for in the year 2010, 2015 and 2020? What 
technologies hold the most promise?
    Mr. Karnser. Well, sir, I'd be pleased to report back for 
the record with a quantitative estimation at those specific 
points in time. But just off the cuff, we can say that we 
expect those non-hydro sources of renewable power generation to 
continue their record expansion, which they've been undergoing 
for the last half decade, about 30 percent year on year growth. 
So if you took that trend line straight up through the 
intervals where you're talking about, you might approximate, 
say, 6 percent in the furthest out number. But I'd like to 
report back to you for the record with a more precise 
estimation.
    [The referenced estimation follows.]

    ``The Department of Energy's Energy Information Administration has 
made the following projections for the percentage of electricity 
capacity that will be contributed by non-hydro renewable sources in 
future years. 2010: 3.1 percent; 2015: 3.5 percent; 2020: 3.6 
percent.''

    Mr. Karnser. You asked also what holds the most promise. To 
some degree, ``we love all of our children,'' they all have a 
place in the American portfolio and a specific niche. So some 
of the larger scale utility grade renewables that will account, 
non- hydro renewables that will account for the largest portion 
of that growth will of course be wind power, which is growing 
at the fastest pace in terms of utility connection. Solar 
power, which is much smaller quantitatively, and will account 
for much smaller load quantitatively, still has a very 
significant role, particularly as a building-integrated 
technology and for demand side management.
    So each of the renewables has different intrinsic 
characteristics for power generation that will inevitably find 
their niche in that growth curve.
    Senator Jeffords. Thank you very much.
    Mr. Collins, you testified that ethanol producers are 
expanding at an unprecedented rate and that there are 47 plants 
and 7 expansions under construction today. I want to be clear. 
Is it correct that this expansion is occurring in compliance 
with the existing environmental law and with the acceptance of 
the local communities in which the plants are located?
    Mr. Collins. I cannot attest to that, because I don't know 
the particular situations of each of those plants. However, we 
and other entities do track the pace of construction partially 
by looking at the permits and other information that have been 
developed by the plant that's under construction. Perhaps 
that's a question for EPA to address, Mr. Wehrum, than me.
    Senator Jeffords. Mr. Collins, you made a number of 
projections in your written testimony about the effect of 
ethanol use on corn prices. Have you made similar projections 
for soybeans, biodiesel and if so, how does the availability of 
used soy oil affect the price?
    Mr. Collins. We have done similar projections as well. The 
situation with soybeans is a lot more complicated than the 
situation with corn, because you have a demand for soybean oil 
for biodiesel, which is growing dramatically. But the increase 
in corn ethanol is producing byproduct feeds that compete with 
soybean meal, so you get a decrease generally in the price of 
soybean meal, which is a protein animal feed. You get an 
increase in the price of soybean oil.
    Then you also have the question of what will happen with 
soybean acreage as corn acreage expands. I think soybean 
acreage will go down. So you have two factors to suggest higher 
soybean prices, less soybean acreage, more demand for soybean 
oil for biodiesel. One factor that suggests soybean prices will 
go down, lower soy meal prices because of the competition from 
byproduct feeds that come out of ethanol plants. All in all, I 
think we end up with a little bit less soybean acreage and a 
slightly higher soybean price, but nothing catastrophic or of 
prices proportions.
    Senator Jeffords. Mr. Karsner, what do you think about wave 
pilot?
    Mr. Karnser. Sir, the Department currently doesn't have an 
active program for wave energy. Having said that, we watch it 
and I have technology experts attending conferences globally 
where there is greater expertise, particularly in the United 
Kingdom right now, developing wave power for tidal basins, et 
cetera. So there is potential in it. I know that New York State 
is doing it on a micro-basis in the East River with floating 
buoys. In general, we think that wave and other forms of water 
energy hold great promise as a renewable fluid technology. But 
we want to assure that we get to the size and scale that is 
significant enough to engage it as a program.
    Senator Jeffords. Thank you.
    Senator Inhofe. Thank you, Senator Jeffords. Senator Thune, 
you have three minutes remaining, if you would like to use any 
part of that.
    Senator Thune. Mr. Chairman, I would just like to 
acknowledge that we were talking, of course, about corn 
ethanol, but also about cellulosic, that there was a lot of 
good work done last year in the Transportation bill. I 
appreciate having the opportunity to work with you, Mr. 
Chairman, as well as with Senator Clinton, in including 
provisions that would promote biofuels research. That was 
something that South Dakota State University is in the middle 
of right now. But I think it's going to play an important role 
as we look at additional ways to expand the use of alternative 
fuels going forward.
    So the research provision, in addition to the RFS, which 
obviously was a huge breakthrough in terms of our energy bill 
last year, but the Highway bill also included some important 
provisions that promote research, so I appreciate your good 
work and leadership as well as other members of this committee 
in helping make that happen.
    Just a couple of observations with respect to the whole 
issue of Brazilian ethanol, because it has been debated about 
whether or not there is enough supply in this Country to meet 
the demand out there. There of course is already a provision 
that allows for some Brazilian ethanol to come into this 
Country. Under one of our trade agreements, and they're not 
anywhere close to the lid or the cap that's allowed there.
    But secondly, there is a qualitative difference, too, 
between the ethanol that's produced in South America and Brazil 
and the ethanol in this Country. They don't have to comply or 
meet the environmental standards that we have in this Country. 
Secondly, I just think that this whole debate really is about 
American energy. It's about getting away from our dependence 
upon foreign sources of energy. So we've all concluded that 
when you can undergo a rise in the price of a barrel of oil 
from $25 or $30 a barrel to $70 or $75 a barrel, the impact it 
has on the economy is pretty profound.
    To me, there is a qualitative difference as well, or a 
distinction between, when you start talking about trade and 
open markets and everything else, a pair of designer jeans that 
you get from China or a tie that you get from some other 
Country, those are very different products than energy. And I 
think we have to do everything we can right now to promote 
American energy.
    That's why I think these policies are so important, that's 
why I think the RFS was so important last year. And all these 
other initiatives that are underway right now in terms of 
developing, whether it's cellulosic ethanol or coal to liquids, 
whatever it is, we have to get energy independent. And in my 
view, I'm not sure that we gain when we become dependent upon 
Brazilian ethanol instead of Middle Eastern oil. We're still 
dependent upon foreign sources of energy. And energy drives 
this economy. The economic impact is profound.
    So I would just simply say, as we continue to develop 
policies in this Country where energy is concerned that we 
continue to look at how we can become energy independent and 
have American energy meet the needs of our economy rather than 
having to depend upon foreign sources of energy. So that is 
more a speech than a question, Mr. Chairman.
    But again, I appreciate your leadership on this issue. I 
know that the renewable fuels standard and the subsequent 
changes in the Highway bill that encourage the research that's 
going on right now are going to be critical in achieving that 
goal and meeting our objective of becoming energy independent 
and having American energy as our source in this Country.
    Thank you.
    Senator Inhofe. Thank you, Senator Thune.
    Senator Boxer has asked that she be given 60 seconds to 
respond to something that is not the subject of this hearing. 
You are recognized for this purpose.
    Senator Boxer. Well, just, the record should show I didn't 
raise it, but you did make a statement about climate change. 
And Mr. Chairman, I'm really hopeful we can work together on 
cellulosic fuel. I mean, that's something I think we ought to 
come together on. And I think Senator Thune made the point 
beautifully that this is an opportunity for us. I hope we can 
all finally find something that we can come together on.
    But I have to just make a point for the record that the 
Administration itself has a statement, we know the surface of 
the earth is warmer and an increase in greenhouse gas as caused 
by human activity is contributing to the problem. That's the 
Administration. We know that 11 academies of sciences 
throughout the world, including the American Academy of 
Sciences, has stated that clearly the earth is warming and we 
need to take steps now.
    I think about what you say, I have a great deal of respect 
for you. But I feel that it's such a risky, you have a risky 
strategy, which is to do nothing. And if these academies of 
sciences are right, then in fact the risks are too great, and I 
just wanted to say that, and hope that we can find other areas 
we can work together on.
    Senator Inhofe. Sure, and I appreciate that, and the record 
will so reflect that. I will have to respond, however, and 
say----
    [Laughter.]
    Senator Inhofe. ---- we could throw in the 17,800 
scientists of the Oregon Petition, we could talk about the 
Smithsonian Harvard report, all of which refute the statements 
you just made. But that's for another hearing another day.
    Senator Obama, we were about to conclude, but we certainly 
welcome you to this hearing. You would be recognized for either 
your opening statement or questions of the panel.

 OPENING STATEMENT OF HON. BARACK OBAMA, U.S. SENATOR FROM THE 
                       STATE OF ILLINOIS

    Senator Obama. Thank you very much, Mr. Chairman. I'll be 
relatively brief. I apologize for being late. My flight was 
delayed.
    This is an issue that is obviously important to my 
constituents in Illinois. I think it's important to all the 
American people. I'm reminded of a quote from the car maker, 
Henry Ford, who said in 1916, ``The world is waiting for a 
substitute for gasoline. Some day there will be no more 
gasoline and long before that time, the prices of gasoline will 
have risen to a point where it will be too expensive to burn as 
motor fuel.'' In 1916, Henry Ford's company produced about half 
a million Model Ts each year. There was enough oil in the U.S. 
to meet our energy needs. Ninety years later, there are 243 
million cars and light trucks in the U.S., and we have to 
import about 60 percent of our oil from abroad.
    I have repeated many times that our dependence on foreign 
oil is not just an economic security issue but also a national 
security issue. As long as our economic fortunes are tied to 
the price of oil our ability to grow our economy and raise the 
standard of living for our people is threatened. Equally 
troubling is the fact that about $800 million that we spend on 
foreign oil each day goes to some of the most volatile regions 
in the earth. I'm sure many of these issues have already been 
raised.
    I just want to say that I'm pleased to have co-sponsored 
the renewable fuels standard that passed last year. When fully 
implemented, the RFS will go a long way toward encouraging 
production of home-grown fuels. But we have to do more. Senator 
Cochran and myself introduced a bill to create a similar 
renewable standard for diesel fuel. Senator Lugar and I 
introduced a proposal to increase CAFE standards for cars and 
light trucks. So I think that the same bipartisan spirit that 
led to the RFS can lead to other legislation to help cut our 
ties to foreign oil.
    And Mr. Chairman, I do have just a couple of questions. And 
I apologize, some of these may have already been asked. In the 
three minutes that I have remaining, if I could direct a couple 
of these first to the Department of Energy, Mr. Karsner.
    I am aware of the fact that the National Ethanol Vehicle 
Coalition has been doing some good work over the last 5 years 
to help promote E-85. And my understanding is that the 
Department of Energy awarded NEVC $1.8 million in fiscal year 
2005, specifically to help expand E-85 infrastructure. My 
understanding is only a million dollars of this amount has been 
paid to the Coalition.
    And given the great interest in E-85 and the fact that my 
flexible fuel vehicle, I can never find a gas station that 
carries it without driving and using up whatever benefits I 
would get, I'm wondering why the Coalition hasn't received this 
funding and whether the Department plans to provide the balance 
of this award.
    Mr. Karnser. Senator Obama, I will look into that matter. 
We certainly at the political level don't delve into individual 
giants into the private sector----
    Senator Obama. Fair enough. If you don't know, it would be 
great if you could get back to my office on it.
    Mr. Karnser. I will report back for the record.
    [The referenced information follows.]

    The National Ethanol Vehicle Coalition (NEVC) has done good work 
helping to develop E-85 infrastructure. In 2005, the Coalition 
submitted an application to the Department of Energy for an additional 
$1.8 million (as a modification to an existing grant which previously 
totaled $2.9 million) to increase the number of E-85 refueling 
stations. The Department funded $1.0 million of the $1.8 million 
request, increasing the grant funding to a total of $3.9 million. 
However, based on fiscal year 2006 congressional guidance, we are now 
primarily funding ethanol infrastructure development competitively, 
through our State Energy Program (SEP) special project grants and other 
solicitations, and the Department considers our obligation under the 
NEVC grant to be fulfilled. We have funded E-85 infrastructure in 
fiscal years 2004, 2005, and 2006 through a combination of the NEVC 
grant, SEP special project grants, competitive solicitations, and an 
NEVC congressionally directed project. We will continue to work toward 
expansion of E-85 infrastructure through competitive solicitations and 
awards, and look forward to working with all parties interested in 
promoting the use of biofuels in the future.

    Mr. Karnser. I will also take this opportunity to plug our 
energysavers.gov web site, and say that there you can find 
wherever the closest E-85 stations might be geographically.
    Senator Obama. Yes, I know where they are. They're just too 
far away. We need more of them.
    Mr. Karnser. We're going to try to put more of them closer.
    Senator Obama. Absolutely. For Mr. Wehrum, of the EPA, in 
the last minute that I've got remaining, it looks like U.S. 
production of ethanol is at about 25 percent above the 2006 RFS 
level, am I correct about that?
    Mr. Wehrum. That's roughly correct, Senator, yes.
    Senator Obama. Do we expect the trend to continue in the 
future, are we sort of moving in that direction where it's 
increasing at that pace?
    Mr. Wehrum. Senator, we rely on EIA, a branch of the 
Department of Energy, for projections on energy matters. But in 
our proposed renewable fuel standard, which will be signed and 
issued tomorrow, we include projections of what we think 
ethanol production and consumption are going to be in the 
Country over the next few years. Our projections on that 
ethanol consumption, is that more ethanol is going to be 
blended into the gasoline supply than is minimally required 
under the renewable fuel standard.
    Senator Obama. Okay. Which raises the thought, then, has 
thought been given about raising the renewable fuel standard to 
reflect the fact that we're actually doing better than we might 
have anticipated and maybe we should raise the bar a little 
bit.
    Mr. Wehrum. Senator, it's not within our authority under 
the law to raise the amount that's----
    Senator Obama. I understand that. I'm asking whether there 
has been a recommendation to Congress along those lines.
    Mr. Wehrum. The Administration has not made such a 
recommendation.
    Senator Obama. Okay. Mr. Chairman, if I could just ask one 
more question of Dr. Collins.
    The USDA's August 8th renewable energy analysis paper 
mentioned the idea of restructuring the Commodity Credit 
Corporation bioenergy program to focus on cellulosic feedstock. 
And the program was a success for corn and soybeans. So I'm 
just interested in whether the USDA has a vision for how a 
modified CCC bioenergy program for the future of cellulosic 
feedstock might look like.
    Mr. Collins. At this point, Senator, we do not. USDA's 
position on the CCC bioenergy program has been to support its 
termination. The program expires this year.
    What we did with that paper was to lay out what we thought 
were some areas that we weren't necessarily recommending but 
some areas that needed some public discussion, some public 
debate for consideration in the 2007 Farm bill.
    Senator Obama. Okay.
    Mr. Collins. We think a possible reinvention of the CCC 
bioenergy program with a focus on cellulosic ethanol is worth a 
public debate about. But we have not----
    Senator Obama. But you haven't issued any recommendations 
yet, but this is something that your office is investigating, 
at least, would that be accurate?
    Mr. Collins. Yes, sir.
    Senator Obama. And are there going to be public hearings or 
reports through your office, or are those still in the works, 
or you're not sure yet?
    Mr. Collins. I'm not sure.
    Senator Obama. Okay. Fair enough.
    Thank you, Mr. Chairman. I appreciate all the work that all 
of you are doing and Mr. Chairman, I appreciate your leadership 
as well as my colleague from South Dakota, who I know cares 
about this deeply as well.
    Senator Inhofe. Thank you, Senator Obama.
    [The prepared statement of Senator Barack Obama follows:]

           Statement of Hon. Barack Obama, U.S. Senator from 
                         the State of Illinois
    Thank you, Mr. Chairman, for holding this hearing on how the 
Federal Government can promote the growth of a domestic renewable fuels 
industry. This is an important issue to my constituents in Illinois.
    When I think about this issue, I'm often reminded of a quote from 
the car maker Henry Ford, who said in 1916: ``The world is waiting for 
a substitute for gasoline. [Someday] there will be no more gasoline, 
and long before that time, the prices of gasoline will have risen to a 
point where it will be too expensive to burn as a motor fuel.''
    In 1916, Henry Ford's company produced about a half million Model 
T's each year, and there was enough oil in the U.S. to meet our energy 
needs. Ninety years later, there are 243 million cars and light trucks 
in the U.S., and we have to import about 60 percent of our oil from 
abroad.
    I've said it many times but our dependence on foreign oil threatens 
not only our economic security but also our national security. As long 
as our economic fortunes are tied to the price of oil, our ability to 
grow our economy and raise the standard of living for our people is 
threatened. Equally troubling, a large portion of the $800 million we 
spend on foreign oil each day goes to countries with volatile 
Governments--places that breed turmoil and terrorism.
    For these reasons, I was pleased to have cosponsored the renewable 
fuels standard that passed last year. When fully implemented, the RFS 
will go a long way towards encouraging the production of home-grown 
fuels and reducing our dangerous dependence on foreign oil.
    But we can--and must--do more. That's why Senator Cochran and I 
introduced a bill to create a similar renewable standard for diesel 
fuel. And that's why Senator Lugar and I introduced a proposal to 
increase CAFE standards for cars and light trucks. So I hope the same 
bipartisan spirit that led to the RFS can lead to other legislation to 
help cut our ties to foreign oil.
    Thank you, Mr. Chairman.

    Let me just ask, I had asked a question of Mr. Karsner, 
relating to the relationship between the feedstock, ethanol 
production and so forth, considering that natural gas is the 
second most important feedstock in ethanol production, second 
only to corn. Would you agree that opposing policies to 
increase natural gas production while supporting the increased 
renewable fuels would be inconsistent? Mr. Karsner said that he 
believes that it is inconsistent. I'd like to ask the same 
question of you, Dr. Collins, and Mr. Wehrum.
    Mr. Wehrum. Senator, I'll admit you took me by surprise. 
Could you repeat your question, please?
    Senator Inhofe. Yes. I was saying that if you're for 
renewables and at the same time, you oppose increasing natural 
gas production, since natural gas is the second largest 
feedstock in renewables, would you say it's inconsistent to be 
supporting renewables but opposing the production, increasing 
production or production of natural gas?
    Mr. Wehrum. Senator, I would just say if the goal is to 
increase the energy independence of the United States, those 
would be inconsistent statements.
    Senator Inhofe. All right, good. Dr. Collins.
    Mr. Collins. Senator Inhofe, the way you phrase the 
question it would appear to be inconsistent.
    Senator Inhofe. Yes, thank you.
    Senator Thune has been kind enough to chair this hearing 
for the last five minutes Senator Carper will have, so Senator 
Thune is presiding. Thank you very much, gentlemen.
    Senator Thune. [Presiding.] The Senator from Delaware.

 OPENING STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR FROM 
                     THE STATE OF DELAWARE

    Senator Carper. Mr. Chairman, you've been here less than 2 
years and you're already running the place.
    [Laughter.]
    Senator Carper. Mr. Wehrum, this issue is close to our 
hearts in Delaware. Most people think Delaware is a big 
agriculture State. We have only three counties, but in our 
southernmost county, we raise more soybeans, I'm told, than any 
county in America. The Dupont company is one of the major 
employers in our State. They're doing great work, including 
among other projects, on cellulosic ethanol. They're doing a 
lot of research with corn, and trying to turn the whole corn 
stalk, Dr. Collins, into ethanol. They're doing that with help 
from a grant from the Energy Department that our Congressional 
delegation has sought and supported.
    I understand in your testimony you may have mentioned your 
Department's commitment to accelerate research and development 
to make cellulosic ethanol commercially competitive by 2012. I 
just want to ask, if you can give us a little bit more detail 
and discuss some of the R&D development projects going on that 
your Department is currently participating. What actual steps 
are you taking to accelerate this research?
    Mr. Collins. I'd be happy to, Senator. First of all, let me 
say that over the past year, we have been reformulating our 
long term plan for research to focus on cellulosic ethanol. The 
document for that plan is now in review.
    But I would say that we really have four pillars.
    Senator Carper. Dr. Collins, I'm going to ask you to answer 
very briefly, I want to raise the same question to Mr. Karsner.
    Mr. Collins. All right. I will just say in a sentence, 
then, our focus has been on feedstock design, that is trying to 
develop crops by eco-region of the Country, feedstock 
production and management, that is to produce and manage so 
that biomass can be produced year-round, supply ethanol plants 
year-round for cellulosic feedstocks.
    Thirdly, feedstock logistics, harvesting and handling, to 
do that in a most effective way. And fourth, feedstock 
conversion, which is to look at both, not just cellulosic, but 
starch-based ethanol as well, to improve the efficiency of 
conversion.
    Senator Carper. Good. Thank you.
    Mr. Karsner, same question. Again, the Energy Department, 
I'm told, is supporting what is being done at the Dupont 
experimental station literally today, as we meet. I think the 
Dupont folks are 3 years into a 4 year endeavor. I'm encouraged 
that the Department wants to accelerate R&D to cellulosic 
ethanol, make it commercially competitive. Let me just ask you, 
what are you doing to accelerate it? And I'm especially 
interested in the kinds of dollars that you want to bring to 
the endeavor.
    Mr. Karnser. Well, the general answer is very similar to 
USDA in the sense that we are breaking down old stove pipes 
across the Federal Government and working with USDA and EPA and 
DOT on a comprehensive strategy with other agencies that 
involve, as a first step, evaluating the regional biomass 
energy feedstocks through partnerships that can determine what 
feedstocks go where for new cellulosic ethanol bio-refining 
capacity. We're also approaching the basic research and 
development with the Office of Science through the bio-energy 
research centers that were just announced, amounting to $250 
million over the next 5 years in two separate centers to look 
at the genomics and the plant genetics to investigate how to 
increase the capacity utilization of removing the sugars from 
the lignin cellulose and hemi-cellulose.
    We also, as part of implementing of the Energy Policy Act, 
have authority for the loan guarantee program which will 
increase the availability and access to capital and hopefully 
lower the cost of funds to new entrants and investors for 
capital formation towards cellulosic ethanol. And finally, 
we're looking at all the aspects of the economics of the supply 
chain for the economic development of cellulosic ethanol 
distribution, transportation and terminal facilities. In this 
respect, corn-based and conventional ethanol is leading the way 
with its current growth rates ironing out and bringing new 
equilibrium to the economics of distributing the ethanol to 
market. Getting it first as a blend fuel and then hopefully 
later cross over into E-85 in a more pure retail form.
    Specifically in terms of the monetary numbers, we 
anticipate a few billion dollars at least in the initial rounds 
of the loan guarantee program. The pre-applications were 
recently solicited on August 8th. Those solicitations are due 
back from the pre-applications on November 6th. And in the 
first quarter of next year, we anticipate the evaluation, and 
eventually the rewards of the first round of the loan guarantee 
program, of which there has been great interest by those in the 
cellulosic ethanol community.
    Alongside of that, there is the Section 932 of the Energy 
Policy Act, where we anticipate up to $53 million that would be 
a cost share grant in a more typical form of R&D of the type 
that you've characterized in our partnership with Dupont, for 
example, to evaluate those technologies that can become 
commercial and replicable at scale, so that we might begin to 
proliferate and accelerate them into the economy.
    Senator Carper. Good. I understand some additional monies 
are going to be needed as a scale-up to maybe build a pilot 
plant and then to go beyond that, they're probably on their 
own, or other companies would be on their own. I would 
encourage you at the Department to continue to support 
generously this kind of research and development. I think it 
has a huge payoff.
    I'm told that we use almost as much energy to create 
ethanol, using the ears of the corn, but I'm told that the 
potential with the cellulosic ethanol is much better in terms 
of the payoff in energy production. So we're real interested in 
following that one.
    Just north of Dover, Delaware is a little town called 
Clayton, where earlier this summer we opened a biodiesel 
refinery. We take just soybean oil and turn it into diesel 
fuel. And when I was Governor, near the end of my second term 
as Governor, we started using biodiesel fuel to fuel some of 
our DelDOT vehicles. It worked pretty well, so we started 
fueling them all, and now a whole bunch of vehicles on the 
DelMarVa Peninsula use biofuels.
    Those that don't, Mr. Wehrum, use in many instances diesel 
fuel, and traditionally it's been fairly high sulfur content 
diesel fuel. I have a related question that I'd like to pose to 
you if I could. I commend the Administration, we've been 
critical of the Administration for some of the things that 
they've done, for some of their sins with respect to a cleaner 
environment. But one of the areas that I think all of us are 
supportive of is the Administration's efforts to reduce diesel 
emissions by introducing the standards for ultra-low sulfur 
diesel.
    And it's my understanding that the ultra-low sulfur diesel 
is required to be introduced in the market, I think on October 
15th at this time for the new model year cars and trucks, 2007 
engines. I think the October 15th date is already the result of 
a 45 day extension, and it's my understanding that there are 
again some that are asking for you to delay this transition 
further beyond October 15th. I am concerned about the 
environmental impacts of the additional delay. I suspect others 
are as well.
    I just want to know, is EPA considering delaying the diesel 
standard further beyond October 15th? Are there any real 
concerns about price increases or supply problems caused by the 
new diesel fuel standard?
    Mr. Wehrum. Senator, it's our intent to stick with the 
current deadline of October 15th for retail distribution under 
the ULSD, the ultra-low sulfur diesel fuel. We have predicted 
from the beginning that this program would increase the cost of 
diesel fuel a few pennies per gallon. As I stated earlier in 
this hearing, we don't attempt to estimate whatever impact it 
may have on price, because there are many, many factors that 
influence price that go far beyond just this basic regulatory 
program.
    We----
    Senator Carper. You can stop right there. That's good.
    Mr. Wehrum. Thank you, Senator.
    Senator Carper. You said what I wanted to hear, October 
15th.
    Lastly, a question if I could for Dr. Collins. I want to 
ask my entire question, but if I could, we're interested in 
farmers getting more money for their soybeans, their corn and 
other commodities that they raise on the DelMarVa Peninsula. 
It's just, I'm sure they're interested in South Dakota and even 
Vermont for their commodities.
    But does the increased price of corn reduce the amount of 
farm subsidies being paid out, reducing costs in the Farm bill? 
If so, how, if not, why not?
    Mr. Collins. It does, Senator. Let me just give you an 
example. For the 2005 crop of corn, we had the most costly corn 
program ever. It was about $9 billion we spent in payments and 
support to U.S. corn farmers. This year, with higher corn 
prices, we're estimating that we'll spend $4.6 billion. So 
there you're talking about a $4 billion swing just in corn 
program cost alone from 1 year to the next.
    So it is true that as corn prices strengthen, as corn 
demand strengthens, it can significantly reduce taxpayer costs 
for Federal farm price and income support programs.
    Senator Carper. Good. Thanks very much.
    And our thanks to each of you for joining us today and for 
your testimony, for your responses to our questions. Thank you. 
Thanks, Mr. Chairman.
    Senator Thune. I want to thank our witnesses for their 
testimony, and we look forward to discussing further as this 
process moves along things that we can do to improve the energy 
situation in this Country, and particularly with regard to 
renewable energy, which as has been stated repeatedly 
throughout the course of this hearing, has all kinds of 
benefits, from the environment to the economy to our national 
energy independence. So we appreciate your input and welcome 
additional suggestions that you might have about things that we 
as a Congress could be looking at to further the growth of 
renewable energy in this Country.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 11:14 a.m., the subcommittee was adjourned.]

         Statement of Hon. Joseph Lieberman, U.S. Senator from 
                        the State of Connecticut
    Thank you, Mr. Chairman, for holding this hearing on the Federal 
Government's renewable fuels programs.
    The Energy Policy Act's promotion of renewable fuels is one of the 
attributes that led me to vote in favor of that law's passage last 
year. The Act directs the Energy Department to institute a ten-cents-
per-gallon financial incentive for the production of cellulosic 
biofuel. It authorizes the Department to provide loan guarantees 
amounting to as much as 80 percent of the cost of at least one 
commercial-scale cellulosic biomass project. It also authorizes the 
Department to provide up to $250 million in loans to merchant producers 
of cellulosic biomass and other approved renewable fuels. It authorizes 
the Agriculture Department to issue $1 million per year in grants to 
small businesses for the marketing and certification of bioproducts. 
And, perhaps most significantly, the Act directs the Environmental 
Protection Agency to mandate the use of at least 4 billion gallons of 
renewable fuel in this country this year, and at least 7.5 billion 
gallons in 2012.
    In my view, these incentives and mandates in the Energy Policy Act 
represent a positive and necessary step toward ending this country's 
destructive oil addiction and curbing global warming. I am glad to 
hear, then, that tomorrow EPA Administrator Johnson will sign a 
proposed rule to implement the Act's renewable fuels mandate.
    As warranted and impressive as the Energy Policy Act's renewable 
fuels provisions are, however, I believe they amount to only a first 
step toward ending our oil addiction and dramatically reducing our 
transportation sector's contribution to global warming. To carry this 
country much farther down the road that we need to travel, I joined 
with Senators Bayh, Brownback, Coleman, and others last November to 
introduce S. 2025, the Vehicle and Fuel Choices for American Security 
Act. That bill, which now has the bipartisan support of 28 Senators, 
would require the executive branch to use means readily at its disposal 
to save, by 2016, 2.5 million barrels per day from projected oil 
consumption in that year. That is roughly the amount of oil that we 
currently import from the Middle East. The bill, which I like to call 
the Set America Free Act, would go on to require 7 million barrels per 
day in savings by 2026 and 10 million barrels per day in savings by 
2031 (our current oil consumption is just over 20 million barrels per 
day).
    To implement these savings, the Set America Free Act would set 
rising targets for manufacturers to produce flexible-fuel, alternative-
fuel, hybrid, plug-in hybrid, and fuel cell vehicles; institute loan 
guarantees, grants, and tax credits to promote sales of those vehicles; 
mandate the development of fuel-efficiency standards for heavy-duty 
vehicles; eliminate the current tax break for purchases of heavy SUVs; 
require the Federal Government to improve the fuel efficiency of its 
vehicle fleets; institute a program for increasing the use of fuel-
saving tires; and institute a series of steps for increasing domestic 
production of ethanol.
    Of particular relevance to today's hearing, the Set America Free 
Act would increase the ethanol infrastructure tax credit to 50 percent. 
This is important, because limited ethanol infrastructure is one of the 
greatest impediments to use of the fuel today. Millions of flexible 
fuel vehicles designed to use ethanol never see a drop of it simply 
because it is unavailable at the pump. The Set America Free Act's tax 
credits would help change that. The Act would also increase the 
authorization for cellulosic ethanol incentives to $200 million for 5 
years, and add a near-term target of 75 million gallons of cellulosic 
biomass fuel by 2010.
    My cosponsors and I were disappointed that Majority Leader Frist 
blocked our effort to add the Set America Free Act to the Gulf of 
Mexico Energy Security Act in July. We were somewhat encouraged, 
however, to hear Senator Frist and Energy Committee Chairman Domenici 
nevertheless praise our bill on the Senate floor. We will continue to 
advance the Set America Free Act in the next Congress, because the 
Energy Policy Act's significant step toward energy security will have 
been in vain unless we now continue the march toward that goal.
    Thank you, Mr. Chairman.
                               __________
 Statement of William Wehrum Acting Assistant Administrator Office of 
         Air and Radiation U.S. Environmental Protection Agency
    Mr. Chairman, and members of the committee, I appreciate the 
opportunity to come before you today to testify on the status of the 
Environmental Protection Agency's efforts to develop the comprehensive 
rulemaking implementing the Energy Policy Act's Renewable Fuels 
Standard.
                     the energy policy act of 2005
    The Energy Policy Act of 2005, or EPAct, required EPA to take a 
significant number of specific actions that directly affect our 
nation's fuel supply and quality. Some of these actions have already 
been proposed or have taken effect, including the removal of the oxygen 
standard for the Federal reformulated gasoline program, proposal of new 
gasoline benzene content standards to control mobile source air toxics, 
and the proposed listing of State boutique fuel requirements. However, 
a lot of work remains. As the Agency continues to work on all these 
actions, the most important and significant fuels requirement 
established in EPAct is a national renewable fuels standard, or RFS. 
Since increasing the amount of domestically-produced renewable fuels is 
a key element of the President's energy initiatives and supports his 
goal of reducing the country's dependence on imported oil, the Agency 
has placed the highest priority in preparing this major rulemaking. 
This effort has required significant resources for the regulatory 
development and impact analysis work and will require significant 
additional resources to implement it. EPA also understands the need to 
implement an RFS rulemaking that maximizes existing fuel production and 
minimizes impacts on the fuel distribution system.
    Interest in renewable fuels has grown significantly in recent years 
due to concerns about high fuel prices, our Nation's dependence on 
foreign oil, and emissions of greenhouse gases such as carbon dioxide. 
These are some of the reasons that the RFS program garnered such strong 
support during its development. The RFS program is critical, and as 
such, it is important that it be carefully developed and implemented 
for the long term.
                      the renewable fuels standard
    Under EPAct, the RFS program requires that increasing volumes of 
renewable fuel be blended into gasoline in the continental United 
States beginning in 2006. EPAct establishes the years for which the RFS 
is in effect and the required minimum annual volumes of renewable fuel. 
The renewable volume begins at 4 billion gallons in 2006 and increases 
to 4.7 billion gallons in 2007, 5.4 billion gallons in 2008 and 
continues to scale up to 7.5 billion gallons in 2012. EPAct requires 
that EPA annually establish the percentage requirement, which will 
apply individually to refiners, blenders, and importers to ensure the 
total volume of renewable fuels specified for that year in EPAct is 
achieved.
    That Act provided the Agency with less than 5 months to develop and 
implement the RFS program by regulation. With the close cooperation and 
support of our stakeholders, including renewable fuel producers and oil 
refiners, EPA was able to accomplish this by making use of a default 
requirement provided in the Act that only applies to 2006. Last 
December we promulgated a direct final rule to implement the default 
standard that allowed the program to begin in January without all the 
credit trading and compliance provisions that the full program 
requires. The default rule provided one additional year, until January 
of 2007, to implement the full program. Under the 2006 RFS default 
rule, refiners, importers, and gasoline blenders are collectively 
responsible for ensuring that the amount of renewable fuel volume used 
nationwide is at least 2.78 percent of the total gasoline used in the 
continental United States, as specified in EPAct. This equates to 
approximately 4.0 billion gallons of renewable fuel, of which both 
ethanol and biodiesel count. If the default standard is not met in 
2006, the rule specifies that the deficit volume of renewable fuel 
would carry over to the RFS requirement for 2007. Based on data of 
ethanol use so far in 2006, it is expected that in excess of 4.5 
billion gallons of renewable fuels will be used in the United States 
this year. Thus we do not anticipate that any deficit will be required 
to be carried over into 2007.
    Although the Act prescribed many aspects of the program, including 
the required renewable fuel volumes, it did not specify certain 
critical elements, such as defining a renewable fuel credit, what 
parties can generate credits, how credits are generated, when and by 
whom credits can be traded, the life of a credit, and the methodology 
for determining the appropriate value of credits for the different 
renewable fuels. Further, unlike past programs in which credit trading 
was used simply as a cost savings measure or a way to increase 
compliance flexibility, for the RFS program it will be a critical 
aspect of demonstrating compliance. Credit trading also differs under 
the RFS program because those parties that produce renewable fuels are 
not the same parties that must demonstrate compliance.
    The proposed RFS rulemaking must also clearly define the liable 
parties for the RFS program, establish how liable parties demonstrate 
compliance with their obligation, and establish the necessary 
compliance and enforcement provisions, including recordkeeping and 
reporting. Because this rule impacts parties not traditionally affected 
by motor vehicle fuel regulations, namely those in the business of 
producing renewable fuels, there is an additional layer of complexity 
not found in our other clean fuel programs. Many of the issues have 
been considerably more complex than originally envisioned.
                      program development overview
    In order to implement a rulemaking of this magnitude, it was 
imperative for the Agency to promptly enter into close dialog with the 
affected parties to understand how the RFS program would impact the 
stakeholders in real world applications. EPA directly engaged all the 
major stakeholders, including the refining industry, renewable fuel 
providers, and fuel marketers and distributors to gather information 
and suggestions which were incorporated into drafting the various 
compliance and credit trading provisions. Completion of a proposed 
rulemaking in an expeditious fashion was only possible by working 
closely with these stakeholders on the critical elements, including 
important provisions that offer maximum flexibility, such as the credit 
trading provisions, and limiting disruptions or changes in existing 
procedures, such as record keeping and reporting. Through close 
collaboration and cooperation, we believe the proposal will have broad 
stakeholder support allowing EPA to move forward quickly with a final 
rule.
                                closing
    Following extensive dialog with all stakeholders, along with the 
significant efforts of our own technical and legal staff, I am pleased 
to report that tomorrow, September 7th Administrator Stephen Johnson 
will sign this landmark proposal. We will be pleased to brief 
Congressional staff on the details of the proposal over the course of 
the next few days if requested. Following public review and comment on 
the proposal, our goal is to promulgate final RFS regulations early in 
2007.
    I want to thank you, Mr. Chairman and the members of the committee 
for your interest in the Agency's progress in developing this important 
rule. This concludes my prepared statement.
    I would be pleased to answer any questions that you may have.
                                 ______
                                 
          Responses by William Wehrum to Additional Questions 
                          from Senator Inhofe
    Question 1. It's extremely important that small refiners can 
compete in the market alongside with the majors. That's why I made sure 
that the renewable fuel standard included a small refiner exemption.
    I know of at least one small refiner that used to blend ethanol 
when they didn't have to because it made financial sense for them to 
but since the Energy bill exercised its exemption because of high 
prices. Mr. Wehrum, how many small refiners have opted against 
participating in the RFS and did they give a reason for their decision?
    Response. EPAct provides small refineries with a temporary 
exemption from the renewable fuel standard requirements until 2011. 
However, small refineries may also waive the exemption and opt-in to 
the program. By opting-in to the program, these small refiners would be 
allowed to participate in the credit trading program just like the 
``obligated parties''--refiners, blenders, importers--who are subject 
to the renewable fuel standard. They would also be subject to the 
renewable fuel standard. Under the proposed RFS rule that the Agency 
announced on September 7, 2006, the small refineries would need to 
notify the Agency of their intention to waive the exemption and then 
register in the same way other obligated parties are required to do so. 
Because the RFS rulemaking is not final, no official registration 
process is currently in place to accommodate any official requests. 
Consequently, the Agency has no official count of how many small 
refiners may choose to waive the applicable exemption. However, based 
on preliminary discussions with the refining industry representatives, 
we are expecting that most small refineries (of which there are 
currently about 42) will take advantage of the automatic exemption, 
since they will still be able to participate in the credit trading 
program if they blend renewable fuels into gasoline.

    Question 2. How might the flexibility of the national RFS be 
impacted by various State biofuels mandates? Wouldn't you agree that 
State biofuels mandates required at various levels in various States 
effectively balkanize the fuel distribution and supply system and harm 
the flexibility of the RFS?
    Response. The RFS program as proposed is designed to implement the 
provisions of the Energy Policy Act of 2005 (EPAct) at a national level 
and provide maximum flexibility for obligated parties to meet the 
national standards through the credit trading program. Obligated 
parties (refiners, importers and blenders) that market fuel in areas 
with State biofuel requirements will need to evaluate their overall 
product slate and account for the Federal and State requirements as 
part of their compliance strategy at both levels.
    Because the Federal RFS program is not final, at this time it is 
difficult to determine exactly how these State programs will impact the 
overall flexibility of the Federal RFS program. However, during the 
legislative process leading to the Energy Policy Act of 2005, the 
Administration supported the Renewable Fuel Program with an important 
proviso: that the credit and trading program be included so as to allow 
flexibility and reduce costs. State mandates have the potential to 
limit this flexibility.

    Question 3. Mr. Wehrum, as you know I strongly believe that Federal 
policies should increase domestic motor fuel supplies. My legislation, 
the Gas PRICE Act would streamline the permitting process for both oil 
and biofuel refineries. Similarly, several members of this committee 
sent Administrator Johnson a letter recommending that EPA reclassify 
fuel ethanol plants under the Clean Air Act so that they may be 
permitted faster. Is EPA going to grant the bipartisan request?
    Response. We are currently considering the letters sent by members 
of Congress along with the public comments submitted on the March 9, 
2006 proposed rule to reclassify ethanol plants under the Clean Air 
Act. We anticipate taking final action on the proposal in early 2007.

    Question 4. Mr. Wehrum, as you know the RFS was crafted to provide 
flexible and efficient compliance across the country. Please provide 
the committee with a sense as to how that goal was maintained in the 
proposed rule.
    Response. EPAct prescribed many aspects of the RFS program, 
including the minimum volume of renewable fuel to be used and the 
requirement to establish a credit trading program. The proposed RFS 
rule would establish a program that allows for all qualified renewable 
products to participate, including renewable ethanol made from corn and 
cellulosic biomass, biodiesel, and renewable diesel. It would also 
establish a mechanism to calculate credits for qualified renewable 
products based on energy content as compared to that of ethanol. 
Further, the credit trading program would afford refiners maximum 
flexibility by allowing obligated parties to meet the standards through 
the use of credits. The credit trading scheme as proposed would be an 
open market program allowing parties to sell or trade credits for 
compliance and bank up to 20 percent of the credits generated in one 
compliance year, for use in the next compliance year. Thus, renewable 
fuels could continue to be blended and consumed where it is most 
economical to do so.
    The RFS proposal was developed through extensive coordination with 
the affected industry sectors, including renewable fuel producers, 
petroleum refiners, product distributors and marketers, and other 
critical parties. Where possible we utilized existing compliance 
mechanisms to reduce the record keeping and reporting burden on 
affected parties. We believe that these efforts helped to ensure that 
the proposed RFS program provides for flexible and efficient 
compliance.

    Question 5. What are the renewable fuels that might qualify to 
receive credits under the September 7, 2006 draft Renewable Fuels 
Standard (RFS) preliminary rule and what ``test'' will be employed to 
determine whether a future fuel might qualify? The Energy Policy Act 
amended Section 211 of the Clean Air Act to define a renewable fuel as 
follows:

    (i) IN GENERAL.--The term `renewable fuel' means motor vehicle fuel 
that--
    (I)(aa) is produced from grain, starch, oilseeds, vegetable, 
animal, or fish materials including fats, greases, and oils, sugarcane, 
sugar beets, sugar components, tobacco, potatoes, or other biomass; or
    (bb) is natural gas produced from a biogas source, including a 
landfill, sewage waste treatment plant, feedlot, or other place where 
decaying organic material is found; and
    (II) is used to replace or reduce the quantity of fossil fuel 
present in a fuel mixture used to operate a motor vehicle.
    By this definition, would diesel fuels derived from coal or by the 
Fischer-Tropsch process from non-biogas methane qualify? A slide 
included in an EPA OTAC presentation earlier this year to illustrate 
the Agency's ``non-exclusion principle'' included both of these fuels 
as ``potentially qualifying'' for credits. Likewise, would MTBE from a 
landfill gas source potentially qualify? How would the fossil fuel use 
associated with ethanol production influence the interpretation of 
subsection (II) if findings such as those advanced by Dr. David 
Pimintel at Cornell University are found to be true?

    Response. The RFS proposal is designed to have the flexibility to 
cover the range of renewable fuels produced today as well as any that 
might be produced in the future, so long as they meet the Act's 
definition of renewable fuel and have been registered and approved for 
use in motor vehicles. We believe that the proposed program, if 
finalized, would provide a significant amount of encouragement for the 
development, production, and use of renewable fuels to reduce our 
dependence on petroleum. In general, renewable fuels must be produced 
from plant or animal products or wastes, as opposed to fossil fuel 
sources. Valid renewable fuels would include ethanol made from starch 
seeds, sugar, or cellulosic materials, biodiesel (monoalkyl esters), 
non-ester renewable diesel, and a variety of other products. Both 
renewable fuels blended into conventional gasoline or diesel and those 
used in their neat (unblended) form as motor vehicle fuel would 
qualify. The proposal provides further details on the renewable fuels 
that would be allowable under the proposed standard.
    You also inquired about whether diesel fuels derived from coal or 
by the Fischer-Tropsch process from non-biogas methane qualify as a 
renewable fuel. Any diesel fuel derived by the Fischer-Tropsch process 
or any other process would qualify only if the feedstocks utilized to 
make the fuel were renewable. Further, you inquired whether MTBE from a 
landfill gas source potentially qualifies as a renewable fuel. Based on 
the interpretation set forth in the proposal, this indeed could qualify 
as a renewable fuel. However, since the production of MTBE involves the 
combination of renewable methane with nonrenewable isobutylene, a 
gallon of MTBE would not qualify as a full gallon of renewable fuel 
under our proposal. Instead, it would qualify as 0.3 gallons.
    Finally, you asked how the fossil fuel use associated with ethanol 
production would influence the interpretation of subsection (II) if 
findings such as those advanced by Dr. David Pimintel at Cornell 
University are found to be true. In such a case, neither our definition 
of renewable fuels nor the number of credits we attribute to any 
particular renewable fuel would be affected. It is important to note 
that Section 211(o)(1)( C)(i) (II) is directed at the fuel mixture 
itself, and whether the fuel itself is from fossil fuel sources. It 
does not address the use of fossil fuel in the production process, such 
as the use of fossil fuel to produce thermal energy used in the 
production process. Dr. Pimentel's concerns about ethanol production 
would only potentially impact our treatment of ethanol if we were 
basing credit values on lifecycle analyses that take into account such 
things as the production process. Although we seek comment on basing 
credits on lifecycle performance, our proposal only uses the energy 
content of the fuel itself in comparison to ethanol to establish credit 
values.
                                 ______
                                 
          Responses by William Wehrum to Additional Questions 
                        from Senator Lautenberg
    Question 1. In your testimony, you indicated that EPA did not 
intend to act upon California's request for a waiver to allow its 
limits on greenhouse gas emissions from cars to take effect, prior to 
the Supreme Court's decision in the Massachusetts v. EPA case it is 
hearing this term.
    Will the Administration similarly wait for the Supreme Court's 
decision in the Duke Power case to issue its final emissions increase 
rule affecting the New Source Review program? If not, why not?
    Response. The primary legal issue in the proposed rulemaking 
concerning the Emissions Test for Electric Generating Units (70 FR 
61081, October 20, 2005), the Agency's authority to adopt an hourly 
emissions rate test, is not squarely before the Court in Duke. 
Accordingly, the agency does not believe that the timing of the Duke 
decision should affect the schedule for that rule.

    Question 2. If EPA's New Source Review proposal to measure hourly 
allowable emissions instead of actual annual emissions had been in 
place 10 years ago, how many of the existing enforcement cases against 
power plants could have been brought?
    Response. The NSR reform rules plainly and expressly state that 
they are to be applied to changes that post-date the rules' respective 
effective dates and thus do not have any impact on the existing 
enforcement cases. EPA intends to continue to vigorously pursue the 
existing enforcement cases and other matters in negotiations.

    Question 3. Could you outline the relative amount of greenhouse gas 
tailpipe emissions that would result from using ``cellulosic'' ethanol, 
as compared to ``coal-to-liquids'' fuels?
    Response. The combustion of biomass-based fuels, such as ethanol 
from cellulosic feedstock, generates CO2. However, the 
emissions released in combustion do not measure the greenhouse gas 
impacts of different fuel types. For example, CO2 emitted 
from biomass-based fuels combustion would not increase long-term 
atmospheric CO2 concentrations since the biogenic carbon 
emitted is fully offset by the uptake of CO2 resulting from 
the growth of new biomass. However, different biomass fuels have 
different embedded levels of fossil fuels used in their production. 
Consequently a ``fullfuel-cycle'' analysis is required to estimate the 
greenhouse gas emissions of different fuel types.
    Coal-to-liquid (CTL) fuels are similar to petroleum based fuels in 
that the CO2 emitted during combustion of the fuel is of 
fossil origin. In addition, when the full-fuel-cycle emissions are 
taken into account, some analysts have found that CTL fuels would have 
greater greenhouse gas emissions than petroleum fuels (although this 
difference can be substantially reduced if carbon capture and storage 
technologies were used in the CTL process).
    To sum up, considering full-fuel-cycle emissions, the use of 
cellulosic ethanol would result in significantly less greenhouse gas 
emissions as compared to the use of grain ethanol, gasoline or CTL 
fuels.
                                 ______
                                 
          Responses by William Wehrum to Additional Questions 
                         from Senator Jeffords
    Question 1. In your written testimony, you describe the challenges 
EPA faced in developing the RFS rule it proposed on September 7, 2006. 
I want to better understand the relationship between those challenges 
and the length of time it took EPA to put this proposed rule together. 
What was the most challenging part of the rule, and how long did it 
take to resolve it?

    Response. Regulatory actions of this magnitude and complexity often 
take multiple years to develop and implement. Prior to embarking on the 
development of the comprehensive proposal that was just announced on 
September 7, 2006, EPA had to develop and promulgate a default rule to 
implement EPAct's provisions for the 2006 RFS standard. Concurrently, 
EPA was also initiating efforts for developing the comprehensive RFS 
proposal. Development of the comprehensive program required 
establishing a credit trading program. This program went beyond the 
involvement of traditional responsible parties (refiners, importers and 
blenders). The renewable fuel producers are now a critical component of 
the supply system because use of their products is now required for 
compliance with the RFS. Developing a system that was workable for the 
renewable fuel producers and that provides maximum flexibility and 
minimal impact in establishing the RFS was the most challenging aspect 
of the rule development process.
    The RFS proposal was developed through extensive coordination with 
the affected industry sectors, including renewable fuel producers, 
petroleum refiners, product distributors and marketers, and other 
critical parties. Understanding the transactions between these sectors, 
how they will change, how to monitor them and how to design a flexible 
and effective credit trading program allowing for all potentially 
qualifying renewable products to participate was very complicated. We 
also utilized existing compliance mechanisms and business practices 
when possible to reduce the record keeping and reporting burden on 
affected parties. As a direct result of these efforts, we believe we 
have broad support for the RFS program as proposed

    Question 2. Have you estimated the effects of the rule you are 
proposing tomorrow on the supply of Clean Air Act compliant motor 
fuels?
    Response. As part of the analysis of the impacts of the proposal, 
we evaluated the impacts on supply of motor vehicle fuels from 
increased renewable fuel use. We conducted an initial assessment of the 
changes refiners would need to make in order to blend additional 
ethanol into their gasoline, including the removal of MTBE and its 
replacement with alkylate and ethanol and the removal of butane to 
maintain the appropriate RVP of the fuel blend. We then estimated the 
net impact on gasoline production which resulted from all these changes 
and determined that there would be a net savings of gasoline produced 
from crude oil of 1.3 to 2.7 percent depending on the volume of ethanol 
use assumed in the calculation. This analysis does not account for all 
the impacts, however, due to the petroleum used in growing and 
transporting ethanol. Therefore we also used the GREET (Greenhouse 
Gases, Regulated Emissions, and Energy Use in Transportation) Model 
developed by Argonne National Laboratory to estimate the lifecycle 
petroleum impacts. This analysis resulted in an estimated 1.0 to 1.6 
percent decrease in all petroleum use in the entire transportation 
sector, again, depending on the volume of ethanol used.
                               __________
 Statement of Alexander Karsner Assistant Secretary, Office of Energy 
       Efficiency and Renewable Energy, U.S. Department of Energy
    Mr. Chairman and members of the committee, I appreciate the 
opportunity to testify today on biofuels. To paraphrase President Bush 
in his State of the Union address this year, reducing America's 
dependence on oil is an imperative for our time, and the need for a 
diverse supply of domestic energy sources has never been greater. 
Biofuels are among the most promising near-term replacements for liquid 
transportation fuels since they offer a renewable, essentially carbon-
neutral energy source that can help to meet a portion of our 
transportation fuel needs with domestic production. If growth in the 
use of biofuels outpaces our Nation's increasing demand for liquid 
transportation fuels, we can reduce our dependence on foreign oil. In 
addition to increasing our energy security, the production of biofuels 
can contribute to the domestic economy, especially rural communities.
    Biofuels play a significant role in the President's Advanced Energy 
Initiative, a broad program designed to change the way we power our 
homes, businesses, and vehicles by developing cleaner, more affordable, 
and more reliable domestic alternative energy sources and technologies. 
I would like to give you an overview of the Department of Energy's 
(DOE) programs in biofuels, specifically research into ethanol and 
cellulosic ethanol.
    Ethanol is now sold across the U.S. with plants expanding to States 
outside the traditional corn-growing areas. As of May 2006, 101 ethanol 
plants were producing nearly 4 billion gallons of ethanol with the 
capacity to produce 4.8 billion gallons. Based on information from the 
Renewable Fuels Association, by 2008, we expect this capacity to 
increase 45 percent with the addition of 42 new plants and the 
expansion of seven existing plants. Almost all the ethanol produced at 
these plants is derived from corn and other starch-based feedstocks.
    To put U.S. ethanol use--and the extent of our oil dependence--in 
perspective, the amount of ethanol produced in 2005, approximately 4 
billion gallons, represents less than three percent of liquid highway 
transportation fuel use. By contrast, one reason Brazil is able to meet 
20 percent of its liquid transportation fuel needs with ethanol is 
because Brazil uses approximately 1/20th (5 percent) of the amount of 
liquid transportation fuels used in the U.S. Brazil uses a sugar cane 
feedstock, whereas U.S. ethanol is largely derived from corn. Given 
land area required for corn production and growing U.S. demand for 
transportation fuel demand, we estimate that the maximum amount of corn 
ethanol that the U.S. could produce on a sustainable basis is 
approximately 18 billion gallons, or about 13 percent of current 
transportation fuel use (by National Corn Growers Association 
estimates). Clearly, producing ethanol cost competitively from other 
feedstocks is essential to helping reduce our dependence on oil.
                           cellulosic ethanol
    While ethanol made from corn is an important blend agent for 
gasoline, corn represents only a small fraction of biomass feedstock 
that can be used to make ethanol. Ethanol can also be produced from 
cellulose, the main component of plant cell walls and the most common 
form of biomass. Cellulosic biomass has the potential to provide a 
clean, abundant, domestic, renewable resource that can make a major 
near-term contribution to increasing supplies of liquid transportation 
fuel.
    The Biofuels Initiative, a key component of the President's 
Advanced Energy Initiative (AEI), seeks to accelerate research and 
development (R&D) to make cellulosic ethanol commercially competitive 
by 2012 and help reduce the Nation's dependence on foreign oil. In 
order to meet these goals, the Department developed targets to help 
guide its efforts. The Office of Energy Efficiency and Renewable Energy 
(EERE) established a near-term energy cost goal of $1.07/gallon of 
cellulosic ethanol by 2012.
    Many materials currently regarded as wastes such as corn stalks, 
straw, and wood chips could be converted to ethanol along with 
dedicated energy crops, including a number of fast-growing trees and 
grasses. While chemically identical to ethanol produced from corn, 
cellulosic ethanol exhibits a net energy balance that may be as much as 
three times higher than corn ethanol. In addition, because energy crops 
reabsorb carbon dioxide that is emitted when they are combusted, the 
use of biofuels sets up a cycle that leaves a low net level of 
greenhouse gas emissions in the atmosphere.\1\
---------------------------------------------------------------------------
    \1\Wang, M.Q., 2002, ``Impacts of Greenhouse Gas Emissions of Using 
Alternative Transportation Fuels with Advanced Vehicle Technologies, in 
Global Climate Change and Transportation: Coming to Terms'', pp.65-77, 
Eno Transportation Foundation, Washington, DC.
---------------------------------------------------------------------------
    However, while making ethanol from cellulose would dramatically 
expand the types and amount of available biomass feedstock that can be 
used to make ethanol, it is more technically difficult--and 
consequently far more expensive--than producing ethanol from corn. In 
order to expand the available resource base for fermented sugars and 
lower the cost of inputs, the Department's research is concentrating on 
developing cost-effective means to use non-starch, non-food-related 
biomass such as trees, grasses, and waste materials as fuel feedstocks. 
The goal is to find production methods that will enable us to convert 
ordinary low-value plant materials such as corn stalks, sawdust, or 
waste paper into fuel ethanol, and to do so cost-effectively and on a 
large industrial scale.
                           eere's biomass r&d
    EERE's research is focused on three areas: feedstock 
infrastructure, platforms R&D, and utilization of platforms outputs. 
Feedstock activities are directed toward reducing the cost of 
collecting and preparing raw biomass, and for the sustainable 
production and delivery of future energy crops. EERE's efforts in this 
area aim to ensure the availability of cost-competitive, sustainable 
feedstocks by 2012.
    A joint U.S. Department of Agriculture (USDA)/DOE study of 2005, 
the so-called ``Billion Ton Study'', indicates that there are enough 
agricultural and forestland resources in the U.S. to sustainably 
produce up to 1.3 billion tons of biomass feedstocks by 2030. This 
would be enough feedstock to potentially produce at least 60 billion 
gallons of ethanol. We stress that this is a resource potential study, 
not an economic study for the future. The study assumes that the new 
feedstock infrastructure includes the collection and use of 
agricultural and forest residues as well as the growth by U.S. farmers 
of dedicated energy crops. Different regions could potentially support 
different feedstock crops--for example, switchgrass in the South 
Central region and willow in the Northeast.
    Our activities relating to Platforms R&D focus on reducing the 
cost, and increasing the quality, of outputs from biochemical and 
thermochemical conversion processes. These processes produce 
intermediates such as sugars and syngas, which are then used to produce 
fuels, value-added chemicals and materials, and heat and power. 
Thermochemical R&D focuses on gasification and pyrolysis technology, 
while biochemical R&D centers on further improving enzymatic and 
pretreatment processes, integrating these two steps in the conversion 
process and reducing the cost of sugar. These activities will help 
develop technologies to be used in producing cellulosic ethanol at a 
competitive price.
    Finally, the program's strategy is to integrate these technologies 
and processes into operating biorefineries. DOE recently issued the 
Commercial Demonstration of an Integrated Biorefinery System 
Solicitation, which was authorized under section 932 of the Energy 
Policy Act of 2005 (EPACT). This solicitation was designed to develop 
industrial-scale demonstration of an integrated biorefinery system 
using a wide variety of lignocellulosic feedstocks such as trees, 
switchgrass and corn stover, including the collection and treatment of 
the feedstock. The aim of the biorefinery demonstration program is to 
show that such a facility could be operated profitably without Federal 
subsidies, once initial construction costs are paid, and easily 
replicated. The Department plans to select the best proposals and begin 
funding projects with Fiscal Year 2007 appropriations.
                    working with the private sector
    To obtain key industry and academia stakeholder input for 
successful strategies to develop biofuels, EERE's Biomass Program last 
month held a ``30x'30'' workshop. The ``30x'30'' refers to the 
theoretical potential of replacing 30 percent of current U.S. gasoline 
consumption with ethanol, or producing about 60 billion gallons of 
ethanol by the year 2030. Over 130 experts from agriculture, 
automotive, fuels, chemicals, and other related industries came 
together to map out R&D and policy strategies for achieving the Biomass 
program's 2012 cellulosic ethanol cost goal and to consider pathways to 
maximize biomass use by 2030. The results will be integrated into a 
planning tool with input from other Federal agencies involved in 
biomass R&D, describing the technical and infrastructure challenges 
that would need to be overcome and to map out each agency's role in 
addressing them.
                 other multi-agency federal initiatives
    To this end, EERE's Biomass Program co-chairs with USDA a multi-
agency initiative. This initiative accelerates DOE's Biomass Program 
R&D activities, as well as some of DOE's Office of Science and USDA's 
bioenergy-related R&D, in accordance with the Biomass Research and 
Development Act of 2000. As part of this effort, DOE and USDA have an 
annual joint solicitation for the Biomass Grant Program addressing 
research, development, and demonstration of biomass-based products, 
bioenergy, biofuels, and related processes. EERE's Biomass Office is 
undertaking an effort to coordinate bioenergyrelated R&D at Federal 
agencies. The 30x30 workshop mentioned earlier was one of the initial 
coordinating efforts. EERE is holding planning meetings with other 
agencies, and regional workshops are being held to gather input from 
area experts in feedstocks, processing and conversion, production uses 
and distribution, and public policy. Additionally, the Renewable Fuels 
Standard and the Biofuels Initiative goals are being incorporated, 
consolidating an integrated and collaborative approach that will help 
us to achieve our national energy goals.
    To continue to build on the President's vision laid out in the AEI, 
DOE and USDA will co-host a national renewable energy conference to 
help create partnerships and strategies necessary to accelerate 
commercialization of renewable energy industries and distribution 
systems. The conference, Advancing Renewable Energy: An American Rural 
Renaissance, is scheduled for October 10-12 in St. Louis. The goal of 
the conference is to identify major impediments and critical pathways 
to get more domestically grown, renewable energy sources out of the 
laboratory and into the market as soon as possible.
    Consistent quality standards for biofuels, such as those that might 
be developed through the American Society for Testing and Materials 
(ASTM International) will enhance consumer acceptance and market 
penetration. DOE is interested in working with others in government and 
the private sector to accomplish this.
                    increasing demand and production
    Before I conclude, I would also like to mention the role that 
increased demand for ethanol will have on increasing ethanol 
production. The Renewable Fuels Standard (RFS), for example, has 
established a baseline for the use of renewable fuels. Authorized by 
EPACT, the RFS requires that four billion gallons of renewable fuels be 
blended with gasoline by 2006, growing to 7.5 billion gallons by 2012 
(with proportional growth beyond 2012). Additionally, the RFS calls for 
a minimum of 250 million gallons of ethanol to be derived from 
cellulosic biomass sources by 2013. These EPACT requirements provide a 
long-term commitment to farmers, renewable fuel producers, refiners and 
motorists that biofuels use will not be a temporary response to 
volatile oil prices and tight markets that can disappear as quickly as 
they appeared and consequently provide some measure of market stability 
to an emerging industry. The Administration supported these EPACT 
requirements.
                               conclusion
    I would like to end by emphasizing that biomass is an important 
domestic renewable energy resource that can help lead our Nation to 
greater energy independence. The Department is working diligently to 
meet the President's goals for 2012 and beyond, fostering biofuels 
technologies with a balanced, yet focused program of research, 
development, and deployment. We will continue to work with our partners 
in the academic community, at our National Labs, at other Federal 
agencies, and in private industry, putting our research dollars in the 
most promising areas to address critical technical barriers. With clear 
goals and strategies to achieve them, we believe that greater 
quantities of cost-competitive liquid biofuels are already in sight.
    Thank you. I would be pleased to respond to any questions the 
committee may have.
                                 ______
                                 
        Responses by Alexander Karsner to Additional Questions 
                          from Senator Inhofe
    Question 1. According to Dr. Collin's testomony, high natual gas 
prices have increased ethanol production costs 10 to 15 cents per 
gallon. Do you agree that if the goal is to reduce reliance on foreign 
countries and reduce prices for American families, then we must 
increase domestic gas production?
    Response. The Department of Energy agrees that increased domestic 
gas production is an important element in a deverse domestic energy 
mix. In addition, we are working closely with the ethanol production 
industry to reduce the amount of fossil fuel inputs, including natural 
gas. Our ethanol R&D will utilize new cellulosic feedstocks that can 
eliminate the need for natural gas consumption in the ethanol 
production process.

    Question 2. Mr. Karsner, it is my understanding that the relative 
high cost of feedstock is one of the factors holding back cellulosic 
ethanol production. How important is bioenergy crop research, like 
projects by the Noble Foundation and Ceres, Inc. to reduce these costs 
by increasing crop yields?
    Response. Reducing the cost of feedstocks in important for 
cellulosic ethanol production and work undertaken by private industry 
is important to enavle cost-competitive and sustainable feedstock 
supplies to enter the marketplace. The Department's Office of Science 
recently released a solucitation for two Bioenergy Research Centers to 
support genomic research for the production of bio-based energy fuels 
such as cellulosic ethanol. Potential advances include the lowering of 
feedstock costs through the development of enzymes to take adcantage of 
the wide variety of feedstocks that can be converted to ethanol in 
different regions of the Country.
    The Department has requested funding in FY 2007 to implement the 
concept of regional feedstock development partnerships to take 
advantage of this variety. Partnerships are needed because of the 
complexity of feedstock issues that incude basic and applied science to 
develop the feedstock resources; infrastructure feedstock needs for 
biorefineries including reliability, availability, and cost; and 
sustainability issues as they pertain to resource development. 
Partnership efforts will bring together Federal funding, the biofuels 
production industry, the grower community, and university researchers 
to better define the actual resource on a regional and local basis.

    Question 3. Witnesses have acknowledged that even with Federal and 
State subsidies ethanol is economic only when oil is pricedhigh. What 
is the ecomomic cost comparison between leasing out areas of Fedeal 
waters that are out of sight, beyon the reach of coastal currents to 
the shore and likely to contain plentiful reserves of high quality oil 
in return for royalty payments and bid bonuses, as compared to direct 
subsidies to refiners blenders of ethanol and Federal and State 
subsidies to agriculture interests? What is the lifting cost of a 
marginal barrel of oil fron the Outer Continental Shelf?
    Response. According to the Energy Information Agency (EIA), the 
latest data available (2004) for the averagelifting costs per barrel of 
oil in the ourter shelf was $4.25 per barrel of oil equivalent.
    The Department of Energy has not conducted a formal cost comparison 
between leasing in Federal waters and supporting the development of a 
domestic ethanol industry. However, the Administration views the 
potential for expanding domestic oil supplies and diversifying the 
Nation's transportation fuel mix as complementary activities for the 
diversification of the domestic energy supply and in reducing America's 
vulnerability to oil supply disruptions. the Advanced Energy Initiative 
(AEI) proposed accelerating development of efficient hybrid and clean 
diesel vehicles, domestic renewable alternatives to gasoline and diesel 
fuels, and advanced battery and hydrogen fuel-cell technologies.

    Question 4. Some ethanol proponents hold up flex fuel vehicles and 
E-85 as the answer to reducing the price of fuel even though it has 
less energy per gallon than gasoline. Consumer Reports recently 
concluded in an article titled ``The Ethanol Myth''that E-85 will cost 
consumers more money than gasoline in August, a 27 percent fuel-economy 
penalty means drivers would have paid an average of $3.99 for the 
energy equivalent of a gallon of gasoline. First, please briefly 
comment on those finding and second, considering that families want 
lower fuel prices, do you believe that the focus on E-85 is misplaced?
    Response. Consumer Reports has researched some of the issues 
surrounding use of ethanol as a transportation fuel. DOE believs that 
ethanol is a reality, not a myth and does not concur with the premise 
of the article. Ethanol supplied 4 billion gallons of transportation 
fuel last year and production is growing more rapidly than ever befor 
which should ensure that the volumetric requirement of the Renewable 
Fuels Standard goal of 7.5 billion gallons of renewable transportation 
fuel be used by 2012 is met or exceeded. Ethanol is only one of several 
policies and technologies the DOE is promoting to reduce transportation 
petroleum use such as hybrid vehicles, more efficient engines, light-
weight materials, cleandiesel engines and other alternative fuels and 
renewable fuels such as biodiesel. All these things together will help 
our Nation reduce its demand for petroleum fuel in the transportation 
sector with its commensurate benefits to the ecomomy and our national 
security.
    As the article points out, ethanol made from cellulosic sources 
(e.g., corn stalks for example instead of the corn itself) has 
environmental, economic, and energy benefits. Ethanol made from 
cellulosic sources requires less energy to make, generates lower 
emissions (both reactive and greenhouse gas) and is projected to be 
cost competitive with ethanol made from corn or similar crops. In 
addition, ethanol from cellulose would be just one of several valuable 
products such as plastics and chemicals made from ``bio-refineries,'' 
and most of the cellulosic resources do not compete with production of 
crops in terms of land use. Under the Advanced Energy Initiative, DOE 
is expanding research, development, and demonstration to make 
cellulosic ethanol cost effective by 2012.
    Futhermore, our analysis indicates that current variability of E-85 
cost structure does not reflect what a more mature langer-term cost 
structure is likely to be. Currently, almost all ethanol is priced as a 
blending component to replace methyl tertiary butyl ether in the 
marketplace. There are alreadu early signals that for E-85, the price 
structure will change as E-85 production volumes increase even for 
ethanol produced from corn. For example, in Minnesota, one of the 
leading E-85 States, a recent monthly survey found that the average 
price of E-85 was selling at 49 cents per gallon less than ``87'' 
octane gasoline, a 16 percent difference. Similar examples elsewhere in 
the Nation show that producers are offering ethanol at prices that 
deliver value to the consumer and expand consumer choices for fuels. 
With the tremendous potential that E-85 has a bulk transportation fuel, 
the Department believes that it is worth continued support.
                                 ______
                                 
        Responses by Alexander Karsner to Additional Questions 
                         from Senator Jeffords
    Question 1. Generally, it seems that DOE is more interested in the 
loan guarantee provisions of the Energy Policy Act of 2005 when it 
comes to developing ehtanol generally, and particularly, in developing 
cellulsic ethanol. In your discussions with ethanol producers, is there 
a preference for loan guarantees rather than grants?
    Response. Projected developers have expressed significant interest 
in both Sections 932 and the Title XVII provision incentives of the 
Energy Policy Act of 2005
    The grants under Section 932, paid for by the Federal Government, 
provide 40 percent of the total project costs. With such a commitment, 
they can usually leverage additional financings from lenders on 
generally faverable terms and conditions to cover the remaining 60 
percent. If they do obtain a loan for the remainder of the costs, then, 
at the end of the day, the project sponser pays virtually nothing to 
build a cellulosic ethanol refinery and divides the revenues from the 
sale of the refinery products to paying the debt to the lenders and 
paying themselves a dividend.
    Under the loan guarantee, the project sponsors must commit their 
own money to paying for a significant portion of the project costs in 
addition to the administrative costs and a Cost Subsidy fee. Assuming 
the project runs smoothly, the Federal Government never pays any money 
at all. The project operates under normal commercial conditions and its 
success virtually assures that similar projects can be financed and 
sustained without additional Federal incentives.
    It is too early to draw definitive conclusions regarding producer 
preferences, although it is fair to say that some producers prefer the 
less constrained nature of grants (on a case by case basisi).

    Question 2. I am also interested in the promotion of energy 
efficiency, in addition to the development of renewable fuels. I have 
been extremely concerned about efficiency programs, and particularly 
with the pace of new appliance and efficiency standards at DOE. For 
example, DOE and EPA have not yet proposed new Energy Star labling for 
on-demand hot water heaters, yet they have tremendous efficiency. What 
is DOE doing to accelerate the development of new efficiency standards?
    Response. On January 31, DOE submitted to Congress ahead of 
schedule an EPACT05 required report detailing the reasons for pat 
delaysand the Department's plan for expeditiously prescribing new and 
amended standards. The Department's plan considers both the backlog and 
meeting the additional EPACT 2005 statutory requirements, have been 
instituted. Productivity improvements in the rulemaking program are 
taking effect and will significantly increase the number of new 
standards to be issued. In Fiscal Year 2006, the program has already 
initiated five new rulemakings while continuing work on two others 
scheduled to be completed in Fiscal Year 2007.
    With respect to ENERGY STAR labling for on-demand hat water 
heaters, DOE is strongly committed to implementing an ENERGY STAR 
labling program for advanced technology residential water heaters. We 
are completing our technical and market analysis and expect to hold a 
stakeholder meeting in December, 2006. Criteria will be announced in 
late spring 2007. The program is anticipated to include all advanced 
technologies such as on-demand or instantaneous whole-house gas water 
heater, heat pump water heaters, gas condensing water heaters, and 
solar water heaters.
                               __________
     Statement of Dr. Keith Collins Chief Economist United States 
                       Department of Agriculture
    Mr. Chairman, thank you for the invitation to discuss the 
implications of the growing biofuels industry on American agriculture. 
Since the energy crisis of the 1970s, developing new energy sources 
from agricultural materials has been viewed as a way to expand the 
domestic energy supply and help lessen our dependence on imported oil. 
My comments today address recent growth in biofuels, the prospects for 
future growth, and the current and future implications of that growth 
for the U.S. agricultural economy.
                 ethanol market production and corn use
    In 2000, 1.6 billion gallons of ethanol were produced in the United 
States. By 2005, 4 billion gallons of ethanol were produced, a 150-
percent increase in 5 years. In 2006, nearly 5 billion gallons of 
ethanol are expected to be produced, a 1 year increase of 20 percent. 
Today, over 100 ethanol plants operate in 20 States. The Renewable 
Fuels Association reports 42 ethanol plants are under construction and 
another 7 are expanding. When that construction and expansion is 
completed, ethanol capacity in the United States will be 7.7 billion 
gallons per year.
    Despite the rapid growth in U.S. ethanol production, the 4 billion 
gallons produced in 2005 was equal only to about 3 percent of the 140 
billion gallons of motor gasoline used. However, ethanol's economic 
importance to agriculture is quite significant. In 2000, about 6 
percent of U.S. corn production was used to produce ethanol. About 14 
percent of the 2005 U.S. corn crop is estimated to have been used for 
ethanol, and USDA projects nearly 20 percent of the 2006 U.S. corn crop 
will be converted into ethanol. For the first time, in the 2006/07 corn 
marketing year, corn used in ethanol is expected to equal to the amount 
of corn exported. This rapid increase in the share of corn production 
used in ethanol highlights two key issues: (1) as more corn supplies 
ethanol plants, rising corn prices and increased corn acreage will have 
implications for other agricultural commodity markets and (2) because 
the supply of corn is relatively small compared with U.S. gasoline 
demand, other domestic sources of renewable and alternative energy must 
be developed to replace petroleum-based fuels if the United States is 
to reduce its dependence on imported oil.
    A number of factors have contributed to the rapid increase in 
ethanol production, including the 51 cent per gallon tax credit 
provided to blenders, high crude oil and gasoline prices, low corn 
prices, the Renewable Fuels Standard (RFS) under the Energy Policy Act 
of 2005, and the sharp reduction in use of ethanol's main oxygenate 
competitor, methyl tertiary butyl ether (MTBE).
                        ethanol production cost
    Another factor supporting ethanol expansion has been generally 
improving production economics. Ethanol production costs declined 
between 1980 and 1998. Technology improved over this period leading to: 
(1) a higher yield of ethanol per bushel of corn, (2) a lower cost of 
enzymes required for conversion, and (3) production automation which 
lowered labor costs. Energy input costs also fell over this period. 
Department of Agriculture (USDA) surveys indicate that between 1998 and 
2002 the average cost of producing ethanol (excluding capital costs and 
a rate of return on investment) remained unchanged at about 95 cents 
per gallon. Since 2002, the cost of producing ethanol has increased by 
10 to 15 cents per gallon due to the increased cost of energy 
(electricity and natural gas). Hence, USDA estimates that the current 
average cost of corn-based ethanol production is about $1.10 per 
gallon.
                     ethanol coproduct animal feeds
    An issue that has gained attention as ethanol production has 
expanded is the implication for animal feed supplies, which is the 
primary use of corn. When corn is used for ethanol, it is diverted from 
animal feed and other uses such as exports. However, different forms of 
animal feeds are produced as ethanol coproducts. The primary feed from 
dry-mill ethanol plants, which account for most of the new plants, is 
distillers dried grains with solubles (DDGS). About 17 pounds of DDGS 
are produced per bushel of corn used for ethanol. Distillers grains are 
sold one of three ways: DDGS with 13 percent moisture, wet distillers 
grains (WDG) with 67 percent moisture, or modified distillers grains 
with 50 percent moisture. Generally, animal nutritionists recommend a 
maximum of 25 percent DDGS for dairy feed rations on a dry matter basis 
and 40 percent DDGS for fed cattle. Monogastric poultry and hog rations 
can include up to 5-15 percent DDGS and are limited because of the high 
fiber content of DDGS.
    DDGS can be used in livestock feed rations as a supply of both 
energy and protein. About one-third of the corn used in the production 
of ethanol is available as a feed in the form of coproducts feeds from 
dry mill ethanol plants. While these coproduct feeds can offset some of 
the feed supply going into ethanol production, there are some 
limitations on the ability to effectively use the available coproduct 
feeds. For example, some producers have indicated feeding at the upper 
end or more of the ranges indicated above can reduce product quality. 
In addition, some producers have been concerned with the variable 
quality of the coproduct feeds, and not all of the coproduct feeds make 
it into the U.S. animal feed supply due to drying, handling, and 
shipping costs.
 ethanol's longer term prospects and implications for u.s. agriculture
    Industry analysts suggest that there may be another 60 or more 
ethanol plants under different stages of planning, and these plants are 
in addition to those currently under, or approved for, construction. 
The expectation is that production capacity could rise well above the 
current 7.7 billion gallon level of plants that are now operating or 
are under expansion or construction. New facilities under construction 
or in development tend to be large, with production capacity in the 
range of 50 to 100 million gallons per year. Ethanol production 
capacity could increase to 8.5 billion gallons by 2008-9 and more than 
10 billion gallons by 2010 if many of the planned plants are built. 
Some suggest ethanol production could be well above 10 billion gallons. 
This prospect raises two issues: is such a production capacity likely, 
and if so, what would it mean for U.S. agriculture?
    While many investments in biofuel production are planned, there are 
risks in the outlook that could slow or prevent continued rapid 
expansion. The major uncertainty is how the ethanol market will evolve 
over time if production of ethanol stays above the levels mandated by 
the RFS. There is no requirement for ethanol use to rise above 7.5 
billion gallons per year at this time, and for use to exceed 7.5 
billion gallons, ethanol must be competitive with gasoline in the 
marketplace. A combination of declining gasoline prices, sharply rising 
corn prices, or a decline in the price premium ethanol has had relative 
to gasoline could curtail the expansion in ethanol production. Let's 
evaluate these factors.
                      gasoline and ethanol prices
    The surge in oil prices has made biofuels much more cost 
competitive with gasoline, helping to spur new investment. Ethanol and 
biodiesel production will continue to expand as long as world petroleum 
prices and ethanol prices remain high. World oil prices have increased 
sharply since 1999, from an annual average nominal price for West Texas 
Intermediate (WTI) crude oil of $19.25 per barrel to over $41 per 
barrel in 2004 and an expected $70.29 per barrel in 2006 (Energy 
Information Administration's (EIA) short-term projection). EIA expects 
the price of crude oil to remain at about that level in 2007.
    Higher crude oil prices have translated into higher wholesale and 
retail prices for gasoline and diesel fuel. EIA estimates that the 
average retail price for gasoline rose from $1.85 per gallon in 2004 to 
a forecast $2.72 per gallon in 2006. The wholesale, or rack, price of 
ethanol has generally traded at a premium to wholesale gasoline prices, 
in the range of 35 to 50 cents a gallon prior to the past year. With 
the recent increase in gasoline prices and the price premium on ethanol 
over gasoline rising to about $1.00 a gallon this year, the ethanol 
rack, or wholesale, price reached the mid-$3.00 per gallon range 
earlier this year, making corn-based ethanol very profitable.
    Looking to the future, Chicago Board of Trade futures prices for 
ethanol in late August have been about $2.20 per gallon for December 
2006 delivery and December 2007 delivery. While these prices indicate a 
drop from this summer's prices and a reduction of the premium on 
ethanol over gasoline, they suggest continued strong and profitable 
prices at the ethanol plant level.
    Further, if the world price of crude oil remains higher than $50 
(in 2005 dollars) per barrel in the future, as projected by EIA, and 
corn prices do not rise considerably, then ethanol would be used as a 
gasoline extender, because ethanol would be competitive with gasoline 
and demand for ethanol would readily exceed the minimum levels in the 
RFS. Below about $30 per barrel for crude oil, there would no incentive 
to produce corn ethanol beyond the RFS, because ethanol would be 
unprofitable to produce and market as a fuel extender.
                              corn prices
    While the prospective gasoline and ethanol prices suggest a strong 
continued incentive to expand ethanol production, rising corn prices 
could reduce the profitability of corn ethanol and slow the expansion 
in ethanol production. Corn costs are the primary input cost in corn 
ethanol production. This summer the net feedstock cost of corn to 
ethanol plants, which is the cost of corn minus the value of the 
coproducts, has been about 50 to 60 cents per gallon of ethanol while 
the ethanol rack price has been in the range of $3.50 per gallon. 
During the past decade, the net cost of corn peaked during the summer 
of 1996 when it reached about $1.50 per bushel, about the same as the 
rack price of ethanol. The high corn price caused many ethanol plants 
to shut down that summer. With ethanol rack prices above $3.00 per 
gallon, ethanol plants can pay high prices for corn and remain 
profitable and in operation. We used a financial model for a 45-
million-gallon-per-year dry mill ethanol plant to estimate how high 
corn prices could go and plants still cover operating costs (excluding 
any return on invested capital). With ethanol prices at the plant of 
$2.25 per gallon, a dry mill plant could pay up to about $5.00 per 
bushel of corn and cover operating costs. The all-time record-high 
season-average corn price is $3.24 per bushel in 1995/96, and corn 
prices have exceeded $3 per bushel in only 3 other years. This analysis 
suggests with continued strong gasoline and ethanol prices over the 
next several years, corn prices will not discourage ethanol expansion 
unless corn prices increase to well beyond previous record-high levels. 
Another implication is that ethanol plants will likely be able to bid 
corn away from other users over a wide range of corn prices.
 agricultural market and program impacts of expanded ethanol production
    USDA released long-term projections of agricultural markets last 
February that indicated the general effects of increased ethanol 
production on agriculture. At that time, USDA projected corn ethanol 
production at about 7.5 billion gallons during the 2012/13 crop year. 
At that level, 2.75 billion bushels of corn would be used for ethanol, 
compared with 2.15 billion expected in 2006/07. As a result of the 
increase in ethanol demand for corn, the analysis indicated that corn 
acreage planted would rise to 85 million acres in 2012, up from 81.8 
million in 2005 and 79.4 million in 2006. Corn prices would increase to 
$2.60 per bushel compared with $1.99 in 2005/06 and an expected $2.35 
in 2006/07. U.S. corn feed use is projected to decline slightly and 
corn exports to rise slightly to 2.2 billion bushels in 2012/13, which 
would be well below corn use for ethanol. The increases in corn acreage 
and yield, which rises from 148 bushels per harvested acre in 2005 to 
158.5 bushels per acre in 2012/13, are sufficient to meet the rising 
ethanol and export demand. Soybean acreage declines from current 
levels, as some land shifts to corn production; soybean meal faces 
greater competition from corn ethanol coproduct feeds; and soybean 
exports decline from current estimates for 2006/07 as competition from 
Brazil and Argentina increases. These opposing forces result in soybean 
prices rising slightly through 2012/13 driven by acreage declines and 
the increase in soybean oil demand. Livestock profitability declines 
under higher corn feeding costs, but beef prices still decline due to 
the secular expansion of the cattle cycle that is just now beginning. 
Hog and broiler prices generally remain at the levels of the past 
couple of years.
    The USDA analysis depicts a farm sector that adjusts fairly readily 
to higher corn demand as crop prices are generally bid up with acreage 
shifts to corn. The livestock sector faces higher feed costs and incurs 
modest and manageable adjustment.
    While this analysis is comforting, it is out of date, as ethanol 
production appears to be on a path to exceed USDA's long-term 
projections released last winter. USDA will release a new analysis this 
winter. In the meantime, based on the discussion to this point, we can 
draw a series of conclusions about the ability of agricultural markets 
to adjust to rapid increases in biofuel production:

    1) Ethanol production is exceeding most analysts' expectations, 
including USDA projections. The 7.5 billion gallons of ethanol 
production previously forecast by 2012/2013 was mainly driven by the 
RFS. With expected market incentives, ethanol production may reach 7.5 
billion gallons over the next couple of years and could reach in excess 
of 10 billion gallons by 2010/2011.
    2) Gasoline and ethanol prices are likely to stay high enough over 
the next several years to maintain ethanol expansion. While there is 
much uncertainty about future crude oil prices, continued world 
economic growth and limited expansion in crude oil production are 
expected to maintain crude oil prices at relatively high levels over 
the next several years. Continued historically high crude oil prices, 
and in turn gasoline prices, will help maintain ethanol prices and 
foster continued growth in ethanol production. There is also 
uncertainty in the longer term as to the relationship of ethanol to 
gasoline prices. As ethanol production expands, the unusually high 
premium relative to gasoline prices seen this year will decline and in 
the longer term may reflect the energy content of the two fuels.
    3) Corn ethanol returns are such that plants can remain profitable 
over a wide range of corn prices. With continued relatively high crude 
oil, gasoline and ethanol prices, ethanol plants can pay much higher 
prices for corn and remain profitable. Various State incentives, 
particularly in Minnesota, Nebraska and South Dakota, add to ethanol 
returns and boost the price ethanol plants can pay for corn and remain 
profitable.
    4) Corn prices could set new record highs over the next 5 to 6 
years. Increased demand for corn for conversion into ethanol will 
likely lead to higher corn prices as corn must be bid away from other 
uses, and land must be bid into corn production and away from other 
crops. As ethanol production expands over the next several years, corn 
prices appear likely to set new records, especially if production is 
adversely affected by weather.
    5) Ethanol plants will likely continue to operate even if corn 
prices rise well above past record highs. Ethanol plants will be able 
to bid corn away from a variety of other uses over a wide range of corn 
prices. In the short term, export demand is more price sensitive than 
domestic feed use, so competition for corn supplies would result in 
larger percentage declines in corn exports compared with other uses.
    6) The United States will need substantial increases in corn 
acreage to prevent exports from declining and livestock profitability 
from falling. We can illustrate the need for more corn acreage with the 
following example. Assume ethanol production increases to 10 billion 
gallons in the 2010 crop year, corn yield per harvested acre rises to 
155 bushels per acre as projected by USDA's last long-term projections, 
ethanol yield is 2.8 gallons per bushel of corn, and 15 percent of corn 
used for ethanol returns to corn feed use in the form of DDGS. Then, if 
exports and feed use are to be maintained, corn acreage would have to 
rise to about 90 million acres in 2010, or 5.5 million more than in 
USDA's February baseline projections and nearly 10 million more than 
the average planted during 2005 and 2006. Econometric relationships 
suggest that corn prices would have to rise to around $3.10-3.20 per 
bushel, or near the current record high, to attract the 5.5 million 
more acres to corn. To the extent that corn exports and domestic feed 
use would decline from current levels under the higher corn prices, 
corn prices would be lower and less corn acreage would be needed to 
meet ethanol demand than indicated in this illustration. Stronger 
growth in corn yields per acre would also reduce the corn acreage and 
price effects of larger ethanol production.
    7) The Conservation Reserve Program (CRP), which has 36 million 
acres set aside from crop production for environmental reasons, may 
provide a source of additional crop acreage. As CRP contracts mature, 
increasing numbers of producers may not seek to reenroll in the CRP, 
and instead, bring previously idled land back into crop production. The 
CRP will likely be examined as part of the 2007 Farm bill process. The 
extent to which producers voluntarily exit the CRP or changes in CRP 
policy could reduce the effects of rapid ethanol expansion on corn 
prices noted above. To provide a rough indication of CRP land that 
could potentially be used to produce corn, we examined all CRP land in 
counties where 25 percent or more of harvested cropland was producing 
non-irrigated corn and soybeans. Only CRP land enrolled during general 
sign ups that could be farmed sustainably was considered. The higher 
environmentally-valued land enrolled in continuous sign ups and the 
Conservation Reserve Enhancement Program was excluded. This preliminary 
assessment concluded that 4.3 to 7.2 million acres currently enrolled 
in the CRP could be used to grow corn or soybeans in a sustainable way.
    8) It is likely other exporters (such as Brazil and Argentina) will 
have to supply more corn to the world market as world meat demand rises 
and U.S. corn ethanol production increases. As U.S. ethanol production 
expands, higher U.S. and world corn prices would provide an incentive 
for Brazil and Argentina to expand corn production and compete with 
U.S. corn in world markets.
    9) Corn stocks are likely to be increasingly tight and corn prices 
high, so the corn sector will be highly vulnerable to market 
disruptions ethanol plants and other users will be operating in a much 
riskier environment than we have today. The expansion in corn ethanol 
production is likely to keep corn stocks at low levels. Market 
disruptions are likely not only from supply disruptions due to natural 
causes but also from market participants such as China, who as 
witnessed in energy markets, can be a big demand-side factor. A 
systemic natural disaster, such as drought, could cause dramatic corn 
price increases under this tight market environment.
    10) Corn ethanol alone cannot greatly reduce U.S. dependence on 
crude oil imports. About 58 percent of all crude oil used in the United 
States is imported. In 2006, ethanol production will reach 5 billion 
gallons, which is equivalent on an energy content basis to only 1.5 
percent of U.S. crude oil imports.
    11) Cellulosic ethanol production appears to be the best renewable 
alternative for reducing crude oil imports. Given the current barriers 
to commercialization of cellulosic ethanol, such as high production 
costs relative to corn ethanol, corn ethanol will have the competitive 
advantage for some time. This suggests that the tightening corn supply 
and demand balance as more and more corn is converted to ethanol will 
not be relieved by cellulosic ethanol for some years into the future.
    12) Even so, ethanol growth is manageable in the near future. 
Markets will work over the longer term, but the allocation function of 
market prices can mean substantial costs for some sectors, so the 
evolution of ethanol bears close monitoring. Key factors that could 
ease the market adjustment are corn yield increases and acreage 
withdrawals from the CRP. Corn yields since 2004 have exceeded the 
long-term trend based on 1980-2003 data. If these yield increases 
reflect better a faster pace of improved seed varieties and adoption, 
trend corn yields could well exceed 155 bushels by 2010. Each 5 bushel 
increase in yield above current trend would be the equivalent of adding 
around 2.5 million acres to corn plantings, enough to produce an 
additional one billion gallons of ethanol.
                biodiesel production and soybean oil use
    Biodiesel, a biofuel substitute for petroleum diesel, is mostly 
made from soybean oil (estimated at over 90 percent), but some 
producers use other oilseed crops, palm oil, animal fats and recycled 
oils to make biodiesel. Biodiesel blends can be used in most diesel 
engines, with little modification. Because it has similar properties to 
petroleum diesel fuel, biodiesel can be blended in any ratio with 
petroleum diesel fuel and is most often blended at the 20 percent level 
(B20). Today, most B20 is used by government motor fleets, urban bus 
fleets, and school buses. In addition biodiesel has been used in farm 
equipment, marine engines and furnaces as a replacement for heating 
oil. The trucking industry has recently shown interest in using 
biodiesel and B20 is being offered at some truck stops.
    U.S. biodiesel production remained very small and flat until USDA 
created the Commodity Credit Corporation Bioenergy Program in fiscal 
year (FY) 2000 that encouraged biodiesel production through cash 
payments to producers. Mostly as a result of this program, biodiesel 
production jumped from 500,000 gallons in 1999 to 28 million gallons in 
2004. In 2005, 91 million gallons of biodiesel were produced with 65 
million supported by the program. The Bioenergy Program authorization 
from the 2002 Farm bill ends in FY 2006. Even so, with high diesel 
prices and new tax incentives, USDA forecasts biodiesel production will 
reach 245 million gallons in 2006, a 170-percent increase year over 
year and a 490-fold increase since 1999.
    As of April 2006, the National Biodiesel Board indicated there were 
65 commercial U.S. biodiesel plants. The annual production capacity of 
these plants ranges from 200,000 gallons to 30 million gallons, and 
they have a total capacity of about 400 million gallons. Most plants 
have an annual production capacity below 6 million gallons. Only 7 
plants have an annual capacity above 15 million gallons, however, newer 
plants currently under construction tend to be larger. The National 
Biodiesel Board reports that there were 50 new plants under 
construction as of April 2006 that are expected to add another 700 
million gallons to annual capacity. The annual capacity of these new 
plants ranges between 15,000 and 85 million gallons. Fourteen plants 
will have an annual capacity over 15 million gallons. Soybean oil is 
the most common feedstock used for biodiesel production, however, the 
largest plant under construction that will have an annual capacity of 
85 million gallons plans to use canola oil. Plants that use recycled 
cooking oil are generally smaller with capacities ranging between 
15,000 and 1 million gallons per year.
                       biodiesel production costs
    The cost of building a biodiesel plant depends on many factors, 
including plant capacity, location, plant design, and equipment cost, 
which varies by the type of feedstock used. A general rule of thumb for 
estimating the cost of installing a small biodiesel plant is about 
$1.00 per gallon of annual capacity, thus a 5-million-gallon capacity 
plant has an estimated installation cost of $5 million. However, due to 
economies of scale, the installation costs begin to decrease as plant 
size exceeds about 5 million gallons per year.
    When assessing the cost of producing biodiesel, soybean oil has a 
higher cost than some other feedstocks, such as yellow grease and beef 
tallow, but these alternatives cost more to process. The processing 
cost per gallon of biodiesel, including the cost of materials, labor, 
energy, plant depreciation, and interest averages about $0.50 per 
gallon for a 5 million gallon per year plant. The cost of the feedstock 
is by far the largest expense for a biodiesel producer. For example, 
soybean oil at current prices would cost about $1.95 to produce one 
gallon of biodiesel, resulting in a total production cost (excluding 
capital costs) of about $2.45 per gallon. Adding the expected return to 
investment and the costs for transportation, blending, and marketing 
would push the expected retail price of 100 percent biodiesel (B100) 
well over $3.00 per gallon. Until recently, the high cost of biodiesel 
has made it very difficult for biodiesel to compete in the diesel fuel 
market. However, with the recent surge in crude oil prices, diesel fuel 
prices have risen to historical highs, and biodiesel has become more 
cost competitive. Moreover, recent legislation has granted biodiesel a 
$1.00 per gallon excise tax credit and a $0.10 gallon small producer 
tax credit. Government incentives along with higher diesel fuel prices 
have made biodiesel production profitable and the industry is now 
expanding rapidly, much like ethanol. Biodiesel production is expected 
to continue growing rapidly over the next few years, with over 100 
plants expected to be on-line by the end of 2007. The pace of this 
expansion will depend on crude oil and diesel prices remaining 
relatively high.
biodiesel's longer term prospects and implications for u.s. agriculture
    The biodiesel industry is still young and relatively small, so as 
it grows to a larger scale and when an infrastructure is developed, the 
costs of producing and marketing biodiesel may decline. New cost-saving 
technologies will likely be developed to help producers use energy more 
efficiently, increase conversion yields and convert cheaper feedstocks 
into high-quality biodiesel. However, in the longer term, the biggest 
challenge may be the ability of the feedstock supply to keep up with 
growing demand. The supply of soybeans and other feedstocks available 
for biodiesel production will be limited by competition from other uses 
and land constraints. For the 2005/06 crop year, biodiesel production 
accounted for 5 percent of soybean oil use, and for 2006/07, biodiesel 
is expected to account for 2.6 billion pounds of soybean oil or 13 
percent of total soybean oil use. The 2.6 billion pounds equals the oil 
extracted from 229 million bushels of soybeans or 8 percent of 
estimated U.S. soybean production in 2006. Therefore, the rapidly 
increasing demand for biodiesel will tend to push feedstock prices up, 
causing production costs to rise.
                               conclusion
    In 2006, ethanol and biodiesel production is expected to total 
about 5.3 billion gallons, an important new source of demand for U.S. 
agriculture. Biofuel production is increasing farm income and rural 
economic activity. However, the supply of corn is relatively small 
compared with U.S. gasoline demand, so other domestic sources of 
renewable and alternative energy must be developed to replace oil and 
thus reduce U.S. reliance on imported oil. Biodiesel, which has grown 
more rapidly than ethanol in recent years on a percentage basis, can 
extend the U.S. supply of diesel fuel, but the supply of oil crops, 
animal fats and other biodiesel feedstocks are also relatively small 
compared to the size of the overall diesel fuel market.
    There is optimism that research may provide technological 
breakthroughs that lead to a significant expansion in ethanol produced 
from alternative biomass feedstocks. Ethanol's feedstock base could 
expand significantly with the advancement of technologies that 
economically convert switchgrass and other low-valued biomass into 
cellulosic ethanol
    Corn ethanol will have an advantage over biomass ethanol in the 
near future under existing biomass technologies. It will take continued 
research and development and time to increase the ethanol yield per dry 
ton of biomass. In addition, research and development is needed to 
increase energy crop yield per acre and reduce the conversion cost of 
biomass to ethanol. The Department of Energy is investing in this 
research and development in its Genomics: GTL program in the Office of 
Science and in its Office of Biomass programs. Research activities are 
also being conducted by USDA. In addition, the Department of Energy and 
the USDA recently announced joint funding for new research projects 
aimed at improving energy crops. Ensuring biofuels meet consistent 
quality standards will also be important for meeting consumer needs and 
market expansion.
    Mr. Chairman, that completes my statement.
                                 ______
                                 
           Responses to Additional Question by Keith Collins 
                           from Senator Boxer
    Question 1. Dr. Collins, although renewable fuels have been around 
for decades, wouldn't you agree that the renewable fuel standard--which 
you may know originated from this committee--has been the greatest 
driver for the growth of the industry?
    Response. I believe that the renewable fuel standard (RFS) has been 
a positive incentive for expansion of biofuels production, but it has 
not been the only driving force behind recent developments. By assuring 
a steadily increasing minimum market for biofuels, the RFS reduces risk 
for the biofuels industry and has been a factor in encouraging 
investment. However, several other factors have been critically 
important to the growth of the industry, including generally moderate 
corn prices and record-high ethanol prices. The high ethanol prices 
have been driven by high crude oil and gasoline prices, by the 51 cent 
blender tax credit, and by the phase-out of methyl tertiary butyl ether 
(MTBE), which has increased the demand for ethanol in reformulated 
gasoline markets. State initiatives and incentives also have likely 
been important drivers of the industry.

    Question 2. Dr. Collins, a significant portion of current crop 
yields is dedicated to ethanol production. Experts have repeatedly 
pointed out that further increases could jeopardize other agriculture 
commodities. Cargill even stated that the focus should be on food then 
feed and last fuel--a position at odds with other companies. What is 
your opinion on this looming controversy and the competing interests 
involved and to what extent are consumers and motorists considered?
    Response. About 19 percent of the 2006 U.S. corn production is 
expected to be used to produce ethanol. This is up from 6 percent in 
2000. Similarly, about 13 percent of 2006/07 soybean oil production is 
expected to be used to produce biodiesel, up from negligible levels in 
2000. If ethanol and biodiesel production maintain their rapid pace of 
growth, corn and soybean oil prices will rise due to increased demand. 
Users of these products domestically and abroad would have to pay more. 
How much more they would have to pay depends on several key factors. 
First, rising prices would cause more land to be bid into production 
for crops used in biofuels. Some of this land would come from other 
crops and some may come from cropland pasture or idle land. Second, 
substantial acreages of land in the long-term Conservation Reserve 
Program (CRP) are not in crop production. To the extent biofuels 
production causes crop price increases, producers are likely to put 
some of this land back into production as CRP contracts mature. Third, 
biotechnology has the promise of increasing the rate of growth of 
yields, and the higher the yield, the less acreage is needed to 
increase production and the lower the price increase would be for crops 
used to produce biofuels. Fourth, the production of ethanol results in 
the production of coproduct feeds, including corn gluten feed, corn 
gluten meal and distillers dried grains. The feeds can substitute for 
corn and soybean meal in livestock rations, so some of the crop 
production going to biofuels is returned to feed livestock in an 
alternative but useable form. Fifth, the use of other, non-grain 
feedstocks for biofuel production, as described in the Administration's 
Advanced Energy Initiativ, offers substantial promise for greatly 
increasing ethanol production without reducing the availability of 
grain for food and feed. The development of new feedstocks for biofuels 
offers new opportunities for America's farmers. Already, the USDA and 
the Department of Energy are funding basic research on the genetics of 
feedstocks to increase their availability and usability for the 
production of biofuels. Consequently, should biofuels production 
continue to grow rapidly, feedstock price increases can be expected, 
but given the mitigating factors just mentioned, the adjustment is 
likely to be manageable for consumers and motorists over the next 
several years.

    Question 3. Does ethanol need the 51 cent tax credit to be 
profitable?
    Response. When ethanol prices peaked earlier in 2006, ethanol 
producers would likely have been profitable without the tax credit. 
However, futures prices on the Chicago Board of Trade have fallen from 
the $3.00 per gallon range to near $2.00 per gallon. Assuming the 
futures prices exceed what some blenders are paying given 
transportation costs and long-term contracts, some ethanol producers 
are likely to need some portion of the credit to be profitable at these 
lower price levels. Under current market conditions neither the mandate 
nor the entire tax credit is solely responsible for driving demand. 
Under less favorable market conditions (e.g., lower crude oil prices) 
the tax credit will be critical to drive demand, and under even less 
favorable conditions - where despite the tax credit the cost of ethanol 
is greater than the cost of gasoline - the mandate will be the baseline 
for driving demand.

    Question 4. Dr. Collins your testimony refers to Federal and State 
``incentives'' for renewable fuels but also describes the ``market.'' 
Considering that the Energy bill mandated the market, are the various 
``incentives'' or subsidies appropriate? As an economist, don't they 
restrict the market's efficiency since it is very difficult to 
understand true cost and price?
    Response. The Energy Policy Act of 2005 mandated a market through 
the RFS. Biofuel production is currently projected to be well above the 
mandated minimum use levels. While subsidies and incentives are one 
factor behind biofuel production exceeding the RFS there are other 
market factors that also influence both production and use. If the RFS 
minimums are the public policy goals for biofuels production, then one 
could argue that the subsidies or incentives are not appropriate. 
However, without them, it is possible biofuels production would decline 
and consumer prices for biofuels would increase. Various State 
incentives, whether tax subsidies, direct subsidies or mandates for 
use, have the general effect of stimulating production or consumption 
or both. Generally, subsidies and incentives reduce market efficiency 
if they are applied in competitive markets with no externalities. Some 
economists argue that some subsidization is justified because the 
environmental and energy security benefits of biofuels are not 
reflected in their market prices. Thus, the market prices for biofuels 
may provide an under-incentive to produce and consume biofuels when 
both market and nonmarket costs and benefits are considered. However, 
it is very difficult to place a value on the external benefits of 
biofuels to appropriately set subsidy levels.

    Question 5. USDA and DOE both have loan programs for biofuels 
production--how are they different? How do USDA and DOE coordinate 
their programs to avoid duplication?
    Response. There is a possibility for overlap between USDA loan 
guarantee programs and DOE's Title XVII loan program. However, there 
are also significant differences between the programs including 
statutory objectives, beneficiaries, location of projects, scope of 
projects, and amount of credit support provided. While these 
differences are important, they do not avoid the possibility for 
overlap.
    The statutory objective of DOE's Title XVII loan guarantee program 
is to support projects that employ advanced (e.g., early commercial) 
technologies, and avoid, reduce, or capture air pollutants and 
greenhouse gas emissions while having a reasonable prospect for 
repayment of debt by the borrower. Projects that may be eligible for a 
Title XVII guarantee include renewable energy systems, fossil energy 
(including gasification), hydrogen fuel cells, nuclear energy 
facilities; carbon capture and sequestration practices and 
technologies; efficient electrical generation, transmission, and 
distribution technologies; efficient end-use technologies; production 
facilities for fuel efficient vehicles; pollution control equipment; 
and crude oil refineries. Thus the program covers among other things, 
alternative transportation fuels production and power generation. 
Guaranteed projects must be in the U.S. (or U.S. territories), and 
borrower eligibility is not restricted.
    While EPACT Title 17 does not limit the size of DOE's program, 
under the first solicitation, DOE will limit the total dollar amount of 
loan guarantee commitments to no more than $2 billion. Statutorily 
Title XVII guarantees cannot exceed 80 percent of total project costs. 
Given these statutory requirements, DOE's program can potentially 
support projects of larger sizes.
    USDA loan programs that can support biofuels production include the 
Renewable Energy Systems and Energy Efficiency Improvements Program, 
the Business and Industry (B&I) Guaranteed Loan Program, and the Rural 
Development Electric Programs. These programs can overlap with the DOE 
loan programs, but are targeted to support different purposes.
    The Farm Security and Rural Investment Act of 2002 (2002 Farm bill) 
established the Renewable Energy Systems and Energy Efficiency 
Improvements Program under Title IX, Section 9006. This section directs 
the Secretary of Agriculture to make loans, loan guarantees, and grants 
to farmers, ranchers and rural small businesses to purchase renewable 
energy systems and make energy efficiency improvements. Renewable 
energy systems include wind, solar, biomass (including biofuel 
production), or geothermal energy, or for producing hydrogen derived 
from biomass or water using wind, solar biomass, or geothermal energy 
sources. Eligible technologies funded under the Section 9006 program 
must be commercially available (i.e., technology in general use within 
the marketplace) or pre-commercially available (i.e., technology with 
documented operating history at scalable size, typically at least 1 
year past completion of start-up, shakedown and/or commissioning).
    Congress provided nearly $23 million to fund the program in each of 
fiscal years (FY) 2003 to 2006. In the first 4 years of the Section 
9006 program, USDA has awarded a total of $87.9 million in grants and 
$34.6 million in guaranteed loans to 832 agricultural producers or 
rural small businesses in over 40 States. The guaranteed loan program 
was initiated in FY 2005 with the publication of the Section 9006 
regulation. FY 2006 was the first full year of the guaranteed loan 
program. USDA anticipates the Section 9006 program will help farmers, 
ranchers, and small rural businesses reduce energy costs and support 
and stimulate rural economic development by helping agricultural 
producers and rural small businesses create new sources of income, 
create new jobs, and create new uses for agricultural products and 
wastes. Grants may not exceed 25 percent of the eligible project costs 
and guaranteed loans may not exceed 50 percent of the eligible project 
costs.
    In addition to differences in program objectives discussed above, 
the Section 9006 program differs from the DOE's Title XVII loan program 
in loan levels, eligible applicants, location of project, and phase of 
technologies. Based on statutory requirements, the Section 9006 program 
can provide a loan guarantee of up to $10 million or 50 percent of the 
total eligible project cost. Additionally, eligible applicants under 
the Section 9006 program are limited to farmers, ranchers, and rural 
small businesses and the project must be located in a rural area. The 
DOE program is not subject to these eligibility or location 
requirements, nor are they subject to a $10 million funding cap. 
Another fundamental difference in the programs is that the Section 9006 
program is targeted specifically for only renewable energy systems, 
whereas under Title XVII, DOE can provide loan guarantees for various 
energy technologies and practices.
    Projects to convert biomass into biobased products and produce 
bioenergy are eligible for financing under the B&I Guaranteed Loan 
Program. The overall purpose of the B&I Guaranteed Loan Program is to 
help create jobs and stimulate rural economies by providing financial 
backing for rural businesses. The program provides guarantees up to 80 
percent of a loan made by a commercial lender. Loan proceeds may be 
used for working capital, machinery and equipment, buildings and real 
estate, and certain types of debt refinancing. Assistance under the B&I 
Guaranteed Loan Program is available to virtually any legally organized 
entity, including a cooperative, corporation, partnership, trust or 
other profit or nonprofit entity, Indian tribe or Federally recognized 
tribal group, municipality, county, or other political subdivision of a 
State. The maximum aggregate B&I Guaranteed Loan(s) amount that can be 
offered to any one borrower under this program is $25 million. A 
maximum of 10 percent of program funding is available to value-added 
cooperative organizations for loans above $25 million to a maximum 
aggregate of $40 million. Providing financial support for projects 
related to biobased products and bioenergy production is viewed as a 
way to create new market opportunities for farm and forestry resources. 
From FY 2001 to FY 2005, 10 such loans were guaranteed with almost $77 
million awarded under the B&I Guaranteed Loan Program.
    Again, there are differences between the DOE's Title XVII loan 
program and the B&I Guaranteed Loan Program in terms of program 
objectives, loan levels, eligible applicants, and project location. For 
example, B&I loan guarantees are not available for projects in cities 
or towns with a population of greater than 50,000 inhabitants or the 
urbanized area contiguous and adjacent to such a city or town. Energy 
technologies funded under the B&I program must be commercially 
available. In addition, the maximum B&I guaranteed loan that can be 
offered to any one borrower is $25 million. The DOE program is not 
subject to these requirements.

    Question 6. Dr. Collins, Thank you for your candor in saying that 
USDA's 2006 baseline projections of corn use and ethanol demand are 
``out of date.'' That baseline projection suggested that ethanol demand 
could be balanced by lower feed use, slowed export growth, higher corn 
yields, and manageable cost increases for livestock. And yet that 
baseline project from last February is still the basis for most 
rationale that ethanol production could increase to 16 billion 
gallons--instead of the 7.5 billion gallons mandated by the Energy 
Policy Act.
    In your testimony, you raised some pertinent observations:

     The corn complex will be increasingly volatile in the next few 
years because of tightness brought on by ethanol,
     Argentina and Brazil will take away some of the US market share 
of corn exports,
     Corn prices are likely to set record highs in the next 5-6 years 
affecting other crops and livestock, and
     That without large increases in corn acreage livestock 
profitability will fall.

    Coming from a corn-deficit State that has a lot of livestock, these 
observations from the Chief Economist of the U.S. Department of 
Agriculture--one who is widely respected I might add--do give me pause.
    We've certainly seen some scenarios laid out for ethanol growth and 
we've seen projections for corn profitability under various market 
scenarios. Can you tell me Dr. Collins, is there any work completed or 
underway at the USDA that shows how badly livestock could get impacted 
from $3.20/bu corn--a level you suggest is possible if not likely?
    Or any look at the long term impact on livestock production from an 
ethanol sector that produces 16 billion gallons as some of the 
advocates and even the National Corn Growers Association says is an 
attainable goal?
    Response. The U.S. Department of Agriculture (USDA) conducts a 10-
year analysis of the agricultural economy each year and usually 
releases the results in February. This February's analysis will reflect 
the recent and projected substantial growth in biofuels and will 
project the implications for the livestock sector. Similarly, the next 
``U.S. and World Agricultural Outlook'' report by the Food and 
Agricultural Policy Institute of the University of Missouri and Iowa 
State University is also expected to incorporate stronger biofuels 
production and assess the implications for the livestock sector. One 
recently published study, ``25 percent Renewable Energy for the United 
States by 2025: Agricultural and Economic Impacts'' (available at 
www.25x25.org), funded by the 25x25 Work Group of the Energy Future 
Coalition projected the farm economy to 2025 assuming renewable energy 
provided 25 percent of the nation's energy consumption. The study 
assumed corn yield growth rates 50 percent greater than in the USDA's 
last long-term baseline projections. Under that assumption and others, 
the study projected corn prices of $2.83 per bushel by 2010, cattle net 
returns 1.5 percent above their baseline, hog net returns 9 percent 
below their baseline, and chicken net returns 4.2 percent below their 
baseline. It is likely that a number of studies of the longer term 
effects of biofuels will be produced during the coming year. USDA plans 
to sponsor a workshop to bring together analysts that are assessing the 
impacts of the emerging biofuels market.

    Question 7. Dr. Collins, in your testimony you speak to ethanol and 
biodiesel. However, it seems as if biodiesel may be harmed at the 
expense of ethanol. More acreage for corn means less for biodiesel. Is 
there a way to increase the production of both without harming the 
other? What other viable biodiesel feedstocks are there?
    Response. In the short-term, higher corn prices and greater 
coproduct feed production appear likely to attract land into corn and 
away from soybeans. However, as technology improves and becomes more 
cost effective and producers try alternative crops, a wide array of 
feedstocks may be used to produce economically both ethanol and 
biodiesel. For example, ethanol may be produced from corn, corn fibers, 
corn stover, switchgrass, rice straw, wheat straw, food residues, and 
short rotation trees and underutilized trees. Biodiesel may be produced 
from an array of vegetable oils, including soybean, rapeseed and 
sunflower as well as from yellow grease.
                                 ______
                                 
          Response by Keith Collins to an Additional Question 
                          from Senator Carper
    Question 1. Some ethanol proponents hold up flex fuel vehicles and 
E-85 as the answer to reducing the price of fuel even though it has 
less energy per gallon than gasoline.
    Consumer Reports recently concluded in an article titled ``The 
Ethanol Myth'' that E85 will cost consumers more money than gasoline. 
For example, with the retail pump price of E85 averaging $2.91 per 
gallon in August, a 27 percent fuel-economy penalty means drivers would 
have paid an average of $3.99 for the energy equivalent of a gallon of 
gasoline.
    First, please briefly comment on those findings and second, 
considering that families want lower fuel prices, do you believe that 
the focus on E-85 is misplaced?
    Response. The article in Consumer Reports appears to be factually 
correct. The energy content of gasoline as measured in British Thermal 
Units (BTUs) is about 115,400 compared to only 75,670 for ethanol (data 
from the National Highway Traffic Safety Administration). Thus, a 
gallon of 100 percent ethanol only has two-thirds of the energy content 
as a gallon of 100 percent gasoline, and consequently, gas mileage for 
ethanol is expected to be less than that for gasoline in conventional 
or flex-fuel vehicles.
    A blend of 85 percent ethanol and 15 percent gasoline would have an 
energy content of 81,630 BTUs, about 70 percent of the energy content 
of 100 percent gasoline.
    Consumer Reports does err, however, in asserting that ethanol or 
E85 will drive gasoline prices. Ethanol in total accounts for about 3 
percent of U.S. gasoline use and E85 an even smaller percentage. E85 is 
a relatively new alternative fuel and that niche of the ethanol market 
is developing. Until there is a developed market for E85, which 
includes vehicles that can use E85 (demand) and the infrastructure in 
place (retail fuel pumps an distribution), E85 will likely be priced at 
a premium and not readily available at all gasoline stations. Once the 
ethanol market is fully developed, ethanol including E85, must compete 
with gasoline based on price, and over time ethanol is likely to be 
discounted based on its BTU content relative to gasoline.
    Consumer Reports is correct in asserting that there will be a 
differential between gasoline and ethanol blends. The renewable fuel 
standard provisions of the Energy Policy Act of 2005 (EPACT) 
established a 7.5 billion gallon minimum use level of renewable fuels 
by 2012. Since EPACT was enacted, gasoline blenders have been phasing 
out methyl tertiary butyl ether (MTBE), which sparked a surge in demand 
for ethanol (the primary alternative to MTBE). In addition, a short 
sugar crop led to lower ethanol production in Brazil. Collectively, 
these factors helped to drive up the price of ethanol this summer. 
Ethanol prices have come down from the highs observed earlier.
    Looking forward, ethanol and E85 are likely to be important 
elements in helping address the need for transportation fuels in the 
United States. There are several questions that must be considered when 
weighing the benefits of ethanol. Ethanol's primary use at the current 
time is as a fuel oxygenate blended with gasoline. Oxygenates, such as 
ethanol, help gasoline burn more efficiently and cleanly and can lead 
to lower emissions. Thus, there are environmental benefits to consider.
                                 ______
                                 
          Responses by Keith Collins to Additional Questions 
                         from Senator Jeffords
    Question 1. Does USDA generally see a preference for loan 
guarantees, rather than grants, for those companies interested in 
producing cellulosic ethanol?
    Response. USDA provides both loan guarantees and grants for 
biofuels production. Grants are provided mainly for feasibility 
studies, development activities, and working capital. However, 
cellulosic ethanol plants are very expensive to build per gallon of 
capacity and large amounts of funding are needed for construction. 
Also, under existing technology there are no commercially viable 
celluosic ethanol plants. Thus, financing cellulosic ethanol plants 
would quickly exhaust the budget authority of USDA energy grant and 
loan programs, thus limiting the benefits of the program to a smaller 
number of program beneficiaries.

    Question 2. How significant do you believe that State renewable 
fuels programs will be in the growth of ethanol use?
    Response. State renewable fuels programs, such as production 
mandates and tax incentives, will probably have a limited overall 
effect on total U.S. ethanol production. Total production will mostly 
be determined by the Federal renewable fuel standard (RFS) and general 
oil and gasoline market conditions. However, State programs could 
influence the distribution of ethanol production throughout the country 
and help stimulate needed investment in infrastructure. States with 
strong incentive programs could encourage instate ethanol production 
and consumption.
    The Environmental Protection Agency (EPA) in their boutique fuels 
study found refiners concerned that State RFS programs may inhibit the 
flexibility of implementing the national RFS. Coordination between EPA, 
refiners, and States in developing any State RFS will be important.

    Question 3. Are small cellulosic ethanol plants economically 
feasible?
    Response. At the present time, small cellulosic ethanol plants are 
not economically viable. In addition, to the best of my knowledge and 
based on existing technology, large cellulosic plants are not viable 
either. There have been recent announcements by some suggesting 
otherwise, but to date only pilot and demonstration plants have been 
built. Further research is required to lower costs and reduce technical 
risks to the point where developers can attract capital market 
financing of a commercial cellulosic ethanol plant.
  

                                  
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