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

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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 [email protected] . 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 [email protected]

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
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