Biofuel Tax Policy: Short Term Progress, Long Term Challenges
Posted August 20, 2012
Runaway oil dependence puts our environment, public health and national security at risk. That’s why the Senate Finance Committee’s recent extension of the cellulosic ethanol income tax credit is welcome news. This incentive, which provides $1.01 per gallon of cellulosic ethanol, will help limit oil demand by encouraging private investment in cleaner, safer alternatives. But there’s still room for improvement. Over the long term, the tax code must incorporate features that address the environmental risks of biofuel production and encourage the development of the best-performing biofuels that protect our climate and natural resources.
As my colleague Cai Steger writes, the Senate Finance package continues critical incentives for early stage renewable energy technologies that benefit public health and the environment. As a potentially low-impact alternative to oil, cellulosic ethanol is on this list. Cellulosic fuels can be produced from a wide range of feedstocks including waste streams, agricultural residues, and sustainably grown energy crops. Indeed, the diversity of cellulosic material suggests substantial potential resources to create biofuels that do not compete with our food, feed supplies or wildlife habitat.
Commercializing these better biofuels requires continuous investment and experience to reduce cost and risk. Investments so far have yielded progress, but technological maturity has been slower than expected. Even so, slow deployment hardly negates the critical need for sustainable alternatives to oil. Rather than retreating, the Senate Finance Committee correctly reaffirmed its commitment to solving our oil dependence and pollution challenges by supporting the next generation of biofuels.
The Finance Committee also amended the incentive to qualify algal fuels. This change will further stimulate investment in high-potential biofuel feedstocks that were not included when the credit was originally codified. Algal fuels have substantial potential advantages such as low greenhouse gas (GHG) emissions, water quality improvement, high energy density, and compliance with existing infrastructure, meaning they can “drop in” to existing pipelines and fuel storage tanks. The Finance Committee likewise acted wisely when it chose to encourage investment in these resources.
Now Congress must act with even more foresight. Extending and modifying these incentives was the right thing to do, but the tax code is in desperate need of revision. When these incentives were created, Congress did not capture the risks of careless biofuel development. Responsibly produced next-generation biofuels have the potential to provide substantial environmental advantages through reduced lifecycle GHG emissions and farming practices that result in cleaner water, healthier soil and less impact on food and feed prices. But biofuels can also harm land, water, and wildlife if made from unsustainable biomass sources. Reckless development of biofuels without safeguards and incentives to encourage farmers to manage biomass crops in ways that minimize tillage, fertilizer use, erosion, and runoff will undermine their environmental potential.
As Congress continues to evaluate the tax code, it should embed environmental performance provisions into tax incentives so that the next generation of biofuels avoids the mistakes of the past. Calibrating incentive payments to environmental performance would drive investment towards biofuels that offer the greatest balance of energy supply, environmental preservation, and public health benefits. For now, we applaud Congress for preserving momentum in uncertain times. But as it takes up deeper tax reform, it must update the tax code to ensure that these fuels deliver on their promise.