| | Statement of Bob Dinneen, President and Chief Executive Officer, Renewable Fuels Association Testimony Before the Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means April 19, 2007
Good afternoon Chairman Neal, Ranking Member English, and
Members of the Subcommittee. My name is Bob Dinneen and I am president and CEO
of the Renewable Fuels Association, the national trade association representing
the U.S. ethanol industry.
This is an important and timely
hearing, and I am pleased to be here to discuss U.S. energy tax policy. Tax
incentives have played a critical role in supporting the development of our
domestic biofuels markets, making U.S. ethanol and biodiesel the fastest
growing renewable energy resources in the world today.
In 2006, the U.S. produced a record 4.9 billion gallons of ethanol, displacing the equivalent of 206
million barrels of crude oil valued at $13.6 billion. Since an increasing
share of our oil is imported, this displacement means that these dollars were
spent and invested in the U.S. and not sent abroad to foreign suppliers.
Ethanol today is the single most important value-added market for farmers, and
is revitalizing rural communities across the country. Finally, as ethanol is
produced from agricultural feedstocks taking carbon out of the atmosphere, it
is the only real strategy to address climate change in place today, actually
lowering greenhouse gas emissions by 8 million tons in 2006.
The single most important
federal policy driving these impressive results is the tax incentives available
to refiners that choose to blend biofuels into gasoline and diesel fuel today.
Background
Today’s ethanol industry consists of 115 biorefineries
located in 19 different states with the capacity to process almost 2 billion
bushels of grain into 5.7 billion gallons of high octane, clean burning motor
fuel, and more than 12 million metric tons of livestock and poultry feed. It
is a dynamic and growing industry that is revitalizing rural America, reducing emissions in our nation’s cities, and lowering our dependence on imported
petroleum.
Ethanol has become an essential component of the U.S. motor fuel market. Today, ethanol is blended in more than 46% of the nation’s fuel,
and is sold virtually from coast to coast and border to border.
The ethanol industry provides a significant contribution to
the American economy. According to an analysis completed for the RFA,
the approximately 4.9 billion gallons of ethanol produced in 2006 resulted in
the following impacts:
- Added $41.1 billion to gross output;
- Created 160,231 jobs in all sectors of the economy;
- Increased economic activity and new jobs from ethanol
increased household income by $6.7 billion, money that flows directly into
consumers’ pockets;
- Contributed $2.7 billion of tax revenue for the Federal
government and $2.3 billion for State and Local governments; and,
- Reduced oil imports by 170 million barrels of oil, valued
at $11.2 billion.
In addition to providing a growing and reliable domestic market for American
farmers, the ethanol industry also provides the opportunity for farmers to
enjoy some of the value added to their commodity by further processing.
Farmer-owned ethanol plants account for 43 percent of the U.S. fuel ethanol plants and almost 34 percent of industry capacity.
There are currently 79 biorefineries under construction. With
seven existing biorefineries expanding, the industry expects more than 6
billion gallons of new production capacity to be in operation by the end of
2009.
Tax Incentives
The most significant tax incentive encouraging the expanded
use of ethanol is the VEETC.
The VEETC gives gasoline marketers and blenders an important incentive to blend
ethanol with their gasoline. Historically, ethanol has not been competitive
with gasoline as a fuel. As shown in Figure 1, spot market ethanol prices have
been almost twice that of spot regular gasoline prices over the past twenty
years.
 LECG, January, 2007
The VEETC protects ethanol producers from declines in oil
and gasoline prices over which they have no control. Since ethanol is sold as
an additive to motor gasoline, its price is determined more by oil and gasoline
than by ethanol supply. An analysis of ethanol prices over the 1990 to 2005
period indicates that the spot market price of ethanol increases 4.6 percent
for every 10 percent increase in spot market gasoline prices, but declines only
1.8 percent for every 10 percent increase in ethanol production. Consequently
ethanol producers are price takers with their revenue determined largely by
developments in the oil and gasoline markets.
Economic theory suggests that a new national industry should
be able to gain a significant market share within the domestic market before
tax incentives are phased out or abolished. Thus, RFA supports legislation
such as the Pomeroy-Hulshof “Renewable Fuels and Energy Independence Promotion
Act” (H.R. 196) to make permanent the biodiesel and ethanol tax incentive and
the small agri-biodiesel producer and small ethanol producer credits, creating
a permanent foundation for these industries. Consistency in Federal policies
will send the necessary and appropriate signals to the marketplace.
Maintaining and extending the existing tax incentives for ethanol and biodiesel
are essential for continued growth of the industry.
Because the VEETC does not discriminate as to the nation or
origin of the ethanol blenders’ use, it allows foreign ethanol producers the
benefit of the incentive. In order to offset the incentive foreign producers
are eligible for, Congress implemented a credit offset, in the form of a
secondary tariff, to prevent American tax payers from subsidizing foreign
ethanol industries. The balancing act between the VEETC and the secondary
tariff has proved effective and must be continued to ensure America is not subsidizing foreign ethanol production.
Finally, it should be noted the federal ethanol tax incentive program has been
extremely cost effective. The $2.7 billion in increased federal tax revenue
attributable to the ethanol industry is in itself $160 million more than the
estimated cost of the Volumetric Ethanol Excise Tax Credit (VEETC), assuming
the 4.9 billion gallons of ethanol produced were blended. At a January 10,
2007 Senate Agriculture, Nutrition and Forestry Committee hearing, however,
U.S. Department of Agriculture’s Chief Economist, Keith Collins, noted that
high crop prices, due in part to the strong domestic market for ethanol, led to
a $6 billion savings for the Federal government from reduced farm
program payments in 2006. Thus, with increased tax revenue and reduced farm
program costs, the taxpayer realized a $4 return for every $1 invested in
domestic renewable energy last year.
New Technologies
The ethanol industry today is on the cutting edge of
technology, pursuing new processes, new energy sources and new feedstocks that
will make tomorrow’s ethanol industry unrecognizable from today’s. Ethanol
companies are already utilizing cold starch fermentation, corn fractionation,
and corn oil extraction. Companies are pursuing more sustainable energy
sources, including biomass gasification and methane digesters. There is not an
ethanol company represented by the RFA that does not have a
cellulose-to-ethanol research program. These cutting edge technologies are
reducing energy consumption and production costs, increasing biorefinery
efficiency, improving the protein content of feed co-products, utilizing new
feedstocks such as cellulose, and reducing emissions by employing best
available control technologies.
The technology exists to process ethanol from cellulose
feedstocks; however, the commercialization of cellulose ethanol remains a
question of economics. The capital investment necessary to build cellulose
facilities remain about five times that of grain-based facilities. Those costs
will, of course, come down once the first handful of cellulose facilities are
built, the bugs in those “first mover” facilities are worked out, and the
technology continues to advance. The enzymes involved in the cellulose ethanol
process remain a significant cost, as well. While there has been a tremendous
amount of progress over the past few years to bring the cost of those enzymes
down, it is still a significant cost relative to processing grain-based
ethanol. To continue this technological revolution, however, continued
government support will be critically important.
The VEETC reduces the risk associated with investment in new
technology, such as cellulosic biofuels. Typically, the financial community
will invest in higher risk, non-traditional activities only with the assurance
that their revenues will not be threatened by foreign or domestic competition.
Continued existence of the VEETC is an effective risk reducing instrument for
investors and the financial community who are key to further expansion of the
U.S, ethanol industry, particularly the use of cellulosic feedstocks for
ethanol production.
Climate Change
The RFA sees climate change as an opportunity to pursue
policies that make sense on a variety of fronts, from protecting the
environment to promoting U.S. energy security and economic development. The
RFA promotes policies, regulations and research and development initiatives that
will lead to the increased production and use of renewable fuels such as
ethanol and biodiesel. The RFA is taking the climate change issue very
seriously. Our members are producing a product that reduces climate change
emissions from cars and trucks. The RFA itself has pledged to become carbon
neutral. To follow through on this commitment, the RFA has joined the Chicago
Climate Exchange, the world’s first and North America’s only voluntary, legally
binding integrated greenhouse gas reduction and trading system for all six
greenhouse gas emission sources, with offset projects in North America and
worldwide. Once completed, the RFA will be offsetting 100 percent of its
carbon emissions.
The RFA generally supports Federal efforts to address
climate change, in part because one set of uniform, national standards can be
more effective than several, overlapping state and regional approaches. While
we cannot speak to the climate change impacts of all new technologies and
fuels, we can address the greenhouse gas (GHG) emissions benefits of renewable
fuels such as ethanol. The Pew Center for Global Climate Change recently
concluded that renewable fuels offer the greatest immediate term opportunity to
reduce GHG emissions from the transportation sector. This is true because
renewable fuels are readily available and can be used without significant
infrastructural or technological advancement. As you may be aware, the United States already uses more than 5.5 billion gallons of ethanol annually. In 2006,
ethanol use in the U.S. reduced CO2-equivalent emissions by approximately 8
million tons, according to the Department of Energy. This is the equivalent of
removing 1.2 million cars from the road from a climate change perspective.
The U.S. Environmental Protection Agency (EPA) released a
Regulatory Impact Analysis (RIA) with the Final Rule implementing the RFS on
April 10, 2007. Chapter 6 of EPA’s RIA, Lifecycle Impacts on Fossil Energy
and Greenhouse Gases (GHG), included a displacement index showing the
impact of replacing a BTU of gasoline or diesel with a BTU of renewable fuel.
For every BTU of gasoline which is replaced by corn ethanol, the total
lifecycle GHG emissions that would have been produced from that BTU of gasoline
would be reduced by 21.8 percent. For every BTU of gasoline which is replaced
by cellulosic ethanol, the total lifecycle GHG emissions that would have been
produced from that BTU of gasoline would be reduced 90.9 percent.
The U.S. ethanol industry is in the midst of a remarkable
evolution, utilizing new more energy efficient technologies with every new
plant that opens and with upgrades made at existing biorefineries as the
industry retools. Examples of new energy saving technologies include fluidized
bed reactors that utilize the syrup from a biorefinery’s evaporators to
generate steam, and biomass gasification that allows ethanol plants to utilize
locally grown biomass to power the plant. Still other ethanol plants are
locating alongside feedlots, allowing them to feed the distillers grains (a
high protein co-product of the ethanol production process) without having to
dry the material first, while at the same time using the manure from the feed
lot to power the plants. These technologies are not only making ethanol
biorefineries more competitive, they are greatly reducing the carbon footprint
of the industry.
The electric, natural gas and transportation sectors
comprise a large majority of U.S. climate change emissions. Any climate
program adopted by the federal government should encompass all three of these
sectors (i.e. not leaving out the transportation sector). Efficiency is the
most oft-stated approach to reducing GHG emissions in the transportation
sector. It is equally important, however, to diversify the fuels market. One
of the critical components to any strategy to diversify petroleum fuels is
increased reliance on Flex-Fuel Vehicles (FFVs). Because FFVs run on virtually
any combination of ethanol and gasoline, they help facilitate an unrestricted,
truly competitive transportation fuels market. Like ethanol, FFVs are
available now. Automakers including GM, Ford, VW, Toyota and Honda already
provide FFVs to the Brazilian automobile market at very little cost. Reportedly,
81 percent of vehicles sold in Brazil in November 2006 were FFVs. FFVs are
becoming increasingly popular in the U.S. However, more could be done to
promote their manufacture and use. The RFA believes that all vehicles, whether
gasoline powered, hybrid or advanced technology, should be flex-fuel. Enhancing
incentives to gasoline marketers to install E-85 refueling pumps will continue
to be essential. Federal policies should extend and expand tax incentives for
E-85 refueling infrastructure, and create new consumer-based tax incentives to
encourage the purchase of FFVs.
Conclusion
Mr. Chairman, a recent Public Opinion Strategies poll found
that 78% of American support increasing the use of domestic renewable fuels
such as ethanol. That reflects the growing consensus that we need to do
everything possible to reduce our dangerous dependence on imported petroleum
because of the attendant environmental and national security consequences of
its continued use. Existing U.S. tax policies have made a difference, and can
continue to drive investment in domestic renewable fuels such as ethanol and
biodiesel. The VEETC, in particular, has played an integral role in supporting
investment and development in ethanol production facilities and the significant
growth of the industry. The continued existence of U.S. renewable energy tax
policy will be critical to the rapid deployment and commercialization of new
technologies for biofuels. The RFA looks forward to working with the Committee
during the 110th Congress to ensure the U.S. ethanol industry
continues to grow.
Thank you.
The Volumetric Ethanol Excise Tax Credit (VEETC) provides
gasoline blenders/refiners with a federal tax refund of 51 cents per gallon of
ethanol on each gallon of ethanol blended with gasoline, providing an important
incentive to blend ethanol with their gasoline. The volumetric excise tax
credit for agri-biodiesel is $1.00 per gallon, and the volumetric excise tax
credit for biodiesel is 50 cents.
Contribution of the Ethanol Industry to the Economy of the
United States, Dr. John Urbanchuk, Director, LECG, LLC, December, 2006.
The first federal tax incentive for ethanol was the partial
exemption for ethanol from federal excise taxes on motor fuel enacted as part
of the Energy Tax Act of 1978. The partial exemption was set at 4 cents per
gallon for motor fuels that contained at least 10 percent ethanol (or 40 cents
per gallon for every gallon of ethanol). The tax exemption was increased to 6
cents per gallon in 1984. The Omnibus Budget Reconciliation Act of 1990 reduced
the rate of exemption to 5.4 cents per gallon. This level was maintained until
it was reduced by the 1998 Transportation Equity Act for the 21st
Century. This legislation reduced the exemption to 5.3 cents per gallon for
2001 and 2002, 5.2 cents per gallon for 2003 and 2004, and 5.1 cents per gallon
through December 31, 2010. The American Jobs Creation Act of 2004 replaced the
partial excise tax exemption for ethanol with the VEETC. Under current law
blenders and marketers are required to pay the full federal excise tax on motor
fuel but can claim a tax credit or refund of 51 cents per gallon of ethanol
blended with gasoline. All excise taxes are deposited into the Highway Trust
Fund and the VEETC is paid out of the General Fund.
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