Putting Your Money Where Your Mouth Is: The Varied Success of Biofuel Incentive Policies in the United States and the European Union

Author:Christine C. Benson
Position:J.D. candidate, The University of Iowa College of Law, May 2007
Pages:634-662
SUMMARY

I. Introduction. II. Background. A. Beginnings of the Biofuel Industry. B. Definitions of Pertinent Terms. C. The Modern Biofuel Industry: Praise, Criticism, and Government Support. 1. Environmental Issues. a. Ethanol. b. Biodiesel. 2. Foreign Policy Issues. 3. Local Economy and Infrastructure Issues. 4. Cost Issues. III. Tax Incentives. A. Reasons and Policy Options. B. Current Status of Biofuel ... (see full summary)

 
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Why sir, there is every possibility that you will soon be able to tax it!1

I Introduction

Lawmakers often use tax and other financial incentives to spur the development of socially valuable industries.2 Lawmakers hope such incentives will help the target industries gain market share and eventually become viable competitors in their relevant markets, at which point the incentives will be able to sunset.3 If the incentives successfully sunset and the industry is then subject to taxation, the government may be able to recoup its investment.4 However, creating incentives that allow an industry to gain strength and flourish on its own is no simple task.

The United States and the European Union (EU) have used various incentives to promote the biofuel industry for decades.5 The industry, led by the development and use of ethanol and biodiesel, is socially valuable for a number of political, environmental, and economic reasons. Biofuels continue to become more cost-effective to produce, but absentPage 635 government support they are far from being a viable replacement for fossil fuels.6

Ethanol and biodiesel are the two leading biofuels.7 Government financial incentives for the production and use of ethanol and biodiesel have been praised as a way to support the environment and decrease dependence on foreign oil.8 However, critics of biofuel incentives point out that biofuels have not always delivered on their proponents' environmental and political promises.9Biofuel production has not always been environmentally friendly, and the industry is still not capable of producing the amount of fuel necessary to significantly reduce dependence on foreign oil.10 Despite such criticism, the United States and the EU continue to support and provide tax relief to the biofuel industry.

The EU's biofuel directives and incentives have not successfully met the goals mandated by legislation.11 The United States has met general biofuel goals in the past, but has only recently implemented a specific renewable fuels standard (RFS) calling for substantially increased amounts of biofuels to be consumed yearly by 2012.12 This Note examines the policy reasons for supporting the biofuel industry through incentives, and contends that the EU needs to increase the number of financial incentives compared to the number of mandates put forth in order to meet the goal of increased market share for biofuels.

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II Background
A Beginnings of the Biofuel Industry

While biofuel research and technology continues to develop, the industry is far from new. The biofuel industry was present in the United States as early as 1908.13 At that time, the United States' biofuel industry focused on ethanol, as it does today.14 Henry Ford was a proponent of renewable fuels.15 Ford's Model T was able to run either on petroleum fuel or pure alcohol fuel.16 Prior to World War II, Standard Oil marketed a 25 percent ethanol blend fuel on the east coast, and an ethanol plant in Kansas produced eighteen million gallons of ethanol per year. Ethanol from that plant was sold at several thousand service stations in the Midwest.17 After World War II, however, the ethanol industry in the United States lost support due to advances in the technology and supply of petroleum.18 The industry did not regain strength in the United States until the 1970s.19

The biofuel industry was also present in Europe prior to World War II. In contrast to the pre-World War II biofuel industry in the United States, which focused on ethanol, Europe's biofuel industry focused on biodiesel.20 Today the United States and the EU continue to focus on ethanol and biodiesel, respectively.21 Rudolph Diesel invented the Diesel engine in the 1890s.22 Diesel, a German, studied the compression engine theories of Frenchman Sadi Carnot.23 At the 1900 World's Fair, DieselPage 637 used peanut oil as fuel when he showcased his engine.24 He wanted to manufacture a less expensive alternative to the steam engine, which would allow smaller businesses to afford engines and thus compete with larger businesses. As part of this vision, Diesel imagined that homegrown vegetable oils would be the fuel for his new engine.25 Diesel's initial idea of vegetable oil as fuel faded into the background with the advent of gasoline-powered automobiles.26 When oil companies refine crude oil to create gasoline, distillate is left over.27 Gasoline distillate is a good fuel for diesel engines and is much less expensive than vegetable oil.28 Even though petroleum diesel gained popularity in the early twentieth century, Europe remained concerned about the depletion of petroleum supplies during this time, preventing a complete decline of the biofuel industry.29However, petroleum diesel fuel was much more widely used than biodiesel for several decades.30 Europe's biodiesel industry did not regain strength until the 1970s, when energy concerns caught the attention of lawmakers and citizens in the United States and Europe alike.31

B Definitions of Pertinent Terms

Before delving into the development, criticism, and praise of the biofuel industries in the United States and Europe since the 1970s, it is necessary to define several commonly used terms in order to lay a foundation for understanding those industries.

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Biofuels are any fuels made from plant matter, such as corn, soybeans, or biomass.32 Biofuels are blended at varying percentages with petroleum fuel. Biofuels are unlimited in supply (unlike petroleum), emit fewer harmful gasses, and reduce dependence on foreign oil.33

Ethanol is an alcohol fuel usually mixed with petroleum at a 10 percent ratio.34 In the United States, corn is used to make approximately 90 percent of ethanol.35 However, biomass36 is being explored as a less expensive alternative to corn in the ethanol production process.37Ethanol is the main biofuel in the United States, and currently accounts for around 0.8 percent of total gasoline consumption in the United States.38

Biodiesel is made by processing and converting animal fat or vegetable oil into a fuel additive.39 Biodiesel blends range from B20, 20 percent vegetable oil and 80 percent petroleum diesel, to B100, pure vegetable oil.40 Biodiesel is more widely used in Europe than in the United States, partly due to the diesel engine's German origin.41

Biomass is plant material.42 It is useful as an energy source because plants store energy during photosynthesis. While biomass does emitPage 639 carbon dioxide when burned, the carbon dioxide emitted is equal to the carbon dioxide consumed during photosynthesis.43 Biomass research and development is ongoing.44 If the Department of Energy reaches its stated goals in regards to biomass technology, the cost of producing ethanol could be reduced by up to sixty cents per gallon in approximately ten years.45

Diesel is the fuel used in diesel engines, also known as compressionignition engines.46 These engines are widely used in Europe.47 Diesel fuel can be made from the distillate left over after crude oil is refined into gasoline.48 It can be blended with vegetable oil at a wide range of ratios to create biodiesel.49

Gasohol was a term widely used in the 1970s and 1980s to refer to a blend of 90 percent gasoline and 10 percent ethanol.50 This term is used less today than it was in the 1970s and 1980s.51

E-85 is a term used to describe fuel made from 85 percent ethanol and only 15 percent petroleum.52 While E-85 is used primarily in fleets of government vehicles, its use by private citizens is increasing in the United States.53 E-85 refueling stations are increasing in number around the country, especially in the Midwest.54

Reformulated gasoline is "specially refined gasoline with low levels of smog-forming volatile organic compounds (VOCs) and low levels ofPage 640 hazardous air pollutants."55 Areas of the United States with significant smog problems have been required to offer reformulated gasoline for sale since the enactment of the 1990 Clean Air Act, though many of these areas already sold reformulated gasoline before 1990.56 However, the Energy Policy Act of 2005 (EPA) allows the use requirements for reformulated gasoline to sunset.57 Adding ethanol to gasoline is one way to create reformulated gasoline and reduce emissions.58

VOCs (volatile organic compounds) are smog-forming compounds released from burning fuel.59 VOCs contribute to the depletion of the ozone layer, but their harmful effects on the ozone are somewhat disputed.60 Ethanol increases the volatility of fuel, and thus emits VOCs.61 This is the main source of criticism and concerns about the environmental impact of ethanol.62

C The Modern Biofuel Industry: Praise, Criticism, and Government Support

The "modern" biofuel industry began in the 1970s in both the United States and the EU.63 Energy crises brought the high and unstable prices of petroleum to the attention of the international community, and renewed interest in biofuels across the United States and Europe.64

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Ethanol was the focus of the biofuel industry in the United States, and biodiesel was the focus of the biofuel industry in Europe.65 Since the 1970s' energy crises, the United States, the EU, and the individual governments of the EU...

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