Fuel Ethanol: Background and Public Policy Issues

Publication Date: December 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

In light of a changing regulatory and legislative arena, ethanol as a motor fuel has taken on a pivotal role in bringing together often conflicting environmental and energy security interests. Ethanol is produced from biomass (mainly corn) and is mixed with gasoline to produce cleaner-burning fuel called "gasohol" or "E10."

The market for fuel ethanol is heavily dependent on federal incentives and regulations. A major impetus to the use of fuel ethanol has been the tax incentive for its use. Ethanol is expensive relative to gasoline, but it is subject to a federal tax incentive of 52 cents per gallon. This exemption brings the cost of ethanol, which is higher than that of conventional gasoline and other oxygenates, within reach of the cost of competitive alternatives. In addition, there are other incentives such as a small ethanol producers tax credit. It has been argued that the fuel ethanol industry could scarcely survive without these incentives.

The Clean Air Act requires that ethanol or another oxygenate be mixed with gasoline in areas with excessive carbon monoxide or ozone pollution. The resulting fuels are called oxygenated gasoline (oxyfuel) and reformulated gasoline (RFG), respectively. Using oxygenates, vehicle emissions of volatile organic compounds (VOCs) have been reduced by 17%, and toxic emissions have been reduced by approximately 30%. However, there has been a push to change the oxygenate requirements for two reasons. First, methyl tertiary butyl ether (MTBE), the most common oxygenate, has been found to contaminate groundwater. Second, it is argued that emissions could be reduced to similar levels through the use of clean burning gasoline that does not contain oxygenates.

Uncertainties about future oxygenate requirements, as both federal and state governments consider changes, have raised concerns among farm and fuel ethanol industry groups and have prompted renewed congressional interest. Without the current regulatory requirements and incentives, or something comparable, much of ethanol's market would likely disappear. Expected changes to the reformulated gasoline requirements could either help or hurt the prospects for fuel ethanol (subsequently affecting the corn market), depending on the regulatory and legislative specifics. As a result, significant efforts have been launched by farm interests, the makers of fuel ethanol, agricultural states, and the manufacturers of petroleum products to shape regulatory policy and legislation.

Ethanol played a key role in the debate over omnibus energy legislation in the 108 Congress. The stalled energy bill (H.R. 6) would have required the use of 5 billion gallons of renewable fuel (including ethanol) by 2012. It is likely that this issue will be raised again in the 109th Congress.