    Biofuels: DOE Lacks a Strategic Approach to Coordinate Increasing
    Production with Infrastructure Development and Vehicle Needs
    (08-JUN-07, GAO-07-713).

    The U.S. transportation sector is almost entirely dependent on
    oil, a condition that poses significant economic and
    environmental risks. Biofuels, such as ethanol and biodiesel,
    have the potential to displace oil use in transportation fuel.
    GAO was asked to describe the status of and impediments to
    expanding biofuel production, distribution infrastructure, and
    compatible vehicles as well as federal policy options to overcome
    the impediments. GAO was also asked to assess the extent to which
    the Department of Energy (DOE) has developed a strategic approach
    to coordinate the expansion of biofuel production,
    infrastructure, and vehicles and has evaluated the effectiveness
    of biofuel tax credits. GAO interviewed representatives and
    reviewed studies and data from DOE, states, industry, and other
    sources.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-713
        ACCNO:   A70506
      TITLE:     Biofuels: DOE Lacks a Strategic Approach to Coordinate
    Increasing Production with Infrastructure Development and Vehicle
    Needs
         DATE:   06/08/2007
      SUBJECT:   Alternative energy sources
    	     Biomass energy
    	     Cost analysis
    	     Energy costs
    	     Energy industry
    	     Fuel taxes
    	     Fuels
    	     Grain and grain products
    	     Policy evaluation
    	     Strategic planning
    	     Tax credit
    	     Energy policies
    	     Energy sources

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    GAO-07-713

         * [1]Results in Brief
         * [2]Background
         * [3]Biofuel Production Has Increased, and Federal Support Target

              * [4]U.S. Ethanol and Biodiesel Production Is Increasing, but The
              * [5]Efforts to Significantly Increase Biofuel Production May Be
              * [6]Several Policy Options, Including Support for Cellulosic Eth

         * [7]The Biofuel Distribution Infrastructure Has Limited Capacity

              * [8]Limited Capacity Exists to Transport Biofuels, and the Costs
              * [9]The Relatively Small Number of Fueling Stations Offering E85
              * [10]The Limited Supply of Ethanol Available for Use as E85 and t
              * [11]A Number of Policy Options Could Help Increase the Number of

         * [12]The Number of Biofuel Compatible Vehicles Is Projected to In

              * [13]The Relatively Small Number of Biofuel Compatible Vehicles i
              * [14]Limited Consumer Demand and Additional Production Costs Are
              * [15]Several Policy Options Could Help Address Impediments to Inc

         * [16]DOE Has Not Yet Developed a Strategic Approach to Coordinate

              * [17]DOE's Strategy for Increasing Ethanol Production Is Not Coor
              * [18]DOE Has Not Evaluated the Performance of Biofuel-Related Tax

         * [19]Conclusions
         * [20]Recommendations for Executive Action
         * [21]Agency Comments and Our Evaluation
         * [22]GAO Comments
         * [23]GAO Contact
         * [24]Staff Acknowledgments
         * [25]GAO's Mission
         * [26]Obtaining Copies of GAO Reports and Testimony

              * [27]Order by Mail or Phone

         * [28]To Report Fraud, Waste, and Abuse in Federal Programs
         * [29]Congressional Relations
         * [30]Public Affairs

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    June 2007

    BIOFUELS

    DOE Lacks a Strategic Approach to Coordinate Increasing Production with
    Infrastructure Development and Vehicle Needs

    GAO-07-713

    Contents

    Letter 1

    Results in Brief 5
    Background 8
    Biofuel Production Has Increased, and Federal Support Targeting Technology
    Development Could Address Some of the Impediments to Greater Production 13
    The Biofuel Distribution Infrastructure Has Limited Capacity to Transport
    the Fuels and Deliver Them to Consumers, and Expanding the Distribution
    System Faces a Variety of Impediments 23
    The Number of Biofuel Compatible Vehicles Is Projected to Increase, but
    Challenges, such as Limited Consumer Demand, Remain 31
    DOE Has Not Yet Developed a Strategic Approach to Coordinate the Expansion
    of Biofuel Production with Infrastructure and Vehicles, and the
    Effectiveness of Biofuel Tax Expenditures Has Not Been Evaluated 39
    Conclusions 43
    Recommendations for Executive Action 45
    Agency Comments and Our Evaluation 45
    GAO Contact 51
    Staff Acknowledgments 51

    Figures

    Figure 1: Location of Ethanol Production Plants in 2007 17
    Figure 2: Location of Public and Federal Fueling Stations That Offered E85
    in 2007 25
    Figure 3: Location of Public and Federal Fueling Stations That Offered B20
    through B100 in 2007 26
    Figure 4: Location of Public Fueling Stations That Offered E85 in 2007 and
    Number of Privately Owned FFVs by State in 2006 35
    Figure 5: Location of Federal Fueling Stations That Offered E85 in 2007
    and Number of Federal Fleet FFVs by State in 2006 38

    Abbreviations

    CAFE Corporate Average Fuel Economy
    DOE Department of Energy
    EIA Energy Information Administration
    EPA Environmental Protection Agency
    FFV flexible fuel vehicle
    GPRA Government Performance and Results Act
    MTBE methyl tertiary butyl ether
    NREL National Renewable Energy Laboratory
    RFS Renewable Fuels Standard
    UL Underwriters Laboratories
    USDA U.S. Department of Agriculture
    VEETC Volumetric Ethanol Excise Tax Credit

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
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    separately.

    United States Government Accountability Office
    Washington, DC 20548

    June 8, 2007

    The Honorable Charles E. Grassley
    Ranking Member
    Committee on Finance
    United States Senate

    The Honorable Norm Coleman
    Ranking Member
    Permanent Subcommittee on Investigations
    Committee on Homeland Security and Governmental Affairs
    United States Senate

    The Honorable Barack Obama
    United States Senate

    In 2006, the United States accounted for slightly less than 25 percent of
    the world's oil consumption, making it the world's largest consumer. In
    particular, the nation's transportation sector is almost entirely
    dependent on oil and accounts for nearly two-thirds of total U.S. oil
    consumption. To meet growing demand for oil in the face of limited and
    declining domestic production, the nation imported about two-thirds of its
    oil and petroleum products in 2006. Absent dramatic reductions in
    consumption and significantly increased use of alternative fuels, the
    nation will become increasingly dependent on imported oil. Because oil is
    a global commodity and because there is currently relatively little spare
    oil production capacity, even a minor disruption in the global oil supply
    could cause large increases in price and economic difficulties for tens of
    millions of Americans. In addition, there are growing concerns about the
    negative environmental impacts of oil use, including its role in
    greenhouse gas emissions that are contributing to potentially significant
    and damaging changes to the global climate system. In 2006, the United
    States accounted for slightly less than 25 percent of the world's oil
    consumption, making it the world's largest consumer. In particular, the
    nation's transportation sector is almost entirely dependent on oil and
    accounts for nearly two-thirds of total U.S. oil consumption. To meet
    growing demand for oil in the face of limited and declining domestic
    production, the nation imported about two-thirds of its oil and petroleum
    products in 2006. Absent dramatic reductions in consumption and
    significantly increased use of alternative fuels, the nation will become
    increasingly dependent on imported oil. Because oil is a global commodity
    and because there is currently relatively little spare oil production
    capacity, even a minor disruption in the global oil supply could cause
    large increases in price and economic difficulties for tens of millions of
    Americans. In addition, there are growing concerns about the negative
    environmental impacts of oil use, including its role in greenhouse gas
    emissions that are contributing to potentially significant and damaging
    changes to the global climate system.

    According to the Department of Energy (DOE), if certain technological and
    other barriers are overcome, domestically produced biofuels made from
    renewable biomass have the potential to displace as much as 30 percent of
    current U.S. transportation fuel consumption by 2030, as well as help
    reduce emissions of greenhouse gases and support farm economies in many
    states. The development of alternative forms of energy, such as biofuels,
    has been a national goal since the oil crises of the 1970s, but to
    According to the Department of Energy (DOE), if certain technological and
    other barriers are overcome, domestically produced biofuels made from
    renewable biomass have the potential to displace as much as 30 percent of
    current U.S. transportation fuel consumption by 2030, as well as help
    reduce emissions of greenhouse gases and support farm economies in many
    states. The development of alternative forms of energy, such as biofuels,
    has been a national goal since the oil crises of the 1970s, but to date
    progress has been limited. Currently, the most commonly produced biofuels
    are ethanol and biodiesel, made primarily from corn and soybean oil
    feedstocks, respectively. Ethanol is primarily blended with gasoline in
    mixtures of 10 percent or less that can be used in any vehicle, but a
    relatively small volume is also blended at a higher level called E85--a
    blend of approximately 85 percent ethanol--which can only be used in
    specially designed flexible fuel vehicles (FFV).^1 Similarly, biodiesel is
    mostly blended with petroleum diesel at low levels, such as B2 (2 percent
    biodiesel), but is also commonly blended with diesel as B20 (20 percent
    biodiesel). Biodiesel in any blend level, as well as 100 percent biodiesel
    (B100), can generally be used in any diesel engine vehicle.

    Using biofuels, particularly in high-level blends as a substitute for oil
    in transportation fuels, is subject to a number of limitations. For
    example, corn and soybeans are primarily used in livestock feed and human
    food products, and therefore using these crops to produce biofuels will
    likely cause livestock feed and human food prices to rise. Moreover,
    ethanol is not a gallon-for-gallon replacement for gasoline because it
    contains only about two-thirds of the energy of a gallon of gasoline.
    While ethanol combusts more efficiently than gasoline, drivers nonetheless
    experience about a 25 percent reduction in miles per gallon in vehicles
    using high blends such as E85. In addition, although DOE, the U.S.
    Department of Agriculture (USDA), and most other researchers maintain that
    a gallon of corn ethanol contains more energy than it takes to produce a
    gallon of the fuel, a small number of researchers believe that corn
    ethanol has a negative energy balance, meaning that it takes more energy
    to produce than it contains. Furthermore, because vehicle manufacturers
    have generally designed vehicles to operate primarily on gasoline or
    diesel, the use of fuels containing more than 10 percent ethanol or 5
    percent biodiesel is not covered under the warranty of most vehicles.

    The federal government has implemented a variety of measures to support
    and promote the greater availability and use of biofuels in place of
    petroleum. For example, the Environmental Protection Agency (EPA) is
    responsible for administering the Renewable Fuels Standard (RFS), which
    mandates that transportation fuel blenders increase their use of renewable
    fuels such as ethanol and biodiesel from 4 billion gallons in 2006 to 7.5
    billion in 2012.^2 Other federal agencies, such as DOE and USDA, conduct
    and fund efforts to further the development of the next generation of
    biofuels, principally ethanol from cellulosic biomass, which could be
    produced from farmed crops such as switchgrass and low-value residues from
    sources like wheat straw and corn stalks that are in abundant supply.^3
    DOE is also responsible for monitoring compliance with the requirement
    that 75 percent of federal fleet vehicle acquisitions be capable of using
    alternative fuels and that the use of the fuels be increased. In addition,
    the Department of Transportation administers the Corporate Average Fuel
    Economy (CAFE) program, which regulates fuel economy for passenger
    vehicles sold in the United States and provides incentives to automobile
    manufacturers for producing alternative fuel vehicles, such as FFVs that
    can use regular gasoline or ethanol blends up to E85.

    ^1DOE's Energy Information Administration estimates that the actual annual
    average ethanol content of E85 is 74 percent due to the need to reduce the
    ethanol content in fall, winter and spring to avoid vehicle starting
    problems in cooler weather.

    Federal policy further encourages biofuel availability and use through
    incentives such as the Volumetric Ethanol Excise Tax Credit (VEETC), which
    provides a 51 cent per gallon tax credit to fuel blenders for ethanol they
    blend with gasoline, and a tax credit for the installation of fueling
    stations to expand public access to biofuels. Tax credits are a type of
    tax expenditure that result in revenue loss for the federal government.
    Through tax expenditures, the government forgoes a certain amount of tax
    revenue to encourage specific behaviors by a particular group of
    taxpayers. The biofuel-related tax credits are in effect spending programs
    channeled through the tax system. We recently reported that according to
    Office of Management and Budget officials, individual agencies should take
    responsibility for identifying tax expenditures that affect their
    missions.^4 We also reported that an evaluation of the various energy
    supply tax credits might involve both DOE and the Department of the
    Treasury (Treasury). The Government Performance and Results Act (GPRA) of
    1993 established a statutory framework for evaluating the performance of
    federal programs, including tax expenditures. The act requires federal
    agencies to, among other things, establish program performance goals,
    gather data on performance, and report the results.

    ^2The President recently announced a goal of producing 35 billion gallons
    of alternative fuels, such as biofuels, coal-to-liquids, and natural gas,
    by 2017.

    ^3Switchgrass is a native grass that thrives on marginal lands, needs
    little water, and no fertilizer.

    ^4See GAO, Government and Performance Accountability: Tax Expenditures
    Represent a Substantial Federal Commitment and Need to Be Reexamined,
    [31]GAO-05-690  (Washington, DC: Sept. 23, 2005).

    In this context, you asked us to describe the status of the nation's (1)
    biofuel production, (2) biofuel distribution infrastructure, and (3)
    biofuel compatible vehicles. For each of these components of biofuel
    development, we also examined impediments to expansion and federal policy
    options that have been proposed to overcome the impediments. Finally, you
    asked us to assess the extent to which DOE has developed a strategic
    approach to coordinate the expansion of biofuel production with
    distribution infrastructure (transport systems and fueling stations) and
    vehicle needs and assess the extent to which DOE has evaluated the
    effectiveness of biofuel tax credits.

    In conducting our work, we reviewed data and analyses from DOE's Energy
    Information Administration (EIA) and other federal, state, and industry
    sources to determine the current status and trends for ethanol and
    biodiesel production.^5 We reviewed key scientific and economic studies
    and spoke with federal and state agency officials, biofuel producers, and
    academics to identify impediments to increasing biofuel production and the
    potential policy options that could be pursued to overcome the
    impediments. To determine the current status and trends for the biofuel
    distribution infrastructure, including fueling stations that provide E85
    or biodiesel blends, we reviewed data from DOE's Alternative Fuels Data
    Center. We spoke with representatives of major oil companies regarding
    their biofuel policies for branded fueling stations, and spoke with
    federal and state agency officials, biofuel producers and distributors,
    and fueling equipment manufacturers and certifiers regarding challenges to
    transporting biofuels and increasing the number of biofuel fueling
    stations and policy options to address those challenges. To determine the
    current status and trends for biofuel compatible vehicles, including
    federal fleet vehicles, we reviewed data and analysis from DOE and other
    federal and automobile industry sources. We spoke with major domestic and
    foreign automobile manufacturers regarding their plans for producing
    biofuel compatible vehicles as well as federal and state agency officials
    and consumer and environmental group representatives regarding the key
    barriers to increasing the number of biofuel compatible vehicles and
    policy options to mitigate those barriers. To assess the extent to which
    DOE has developed a strategic approach to coordinate the expansion of
    biofuel production with distribution infrastructure and vehicle needs and
    evaluated the effectiveness of biofuel tax credits, we met with key
    officials at DOE and gathered documentation of how they plan, implement,
    monitor, and evaluate the performance of biofuel-related programs.

    ^5EIA is a statistical agency of DOE that provides energy data, forecasts,
    and analysis to promote sound policymaking, efficient markets, and public
    understanding regarding energy and its interaction with the economy and
    environment.

    We did not evaluate the costs and benefits of producing and using greater
    amounts of biofuels, expanding the biofuel distribution infrastructure, or
    increasing the number of biofuel compatible vehicles. Rather, we assessed
    the current status of production, distribution infrastructure, and
    vehicles; identified impediments to their further expansion; and noted
    steps that could be taken to expand the production and use of biofuels
    should Congress deem it to be in the national interest. We assessed the
    reliability of the industry and agency data that we used and found the
    data to be sufficiently reliable for the purposes of this report. We
    performed our work between June 2006 and June 2007 in accordance with
    generally accepted government auditing standards.

    Results in Brief

    Ethanol and biodiesel production is rapidly increasing, but the challenge
    of producing biofuels at a lower cost than that of petroleum fuels makes
    it unlikely that they will displace a considerable amount of petroleum in
    transportation fuels until less expensive production processes are
    developed. From 2004 to 2006, annual U.S. ethanol production increased
    from 3.4 billion gallons to about 4.9 billion gallons, and annual
    biodiesel production expanded from 28 million gallons to approximately 287
    million gallons. Despite these rapid increases, ethanol and biodiesel
    together composed only about 3 percent of gasoline and diesel motor fuel
    used in 2006. About 99 percent of the ethanol produced in 2006 was blended
    with gasoline at levels of 10 percent or less, and most biodiesel was
    blended with diesel fuel at levels of 20 percent or less. The key
    challenge to increasing biofuel production is making biofuels cost
    competitive with petroleum-based transportation fuels. Currently, the cost
    of biofuel is largely determined by the cost of feedstocks--primarily corn
    and soybeans--that are in limited supply and have increased in price due
    to high demand for biofuel production. For this and other reasons, such as
    high demand for ethanol as a fuel additive, the average wholesale price of
    ethanol per gallon in 2006 was about 33 percent more than the average
    wholesale price of gasoline. Since ethanol contains one-third less energy
    than gasoline, the price differential is even more significant than this
    comparison indicates. According to DOE, producing ethanol using cellulosic
    biomass as the feedstock could greatly expand the amount of ethanol
    available, but current production costs are roughly double those of corn
    ethanol. DOE has set a target of 2012 to achieve technological advances,
    such as reducing the cost of the enzymes used in the production process,
    which would make cellulosic ethanol cost competitive with corn ethanol.
    Energy experts with whom we spoke and our own analysis indicate that
    because of limitations on the amount of corn and soybeans that are
    available for biofuel production, given competition for the use of land to
    grow crops for livestock and human consumption, significant expansion of
    biofuels production will be unlikely without policies that put a priority
    on support for cellulosic ethanol research and development and that offer
    enhanced incentives for its production.

    The biofuel distribution infrastructure has limited capacity to transport
    the fuels and deliver them to consumers, and significant growth in the
    distribution system faces a variety of impediments. Biofuels are primarily
    transported by rail, but also by truck and barge, and limited capacity in
    this distribution system has led to supply disruptions and concerns about
    the system's ability to effectively transport greater amounts of biofuels
    if production significantly increases. The key challenges to meeting
    biofuel transport needs are potential capacity limitations in the freight
    rail system and the cost of developing a dedicated ethanol pipeline system
    if one is needed. In addition, less than 1 percent of fueling stations
    offer E85 or high blends of biodiesel. In early 2007, approximately 1,100
    fueling stations, primarily in the Midwest, offered E85, and approximately
    400 fueling stations throughout the country offered B20 through B100.
    Efforts to increase the number of stations offering high-level biofuel
    blends face challenges. Most significantly, absent a breakthrough in
    cellulosic technology, it is likely that little ethanol would be blended
    as E85. Most of the ethanol that is currently projected by EIA to be
    produced through 2030 could be used--and would likely bring a higher price
    to the sellers--in low blends as a gasoline extender or oxygenate to
    reduce vehicle emissions, as this is the way that about 99 percent of
    ethanol is currently being used. Biofuels also require specialized storage
    and dispensing equipment. For example, because ethanol is corrosive, E85
    requires separate storage tanks, pumps, and dispensers at fueling
    stations. It can cost a fueling station operator around $3,300 to
    minimally modify existing equipment or about $60,000 to install new
    equipment--which may be a significant impediment for many potential
    retailers. Several potential options have been proposed to increase the
    number of stations offering biofuels, such as providing enhanced tax
    credits for station owners to install biofuel compatible dispensers or
    mandating that station owners install them. While these policy options
    would likely result in more stations that offer biofuels, given the higher
    costs and limited availability of biofuels, it is unlikely that the
    greater number of biofuel fueling stations would lead to significantly
    greater use of biofuels at this time.

    The relatively few biofuel compatible vehicles in use in the United States
    could increase substantially in the near future because of planned
    production increases by manufacturers, but impediments to further
    production increases remain. In 2006, there were an estimated 4.5 million
    FFVs in the United States--about 1.8 percent of the nearly 244 million
    U.S. vehicles. Recently, DaimlerChrysler, Ford, and General Motors
    committed to increasing FFV production to compose about 50 percent of
    their annual production by 2012 despite limited consumer demand for FFVs
    and the additional engineering research and material costs to produce FFVs
    on a significantly larger scale. Several policy options have been proposed
    to increase the number of biofuel compatible vehicles, such as providing
    automobile manufacturers with, in addition to the CAFE credits they
    already receive, tax incentives to offset the additional costs of
    manufacturing more FFVs or requiring automobile manufacturers to make an
    increasing percentage of their fleet biofuel compatible until the U.S.
    automotive fleet is 100 percent FFVs. However, according to the Department
    of Transportation, DOE, and EPA, some automobile manufacturers have
    already used CAFE incentives to produce many FFVs that are less fuel
    efficient and that consumers generally do not operate with biofuels,
    resulting in increased petroleum use. While various policy options could
    increase the number of biofuel compatible vehicles, they would likely have
    little impact on biofuel use unless these fuels become cost competitive
    and more widely available in higher blends. For example, in early 2007,
    there were an estimated 257,000 privately owned FFVs throughout California
    but only one publicly accessible fueling station--located in the San Diego
    area--that offered E85.

    DOE has not yet developed a comprehensive strategic approach to coordinate
    the expansion of biofuel production with biofuel distribution
    infrastructure development and vehicle production, and has not evaluated
    the effectiveness of biofuel tax credits. It is currently not known what
    blend of ethanol--E10, E85, or something in between--would most
    effectively and efficiently increase the use of the fuel; what level of
    distribution infrastructure development or vehicle production is needed to
    support that blend level; and when the infrastructure and vehicles will be
    needed. While DOE's Biomass Program has a strategic approach for
    increasing ethanol production, DOE has not yet developed a comprehensive
    strategic approach for determining the distribution infrastructure and
    vehicles needed to transport and use the increased production that could
    result from the program. Such an approach could assist in resolving these
    questions and help DOE and other agencies determine what level and types
    of federal involvement in research and development or subsidies for
    infrastructure development or vehicle production are needed to help meet
    national goals for increasing biofuels use. In addition, the tax credits
    provided under the VEETC cost the federal government about $2.7 billion in
    forgone revenue in 2006, according to the Treasury Department. However,
    DOE and Treasury have not worked together to define their roles and
    responsibilities for establishing outcome-oriented goals or evaluating and
    reporting on the results of these and other tax expenditures.
    Consequently, the extent to which these large tax expenditures have
    resulted in the production of more ethanol than would have occurred
    without them, or produced specific outcomes, such as reducing petroleum
    imports, is unknown. Furthermore, it is not known if similar benefits or
    outcomes might be achieved by less costly means.

    To improve biofuel-related planning and to provide Congress better
    information on the costs and benefits of biofuel tax expenditures, we are
    recommending that the Secretary of Energy (1) collaborate with public and
    private sector stakeholders to develop a comprehensive strategic approach
    to increasing the availability and use of biofuels that coordinates
    expected biofuel production levels with the necessary distribution
    infrastructure development and vehicle production, and (2) collaborate
    with the Secretary of the Treasury to evaluate and report on the extent to
    which biofuel-related tax credits are effectively and efficiently
    achieving their goals, as well as the extent to which they support the
    department's comprehensive strategic approach for biofuels. In commenting
    on a draft of this report, DOE agreed with our recommendations. DOE's
    comments appear in appendix I.

    Background

    Over the last 30 years, the United States has benefited from relatively
    inexpensive and abundant oil supplies, but has also experienced periodic
    disruptions resulting in price shocks and related energy crises. In 1973,
    oil cost about $15 per barrel (adjusted for inflation) and accounted for
    96 percent of the energy used by the transportation sector. The disruption
    of oil imports caused by the 1973 oil embargo by the Organization of Arab
    Petroleum Exporting Countries led to the doubling of oil prices in the
    United States between 1973 and 1974. Prices doubled again between 1978 and
    1981 during the Iranian Revolution and the Iran-Iraq war. Oil prices fell
    in the mid-1980s, and as the U.S. economy expanded and domestic sources of
    oil declined, U.S. reliance on imported crude oil grew from 40.5 percent
    of the U.S. supply in 1980 to 66.1 percent in 2006. Oil now accounts for
    98 percent of the energy consumed for transportation, according to EIA.
    Furthermore, EIA expects oil consumption in the transportation sector to
    grow by more than 40 percent, increasing from 4.8 billion barrels annually
    in 2004 to 6.8 billion barrels in 2030.

    Biofuels, such as ethanol and biodiesel, are alternative transportation
    fuels produced from renewable sources. Increasing ethanol and biodiesel
    production and use have been touted by proponents as a means to address
    energy security concerns and lower greenhouse gas emissions while raising
    domestic demand for U.S. farm products. Currently, the most commonly
    produced biofuels are ethanol and biodiesel, made primarily from corn and
    soybean oil feedstocks, respectively. The United States is the world's
    largest corn producer--in the 2005-to-2006 marketing year, farmers
    produced over 11 billion bushels of corn and exported about 19 percent of
    the harvest.^6 The United States is also the world's largest soybean
    producer--in the 2005-to-2006 marketing year, farmers produced over 3
    billion bushels of soybeans and exported about 31 percent of the harvest.

    In general, large-scale ethanol production is either corn-based or
    sugar-based, using feedstocks such as sugarcane. Corn, which contains
    starch that can relatively easily be converted into sugar, is the
    feedstock for about 98 percent of the ethanol produced in the United
    States. While Brazil produces large amounts of ethanol from sugarcane,
    according to USDA, in the United States, the cost of domestic sugarcane
    feedstock would make ethanol production twice as costly as using corn.
    Biodiesel is produced by chemically combining a feedstock--such as
    recycled cooking grease, animal fat, or most commonly soybean oil--with
    alcohol. Biorefineries not only produce biofuels, but the conversion
    processes also create valuable coproducts--for example, ethanol production
    also results in distillers grains that are used as livestock feed.

    Since the late 1970s, energy, environmental, and agricultural legislation
    and policies have encouraged the production and use of ethanol and
    biodiesel. The Energy Tax Act of 1978 first authorized a motor fuel excise
    tax exemption for ethanol blends, which was extended in several subsequent
    statutes. A 54 cent per gallon duty on imported ethanol to offset the U.S.
    tax incentives was recently extended through the end of 2008.^7 The
    American Jobs Creation Act of 2004 established a tax credit of up to $1
    per gallon of biodiesel produced, and the Energy Policy Act of 2005 (EPAct
    2005) extended this credit through 2008. Laws are also in place giving
    income tax credits and loan guarantees to small ethanol producers.
    Provisions of the Clean Air Act Amendments of 1990 established programs to
    control carbon monoxide and ozone problems created by motor fuel
    emissions, and ethanol and methyl tertiary butyl ether (MTBE) were the
    primary oxygenates blended into gasoline to meet the programs' standards.
    Because MTBE was subsequently found to contaminate water, its use is
    currently being phased out--25 states have banned the additive as of
    2006--increasing demand for ethanol. EPA's recently adopted low-sulfur
    diesel standards designed to help reduce harmful emissions could increase
    demand for biodiesel, which provides lubricity benefits when blended with
    regular diesel. The Farm Security and Rural Investment Act of 2002
    contained the first energy title in farm bill history, authorizing a range
    of programs through 2007 to promote bioenergy production and consumption.

    ^6The marketing year for corn is from September 1 each year to August 31
    of the following year, and the marketing year for soybeans is from October
    1 each year to September 30 of the following year.

    ^7Tax Relief and Health Care Act of 2006 (Pub. L. No. 109-432).

    In addition, some states have established laws and policies to increase
    renewable fuel availability and use through biofuel mandates, production
    incentives, and tax credits. According to the American Coalition for
    Ethanol, in 2006, 4 states had mandates for the use of renewable fuels,
    and 12 states had such a mandate under consideration. In addition, 17
    states provided ethanol production incentives, and 12 states offered
    incentives to encourage retailers to provide biofuels at their stations.
    One of the first states to actively promote biofuels was Minnesota, which
    currently mandates that 2 percent of the diesel transportation fuel
    consumed in the state be biodiesel and that 20 percent of gasoline
    transportation fuel be ethanol by 2013.^8 Minnesota state officials view
    their support for biofuels as a means to boost their farm economy by
    increasing demand for feedstock crops while also contributing to a cleaner
    environment.

    Despite the federal and state efforts to support and promote ethanol and
    biodiesel, the public has been slow to accept them because they have not
    been cost competitive or readily available compared to relatively cheap
    and abundant petroleum-based fuels.^9 Furthermore, because biofuels
    contain less energy per gallon than their petroleum-based counterparts,
    consumers must purchase more of the fuels to travel the same distance. A
    gasoline blend containing 10 percent ethanol results in a 2 to 3 percent
    decrease in miles-per-gallon fuel economy, while in a higher blend such as
    E85, the decrease is proportionally larger. The energy content of a gallon
    of biodiesel is about 8 percent lower than that of petroleum diesel,
    causing vehicles running on B20, for example, to experience about a 2
    percent decrease in miles per gallon, while for vehicles running on B100,
    the decrease is proportionally larger.

    ^8EPA has determined that the sale of blends of E10 or less for most
    vehicles and up to E85 for FFVs is allowed under the Clean Air Act
    Amendments of 1990. The state of Minnesota and the Renewable Fuels
    Association are currently sponsoring research to determine the effects of
    ethanol blends up to E20 on vehicle fuel systems and emissions. The
    sponsors plan to submit the results to EPA for an evaluation of E20's
    compliance with the Clean Air Act. If EPA rules in favor of allowing the
    use of blends up to E20, the ruling would apply nationwide. In the
    interim, Minnesota is attempting to meet its 20 percent goal by a
    combination of E10 and E85 use. In addition, DOE plans to work with EPA to
    develop a national test program to gather the data required to facilitate
    the legal certification of fuel blends up to E15 or E20.

    Furthermore, the net energy value of biofuels has been the subject of
    debate. Numerous studies conducted since the late 1970s have estimated the
    net energy value of corn ethanol, but variations in data and assumptions
    have resulted in a wide range of estimates, a few indicating that it takes
    more nonrenewable energy to produce ethanol than is delivered when the
    fuel is consumed. In 2002, USDA conducted a study to estimate the net
    energy value of ethanol and to identify the cause of variance among
    studies.^10 USDA's analysis determined that corn ethanol yields 34 percent
    more energy than it takes to produce it--considering the entire fuel cycle
    of growing the corn, harvesting it, transporting it, and distilling it
    into ethanol--when using the assumption that the fertilizers used in
    growing the corn were produced by modern processing plants, the corn is
    converted in modern ethanol plants, and farmers achieve average corn
    yields. Furthermore, only about 17 percent of the energy used to produce
    ethanol comes from gasoline or diesel fuel. Therefore, for every gallon of
    petroleum fuel used to produce ethanol, about six energy equivalent units
    of ethanol can be produced. Biodiesel, according to a 1998 joint USDA-DOE
    study, yields 220 percent more energy than is used in its production.

    ^9Some people believe that the prices U.S. consumers pay for petroleum
    fuels do not reflect their true costs. For example, some researchers have
    concluded that petroleum fuels would sell at a much higher price--making
    biofuels more competitive--if the full environmental costs of producing
    and using petroleum fuels and the full costs of ensuring oil supply
    security worldwide were accounted for in the price. A comparison of the
    costs of biofuels and petroleum fuels would also have to take into account
    the full environmental and other costs of producing biofuels, such as the
    impacts of potentially devoting greater land area to commercial
    agriculture and using greater amounts of fresh water for irrigation.

    ^10USDA, The Energy Balance of Corn Ethanol: An Update, (AER-813), Office
    of Energy Policy and New Uses, July 2002. Subsequently, in a January 2006
    study published in Science magazine, University of California, Berkeley,
    researchers reviewed six representative analyses of fuel ethanol and found
    that those that reported negative net energy incorrectly accounted for
    input energy and used some obsolete data.

    Research on the environmental effects of biofuels on air quality has shown
    a variety of impacts depending on how the fuels are blended and where they
    are used. Through 2005 ethanol was primarily used in blends under 10
    percent to meet a minimum oxygenate requirement for reformulated
    gasoline--in accordance with the Clean Air Act Amendments of 1990--to
    reduce vehicle emissions in certain metropolitan areas with high levels of
    ground-level ozone. Although oxygenates lead to lower emissions of carbon
    monoxide, in some cases they may lead to higher emissions of nitrogen
    oxides and volatile organic compounds, which can in some areas lead to
    increased ground-level ozone formation due to atmospheric conditions.^11
    Regarding greenhouse gas emissions, an Argonne National Laboratory study
    found that for the entire fuel cycle--from growing the corn to producing
    the ethanol--corn-based E10 generates about 1 percent lower greenhouse gas
    emissions than gasoline, while emissions are about 20 percent lower for
    E85.^12 Biodiesel reduces nearly all forms of air pollution compared to
    petroleum diesel, although ozone-forming nitrogen oxide emissions are
    created. According to a joint DOE and USDA study, biodiesel also reduces
    greenhouse gasses, for example, producing 78 percent less carbon dioxide
    than diesel fuel for the entire fuel cycle.

    In an effort to obtain greater net energy and environmental benefits than
    with corn ethanol, DOE's Biomass Program is leading research efforts
    toward developing a process to produce cellulosic ethanol that is cost
    competitive with gasoline. Cellulosic ethanol is chemically the same as
    corn- or sugar-based ethanol, but is produced from feedstocks that are of
    lower economic value. These feedstocks include switchgrass as well as
    fast-growing woody crops such as hybrid poplar trees, and other biomass
    materials, such as logging and crop residues. Because cellulosic
    feedstocks require far less natural gas-derived fertilizer for their
    production, the overall energy balance and other benefits of cellulosic
    ethanol could be significantly greater than those of corn ethanol. For
    example, the Argonne National Laboratory study concluded that
    cellulose-based E85 could reduce fossil energy consumption, such as that
    of natural gas, coal, and oil, by roughly 70 percent and could reduce
    greenhouse gas emissions by roughly 70 to 90 percent per vehicle mile
    traveled in a midsize car. However, while cellulosic feedstocks are
    abundant and inexpensive, currently, cellulosic feedstock conversion
    technology is rudimentary and expensive. Consequently, while pilot
    facilities are operating in the United States and Canada, there are
    currently no commercial cellulose-to-ethanol facilities operating in the
    United States, although plans to build such plants are under way.
    Biodiesel research is not a top priority for DOE, but private companies
    are developing technology, for example, to produce biodiesel from
    feedstocks such as algae.

    ^11Section 1504(a) of the Energy Policy Act of 2005 (Pub.L. No. 109-58)
    eliminated the reformulated gasoline oxygenate standard as of May 2006 and
    required EPA to revise its regulations for the program to allow the sale
    of nonoxygenated reformulated gasoline.

    ^12DOE, Effects of Fuel Ethanol Use on Fuel-Cycle Energy and Greenhouse
    Gas Emissions, Argonne National Laboratory, January 1999. The study
    analyzed emissions of three major greenhouse gasses--carbon dioxide,
    methane, and nitrous oxide.

    Biofuel Production Has Increased, and Federal Support Targeting Technology
    Development Could Address Some of the Impediments to Greater Production

    U.S. annual ethanol and biodiesel production increased rapidly from 2004
    to 2006, but together these fuels composed only about 3 percent of
    gasoline and diesel motor fuel used in 2006. The challenge of producing
    biofuels at a lower cost than petroleum fuels makes it unlikely that they
    will displace a considerable amount of the petroleum used in
    transportation fuels until new production processes are developed. The
    higher relative cost of producing biofuels is largely due to the cost of
    the primary feedstocks--corn and soybean oil. Producing ethanol from
    alternative feedstocks such as switchgrass or other biomass materials
    could expand the geographic range of biofuel plants, but the challenge of
    producing cost competitive cellulosic ethanol is even greater than for
    conventional corn ethanol. Nevertheless, policy options exist that could
    help overcome some of these challenges, allowing biofuels to compose an
    even greater proportion of the nation's total transportation fuel supply.

    U.S. Ethanol and Biodiesel Production Is Increasing, but These Fuels Provide
    Only a Very Small Proportion of the Nation's Total Motor Transportation Fuel

    From 2004 to 2006, annual U.S. ethanol production increased about 43
    percent from 3.4 billion gallons to about 4.9 billion gallons. About 99
    percent of the ethanol produced in 2006 was used in gasoline blends of 10
    percent or less, and the remaining 1 percent was blended to produce E85.
    U.S. ethanol production capacity is projected to rise rapidly. According
    to the Renewable Fuels Association, in early 2007, 114 ethanol plants were
    operating, 7 of these plants were expanding, and 78 new plants were under
    construction. According to EIA, on the basis of estimates of the number of
    plants under construction, domestic ethanol production could rise to at
    least 7.5 billion gallons by 2008. Looking out further, EIA projects
    ethanol use of 11.2 billion gallons in 2012 and, absent significant
    cellulosic ethanol production, 14.6 billion gallons in 2030.^13 However,
    some other projections are higher, such as a May 2007 Iowa State
    University study sponsored in part by USDA, which estimates 14.8 billion
    gallons of corn ethanol production by 2011.^14 Nevertheless, U.S. ethanol
    production composed only 3.4 percent of the total amount of gasoline used
    in 2006. Moreover, on an energy equivalent basis, ethanol made up only 2.3
    percent of gasoline used in 2006, because ethanol contains about
    two-thirds the energy of gasoline. EIA estimates that ethanol will likely
    account for only 7.6 percent of the volume of gasoline projected to be
    consumed in 2030.

    From 2004 to 2006, annual U.S. biodiesel production increased more than
    10-fold from 28 million gallons to approximately 287 million gallons.
    Biodiesel is mostly used in B20 or lesser concentrations, such as B2, in
    part due to state mandates, such as in Minnesota, that all diesel fuels
    contain 2 percent biodiesel. At the beginning of 2007, 105 biodiesel
    plants were operating, 8 plants were expanding, and 77 companies have
    plants under construction. Even with this expansion, EIA projects that
    domestic biodiesel production will likely increase to only 308 million
    gallons in 2012, and only 395 million gallons in 2030, in part because
    some plant production capacity is used for other products such as
    cosmetics.^15 Despite rapid increases in production, biodiesel composed
    only an estimated 0.6 percent of total diesel motor fuel used in 2006, and
    a somewhat smaller proportion on an energy equivalent basis due to the
    fact that biodiesel contains about 8 percent less energy than diesel does.

    The recent large increase in biofuel production has occurred for a number
    of reasons. Greater ethanol production occurred largely as a result of the
    phaseout of the fuel additive MTBE. Fuel blenders needed a replacement for
    MTBE to achieve desired performance and emissions characteristics, and
    ethanol was the best available choice. In addition, the 51 cent per gallon
    VEETC has helped to make ethanol more cost competitive with gasoline.
    While the RFS mandate has guaranteed a base level of demand for the fuel,
    according to economists with whom we spoke, it has had a limited role in
    increasing ethanol production. In 2006, the production of ethanol exceeded
    the amount of renewable fuel needed to meet the RFS by 21 percent and,
    according to our analysis of EIA data, is projected to exceed the amount
    required in 2012, 3 years before then, in 2009. Current levels of
    biodiesel production are largely due to the federal excise tax incentives
    provided by the American Jobs Creation Act of 2004, which was extended
    through 2008 under EPAct 2005.^16 These incentives include the $1 per
    gallon tax credit for biodiesel produced from virgin oils or fats and a 50
    cent per gallon tax credit for biodiesel produced from recycled grease.
    Additionally, biodiesel production has increased, in part because of the
    RFS, which includes biodiesel as a fuel that counts toward meeting the
    program's overall requirements for the amount of renewable content in
    motor fuel. Furthermore, state-level biodiesel incentives such as
    Minnesota's B2 mandate have encouraged biodiesel production by
    guaranteeing use of the fuel.

    ^13DOE, EIA, Annual Energy Outlook 2007, DOE/EIA-0383(2007). EIA's
    projection assumes that the support for ethanol provided in recently
    enacted federal legislation will be extended indefinitely.

    ^14Iowa State University, Emerging Biofuels: Outlook of Effects on U.S.
    Grain, Oilseed, and Livestock Markets, Center for Agricultural and Rural
    Development, May 2007.

    ^15EIA's projection in the Annual Energy Outlook 2007 assumes that the
    support for biodiesel provided in recently enacted federal legislation
    will not be extended beyond 2008. However, according to EIA, should the
    tax credit for biodiesel be reauthorized after 2008, it would
    significantly increase biodiesel production.

    Efforts to Significantly Increase Biofuel Production May Be Impeded by Various
    Factors That Contribute to High Production Costs Relative to Those of Petroleum
    Fuels

    A key challenge to increasing biofuel production is making biofuels cost
    competitive with gasoline and diesel fuel. The higher costs of producing
    biofuels contributes to higher biofuel wholesale prices compared to those
    for gasoline or diesel, making biofuels less desirable as a substitute.
    For example, based on a March 2007 estimate provided by USDA, the cost to
    produce a gallon of ethanol, including the cost of corn and processing, is
    about $2.51 per gallon of gasoline equivalent,^17 while based on our
    analysis of EIA estimates, in January 2007, the crude oil and refining
    components of the retail price of gasoline were about $1.46 per gallon.^18
    In 2006, the average wholesale price of ethanol was 33 percent more on a
    per volume basis than the wholesale price of a gallon of regular unleaded
    gasoline and about 102 percent more expensive on a gallon of gasoline
    equivalent basis. In addition to the higher cost of production, the higher
    wholesale price for ethanol in 2006 was also attributable, to a certain
    extent, to the high demand for ethanol caused by the MTBE phaseout, as
    well as the general rise in petroleum and natural gas prices.

    ^16Biodiesel production was also supported by grants from the Commodity
    Credit Commission Bio-energy Program, which was not funded beyond 2006.

    ^17"Gallon of gasoline equivalent" equates the energy content of a gallon
    of ethanol to that of a gallon of gasoline.

    ^18According to USDA, the estimated production cost for ethanol is based
    on the cost of the corn feedstock and processing costs. USDA used the
    early 2007 corn cost of about $3.50 per bushel. The production cost for
    gasoline includes at a minimum, the cost of crude oil and refining costs.
    According to EIA, the crude oil cost is the average price of crude oil
    purchased by refiners. The refining costs are derived from a calculation
    of the difference between the monthly average spot market price of
    gasoline and the average price of crude oil purchased by refiners, and
    includes an undetermined amount of refiner profits.

    Feedstocks such as corn and soybean oil are the largest costs of biofuel
    production, and the high prices of these feedstocks are impediments to
    reducing ethanol and biodiesel production costs. According to EIA, the
    U.S. ethanol industry relies almost exclusively on corn, and as shown in
    figure 1, production facilities are concentrated in the Midwest, where the
    feedstock is most plentiful. According to USDA, prices for corn have risen
    sharply, likely because of increased demand for its use in ethanol. Prices
    for soybean oil have increased recently in anticipation of reduced soybean
    planted area in 2007 because of increased planting of corn. For example,
    in the 2005-to-2006 marketing year corn cost $2.00 per bushel, which we
    estimate was about 62 percent of the cost of producing ethanol. According
    to USDA, corn prices are projected to average between $3.00 to $3.40 per
    bushel in the 2006-to-2007 marketing year and according to our analysis
    make up an estimated 74 percent of the cost of producing ethanol. For
    biodiesel production, in the 2005-to-2006 marketing year soybean oil cost
    on average 23 cents per pound, which we estimate was about 79 percent of
    the cost of producing biodiesel in 2006. USDA projects soybean oil prices
    to rise to between an average of 27 cents per pound to 29 cents per pound
    in the 2006-to-2007 marketing year and according to our analysis make up
    an estimated 82 percent of the cost to produce biodiesel.

    Figure 1: Location of Ethanol Production Plants in 2007

    Limits on both the total production of feedstocks and the amounts of those
    feedstocks that are available for energy production are also impediments
    to significantly increasing biofuel production. For example, in 2006, an
    estimated 15 percent of the corn available in the 2005-to-2006 marketing
    year was used to produce about 4.9 billion gallons of ethanol, which
    composed 3.4 percent of total gasoline consumption.^19 Assuming that
    ethanol production continues to expand as projected by EIA, by 2012, about
    30 percent of the corn crop will be needed to produce 11.2 billion gallons
    of ethanol, which would constitute 7.4 percent of projected total gasoline
    consumption.^20 Since corn crop yields have historically only increased at
    a rate of about 2 percent per year, the corn needed to significantly
    increase ethanol production will come from planting more acres of corn by
    putting pastureland and idle land into production, planting corn where
    other crops were previously grown, or using corn that is currently
    exported or used as feed for livestock or other purposes. Concerns exist
    about the potential impacts of such actions on food prices and the
    environment. For example, using more corn for energy production will
    likely exert additional upward pressure on corn prices, potentially
    influencing livestock feed markets and meat prices. Furthermore,
    environmental concerns exist regarding greater water use and impacts on
    wildlife if land set aside for purposes such as water conservation or
    wildlife habitat is put into production. Because of these limitations and
    concerns, DOE and industry experts generally agree that approximately 15
    billion to 16 billion gallons is the maximum amount of ethanol production
    that can be derived from the U.S. corn supply. Similar concerns exist
    regarding the impacts of devoting larger proportions of the soybean crop
    to biodiesel production, although the impacts are likely to be smaller
    because of the smaller scale of increases to biodiesel production
    projected by EIA.

    ^19EIA includes ethanol as a component in its calculation of total
    gasoline consumption.

    ^20This calculation is based on USDA's projected corn supply in the
    2012-to-2013 marketing year, which is about 13.5 billion bushels.

    According to DOE, producing cellulosic ethanol from alternative feedstocks
    could greatly expand the amount of ethanol produced, but currently the
    costs of facility construction and production are significantly greater
    than those of corn ethanol. According to a DOE study, there is sufficient
    biomass in feedstocks such as wood chips and corn stalks to potentially
    produce roughly 60 billion gallons of ethanol per year by 2030, or about
    30 percent of the amount of gasoline EIA projects to be consumed in that
    year. Biomass that could be used in cellulosic ethanol production is
    plentiful and relatively inexpensive nationwide, and plants built in
    proximity to the feedstocks would help to lessen the cost of obtaining the
    feedstocks as well as distributing biofuels nationwide. However, according
    to DOE's National Renewable Energy Laboratory (NREL), the total project
    investment for a cellulosic ethanol plant with a production capacity of 50
    million gallons per year is estimated at about $250 million dollars, as
    compared to a total project investment of $76 million for a corn ethanol
    plant of similar capacity.^21 Furthermore, according to DOE, the cost of
    producing a gallon of cellulosic ethanol is about twice the cost of
    corn-based ethanol. The cost to produce cellulosic ethanol is higher than
    that of corn-based ethanol because of processing costs, enzyme costs, and
    the cost to collect the feedstocks. Considerable research and development
    by NREL and its partners has significantly reduced the estimated cost of
    producing the enzyme used to break down cellulose into sugar to make
    ethanol, but according to DOE further successes in research and
    development are needed to make cellulosic ethanol a viable economic option
    for expanded ethanol production.^22

    21Total project investment figures are in 2007 dollars and include plant
    construction, equipment, installation, site development, and other costs
    such as startup costs and permits.

    Several Policy Options, Including Support for Cellulosic Ethanol Production
    Technology, Could Help Overcome Some of the Impediments to Increasing Biofuel
    Production

    One policy option for increasing biofuel production is raising the amount
    or extending the duration of tax incentives for ethanol and biodiesel
    production. This option provides the advantage to producers of offsetting
    a greater portion of their costs. However, a disadvantage is the potential
    for significant additional federal revenue losses, depending on the level
    of increase or the length of the extension. Furthermore, according to some
    economists, it is difficult to predict the effect of revised tax
    incentives. If the incentives are set too low to offset production costs,
    biofuel production will not rise significantly; if incentives are set too
    high, producers will receive windfall profits if production costs decline
    or oil prices increase significantly.

    Linking the level of biofuel tax incentives to the price of petroleum
    fuels could provide the advantage of limiting government revenue losses by
    providing tax credits only when biofuels are not cost competitive with
    petroleum fuels. For example, one proposal for a variable tax credit would
    provide 5 cents in ethanol tax credits for every $1 the price of oil is
    below the trigger price of $45 per barrel.^23 However, according to some
    economists with whom we spoke, establishing a variable tax credit would be
    challenging due to the difficulty of determining the correct trigger price
    for oil as well as constructing the variable subsidy to deal with
    constantly fluctuating corn prices. Another form of variable tax credit
    could be based on the renewable energy content of the biofuel, taking into
    account the net energy balance of production. Such a credit could provide
    greater support to fuels that displace a greater amount of petroleum and
    yield greater environmental benefits. One economist with whom we spoke
    noted that a variable tax credit could also support other biofuels, in
    addition to ethanol and biodiesel, stressing the importance of not
    excluding other promising biofuels.^24 However, the economists with whom
    we spoke noted a disadvantage to any production incentives for biofuels.
    Assuming lower costs are passed on to consumers, they may be encouraged to
    drive more miles or purchase less efficient vehicles, resulting in little
    or no reduction in petroleum fuel consumption.

    ^22NREL, managed by Midwest Research Institute and Batelle, is the
    principal research laboratory for DOE's Office of Energy Efficiency and
    Renewable Energy.

    ^23Senate Bill 162, National Fuels Initiative, 110th Cong., 1st Sess.
    (2007).

    Another option for increasing biofuel production is raising the level of
    the RFS. This option offers the advantage of virtually guaranteeing
    increased biofuel production and use to a specific predetermined level.
    Furthermore, a higher RFS could ensure a larger market for biofuels, thus
    mitigating risks for investors and encouraging expenditures for developing
    new production technology. A disadvantage of this option is that if
    biofuel prices significantly increase with an RFS mandate in place, then
    the price of fuel for consumers could also significantly increase. Corn
    prices have risen sharply recently with rapid increases in ethanol
    production, and could be expected to increase further under a higher RFS
    as demand for fuel production creates greater competition with other
    feedstock users. If the costs of biofuel production increase, the costs of
    complying with the RFS for blenders who integrate biofuels into the
    transportation fuel supply will also increase, and these costs could be
    expected to be passed on to consumers. Advances in production technology
    that have the potential to lower costs--such as cellulosic ethanol
    production that uses lower-cost feedstocks--could help meet a higher RFS
    with cost-competitive biofuels, but it is currently unclear exactly when
    such technological advances will be achieved.

    A third option for increasing biofuel production is to provide support for
    the development of cellulosic ethanol production technology. This could
    involve ensuring continued funding for research and development,
    increasing federal cost-sharing efforts to reduce risk to producers, and
    adding incentives for the production of biomass feedstocks. These policy
    options have the advantage of potentially resulting in a huge increase in
    cost-competitive biofuel production. The disadvantages are that such
    policies could require significant federal expenditures and there are no
    guarantees as to when or if cost-competitive cellulosic ethanol will be
    produced. According to the NREL officials with whom we spoke, DOE's
    research and development efforts for cellulosic ethanol are currently
    funded and on schedule toward the goal of making production commercially
    viable by 2012.^25 However, they said that technological uncertainties
    remain and it is therefore essential that research funding continue to
    meet this goal.^26

    24For example, biobutanol is a next-generation biofuel that can be made
    from corn or cellulosic biomass, has similar energy content to gasoline,
    and could be distributed through existing fuel pipelines.

    According to NREL, the primary nontechnological barrier to expanding
    cellulosic ethanol production is the perceived financial risk, making it
    difficult for companies to secure funding to build facilities. To
    initially reduce financial risk, DOE provided grants in 2002 totaling $80
    million dollars to fund six small-scale cellulosic ethanol biorefineries
    that support the technology in the demonstration phase. Then, in February
    2007, DOE announced it would give $385 million in grants to six cellulosic
    ethanol biorefineries over a 4-year period to help the industry develop
    larger-scale pilot production facilities.^27 Another measure that would
    help producers to mitigate the financial risks of full-scale commercial
    production is a federal insurance program that would pay cellulosic
    ethanol producers a settlement if they did not achieve their first-year
    production goals. According to one NREL official with whom we spoke, the
    advantage of an insurance program is that it can be based on well-defined
    performance metrics that limit potential government payments to specific
    outcomes, as opposed to the potentially larger losses from defaults under
    a loan guarantee program for producers. Another option suggested by NREL
    is a program to provide direct payments to growers of cellulosic
    feedstock, such as switchgrass, in order to ensure that an adequate supply
    of those feedstocks is available when cellulosic ethanol plants begin
    full-scale production. The insurance and grower payment programs both have
    the potential advantage of helping to increase initial cellulosic ethanol
    production but could end up being costly.

    ^25DOE established this goal to meet the objectives of the President's
    2006 Advanced Energy Initiative, aimed at reducing the nation's dependence
    on foreign sources of energy.

    ^26NREL recently completed a draft assessment of the market drivers and
    technology needs to achieve the goal of supplying 30 percent of 2004 motor
    gasoline fuel demand with biofuels by 2030. See NREL, A National
    Laboratory Market and Technology Assessment of the 30x30 Scenario, NREL
    Technical Report /TP-510-40942, January 2007.

    ^27Cellulosic ethanol producers can also take advantage of a loan
    guarantee program created by EPAct 2005. We recently evaluated the program
    and reported that DOE has not completed key steps to ensure that the
    program will be well managed and able to accomplish its objectives, and
    that there are risks to the government because of DOE's potential to
    underestimate loan guarantee subsidy and administrative costs. See GAO,
    The Department of Energy: Key Steps Needed to Help Ensure the Success of
    the New Loan Guarantee Program for Innovative Technologies by Better
    Managing Its Financial Risk, [32]GAO-07-339R  (Washington, D.C.: Feb. 28,
    2007). There is also a special depreciation deduction for cellulosic
    ethanol plants contracted to be acquired after December 20, 2006, that
    allows producers to take a depreciation deduction of 50 percent of the
    adjusted basis of a new cellulosic ethanol plant in the year it is put in
    service. In addition, EPAct 2005 authorized DOE to make per gallon
    incentive payments to cellulosic ethanol producers until production
    reaches 1 billion gallons, or 2015, whichever comes first.

    Other policy options, while not directly related to biofuel production,
    could nevertheless influence the availability and use of biofuels. For
    example, removing the existing 54 cent per gallon import duty on ethanol
    could have the advantage of significantly increasing the availability of
    biofuels for blending into the U.S. transportation fuel supply, largely
    because of the huge potential for increased imports of low-cost biofuels
    from South America. However, this could present a threat to the continued
    development of domestic biofuel production and would no longer provide an
    offset to the payment of biofuel excise tax credits to blenders of foreign
    ethanol. According to a recent survey of economists conducted by the Wall
    Street Journal, as well as several economists with whom we spoke,
    additional taxes on petroleum fuels or taxes on carbon dioxide emissions
    would be the most economically efficient means of increasing biofuel
    use.^28 Taxes would allow biofuels to be used at the level where they
    provide the greatest economic, environmental, and other benefits for the
    least cost, rather than at a mandated level that is, according to an
    economist with whom we spoke, difficult to correctly determine. Such an
    approach has the potential advantages of making all biofuels more cost
    competitive with petroleum fuels, and the added cost of petroleum fuels
    could encourage conservation. The potential disadvantage of this approach
    is that it is likely to be unpopular with consumers facing higher prices
    at the pump and with businesses that extract fossil fuels, such as the oil
    and coal industries.

    ^28Wall Street Journal, "Politics & Economics: Economists Back Fossil-Fuel
    Tax To Spur Alternative Energies," February 9, 2007.

    The Biofuel Distribution Infrastructure Has Limited Capacity to Transport the
    Fuels and Deliver Them to Consumers, and Expanding the Distribution System Faces
    a Variety of Impediments

    Currently biofuels are transported primarily on the freight rail system,
    and this system has limited capacity to transport greater amounts of
    biofuels if production significantly increases. We estimate that in early
    2007, about 1 percent of fueling stations in the United States offered
    E85--primarily in the Midwest--or high blends of biodiesel (B20 through
    B100). Under current conditions, significant growth in the number of
    stations that offer high blends of biofuels beyond the regions where the
    fuels are produced appears unlikely. Increasing the availability of
    biofuels at fueling stations is impeded in large part by the limited
    supplies of ethanol and biodiesel and the cost of storage and dispensing
    equipment for biofuels. Several policy options could help to increase the
    number of stations that offer biofuels, but until a larger supply of
    cost-competitive biofuels is available, it is doubtful that a greater
    number of stations would lead to greater use of biofuels.

    Limited Capacity Exists to Transport Biofuels, and the Costs Are Higher than for
    Petroleum Fuels

    According to DOE, biofuels are not transported through the petroleum
    product pipeline system because of concerns that, for example, ethanol
    will attract water in the pipes, rendering it unfit to blend with
    gasoline, and no dedicated biofuel pipeline system exists. Furthermore,
    according to DOE, the existing petroleum product pipelines are generally
    not configured to transport ethanol from regions where it is currently
    produced to regions where it is consumed. Therefore, ethanol is
    transported primarily by rail, but also by truck and barge, and biodiesel
    is transported by rail and truck--a distribution system that is more
    complicated than for petroleum fuels and has contributed to regional
    supply shortages. For example, while ethanol production is concentrated in
    the Midwest largely because of the proximity of large corn feedstock
    supplies, demand for ethanol as a blend component to replace MTBE in
    gasoline is high on the east and west coasts. In California gasoline is
    blended with about 5.7 percent ethanol. According to EIA, limited rail and
    truck capacity complicated the delivery of ethanol between April and June
    2006, contributing to regional ethanol supply shortages and price spikes.

    The current biofuel transport system is also more costly than for
    petroleum fuels. According to NREL, the overall cost of transporting
    ethanol from production plants to fueling stations is estimated to range
    from 13 cents per gallon to 18 cents per gallon, depending on the distance
    traveled and the mode of transportation. In contrast, the overall cost of
    transporting petroleum fuels from refineries to fueling stations is
    estimated on a nationwide basis to be about 3 to 5 cents per gallon.

    The key challenges to meeting biofuel transport needs are potential
    capacity limitations in the freight rail system and the cost of developing
    a dedicated ethanol pipeline system if one is needed. Looking to the
    future, DOE and ethanol industry experts are concerned about transporting
    greater amounts of biofuels if production significantly increases.
    Substantial increases in overall freight traffic are forecast, and as we
    recently reported, the freight railroad industry's ability to meet the
    growing demand is largely uncertain.^29 Replacing, maintaining, and
    upgrading the existing aging rail infrastructure are extremely costly, and
    while railroads told us that they plan to make substantial investments in
    infrastructure, the extent to which these investments will increase
    capacity as freight demand increases is unclear. Alternatively, existing
    petroleum pipelines could be used in certain areas to transport ethanol if
    ongoing efforts by operators to identify ways to modify their systems to
    make them compatible with ethanol or ethanol-blended gasoline are
    successful. Building dedicated pipelines to transport ethanol would be
    extremely expensive, according to a 2006 NREL report, which estimates the
    current costs of constructing pipelines at roughly $1 million per mile,
    although the cost can vary dramatically based on right-of-way issues, the
    number of required pumping stations, and other considerations.

    The Relatively Small Number of Fueling Stations Offering E85 Are Concentrated in
    the Midwest, while Stations Offering Biodiesel Are More Widely Dispersed

    In early 2007, approximately 1,100 public and federal fueling stations
    offered E85, concentrated largely in the Midwest, as shown in figure 2.
    The number of fueling stations that offered E85 increased by an average of
    about 350 per year between 2004 and 2006. Despite this rapid increase, we
    estimate that the number of fueling stations that offered E85 was only
    about 0.6 percent of the total number of all fueling stations. According
    to industry experts, most fueling stations with E85 are located in
    proximity to ethanol plants in order to minimize distribution costs. For
    example, in early 2007, 55 percent of the fueling stations that offered
    E85 were concentrated in five midwestern states--Minnesota, Illinois,
    Iowa, South Dakota, and Nebraska--where about 75 percent of the nation's
    ethanol is produced (see fig. 2). Of the total number of fueling stations
    that offered E85, in early 2007, 57 were federally operated for use by
    government fleet vehicles and were distributed nationwide.

    ^29See GAO, Freight Railroads: Industry Health Has Improved, but Concerns
    about Competition and Capacity Should Be Addressed, [33]GAO-07-94
    (Washington, D.C.: Oct. 6, 2006).

    Figure 2: Location of Public and Federal Fueling Stations That Offered E85
    in 2007

    In early 2007, approximately 400 public and federal fueling stations
    across the country offered biodiesel blends of B20 through B100, as shown
    in figure 3.^30 The number of fueling stations that offered biodiesel
    increased by an average of about 186 per year between 2004 and 2006.
    Despite this rapid increase, we estimate that the number of fueling
    stations that offered biodiesel was only about 1 percent of the total
    number of fueling stations that offered diesel. Biodiesel fueling stations
    are dispersed nationwide because production facilities are not
    concentrated in any specific region. Biodiesel is commonly used in low
    blends--B20 is a popular blend because it provides better mileage than
    pure biodiesel yet still provides some of its benefits, such as good
    lubricity. In addition, B20 is common because federal fleet vehicles that
    use the blend earn credits toward meeting the statutory requirements for
    the acquisition of alternative fuel vehicles by federal agencies.^31 Of
    the approximately 400 public and federal fueling stations that offered
    biodiesel in early 2007, 75 were federally operated, and were for use by
    the government fleet of vehicles.

    ^30DOE collects full data on stations that offer B20 through B100, and
    limited data on stations that offer lower blends of biodiesel. Many
    stations offer a low blend. For example, all diesel fuel sold in Minnesota
    is 2 percent biodiesel by law.

    Figure 3: Location of Public and Federal Fueling Stations That Offered B20
    through B100 in 2007

    According to DOE and officials from state governments, the increase in the
    number of fueling stations that offered E85 is due in part to federal
    grants to states and private businesses distributed through DOE's Clean
    Cities Program. This program was established in 1993 as part of the
    department's efforts to advance the nation's economic, environmental, and
    energy security by supporting local decisions to adopt practices that
    contribute to reduced petroleum consumption and is the department's only
    program aimed at expanding the biofuel infrastructure. Between 1999 and
    2006, Clean Cities provided $11 million in grants to 33 states to install
    biofuel infrastructure. Clean Cities' criteria for awarding the grants
    include, for example, the ability of the grantee to (1) access and
    dispense a significant amount of biofuel, and (2) share at least 50
    percent of the project costs, as well as the grantee's record of past
    success with alternative fuel infrastructure development. The $7.2 million
    in 2006 grants, with private and state or local cost sharing, will result
    in biofuel dispensers in 210 locations--primarily for E85--being installed
    in 21 states, such as California, Colorado, Georgia, and Iowa, and biofuel
    blending infrastructure being added in 9 states. According to a Clean
    Cities official, the program has successfully targeted grants to locations
    where grantees have a high probability of increasing biofuel use. However,
    significant increases in ethanol production would create the need for
    greater infrastructure expansion, thus placing much greater demands on
    this program.

    ^31The Energy Conservation Reauthorization Act of 1998 amended the Energy
    Policy Act of 1992 to allow federal fleets to generate one alternative
    fuel vehicle acquisition credit for every 450 gallons of pure biodiesel
    (equivalent to 2,250 gallons of B20) purchased for use in diesel vehicles
    with a gross vehicle weight rating of more than 8,500 pounds.

    In addition, certain states have provided significant funding to install
    E85 fuel dispensers at stations. For example, from 2005 to 2006, at least
    29 E85 dispensers were added to stations in Iowa, partially funded with
    grants provided by a 2-year state program, and 64 E85 dispensers were
    added in Illinois, partially funded with grants from a private foundation,
    but administered by the state Department of Commerce and Economic
    Opportunity. According to a Clean Cities official, the increase in the
    number of fueling stations that offered biodiesel was due in part to
    federal grants to states and private businesses distributed by the Clean
    Cities Program and significant additional funding provided by state
    governments. Furthermore, the state mandate in Minnesota that all diesel
    fuel contain at least 2 percent biodiesel by volume required that all
    stations provide biodiesel as B2, and in future years, B2 mandates in the
    states of Washington and Louisiana will likely contribute to increased
    availability of biodiesel blends in those states. While EPAct 2005
    provided a tax credit of up to $30,000 toward the cost of installing
    biofuel dispensers and related equipment, the impact of this tax credit on
    the number of biofuel dispensers installed in 2006 is not yet known.

    The Limited Supply of Ethanol Available for Use as E85 and the Need for
    Specialized Storage and Dispensing Equipment Are among the Key Impediments to
    Providing Biofuels at More Fueling Stations

    The limited amount of ethanol made available for use in E85 is the primary
    impediment to significantly expanding the number of stations that offer
    the fuel. According to EIA, in 2006, about 1 percent of the ethanol
    produced in 2006 was used in E85. Little ethanol was available for E85
    because producers prefer to sell ethanol at a higher price for use in low
    blends rather than selling ethanol at a discount for use in E85. High
    demand for ethanol in low blends as an oxygenate and fuel extender has
    contributed to wholesale ethanol prices that are significantly higher than
    the wholesale price of gasoline. An additional incentive to selling
    ethanol in blends of 10 percent or lower, according to one major fuel
    blender with whom we spoke, is that the fuel economy reduction at that
    level is too small for consumers to notice; hence, the fuel can be sold at
    the same price as conventional gasoline at fueling stations. On the other
    hand, to attract customers, fueling stations must generally sell E85 at a
    discount to conventional gasoline to offset the noticeably lower miles per
    gallon that drivers experience when using the fuel. For example, in 2006,
    according to DOE's Alternative Fuel Price Reports, E85 sold for 11 percent
    less on average than regular gasoline at a sample of fueling stations
    nationwide. However, few producers are willing to discount ethanol so that
    fueling stations can price E85 lower than gasoline. Consequently, EIA
    projects that use of ethanol for E85 will continue to be limited until the
    market for blends of 10 percent and under is nearly saturated.

    For biodiesel, the low overall production levels are the primary
    impediment to significantly expanding the number of fueling stations that
    offer biodiesel blends. According to our estimate, in 2006, the
    approximate amount of biodiesel produced was only 0.6 percent of the
    amount of diesel fuel used and, according to EIA, by 2030 is projected to
    remain at 0.6 percent of the amount of diesel used, or 395 million
    gallons. Furthermore, according to EIA, if production reaches 300 million
    gallons to 600 million gallons annually, competition with food and feed
    markets for soybeans may make biodiesel production more expensive and
    further reduce its competitiveness with diesel. Even without additional
    competition over soybeans, according to DOE's Alternative Fuel Price
    Reports, in 2006, pure biodiesel sales prices were on average 26 percent
    higher than those of diesel fuel at a sample of biodiesel fueling stations
    nationwide. According to EIA, the higher price of biodiesel relative to
    diesel contributes to low demand for biodiesel. Finally, using biodiesel
    can result in clogged fuel filters--the solvent properties of biodiesel
    can loosen accumulated settlements in fuel tanks left by diesel--and
    performance problems under certain conditions, such as gelling in cold
    weather, which are further impediments to increasing the number of
    stations that sell biodiesel.

    The cost of specialized storage and dispensing equipment is an impediment
    to further expanding the number of fueling stations that offer biofuels.
    While this is a lesser impediment for biodiesel, it may be a significant
    impediment for potential E85 retailers because the corrosive
    characteristics of ethanol in high concentrations may, for example, cause
    metal equipment parts made of zinc and aluminum to degrade and contaminate
    the fuel over time, potentially harming the engines of vehicles that use
    the fuel.^32 Station owners may modify equipment at relatively little cost
    or may spend significantly more for new specialized equipment due to
    concerns about equipment safety and liability. For example, Illinois state
    officials told us that the costs to convert existing gasoline storage
    tanks and dispensers to E85 at 64 fueling stations from 2005 to 2006
    averaged a relatively low $3,354. This generally involved simply replacing
    some dispenser parts, although it sometimes included cleaning the storage
    tank. According to a major manufacturer of fuel-dispensing equipment, the
    cost to purchase a new dispenser designed for E85 is about $13,000--about
    $7,000 more than for a regular gasoline dispenser. Further, according to a
    study commissioned by DOE, a completely new installation including items
    such as an underground tank, a dispenser, associated piping, and concrete
    work costs up to about $62,400. An associated impediment is the lack of a
    dispenser that has been certified for E85 use by Underwriters Laboratories
    (UL).^33 According to representatives of Wal-mart, BP, and Marathon
    Petroleum, the lack of a UL-approved E85 dispenser has been a greater
    barrier than the potential cost of the equipment and has caused them to
    defer plans to offer the fuel at their respective company-owned stations
    until such a dispenser is available. According to UL, the organization is
    in the process of developing safety requirements for E85 dispensers and
    components, although initial results of a survey it conducted indicate
    that E85 fuel exposures have not resulted in significant safety or
    maintenance problems for existing equipment.

    Finally, the marketing policies of some major oil companies may limit the
    availability of biofuels at fueling stations. According to our estimate,
    roughly 37 percent of the 169,000 fueling stations in the United
    States--including company and franchise operations--are under the brand of
    one of the five major oil companies we spoke to--BP America, Chevron
    Products Company, ConocoPhillips, ExxonMobil, and Shell Oil Products US.
    However, according to information provided by DOE's Alternative Fuels Data
    Center, in early 2007, only about 9 percent of the fueling stations that
    offered E85 and about 8 percent of the stations that offered higher blends
    of biodiesel were under the brand of one of the five oil companies.
    According to representatives of the five major oil companies, while no
    stations are prohibited from selling biofuels, none of the companies offer
    E85 to their stations as a branded product and none of the companies offer
    biodiesel except where required to by state mandate. Industry experts with
    whom we spoke told us that branded stations that offer E85 procure their
    own supply of the fuel from other sources. For this reason, officials from
    one of the five oil companies told us that their company policy prohibits
    branded stations from advertising E85 on their marquees. All five of the
    companies require E85 to be labeled to differentiate it from branded
    fuels. Company representatives said that they require labeling E85 fuel
    dispensers to protect their brand name, since the company does not control
    product quality, and to ensure that consumers do not misfuel vehicles that
    are not designed to operate on E85.

    ^32In cold climates the tanks and lines used for higher biodiesel blends
    need to be warmed to prevent gelling of the fuel.

    ^33UL is an independent, not-for-profit product safety certification
    organization that tests products and writes standards for safety.

    A Number of Policy Options Could Help Increase the Number of Stations That Offer
    Biofuels, but Increased Use Is Unlikely without a Larger Supply of
    Cost-Competitive Biofuels

    Members of Congress have proposed various policy options to increase the
    number of fueling stations that offer biofuels, including the following:

               o Mandating major oil companies to install at least one E85
               dispenser at their fueling stations. Such a mandate could also
               require the percentage of company-owned properties with an E85
               dispenser to gradually increase over time, eventually to 50
               percent.
               o Increasing the amount of the alternative fueling infrastructure
               tax credit to greater than the current limit of 30 percent of the
               cost of any qualified alternative vehicle refueling property or
               $30,000.
               o Allowing the public to access biofuel dispensers located on
               federal properties.
               o Using fines from CAFE penalties paid by automobile manufacturers
               to provide grants for biofuel dispensers.^34
               o Prohibiting biofuel marketing restrictions on fueling station
               franchisees and restrictions on selling biofuels only in certain
               areas of their property.

    ^34Automobile manufacturers are required to pay penalties for not
    complying with CAFE standards. According to the Department of
    Transportation, in 2005 these penalties amounted to $27,472,539.

    While any one of these mandates, incentives, or other strategies would
    likely increase the number of stations that offer biofuels to the public,
    absent the availability of a large supply of cost-competitive biofuel
    where they are located, it is unlikely that they would significantly
    increase biofuel use. Efforts to increase the number of stations that
    provide biofuels have primarily been successful in areas where large
    amounts of biofuels are produced, and the fuel is more likely to be sold
    for less than gasoline. For example, in Minnesota, which in early 2007 had
    about 28 percent of the nation's E85 stations and almost 10 percent of the
    nation's ethanol production capacity in-state, cost-competitive E85 is
    provided largely as a result of local ethanol producers' willingness to
    sell ethanol below its market price for E85 blending, the state's 13 cents
    per gallon ethanol production incentive payment, and the state's 5.8 cents
    per gallon excise tax exemption for stations that sell E85. Minnesota has
    already saturated its E10 market, making the state's excess supply of
    ethanol available for use in higher blends, such as E85. Outside of the
    Midwest, few regions have an available supply of cost-competitive ethanol
    to allow for E85 price discounts, and blenders generally choose to use
    available ethanol in E10 or lower blends because it is more profitable
    than higher blends. Until other regions of the United States have large
    supplies of cost-competitive ethanol or biodiesel, it is unlikely that
    increasing the number of stations that offer biofuels in those regions
    will result in significantly greater biofuel use.

    The Number of Biofuel Compatible Vehicles Is Projected to Increase, but
    Challenges, such as Limited Consumer Demand, Remain

    The relatively few biofuel compatible vehicles in use in the United States
    could increase substantially in the near future because of planned
    production increases by major automobile manufacturers. Nonetheless,
    according to some manufacturers with whom we spoke, further production
    increases are impeded by limited consumer demand for FFVs and the
    additional costs of producing them. Increasing the number of diesel
    vehicles is impeded by the additional costs to make the vehicles compliant
    with emissions regulations. Several policy options have been proposed to
    address these challenges. These may increase the number of biofuel
    compatible vehicles but would be unlikely to increase biofuel use until
    the fuels are less expensive and more widely available.

    The Relatively Small Number of Biofuel Compatible Vehicles in Use May Increase
    Substantially in the Near Future

    According to data provided by the Alliance of Automobile Manufacturers and
    DOE, in 2006, there were an estimated 4.5 million FFVs in use capable of
    operating on ethanol blends up to E85. We estimate that this number
    accounts for about 1.8 percent of the 244 million U.S. vehicles. EIA's
    most recent estimate projects FFV sales to increase from about 600,000 in
    2006 to about 1.8 million per year in 2012 and compose about 10 percent of
    sales of new light duty vehicles.^35 EIA projects FFV sales to reach about
    2 million per year by 2030 and remain at about 10 percent of total light
    duty vehicle sales. However, these numbers could increase significantly
    due to a March 2007 commitment by DaimlerChrysler, Ford, and General
    Motors to increase FFV production to compose about 50 percent of their
    annual production by 2012.

    According to data provided by the Alliance of Automobile Manufacturers and
    DOE, in 2006, there were an estimated 4.9 million diesel vehicles
    generally capable of operating on biodiesel blends. We estimate that this
    number accounts for about 2 percent of the total number of vehicles in the
    United States. EIA's most recent estimate projects diesel vehicle sales to
    increase from about 360,000 in 2006 to about 424,000 per year in 2012 and
    make up about 2.4 percent of sales of total light duty vehicles. EIA
    projects diesel vehicle sales to reach about 1.2 million per year by 2030,
    which is about 6 percent of total light duty vehicle sales.

    The federal fleet of vehicles contains large numbers of FFVs and diesel
    vehicles. According to the General Services Administration, in fiscal year
    2006, federal fleet FFVs numbered 96,229, composing about 15 percent of
    the total number of federal fleet vehicles and about 99 percent of the
    alternative fuel vehicles acquired by federal agencies.^36 In fiscal year
    2006, diesel vehicles numbered 79,954, composing nearly 13 percent of the
    total federal fleet of vehicles.

    According to EIA, automakers produced virtually all FFVs since 1992 for
    the sole purpose of acquiring credits toward the fuel economy requirements
    of the Department of Transportation's CAFE program. Under this program
    FFVs are treated as though they attain higher fuel economy than they
    necessarily would for the purpose of encouraging manufacturers to produce
    them. The Energy Policy Act of 1992 (EPAct 1992) required federal agencies
    to purchase FFVs. Specifically, it required that at least 25 percent of
    federal vehicle purchases be alternative fuel vehicles in 1996, increasing
    to 75 percent by 1999.^37 The Energy Conservation and Reauthorization Act
    of 1998, which amended EPAct 1992, encouraged federal agencies to use
    biodiesel by allowing them to partially meet the EPAct 1992 vehicle
    acquisition requirements by using biodiesel in federal fleet diesel
    vehicles.

    ^35Light duty vehicles have a gross vehicle weight of 8,500 pounds or
    less. Common examples include cars, pickup trucks, and sport utility
    vehicles.

    ^36Federal alternative fuel vehicles in fiscal year 2006 included vehicles
    that can operate on compressed natural gas, E85, electricity, liquefied
    natural gas, or liquefied petroleum gas. However, in fiscal year 2006,
    alternative fuel vehicles acquired by federal fleets only included FFVs
    and compressed natural gas capable vehicles.

    Limited Consumer Demand and Additional Production Costs Are Impediments to
    Increasing the Number of Biofuel Compatible Vehicles

    According to some automobile manufacturer representatives with whom we
    spoke, consumers have limited awareness of FFVs. As a result, few
    potential vehicle purchasers visit dealerships looking for FFVs.
    Furthermore, according to some manufacturers and EIA, consumers who
    purchase FFVs are often unaware that their vehicles are capable of using
    E85. According to a manufacturer representative with whom we spoke,
    awareness is increasing in part because of increased advertising in 2006
    designed to educate potential buyers about FFVs. Accordingly, a survey of
    new vehicle buyers by Harris Interactive and Kelley Blue Book found that
    buyer awareness of FFVs increased from 42 percent in January 2006 to 63
    percent in November 2006.

    However, consumers looking for an FFV to purchase have a relatively narrow
    range of vehicles to select from. Currently, few models of smaller, more
    fuel efficient vehicles are flex-fuel capable. According to EPA and DOE,
    only 3 FFVs available in model year 2007 were compact or midsize cars,
    while 23 were large cars, pickup trucks, vans, minivans, or sport utility
    vehicles. Some automobile manufacturer representatives with whom we spoke
    said that they have limited the models and total numbers of FFVs they make
    because of the additional production cost per vehicle, ranging between $30
    and $300, depending on the manufacturer. In addition, one automobile
    manufacturer representative with whom we spoke told us that the
    significant research and development costs associated with designing
    flexible fuel systems for different engines and model types limited the
    models of FFVs the company makes.

    ^37EPAct 1992 also required certain state government and alternative fuel
    provider fleets to acquire alternative fuel vehicles.

    Despite increasing consumer awareness and commitments from manufacturers
    to produce more FFVs, consumer demand may continue to be limited by the
    lack of E85 fueling stations in areas where the largest numbers of
    vehicles are located, as shown in figure 4. For example, according to data
    provided by the Alliance of Automobile Manufacturers, in 2006, the largest
    numbers of privately owned FFVs were located in Texas, Florida and
    California. While there were about 415,000 privately owned FFVs in Texas,
    in early 2007 only 18 publicly accessible fueling stations offered E85. In
    Florida there were about 307,000 privately owned FFVs but only 2 publicly
    accessible fueling stations offered E85 in early 2007, and in California,
    there were an estimated 257,000 FFVs but only 1 publicly accessible
    fueling station--located in the San Diego area--offered E85.

    Figure 4: Location of Public Fueling Stations That Offered E85 in 2007 and
    Number of Privately Owned FFVs by State in 2006

    Increasing the availability of diesel vehicles is impeded by the
    additional costs to make the vehicles compliant with emissions
    regulations. Biodiesel contains oxygen, which aids in combustion but
    results in emissions of nitrogen oxides that can lead to increased
    ground-level ozone. According to an industry expert with whom we spoke,
    the compliance cost of meeting current emissions standards for diesel
    vehicles adds about $3,000 to the cost of the vehicles.

    Several Policy Options Could Help Address Impediments to Increasing the Number
    of Biofuel Compatible Vehicles, but the Effect on Biofuel Use Is Unknown

    A number of policies to increase the production of biofuel compatible
    vehicles have been proposed by members of Congress. The proposals include
    the following:

               o providing a production cost tax credit of about $100 per vehicle
               to automobile manufactures for each FFV they produce;
               o mandating that automobile manufacturers produce FFVs, for
               example, by requiring the percentage of vehicles that are biofuel
               compatible to gradually increase over time to eventually 100
               percent of the manufacturer's fleet;
               o and taxing conventionally fueled vehicles.

    On the basis of the impediments we have identified, it is unlikely that
    increasing the number of biofuel compatible vehicles would increase
    biofuel use until there is a large enough supply of cost-competitive fuel
    that is readily available to drivers. Regarding FFVs, increasing the
    number of such vehicles may actually increase gasoline usage if E85 is not
    readily available because the FFVs currently on the road--and potentially
    those that are added in the future--are larger vehicles that get
    relatively poor gas mileage and are operating mainly on gasoline.
    According to a report from the Department of Transportation, DOE, and EPA,
    automobile manufacturers have used CAFE incentives to produce less fuel
    efficient FFVs that consumers generally do not operate with biofuels,
    resulting in increased petroleum use. The report projected in 2003 that 9
    billion gallons of additional gasoline would be used between 2005 and 2008
    as a result of the CAFE credit for FFVs. We have also reported that the
    CAFE program's effectiveness in reducing oil consumption is hampered by
    the provision that grants credits to manufacturers for selling FFVs
    because these vehicles often run on regular gasoline.^38

    38See GAO, Passenger Vehicle Fuel Economy: Preliminary Observations on
    Corporate Average Fuel Economy Standards, [34]GAO-07-551T  (Washington,
    D.C.: Mar. 6, 2007).

    The lack of access to E85 for federal fleet FFVs illustrates the potential
    pitfalls of putting FFVs on the road without a sufficient number of
    stations to provide the fuels. While there were about 96,000 FFVs in the
    federal fleet in fiscal year 2006, there are only 57 fueling stations
    dedicated to supplying them with E85 in early 2007. Federal fleet FFVs
    were distributed nationwide, but the largest numbers were in the states of
    California, Texas, and Florida, as shown in figure 5. In California, there
    were 8,146 federal fleet FFVs, but only 3 stations--2 federal and 1
    public--that provide E85. Similarly, there are only 24 E85 stations in
    Texas to serve 6,810 federal FFVs, and only 8 stations in Florida to serve
    6,606 federal FFVs. This situation can lead to greater petroleum fuel
    usage by federal agencies. As we reported in February 2007, the U.S.
    Postal Service was required to purchase FFVs even though the available
    vehicles had larger engines than were needed. Because the Postal Service
    found that E85 was generally 17 percent more expensive than gasoline, and
    that E85 stations were sometimes too far away to justify the travel costs,
    it chose to fuel these vehicles with regular gasoline, resulting in
    increased use of petroleum fuels.^39 The agency's FFV fleet failed to
    create enough E85 demand to spur investment in the installation of E85
    dispensers at fueling stations, even in areas where there were large
    numbers of Postal Service FFVs.

    ^39See GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices
    Requires Improved Tracking and Monitoring of Consumption Information,
    [35]GAO-07-244  (Washington, D.C.: Feb. 16, 2007).

    Figure 5: Location of Federal Fueling Stations That Offered E85 in 2007
    and Number of Federal Fleet FFVs by State in 2006

    DOE Has Not Yet Developed a Strategic Approach to Coordinate the Expansion of
    Biofuel Production with Infrastructure and Vehicles, and the Effectiveness of
    Biofuel Tax Expenditures Has Not Been Evaluated

    Currently DOE lacks a comprehensive strategic approach to coordinate the
    expansion of biofuels production with biofuel distribution infrastructure
    development and vehicle production. While DOE's Biomass Program has a
    strategic approach to increasing ethanol production, DOE has not yet
    developed a comprehensive strategic approach for determining the
    infrastructure (transport system and fueling stations) and vehicles needed
    to distribute and use the increased production that could result from the
    program. A strategic approach could assist in resolving important
    questions, such as which blend level of ethanol--E10, E85, or something in
    between--would most effectively and efficiently increase the use of the
    fuel and which elements of the biofuel infrastructure should receive
    government support. In addition, federal agencies have not evaluated the
    performance of biofuel-related tax expenditures, making it impossible to
    determine their impacts on the economy, environment, or energy security.

    DOE's Strategy for Increasing Ethanol Production Is Not Coordinated with a
    Comprehensive Strategic Approach for Distribution Infrastructure Development and
    Vehicle Production

    DOE has a strategic approach for increasing ethanol production, which it
    developed in collaboration with other federal agencies and the private
    sector. The agency's approach is spelled out in the multiyear plan for its
    Biomass Program, which describes the agency's approach to the research and
    development of cellulosic biomass-to-fuel technologies; provides analysis
    of the markets involved in each technology; lists relevant
    accomplishments; outlines specific goals, milestones, and barriers; and
    describes what the role of the federal government should be. For example,
    the Biomass Program focuses on technologies that have a high level of
    technical and economic risk but also offer significant potential rewards
    for the nation. In addition, Congress established the Biomass Research and
    Development Board (Biomass Board) to help ensure a coordinated strategic
    approach to research and development spending at DOE, USDA, EPA, the
    National Science Foundation, and other agencies. The goal of the Biomass
    Board is to bring coherence to federal strategic planning and to maximize
    the benefits from federal grants and assistance. Members of the Biomass
    Board, with advice from private sector stakeholders, identify gaps in fuel
    production technology that need to be addressed by research and
    development and seek to coordinate efforts in order to avoid duplication
    of effort.

    However, DOE has not yet developed a comprehensive strategic approach to
    coordinate the significantly larger volume of biofuel production that
    could result from the Biomass Program with distribution infrastructure
    development and vehicle production. DOE officials told us they recognize
    the importance of developing a strategic approach and have taken an
    initial step in that direction. According to a DOE official with whom we
    spoke, in March 2007, officials from DOE's Biomass Program drafted a
    position paper that supported moving nationwide ethanol blends beyond E10
    to E15 or E20 in order to achieve the most efficient expansion of ethanol
    use. DOE would continue to support E85 only in areas with high ethanol
    production levels. However, the position paper has not yet been approved,
    and according to one DOE official with whom we spoke, it is still unclear
    how this position will affect future DOE activities and priorities related
    to ethanol infrastructure. After DOE finalizes its decision on ethanol
    blend levels, the official told us that it would then need to coordinate
    with other agencies to develop a strategic approach to biofuel
    infrastructure expansion. In that regard, DOE has recently begun working
    with USDA and other federal agencies through the Biomass Board to develop
    a plan to achieve the President's goal of displacing 20 percent of U.S.
    gasoline consumption in the next 10 years. According to DOE, private
    sector stakeholders involved in biofuel production, delivery
    infrastructure, and vehicles will also have a key role in the development
    of successful strategies for expanding biofuel production and use.

    In the absence of a strategic approach, important questions--such as what
    distribution infrastructure and vehicles are needed to support DOE's
    chosen blend level, when they are needed, or what government support is
    needed and what will develop through market forces--remain unanswered. For
    example, if cellulosic ethanol production begins on a commercial scale,
    the expansion of biofuel infrastructure to meet the President's target
    level of 35 billion gallons by 2017 may be achieved through the use of E10
    nationally and E85 regionally, or with the use of E20 nationally.
    Determining which fuel blend strategy to pursue is critical in guiding the
    development of distribution infrastructure because, according to several
    industry officials, a national E20 approach may not require much
    investment in new dispensers, and depending on the results of current fuel
    system testing, it might be accomplished with the existing automobile
    fleet. However, using E20 nationally may not be feasible if transportation
    limitations prevent the large-scale distribution of ethanol beyond its
    regional production centers, in which case regional expansion of E85 may
    make sense. For example, rail industry representatives with whom we spoke
    indicated that there is currently no spare capacity in the rail system to
    transport higher levels of biofuels. As a result, achieving even
    relatively small increases in biofuel use may be difficult with the
    current transportation infrastructure. It is also not known what roles the
    government and private sector should play in the development and expansion
    of the nation's biofuel infrastructure and fleet of biofuel compatible
    vehicles. For example, DOE has not determined the extent to which the
    federal government needs to be involved in supporting the expansion of the
    E85 fueling station infrastructure or whether the needed infrastructure
    will continue expanding largely as a result of market forces and state
    support in areas that produce large amounts of ethanol.

    DOE Has Not Evaluated the Performance of Biofuel-Related Tax Expenditures

    Federal biofuel tax expenditures are composed of excise tax credits for
    ethanol and biodiesel blenders, tax credits for small ethanol and
    biodiesel producers, a tax credit for alternative fueling infrastructure
    development, and a special depreciation deduction for cellulosic ethanol
    facilities.^40 Through these tax expenditures, the government forgoes a
    certain amount of tax revenue to encourage biofuel use because of the
    presumed benefits, such as reducing greenhouse gases and improving energy
    security and rural economies. The largest of the biofuel tax expenditures
    is the VEETC, which according to the Department of the Treasury, cost
    about $2.7 billion in forgone tax revenue in 2006.

    The Government Performance and Results Act provides an impetus for
    executive branch agencies to evaluate tax expenditures that affect their
    missions. However, as we previously reported, one of the key impediments
    to moving forward in evaluating tax expenditure outcomes is the continuing
    lack of clarity about the roles of the Office of Management and Budget
    (OMB), Treasury, and the departments or agencies with program
    responsibilities, such as DOE.^41 We also reported that OMB officials said
    the agency did not have the expertise or resources to conduct its own
    comprehensive analyses of tax expenditures and that individual agencies
    should take responsibility for identifying tax expenditures that affect
    their missions, with Treasury's Office of Tax Analysis leading efforts to
    evaluate tax expenditures. To help evaluate whether tax expenditures are
    achieving the desired results, our work related to GPRA and the experience
    of leading organizations have shown the importance of establishing
    outcome-oriented performance goals and measures. However, DOE and Treasury
    have not worked together to define their roles and responsibilities for
    evaluating biofuel tax expenditures, nor has either agency established the
    performance goals or measures needed to conduct an evaluation, or gathered
    and reported any performance data. Consequently, there is no reporting on
    whether biofuel tax expenditures are achieving their desired goals.

    ^40Volumetric Ethanol Excise Tax Credit S301 (Pub.L. No. 108-357),
    Biodiesel Tax Credit S1344 (Pub. L. No. 109-58), Small Ethanol Producer
    Credit S11502 (Pub. L. No. 101-508), Small Agri-Biodiesel Tax Credit S1345
    (Pub. L. No. 109-58), Alternative Fuel Infrastructure Tax Credit S1342
    (Pub. L. No. 109-58), Special Depreciation Allowance for Cellulosic
    Biomass Ethanol Plant Property S209 (Pub. L. No. 109-432).

    ^41See [36]GAO-05-690 .

    It is important to evaluate the outcomes of biofuel tax expenditures so
    that the government can determine if spending on biofuels has positive
    results. Evaluating the outcomes of biofuel tax expenditures consists of
    comparing the level of forgone tax revenue to the outcomes or benefits.
    The outcomes or benefits would be the dollar savings resulting from
    improved energy security or the improvements to rural economies, for
    example, and should be greater than the amount of forgone tax revenue for
    there to be a positive result.^42 In addition, knowing the level of
    benefits on a measurable basis, such as per gallon of biofuel, would allow
    policymakers to determine the level of tax expenditure that would ensure a
    positive result. Being able to determine the proper level of tax
    expenditure per gallon is important because if it is set too high, then
    biofuel use would be more costly to taxpayers than the benefit it
    provides, and likewise, if tax expenditures are too low, not enough
    biofuel would be used and the potential benefits from increased biofuel
    use would remain unrealized. Because neither DOE nor any other executive
    branch agency has conducted an analysis of the benefits of the VEETC, it
    is impossible to know whether the 51 cent tax expenditure for every gallon
    of ethanol blended with gasoline is too high, too low, or at the proper
    level.

    It is also important to evaluate the outcomes of biofuel tax expenditures
    so that the government can determine if there are more cost-effective
    means to achieve the same outcomes. Tax expenditures are not the only
    means to increase the production and use of biofuels. Taxes on gasoline
    and a RFS that requires a specified level of biofuel use are other policy
    options that have been implemented and could be expanded to achieve the
    same outcome as the VEETC is assumed to achieve, but at a lower cost to
    the government. For example, according to analysis conducted by DOE and
    USDA and some economists with whom we spoke, the current approach of using
    both an RFS and an excise tax credit, such as the VEETC, may be largely
    redundant because biofuel use can never be lower than the level mandated
    by the RFS. Consequently, most of the benefits that accrue to society from
    the levels of biofuel use mandated by the RFS could have been achieved
    without the need for any forgone tax revenue.

    ^42Setting targets for and monitoring the number of gallons of biofuel
    produced and used (outputs) does not measure the benefits of biofuels
    (outcomes) and therefore cannot be used to measure the performance of
    biofuel tax expenditures.

    Although executive branch agencies have not evaluated the performance of
    biofuel tax expenditures, other organizations have conducted limited
    evaluations that have raised questions about the effectiveness of these
    tax expenditures. For example, in 2006, the Congressional Research Service
    analyzed the VEETC and biodiesel tax credits and issued a report stating
    that tax expenditures are generally an inefficient way to deal with
    environmental or energy security concerns and this was the case with
    biofuel tax expenditures, which do not directly address the external costs
    of petroleum motor fuels production, use, or importation, such as the
    costs of greenhouse gas emissions.^43 The report also found that with the
    RFS in place, the VEETC has caused substantial and unnecessary losses in
    federal tax revenue without providing a significant incentive for
    additional production. These losses could increase in the future if
    production increases. For example, at the current rate of subsidy, if 15
    billion gallons of ethanol were produced annually, it would cost the
    Treasury an estimated $7.6 billion annually. In addition, a study by the
    Global Subsidies Initiative estimated that the government provided a total
    subsidy of $1.80 for each gallon of gasoline displaced with ethanol in the
    United States transportation sector.^44 To a large extent, this subsidy
    came from tax expenditures, particularly the VEETC. Because outcome goals
    for biofuel tax expenditures have not been established and performance
    data have not been gathered, it is impossible to determine if the $1.80
    per gallon cost resulted in an equal or greater amount of benefits.

    Conclusions

    Congress and the President have made commitments to support the
    development of domestically produced biofuels, biofuel fueling stations,
    and FFVs because of the expected benefits for rural economies, energy
    security, and the environment. However, the nation can and should think
    more strategically about these commitments. Because there are limits on
    the amount of corn ethanol that can be produced as well as market
    conditions that favor selling ethanol for blending as E10, it is unlikely
    that ethanol producers will make significant quantities of corn ethanol
    available for blending as E85. Without a sufficient volume of
    competitively priced ethanol for E85, federal investments in E85 fueling
    station infrastructure and FFVs would result in additional costs and yet
    would not likely be effective at increasing the use of the fuel. To date,
    DOE's Clean Cities program has made a relatively small investment in
    expanding the number of E85 fueling stations, but it is questionable
    whether even this limited federal expenditure was necessary or whether any
    additional federal funds should be devoted to further expansion unless
    ethanol production dramatically increases. Likewise, because most FFVs are
    larger, less fuel efficient vehicles that generally use gasoline, there
    are environmental costs associated with providing incentives through the
    CAFE program for increasing the production of these vehicles in the
    absence of an available, cost-competitive supply of E85.

    ^43U.S. Senate. Committee on the Budget. Tax Expenditures: Compendium of
    Background Material on Individual Provisions (S. PRT. 109-072, pp. 91).
    Prepared by the Congressional Research Service. Washington: 2006.

    ^44See Doug Koplow, Biofuels--At What Cost?: Government Support for
    Ethanol and Biodiesel in the United States, the Global Subsidies
    Initiative of the International Institute for Sustainable Development,
    October 2006. The $1.80 estimate includes all government support for
    ethanol and corn, including state-level ethanol incentives and other
    federal nontax expenditures such as direct payments to corn producers.

    Currently the nation lacks a comprehensive strategic approach to
    coordinate the expansion of biofuels production with distribution
    infrastructure development and vehicle production. Because such an
    approach does not exist, fundamental questions remain unanswered. For
    example, it has not yet been determined whether conventional vehicles can
    run on blends of more than E10 without damaging the vehicles and still
    meet EPA Clean Air Act requirements. The answer to this question will have
    a significant impact on when or if biofuel-specific infrastructure or
    vehicles are needed. Absent a coordinated, strategic approach, the nation
    runs the risk of unnecessarily investing in fueling stations or FFVs that
    cannot be effectively utilized or of producing significant quantities of
    ethanol but not having an effective way to deliver the fuel to stations
    and consumers. Finally, as biofuel production increases, biofuel tax
    expenditures will become increasingly expensive. However, because DOE and
    Treasury have not defined their roles and responsibilities or evaluated
    and reported on the performance of biofuel tax credits, policymakers have
    little basis for evaluating whether the benefits of these tax expenditures
    outweigh the costs.

    Recommendations for Executive Action

    To improve biofuel-related planning and to provide Congress better
    information on the costs and benefits of biofuel tax expenditures, we are
    recommending that the Secretary of Energy:

               o Collaborate with public and private sector stakeholders to
               develop a comprehensive strategic approach to increasing the
               availability and use of biofuels that coordinates expected biofuel
               production levels with the necessary distribution infrastructure
               development and vehicle production.
               o Collaborate with the Secretary of the Treasury to evaluate and
               report on the extent to which biofuel-related tax expenditures are
               effectively and efficiently achieving their goals, as well as the
               extent to which they support the department's comprehensive
               strategic approach for biofuels. As a first step, the Secretaries
               will need to define their roles and responsibilities for
               conducting the evaluation.

    Agency Comments and Our Evaluation

    We provided a copy of our draft report to the Department of Energy for its
    review and comment. In its written response DOE agreed with both of our
    recommendations and described its key initiatives to promote cellulosic
    ethanol development and deployment, as well as its efforts with other
    federal agencies and the private sector to coordinate increased biofuels
    production, infrastructure development, and vehicle technology. DOE also
    provided technical comments, which we incorporated into the report as
    appropriate. DOE's comments and our detailed responses are presented in
    appendix I.

    We are sending copies of this report to the Secretary of Energy,
    appropriate congressional committees, and other interested members of
    Congress. We also will make copies available to others upon request. In
    addition, the report will be available at no charge on the GAO Web site at
    http://www.gao.gov .

    If you or your staff have any questions about this report, please contact
    me at (202) 512-3841 or gaffiganm@gao.gov . Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. GAO staff who made major contributions to this
    report are listed in appendix II.

    Mark E. Gaffigan
    Acting Director, Natural Resources and Environment

    Appendix I: Comments from the Department of Energy Appendix

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    See comment 1.

    See comment 2.

    GAO Comments

    The following are GAO's comments on the Department of Energy's letter
    dated May 25, 2007.

    1. While a detailed discussion of all federal programs related to biofuels
    and bioproducts is beyond the scope and objectives of this report, we
    believe that the report sufficiently recognizes the key efforts under way
    by DOE and other federal agencies.

    2. We revised the report to indicate that private sector stakeholders will
    play a key role in the investment and implementation of a successful
    strategy for biofuels commercialization.

    Appendix II: GAO Contact and Staff Acknowledgments

    GAO Contact

    Mark E. Gaffigan, (202) 512-3841or gaffiganm@gao.gov

    Staff Acknowledgments

    In addition to those named above, Stephen D. Secrist, Assistant Director;
    Brad C. Dobbins; Winchee Lin; Robert J. Marek; and Bryan G. Rogowski made
    key contributions to this report. Also contributing to the report were
    Catherine A. Colwell, John W. Delicath, Franklin W. Rusco, MaryLynn
    Sergent, James A. Stack, and Barbara R. Timmerman.

    (360708)

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    www.gao.gov/cgi-bin/getrpt?GAO-07-713 .

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    Highlights of [46]GAO-07-713 , a report to congressional requesters

    June 2007

    BIOFUELS

    DOE Lacks a Strategic Approach to Coordinate Increasing Production with
    Infrastructure Development and Vehicle Needs

    The U.S. transportation sector is almost entirely dependent on oil, a
    condition that poses significant economic and environmental risks.
    Biofuels, such as ethanol and biodiesel, have the potential to displace
    oil use in transportation fuel. GAO was asked to describe the status of
    and impediments to expanding biofuel production, distribution
    infrastructure, and compatible vehicles as well as federal policy options
    to overcome the impediments. GAO was also asked to assess the extent to
    which the Department of Energy (DOE) has developed a strategic approach to
    coordinate the expansion of biofuel production, infrastructure, and
    vehicles and has evaluated the effectiveness of biofuel tax credits. GAO
    interviewed representatives and reviewed studies and data from DOE,
    states, industry, and other sources.

    [47]What GAO Recommends

    GAO recommends that the Secretary of Energy (1) collaborate with public
    and private sector stakeholders to develop a strategic approach that
    coordinates expected biofuel production with distribution infrastructure
    and vehicle production, and (2) collaborate with the Secretary of the
    Treasury to evaluate and report on the extent to which biofuel-related tax
    expenditures are achieving their goals.

    DOE reviewed a draft of this report and generally agreed with the findings
    and recommendations.

    Combined ethanol and biodiesel production increased rapidly from about 3.4
    billion gallons in 2004 to about 4.9 billion gallons in 2006, but these
    biofuels--primarily ethanol--composed only about 3 percent of 2006 U.S.
    gasoline and diesel transportation fuel use. Due to limitations on the
    production and use of corn--the primary feedstock used to produce ethanol
    in the United States--15 billion to 16 billion gallons is the generally
    agreed maximum amount of U.S. corn ethanol production. Using cellulosic
    feedstocks, such as corn stalks or other plant material, could expand the
    amount of ethanol produced, but the production costs are currently twice
    those of corn ethanol. Policies that support cellulosic ethanol research
    have the potential to increase the future availability of cost-competitive
    ethanol.

    Existing biofuel distribution infrastructure has limited capacity to
    transport the fuels and deliver them to consumers. Biofuels are
    transported largely by rail, and the ability of that industry to meet
    growing demand is uncertain. In addition, in early 2007, about 1 percent
    of fueling stations in the United States offered E85--a blend of about 85
    percent ethanol and 15 percent gasoline--or high blends of biodiesel, such
    as B20 or higher. Increasing the availability of E85 at fueling stations
    is impeded largely by the limited availability of ethanol for use in high
    blends. Several policy options, such as mandating their installation,
    could increase the number of biofuel dispensers in stations. However,
    until more biofuel is available at a lower cost, it is unlikely that more
    fueling stations would lead to significantly greater biofuels use.

    In 2006, an estimated 4.5 million flexible fuel vehicles (FFV) capable of
    operating on ethanol blends up to E85 were in use--an estimated 1.8
    percent of the nearly 244 million U.S. vehicles. The number of FFVs may
    increase substantially because of a recent commitment by DaimlerChrysler,
    Ford, and General Motors to increase FFV production to compose about 50
    percent of their annual production by 2012. Several policy options, such
    as a tax credit for FFV production, could increase the number of FFVs, but
    would likely have little impact on biofuel use until E85 is less expensive
    and more widely available. It is also a concern that because many FFVs are
    less fuel efficient than other vehicles and rarely use E85, they actually
    increase petroleum use.

    DOE has not yet developed a comprehensive approach to coordinate its
    strategy for expanding biofuels production with the development of biofuel
    infrastructure and production of vehicles. Such an approach could assist
    in determining which blend of ethanol--E10, E85, or something in between--
    would most effectively and efficiently increase the use of the fuel and
    what infrastructure development or vehicle production is needed to support
    that blend level. In addition, DOE has not evaluated the performance of
    biofuel-related tax credits, the largest of which cost the Treasury
    $2.7billion in 2006. As a result, it is not known if these expenditures
    produced the desired outcomes or if similar benefits might have been
    achieved at a lower cost.

    References

    Visible links
      31. http://www.gao.gov/cgi-bin/getrpt?GAO-05-690
      32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-339R
      33. http://www.gao.gov/cgi-bin/getrpt?GAO-07-94
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-551T
      35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-244
      36. http://www.gao.gov/cgi-bin/getrpt?GAO-05-690
      46. http://www.gao.gov/cgi-bin/getrpt?GAO-07-713
    *** End of document. ***