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December 10, 2010
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Energy and Natural Resources
The federal government promotes the production of energy and regulates the use of natural resources. Federal agencies also support research efforts to develop new sources of energy and to conserve natural resources. CBO analyzes the effects of current and proposed policies in this area.
Abstract
In response to concerns that the accumulation of greenhouse gases in the atmosphere could have serious and costly effects, the Congress has considered creating a nationwide cap-and-trade program that would limit emissions of those gases below the levels projected under current law and would allow trading of rights, or allowances, to produce those emissions. In creating markets for allowance trading, policymakers would face important questions about how best to ensure that any instability in those markets did not raise the cost of reducing emissions or spill over to the rest of the U.S. economy (as happened with instability in mortgage markets during the recent financial crisis). Some observers have proposed excluding certain participants or transactions from allowance markets. This study examines the likely impact of prohibiting allowance trading by entities not directly covered by a cap-and-trade program and of banning the use of allowance derivatives. The report also discusses some alternative restrictions on participation and transactions in allowance markets that could impose lower costs on covered entities while reducing the risk of instability in those markets and in the overall economy.
Highlights
Following the recent financial crisis, concerns about how financial markets function and what can destabilize them have increased. In a cap-and-trade program to reduce greenhouse gas emissions--such as the programs that have been considered by the Congress--a central feature would be the markets in which emissions allowances would be traded. Thus, issues of key interest to policymakers designing such a program include what kinds of participants and transactions would be permitted in allowance markets.
Under a cap-and-trade program, entities covered by the cap--which could include oil refiners, natural gas distributors, and large electricity generators that use fossil fuels--would be required to hold government-issued allowances that would give them the right to emit a specific amount of greenhouse gases into the atmosphere. Those covered entities would be free to buy and sell allowances, which would give rise to markets to facilitate that trading. Active allowance trading would reduce the total cost of meeting a cap on emissions by helping covered entities manage fluctuations in their need for allowances caused by changes in the production of emissions-intensive goods and services.
At the same time, observers worry that active allowance markets could foster complex or opaque transactions, price bubbles, market manipulation, or other instabilities that could raise the cost of reducing emissions and harm the broader economy. That potential has spurred proposals to prohibit or otherwise limit certain types of market participants or transactions under a cap-and-trade program. This analysis finds that less restrictive limits would generally have a greater chance of addressing observers' concerns, with fewer negative effects, than outright prohibitions would.
Concerns About Allowance Markets
Unless regulation prevented it, allowance markets would probably attract many of the same types of traders and transactions as existing markets for agricultural, energy, and financial products. Besides covered entities (and other entities that might receive allowances from the government), traders would include banks, investors, and other parties that would not be subject to a cap on emissions but would facilitate transactions by trading allowances with covered entities. The transactions of those various parties would probably include allowance derivatives--financial contracts that, for example, would guarantee the holder a price for a specific number of allowances at a specified future time. Such traders and transactions are common in existing allowance markets, including the ones created by current cap-and-trade programs for greenhouse gas emissions in the northeastern United States and the European Union.
Some observers, however, are concerned that transactions by traders who are not covered entities (sometimes called "speculators") and derivatives transactions can pose risks to the stability of allowance markets and reduce the cost-effectiveness of a cap-and-trade program. For example, concerns exist that speculative traders and complex or opaque financial transactions can make allowance markets less transparent, cause allowance prices to spike and perhaps differ (become "decoupled") from the cost of reducing emissions, or contribute to market manipulation. Moreover, instability in allowance markets might harm the broader economy. That concern is underscored by the recent collapse of the market for private mortgage-backed securities, which illustrated how disruptions in one market or sector of the economy can spill over into other markets--a phenomenon known as systemic risk.
Limiting Participants in Allowance Markets
To reduce worries about systemic risk, price decoupling, and manipulation, some observers have proposed limiting participation in allowance markets only to covered entities. Prohibiting other parties from trading in allowance markets, however, would most likely raise costs for covered entities by reducing market liquidity (the ease with which firms could buy or sell large quantities of allowances without affecting their current market price). In addition, a ban on certain participants would be difficult and costly to enforce.
Such a ban would also be unlikely to address concerns about allowance markets effectively. The reason is that the same financial incentives that would motivate noncovered entities to participate in the market--the ability to profit from absorbing the risk of price changes or the potential to realize gains from investing in allowances--would probably cause some covered entities to pursue those same opportunities. But to the extent that those covered entities were less effective at doing so than the excluded participants, the cost of complying with the program would be higher and market stability could decline.
Alternatively, participation limits that were less stringent and more targeted could address some of the concerns noted above at a lower cost. For example, many markets for agricultural, energy, and financial products have implemented "position limits," which restrict the number of contracts a participant can hold. Many of those markets also use "circuit breakers," which limit the total amount by which prices can rise or fall over a given period. Position limits would probably lessen the possibility of systemic risk and manipulation in allowance markets, and circuit breakers would reduce the likelihood that allowance prices would become decoupled from the cost of reducing emissions. Both types of regulations have the drawback of tending to make prices less informative, but they would impose lower costs on covered entities than a ban on certain participants would.
Limiting Derivatives Transactions in Allowance Markets
Participants in many markets for commodities or financial securities use derivatives extensively to reduce their exposure to changes in prices. However, certain types of derivatives played key roles in the recent financial crisis, and their potential complexity and opacity have prompted concerns that derivatives in allowance markets could also foster systemic risk and decrease transparency.
Some observers have responded to those concerns by proposing that a potential cap-and-trade program prohibit the trading of allowance derivatives. Not being able to use derivatives contracts, however, would increase covered entities' exposure to changing allowance prices, which would raise the costs of complying with the cap-and-trade program. Moreover, like banning certain market participants, prohibiting derivatives would probably not reduce the risk of disruptions in allowance markets--and might even increase that risk. In particular, the costs associated with absorbing price uncertainty could encourage firms to seek the benefits of derivatives from other financial transactions that would be harder to regulate or less transparent because they might, for example, occur in markets outside the United States. Consequently, enforcing a ban on derivatives would be difficult and expensive.
Other approaches could be more effective than a ban at addressing concerns about derivatives. For instance, increasing reliance on centralized clearing houses (institutions that facilitate the settlement of transactions between two parties) and on exchanges (organized markets, such as the Chicago Mercantile Exchange, where standardized financial transactions take place) would increase transparency and probably reduce systemic risk in allowance markets. In addition, raising transaction fees on trades that occurred "over the counter" rather than through a clearing house or exchange would create an incentive to move trading to those more transparent settings. And if set correctly, the fees would also cover the cost of the risks posed by transactions that were not suited to clearing houses or exchanges. Such changes would address concerns about systemic risk and lack of transparency while continuing to allow covered entities to use derivatives to reduce their costs of complying with a cap-and-trade program.
The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) includes similar changes to existing financial markets. The law requires the federal agency that regulates derivatives transactions in commodity markets to set position limits for exchange-traded derivatives on all energy, metal, agricultural, and other physical commodities. It also expands the use of clearing houses and exchanges and increases regulation of over-the-counter derivatives. Although the regulations implementing the Dodd-Frank law are still being drafted, the law's provisions would probably apply to any allowance markets created as part of a nationwide cap-and-trade program for greenhouse gas emissions.
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Public Spending on Transportation and Water Infrastructure
Highlights
In fiscal year 2007—the most recent year for which data on combined spending by the federal government and by state and local governments are available—total public spending for transportation and water infrastructure was $356 billion, or 2.4 percent of the nation’s economic output as measured by its gross domestic product. For the purposes of this study, transportation and water infrastructure encompasses infrastructure for all forms of surface transportation (highways, mass transit, rail, and waterways), aviation, water resources (such as dams and levees), and water distribution and wastewater treatment.
Recent Developments in Public Spending for Transportation and Water Infrastructure
Between 2003 and 2007, real (inflation-adjusted) public spending on transportation and water infrastructure declined by $23 billion, or 6 percent. That decline, which reflects a decrease in real capital spending, especially by the federal government, stands in contrast to the fairly steady increase in spending for such infrastructure during the previous two decades. In particular, real capital spending on highways, mass transit, and aviation fell markedly even as capital spending on other types of infrastructure—such as rail and water transportation, water resources, and water supply and wastewater treatment—remained stable or rose. The drop in real capital spending for highways, mass transit, and aviation between 2003 and 2007 was primarily the result of a sharp increase in prices for materials used to build such infrastructure—an increase that outpaced the growth of nominal (current-dollar) spending on those types of infrastructure.
In 2009, the federal government spent $87 billion on transportation and water infrastructure, an increase of $6 billion over the amount spent in 2007. Of those outlays, about $4 billion was made available through the American Recovery and Reinvestment Act of 2009 (ARRA). In total, lawmakers appropriated $62 billion in funding for transportation and water infrastructure under that legislation. The Congressional Budget Office expects that, in nominal terms, federal spending for transportation and water infrastructure under ARRA will total $54 billion through 2013, by which time almost 90 percent of the funds made available for infrastructure through ARRA will have been spent.
The Composition of Public Spending for Transportation and Water Infrastructure
The composition of public spending on transportation and water infrastructure can be represented in three ways: by the level of government providing the funding or other form of financial support; by the nature of the spending (whether it is designated for capital projects or for operation and maintenance); and by the type of infrastructure. State and local governments account for about 75 percent of total public spending on transportation and water infrastructure—even after subtracting from their gross spending the value of grants and loan subsidies that the federal government provides for such purposes—and the federal government accounts for the other 25 percent. That split has remained roughly constant over the past two decades.
In recent years, not quite half of total public funding for transportation and water infrastructure in the United States has been devoted to capital spending for activities such as construction and equipment purchases. State and local governments have accounted for about 60 percent of those expenditures, and the federal government has accounted for about 40 percent. A little more than half of total public spending for such infrastructure has been used for operation and maintenance, of which state and local governments have provided about 90 percent. Although the federal government has played a limited role in the funding of operation and maintenance for transportation and water infrastructure as a whole, it has provided much of the funding for operating and maintaining the nation’s air traffic control system.
Spending on highways at all levels of government accounted for 43 percent of expenditures for transportation and water infrastructure in 2007. Expenditures on water supply and wastewater treatment systems accounted for 28 percent of spending; aviation, mass transit and rail made up 23 percent; and the remaining categories of water transportation and water resources accounted for 5 percent.
The Role of Government in Funding Transportation and Water Infrastructure
In the United States, the public sector rather than the private sector typically provides funding for transportation and water infrastructure. Whether it is more efficient for the federal government to provide that funding depends on the type of infrastructure and the likelihood that such infrastructure will be undersupplied if its provision is left to state and local governments or to the private sector.
Evidence suggests that spending for carefully selected infrastructure projects can contribute to long-term economic growth by increasing the capital stock and raising productivity. (During a prolonged economic downturn, infrastructure spending can also mitigate losses in output and employment.) Realizing the potential gains from public spending for transportation and water infrastructure depends crucially on identifying economically justifiable projects—those with benefits to society that are expected to outweigh costs—but a variety of factors make identifying such projects difficult. In addition, the demand for infrastructure could be better aligned with the existing supply by putting a price on those services that reflects the full cost of using infrastructure, including both the cost of providing infrastructure services and the costs that one person’s use imposes on others. The federal government could make its current funding more effective by ensuring that the costs of infrastructure projects are allocated across levels of government on the basis of where the benefits are expected to accrue. Otherwise, for example, federal funding for infrastructure that provided benefits primarily at the local level could result in too many projects, or projects that are too expensive, being undertaken. In addition, individuals and businesses might consume too many infrastructure services relative to the cost of providing those services—because the federal share of that cost is largely borne not by local residents but by taxpayers throughout the country.
Managing Allowance Prices in a Cap-and-Trade Program
Highlights
The accumulation of greenhouse gases in the atmosphere--particularly carbon dioxide released as a result of deforestation and the use of fossil fuels--could create costly changes in regional climates throughout the world. Concern about the damage from such changes has led policymakers and analysts to consider policies designed to reduce emissions of those gases.
Many proposals have focused on cap-and-trade programs, which would limit the number of tons of greenhouse gases emitted into the atmosphere over several decades from certain sectors of the U.S. economy. Under such a program, lawmakers would set gradually tightening annual caps on greenhouse gas emissions that together would imply a cumulative limit over the duration of the policy. Rights to emit the gases, referred to as allowances, would then be distributed to businesses or other entities, such as state governments, in amounts that corresponded to those limits. (One allowance would permit one ton of emissions.) The government could distribute the allowances by either selling them, possibly in an auction, or giving them away. Once the allowances were distributed, they could be bought and sold in the secondary market for them that would develop.
Firms subject to the caps--for example, firms that emitted large quantities of greenhouse gases or that produced or imported fossil fuels that released emissions when burned--would be required to submit allowances to the agency charged with implementing the program. Under most proposed programs, firms could shift their use of allowances from one year to another by “banking” unused allowances for the future or, to a more limited degree, by “borrowing” allowances from future allocations. That trading and flexibility in timing would allow firms to undertake emissions reductions where, how, and to some extent when it was least costly for them to do so.
In choosing the level of the annual caps on emissions, policymakers would be making decisions complicated by uncertainty about the damage that might result from greenhouse gas emissions, and thus the benefits to be gained from reducing them, and about the costs of such reductions. Those costs would increase what firms spent in producing goods and services and would be borne by households in the form of higher prices. In establishing a program’s annual limits on emissions, policymakers ideally would have reliable information about the allowance prices that would be associated with the various caps they might consider. Those prices would reflect the cost of the most expensive reduction in emissions made to comply with the program at a given point in time. But projections of allowance prices are inherently uncertain. Once a cap-and-trade program was in place, actual prices would vary on the basis of current conditions, such as the weather and the economy, and firms’ expectations about factors affecting their compliance costs over the duration of the policy.
In fact, prices in the allowance market would be continually changing and could reach levels that were much higher or lower than policymakers had anticipated. Changes in prices that were caused by new information could help ensure that the caps on emissions were met at the least possible cost. Higher allowance prices, for example, would encourage firms to invest more in emissions-reducing equipment in the near term as a way to curtail their longer-term costs for meeting the caps. However, unexpectedly high (or low) allowance prices would make the cost of meeting the caps much higher (or lower) than policymakers had expected, which could alter the trade-off between costs and benefits that policymakers had anticipated when they selected the caps.
Concerns about unexpectedly high or low allowance prices have led to proposals to place upper or lower limits on those prices. The Congressional Budget Office (CBO) has examined the possible effects of several features that would change the number of allowances available to firms at various prices and in so doing help limit the range of allowance prices.
CBO’s Findings
CBO examined the effects on allowance prices and greenhouse gas emissions of three mechanisms that would help prevent allowance prices from reaching unexpected highs and lows: a price ceiling, which would be implemented by offering an unlimited number of allowances for sale at a given price, thereby placing an upper bound on allowance prices; an allowance reserve, in which a limited number of additional allowances would be offered to firms at or above a given price, thereby curtailing but not eliminating price increases beyond that level; and a price floor, which would be implemented by decreasing the number of allowances available at a given time to maintain a lower bound on prices.
An upper bound on allowance prices could prevent the policy’s costs to the economy from being unacceptably high, but it could also cause emissions to exceed the cumulative cap because the bound would be sustained by adding allowances to the program. The effects of a lower bound would depend on whether firms could bank allowances. If banking was not permitted, a lower bound could motivate firms to make additional cuts in emissions over the duration of the policy beyond those that would otherwise be required by the cap. If banking was permitted, firms would probably not make such additional cuts.
A Price Ceiling
Policymakers could set an upper limit, or ceiling, on allowance prices by allowing firms to buy an unlimited number of allowances, in addition to those created under the cap, at a specified “ceiling price.” Such a policy would have the following consequences:
- It would provide an upper limit on allowance prices but not on emissions.
- The higher the ceiling price was set above the projected path of allowance prices, the less likely it would be that firms would buy additional allowances and if they did buy them, the fewer they would buy. As a result, a higher ceiling would generally lead to fewer additional emissions than would arise under a lower ceiling.
- Provided that firms were able to shift allowances from one year to another--that is, bank and borrow them--a ceiling could dampen the price of allowances, even when the market price was below the ceiling price. Such price dampening, which would be most likely when the market price of allowances was near the ceiling price, would occur because firms would attach a lower value to an allowance today to reflect the fact that its price in the future could not rise above the ceiling price.
- If the ceiling lowered allowance prices, it would diminish firms’ incentives to invest in equipment that reduced emissions and in efforts to develop new lower-cost emissions-reducing technologies. That decrease in investment would lower firms’ spending for emissions reductions in the near term but could increase it in the future, when firms’ compliance costs rose.
An Allowance Reserve
Alternatively, policymakers could offer to sell firms a limited number of “reserve” allowances at or above a given price, referred to here as an “access price.” Such a reserve would have the following effects:
- It would impose an upper limit on emissions--which might be different from the cap--but would not set an upper limit on the price of allowances.
-
The environmental and economic consequences of using the allowances in the reserve would depend on whether the reserve increased or decreased the number of allowances that would otherwise be permitted under the cap.
- A reserve created by supplementing the number of allowances supplied under the cap would allow a limited loosening of the cap when costs were high. A supplemental-allowance reserve would tend to increase emissions and lower allowance prices relative to a policy with the same cap but no reserve. All else being equal, the larger the reserve and the lower the access price for releasing the allowances it contained, the more likely that the reserve would dampen allowance prices and allow emissions to exceed the cap.
- A reserve created by withholding allowances that would otherwise be distributed under the cap could increase firms’ compliance costs but allow fewer emissions than those under a program with the same cap but no reserve. All else being equal, the larger the reserve and the higher the access price, the more likely that the reserve would increase prices and curb emissions to a greater extent than would a similar program without a reserve.
- The effect of a reserve on emissions and allowance prices might be greater but would be less certain if regulators could restock the reserve by using offset credits, which reflect reductions in domestic or overseas emissions that would not otherwise be subject to the cap. Under such an approach, regulators would purchase the credits, then retire them and add a corresponding number of allowances to the reserve. Allowing regulators to restock the reserve in that way could lower firms’ costs for compliance because the number of reserve allowances would rise. However, that reliance might also prompt questions about the credibility of the cap: Regulators could find it challenging to verify that offset credits represented actual reductions relative to projected emissions in the absence of the cap-and-trade program.
- If the federal government used auctions to sell the reserve allowances it created, it would capture their full value. Alternatively, if the reserve allowances were distributed by offering firms options to purchase them at a fixed price, the government and firms would share the allowances’ value.
A Price Floor
Another approach, a price floor, would set a lower limit on the price of all traded allowances. With a “hard” price floor, the simplest form of such an approach, the government would be required to purchase an unlimited number of allowances at a predetermined price. Broadly speaking, including a price floor in a cap-and-trade program would tend to boost allowance prices in the near term but would probably not result in fewer emissions over the duration of the policy if firms were permitted to bank allowances. CBO’s analysis also indicates the
following:
- The further below the projected path of allowance prices that the floor price was set, the less likely it would be that the floor would become binding--that is, prevent any further decline in prices.
- At the time that it was binding, a price floor would increase firms’ compliance costs, relative to a policy with the same cap and no price floor, because it would require firms to reduce emissions more than they otherwise would.
- To the extent that a price floor increased the price of allowances, it would strengthen firms’ incentives to invest in emissions-reducing capital equipment and to develop new lower-cost technologies for reducing emissions. Those investments would boost firms’ spending in the near term but decrease their compliance costs (and lower allowance prices) in the future.
- If firms could shift allowances from one period to another, a price floor would probably not result in cumulative emissions over the life of the policy (typically several decades) that were less than the amount permitted under the policy’s cap. Instead, a floor would shift reductions forward in time.
- Policymakers could try to set a lower limit on the price of allowances by establishing a minimum bid price for the allowances sold in a government-run auction. But that bid price would establish a floor for prices in the secondary market only if the demand for allowances was great enough that firms would want to buy at least some of the allowances being auctioned.
Unintended Consequences of Managing Allowance Prices
Actual experience in managing allowance prices through the approaches that CBO examined is quite limited, which could make it harder to anticipate the effects of such features if they were included in a cap-and-trade program for greenhouse gas emissions. For example, a hard price floor might turn out to be very costly to implement. Also, some analysts are concerned that a price ceiling or an allowance reserve could result in allowances being added to the program under circumstances--including firms’ attempts to manipulate allowance prices through those features--that in the end might not be justified by actual compliance costs. A further consideration is that the mere presence of a price ceiling or a price floor might cause allowance prices to gravitate toward those levels. Moreover, allowing firms to buy an unlimited number of allowances at a ceiling price could complicate possible efforts to tighten the annual caps in the future: Firms could bank allowances during the time that the price ceiling was in effect and then use those allowances to exceed the tighter caps established for future periods.
The Federal Government's Responsibilities and Liabilities Under the Nuclear Waste Policy Act
Highlights
Mr. Chairman, Congressman Ryan, and Members of the Committee, I am pleased to provide updated information about the federal governments responsibilities and liabilities under the Nuclear Waste Policy Act of 1982 (NWPA). Since I testified on this topic in 2009, there have been a number of important developments. After signaling its intention to terminate a project to build a geologic repository for nuclear waste at Yucca Mountain--the only site where such waste is authorized to be stored under current law--the Administration announced in January 2010 the formation of a Blue Ribbon Commission to make recommendations on alternative means of storing, processing, and disposing of nuclear waste. In March, the Administration filed a motion with the Nuclear Regulatory Commission (NRC) to withdraw its license application to construct a permanent repository at Yucca Mountain. That motion was denied in June by a three-member NRC panel; the Administration has subsequently appealed that decision.
Despite those developments, the federal government remains responsible for permanently disposing of spent nuclear fuel generated by civilian facilities, and the owners of those facilities continue to pay fees for that service. Regardless of how the government meets that responsibility, that task will require a significant amount of federal spending over many decades.
monthly archive
- May 2013 (2)
- April 2013 (14)
- March 2013 (22)
- February 2013 (10)
- January 2013 (11)
- December 2012 (4)
- November 2012 (10)
- October 2012 (4)
- September 2012 (6)
- August 2012 (5)
- July 2012 (11)
- June 2012 (8)
Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals
Abstract
The federal government supports the use of biofuels--transportation fuels produced mainly from renewable plant matter, such as corn--in the pursuit of national energy, environmental, and agricultural policy goals. Tax credits encourage the production and sale of biofuels in the United States, effectively lowering the private costs of producing biofuels, such as ethanol or biodiesel, relative to the costs of producing their substitutes--gasoline and diesel fuel. In addition, federal mandates require the use of specified minimum amounts and types of biofuel each year through 2022. Together, the credits and mandates increase domestic supplies of energy and reduce U.S. emissions of greenhouse gases, albeit at a cost to taxpayers.
Highlights
Proponents of federal support for biofuels, which are transportation fuels produced mainly from renewable plant matter, offer several rationales for that support. First, biofuels may help the nation meet energy policy goals by increasing the domestic production of fuels for transportation and reducing the United States' dependence on fossil fuels, such as oil. Second, biofuels may contribute to meeting environmental policy objectives, such as the reduction of greenhouse gas emissions. Third, federal support for biofuels can increase incomes in the agricultural sector.
The federal government began providing tax credits for various biofuels in the 1970s; in addition, laws enacted in recent years have required producers or blenders of transportation fuels to incorporate specified minimum annual amounts of biofuels--amounts that rise over time--into the fuels that they sell. Different types of biofuels have been granted different tax credits, ranging from 45 cents per gallon to approximately one dollar per gallon. Those differing credits raise questions about whether federal policy provides equal incentives for producing different kinds of biofuels and imposes equal costs on taxpayers for achieving certain energy or environmental policy goals.
Roughly 11 billion gallons of biofuels were produced and sold in the United States in 2009, and ethanol produced from corn accounted for nearly all (about 10.8 billion gallons) of that total. Blenders of transportation fuels receive a tax credit of 45 cents for each gallon of ethanol (regardless of the feedstock, or raw material) that is combined with gasoline and sold. Although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to the farmers who grow the corn--in the form of higher prices received for their products.
Most of the rest of the biofuel sold in the United States consists of biodiesel, which is made largely from soybean oil but is also produced from animal fats, recycled plant oils, and other feedstocks. Until recently, the producers of biodiesel made from new oils or animal fats received a tax credit of one dollar per gallon. Although that credit expired in December 2009, the Congressional Budget Office (CBO) included it in the analysis to provide information about the value of the credit should policymakers, as they have at other times, decide to reinstate it.
In the future, cellulosic ethanol could account for a significant share of domestic production of biofuels. Cellulosic ethanol is made from plant wastes, such as corn stover (basically the leaves and stalks of corn plants) or woodchips, or from crops grown specifically for fuel production, such as switchgrass (a tall North American grass used for hay and forage). Its producers are eligible for a tax credit of $1.01 per gallon if it is produced and blended with gasoline; even with that credit, however, cellulosic ethanol is not viable commercially today and is produced in very limited quantities.
In fiscal year 2009, the biofuel tax credits reduced federal excise tax collections by about $6 billion below what they would have been if the credits had not been in effect. This CBO study assesses the credits' contributions to achieving energy and environmental goals in the light of those forgone revenues; it does not consider any impact on farm incomes or the agricultural sector more broadly. The analysis focuses specifically on the differential effects of the various credits in achieving two objectives: displacing the use of petroleum fuel and reducing greenhouse gas emissions.
CBO's main conclusions are the following:
- The incentives that the tax credits provide to producers of biofuels differ among the fuels. After adjustments for the different energy contents of the various biofuels and the petroleum fuel used to produce them, producers of ethanol made from corn receive 73 cents to provide an amount of biofuel with the energy equivalent to that in one gallon of gasoline. On a similar basis, producers of cellulosic ethanol receive $1.62, and producers of biodiesel receive $1.08.
- The costs to taxpayers of reducing consumption of petroleum fuels differ by biofuel. Such costs depend on the size of the tax credit for each fuel, the changes in federal revenues that result from the difference in the excise taxes collected on sales of gasoline and biofuels, and the amount of biofuels that would have been produced if the credits had not been available. The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol made from corn and $3.00 for cellulosic ethanol. The cost of reducing an equivalent amount of diesel fuel (that is, a quantity having the same amount of energy as a gallon of gasoline) using biodiesel is $2.55, based on the tax policy in place through last year.
- Similarly, the costs to taxpayers of reducing greenhouse gas emissions through the biofuel tax credits vary by fuel: about $750 per metric ton of CO2e (that is, per metric ton of greenhouse gases measured in terms of an equivalent amount of carbon dioxide) for ethanol, about $275 per metric ton of CO2e for cellulosic ethanol, and about $300 per metric ton of CO2e for biodiesel. Those estimates do not reflect any emissions of carbon dioxide that occur when the production of biofuels causes forests or grasslands to be converted to farmland for growing the fuels' feedstocks. If those emissions were taken into account, such changes in land use would raise the cost of reducing emissions and change the relative costs of reducing emissions through the use of different biofuels--in some cases, by a substantial amount.
Federal biofuel mandates require vendors of motor fuels to produce or blend specified minimum volumes of the different fuels with gasoline and diesel fuel; the annual targets are scheduled to rise through 2022. In the past, those requirements have not directly increased the quantity of biofuels sold in the United States because the combination of underlying economic conditions and the biofuel tax credits has caused the use of biofuels to exceed the mandated quantities. However, the mandates probably provided producers with some degree of confidence that a market for those fuels would exist, thereby encouraging investment in the facilities needed to produce them. In the future, the scheduled rise in mandated volumes would require the production of biofuels in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included. To the extent that the mandates determine levels of production in the future, the biofuel tax credits would no longer be increasing production, but they would still be reducing the costs borne by producers and consumers of biofuels and shifting some of those costs to taxpayers