This is the accessible text file for GAO report number GAO-07-713 
entitled 'Biofuels: DOE Lacks a Strategic Approach to Coordinate 
Increasing Production with Infrastructure Development and Vehicle 
Needs' which was released on June 11, 2007. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

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

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: 

GAO Highlights: 

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

Why GAO Did This Study: 

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. 

What GAO Found: 

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 $2.7 billion 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. 

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 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-713]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Mark Gaffigan at (202) 
512-3841 or gaffiganm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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

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: 

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

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: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

GAO Contact: 

Staff Acknowledgments: 

Figures: 

Figure 1: Location of Ethanol Production Plants in 2007: 

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

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

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

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

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: 

[End of section] 

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. 

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).[Footnote 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.[Footnote 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.[Footnote 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. 

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.[Footnote 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. 

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.[Footnote 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. 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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. 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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. 

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,[Footnote 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.[Footnote 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. 

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: 

[See PDF for image] 

Source: Renewable Fuels Association data. 

[End of figure] 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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.[Footnote 22] 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 25] However, they said 
that technological uncertainties remain and it is therefore essential 
that research funding continue to meet this goal.[Footnote 26] 

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.[Footnote 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. 

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.[Footnote 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. 

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.[Footnote 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. 

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

[See PDF for image] 

Sources: Congressional Research Service and DOE's Alternative Fuels 
Data Center data. 

[End of figure] 

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.[Footnote 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.[Footnote 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. 

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

[See PDF for image] 

Source: DOE's Alternative Fuels Data Center data. 

[End of figure] 

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. 

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.[Footnote 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).[Footnote 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. 

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: 

˛ 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. 

˛ 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. 

˛ Allowing the public to access biofuel dispensers located on federal 
properties. 

˛ Using fines from CAFE penalties paid by automobile manufacturers to 
provide grants for biofuel dispensers.[Footnote 34] 

˛ Prohibiting biofuel marketing restrictions on fueling station 
franchisees and restrictions on selling biofuels only in certain areas 
of their property. 

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.[Footnote 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.[Footnote 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.[Footnote 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. 

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. 

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: 

[See PDF for image] 

Sources: DOE's Alternative Fuels Data Center and Alliance of Automobile 
Manufacturers data. 

[End of figure] 

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: 

˛ providing a production cost tax credit of about $100 per vehicle to 
automobile manufactures for each FFV they produce; 

˛ 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; 

˛ 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.[Footnote 38] 

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.[Footnote 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. 

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

[See PDF for image] 

Sources: DOE's Alternative Fuels Data Center and DOE's and General 
Services Administration's (GSA) Federal Automotive Statistical Tool 
data. 

[End of figure] 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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. 

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.[Footnote 
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.[Footnote 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. 

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: 

˛ 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. 

˛ Collaborate with the Secretary of the Treasury to evaluate and report 
on the extent to which biofuel-related tax expenditures are effectively 
and efficiently achieving their goals, as well as the extent to which 
they support the department's comprehensive strategic approach for 
biofuels. As a first step, the Secretaries will need to define their 
roles and responsibilities for conducting the evaluation. 

Agency Comments and Our Evaluation: 

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

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

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

Signed by: 

Mark E. Gaffigan: 
Acting Director, Natural Resources and Environment: 

[End of section] 

Appendix I: Comments from the Department of Energy: 

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

Department of Energy: 
Washington, DC 20585: 

May 25. 2007: 

Mr. Mark E. Gaffigan: 
Acting Director, Natural Resources and Environment: 
Government Accountability Office: 
441 G Street, NW Room 2T-23A: 
Washington, DC 20548: 

Dear Mr. Gaffigan: 

Thank you for the opportunity to comment on the draft Government 
Accountability Office Report, entitled "DOE Lacks a Strategic Approach 
to Coordinate Increasing Production With Infrastructure Development and 
Vehicle Needs." The Department of Energy, with the help of many Federal 
agencies, is taking a leadership role in commercializing cellulosic 
biofuels. Our efforts address issues that run the gamut from feedstock 
production to filling up at the pump. They include fuel production 
technologies, vehicle and delivery infrastructure, as well as vehicle 
testing and optimization to name a few. 

The Department of Energy, together with a number of other federal 
agencies, is taking a leading role in the development, 
commercialization, and deployment of cost competitive cellulosic 
ethanol. We are working together with other federal agencies to 
identify and promote infrastructure needs that will be necessary to 
handle the rapid increase of ethanol, cellulosic ethanol and 
alternative fuels that will be necessary to meet the President's goal 
of displacing twenty percent of America's gasoline use in 10 years. 

Let me provide you with several key initiatives which the Department of 
Energy has undertaken to promote cellulosic ethanol development and 
deployment in the short term. I then want to describe what the 
Department is doing with other federal agencies and the private sector 
to coordinate increased biofuels production and infrastructure 
development. 

As you know, commercial scale cellulosic ethanol refineries do not yet 
exist. To help develop this industry and create cost competitive 
cellulosic ethanol, the Office of Energy Efficiency and Renewable 
Energy announced a solicitation under Section 932 of the EPACT of 2005, 
and recently selected six advanced technology biorefinery 
demonstrations to validate cost competitive biofuels and other 
products. These investments, including private capital, will infuse up 
to $1.2 billion toward commercializing biofuels. In addition, the 
Department just released a solicitation for up to $400 million, 
including private funding, to support the development of small-scale 
biorefineries that can quickly be moved to commercial scale. These 
public-private investments in technology of up to $1.6 billion, 
combined with sound business strategy, give the United States a high 
probability of success in commercializing biofuels. The report 
indicates that greater vehicle use and infrastructure deployment will 
not occur without a large supply of cost-competitive biofuels and we 
agree. However, the report does not recognize efforts underway by the 
Department of Energy and other Federal agencies to make the bio fuels 
and bioproducts industry happen. 

As part of our intermediate and long-term strategy, the Department of 
Energy is providing an additional investment of up to $375 million to 
back this technology development through the creation of three 
"Bioenergy Research Centers." The purpose of these centers will be to 
engage one of America's most successful industries, biotechnology, into 
longer term research such as plant genomics in optimizing feedstocks 
and conversion processes. Through its loan guarantee program, the 
Department is helping spur commercialization of biofuels. By providing 
the full faith and credit of the U.S. government, loan guarantees will 
enable the government to share some of the financial risks in 
demonstrating new biofuel-related technologies. 

The Department of Energy is also formulating a biofuels infrastructure 
strategy that brings together our biofuels and vehicle technology 
programs. The purpose of this effort will be to look at vehicle 
performance impacts from operation on various biofuel blends. 
Comprehensive testing will be conducted in close coordination with the 
Environmental Protection Agency and may include engine optimization and 
integration of energy storage into bio-fueled vehicles. 

The scope of the report goes beyond the mission and authority of the 
work by the Department of Energy. However, the Department is working 
very closely with the U.S. Department of Agriculture to promote bio 
fuels and bioproducts. The Secretaries of Energy and Agriculture have 
recently appointed members to a reconstituted "Biomass Research and 
Development Board." This high level board of ten federal agencies is co-
chaired by the Under Secretary for Rural Development, Department of 
Agriculture and the Assistant Secretary for Energy Efficiency and 
Renewable Energy, Department of Energy and includes: 

* the Acting Deputy Secretary of Transportation; 

* the Assistant Administrator for Research and Development, 
Environmental Protection Agency; 

* the Director of the National Science Foundation; 

* the Assistant Secretary, Land and Minerals Management, Department of 
Interior; 

* Assistant Secretary for Economic Policy, Department of Treasury; 

* Under Secretary of Science, Department of Energy; 

* Under Secretary for Research, Education and Economics, Department of 
Agriculture; 

* Office of Science and Technology Policy; 

* Federal Environmental Executive; and: 

* Chief Scientist, National Institute of Standards and Technology, 
Department of Commerce. 

This Board will look at all aspects of a biofuel-based economy and 
publish a National Biofuels Action Plan that communicates the 
government's strategies for production, delivery and end-use necessary 
for widespread deployment and commercialization. 

This national plan will support both the President's "Twenty in Ten" 
initiative and his May 14, 2007, Executive Order that calls for 
interagency cooperation in addressing transportation sector greenhouse 
gas emissions. Furthermore, major stakeholders involved in biofuel 
production, delivery infrastructure and vehicles will be consulted on 
the plan and its implementation strategies. The Government 
Accountability Office's report failed to emphasize the key role that 
these private stakeholders will have on the investment and 
implementation of successful strategies for biofuels commercialization. 
We agree with the report's recommendation for the Departments of Energy 
and Treasury to work together on evaluating the effectiveness of tax 
policies. 

Enclosed, please find additional comments that provide more detail on 
the specifics o^ your report. If you have any questions, please contact 
me at 202-586-5523. 

Signed by: 

Steven G. Chalk: 
Deputy Assistant Secretary for Renewable Energy: 
Office of Technology Development: 
Energy Efficiency and Renewable Energy: 

Enclosure: 

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. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

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

(360708): 

FOOTNOTES 

[1] DOE'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. 

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

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

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

[5] EIA 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. 

[6] The 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. 

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

[8] EPA 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. 

[9] Some 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. 

[10] USDA, 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. 

[11] Section 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. 

[12] DOE, 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. 

[13] DOE, 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. 

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

[15] EIA'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. 

[16] Biodiesel 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. 

[18] According 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. 

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

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

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

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

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

[24] For 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. 

[25] DOE 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. 

[26] NREL 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. 

[27] Cellulosic 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, 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. 

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

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

[30] DOE 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. 

[31] The 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. 

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

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

[34] Automobile 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. 

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

[36] Federal 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. 

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

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

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

[40] Volumetric Ethanol Excise Tax Credit §301 (Pub.L. No. 108-357), 
Biodiesel Tax Credit §1344 (Pub. L. No. 109-58), Small Ethanol Producer 
Credit §11502 (Pub. L. No. 101-508), Small Agri-Biodiesel Tax Credit 
§1345 (Pub. L. No. 109-58), Alternative Fuel Infrastructure Tax Credit 
§1342 (Pub. L. No. 109-58), Special Depreciation Allowance for 
Cellulosic Biomass Ethanol Plant Property §209 (Pub. L. No. 109-432). 

[41] See GAO-05-690. 

[42] Setting 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. 

[43] U.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. 

[44] See 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. 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to www.gao.gov and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 441 G Street NW, Room LM 
Washington, D.C. 20548: 

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202) 
512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S. 
Government Accountability Office, 441 G Street NW, Room 7125 
Washington, D.C. 20548: 

Public Affairs: 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: