By Curt Rich

This article originally appeared in the December 7, 2007 issue of the Los Angeles Daily Journal.

Once heralded as the lynchpin to America’s energy independence, ethanol is increasingly under attack as a flawed energy resource. The livestock and food industries criticize ethanol for the impact it has on the price of corn. Environmentalists point out that corn ethanol takes almost as much energy to make as it produces. Communities in more arid regions of the country worry about corn ethanol’s high demand for water.

At the same time, Congress is debating energy legislation to substantially increase the amount of ethanol that we produce and consume in the United States. Before the year ends, Congress will vote on a bill that mandates sellers of transportation fuels to increase annual renewable fuel consumption by as much as 36 billion gallons by 2022. For a country that consumed 140 billion gallons of gasoline in 2006, that amounts to more than one-quarter of our annual gasoline use.

In the near term, policymakers are expecting corn ethanol production to continue to expand to meet this market mandate. Industry experts generally believe that the U.S. can continue to increase corn production to produce up to 14-15 billion gallons of ethanol annually. So, what fuel will supply the additional 20 billion gallons of non-corn biofuels needed within the next 15 years?

Cellulosic biofuels are made by releasing the sugars locked in the cell structure of plants — wood, grasses, dedicated energy crops, agricultural waste and even yard clippings — and fermenting that sugar into fuel. 

The Federal Government’s 2005 “Billion Ton Study” concluded that the U.S. produces enough surplus biomass annually to produce 3.5 billion barrels of oil, or 60 percent of our country’s yearly consumption. In addition, cellulosic biofuels produce four to six times more energy than they require to make, while reducing greenhouse gas emissions by 86 percent compared to petroleum.

Corn ethanol, by contrast, produces one and a half times the energy it consumes, and reduces emissions by only 18-29 percent. As a successor to corn ethanol, cellulosic biofuels show real promise, but this potential currently exists only at a demonstration scale. In order to rapidly move to the nationwide commercial deployment of cellulosic biofuels, Congress must embrace policies that singularly develop the cellulosic biofuel industry. Those policies include investing in continued research, helping to finance the fi rst generation of cellulosic biorefi ners, creating a national market for cellulosic biofuels, and providing initial price support to help this new industry gain its footing.

First, in the area of research and development, the Bush administration gets high marks for providing robust financial support for the cellulosic biofuel industry. In 2006, the Department of Energy announced more than $500 million in grant funding for first-generation biorefi neries and associated cellulosic biofuel research. This industry will require that level of support and more over the next few years, as it works to move the technology from the laboratory to the marketplace.

Second, the biggest barrier to commercialization for a new industry is access to capital.  In the case of the cellulosic biofuel industry,commercial lenders are simply unwilling to invest hundreds of millions of dollars in a project that uses pre-commercial technology.

The Energy Policy Act of 2005 provides new authority to the Department of Energy to issue federal loan guarantees to support new cellulosic biorefineries. Just last month, the DOE announced its fi rst round of loan guarantees, including an award to build a commercial facility that converts landfill waste into ethanol. Four projects is a good start, but the DOE needs to move quickly and provide federal financing to other meritorious proposals to really jump-start this industry.

Third, the cellulosic biofuel industry needs a domestic market. In 2005, Congress passed the federal renewable fuel standard requiring the increased use of renewable fuels.  This federal mandate helped galvanize the dramatic growth in U.S. production and consumption of corn ethanol.

Last year, U.S. corn ethanol consumption jumped 33 percent to 5.4 billion gallons. By 2009, if all the plants that are planned or under construction are built, corn ethanol production capacity will reach 11.6 billion gallons a year. A federal renewable fuel standard for cellulosic biofuels that begins in 2010 — when the first commercial cellulosic biorefineries come on line — can spur the same sort of growth for our next generation of biofuels.

Finally, the cellulosic biofuel industry needs a targeted federal tax credit. Tax subsidies are frequently criticized, but the simple fact is they are effective in driving industry innovation and creating markets. Tax credits are largely responsible for building the wind industry and spurring sales of hybrid automobiles.

The corn ethanol industry has enjoyed a tax subsidy since 1978 and currently receives a tax credit of 51 cents per gallon.  The cellulosic biofuel industry will need a tax credit commensurate with its initial high cost of production. Legislation is pending that gives the industry a $1.28 per gallon credit. Unlike other industries, however, the cellulosic biofuel industry advocates limiting the credit for the first 2 billion gallons of cellulosic ethanol produced. This limitation avoids giving producers a permanent subsidy, but rather ignites a race by entrepreneurs to be the first to market.

There is emerging consensus that cellulosic biofuels may offer the most rapid, productive and cost-effective pathway to increase our domestic output on transportation fuels. Congress and the administration must act aggressively to jump-start this industry. The policy road map discussed here is a good place to start.

Reprinted with permission.