Biofuels in Perspective

Bio-Ethanol Development in the USA 41
water even at parts per million. MTBE contamination of ground and surface water became
a national environmental issue.
Oil companies had strenuously opposed any requirements for the use of ethanol fuels
prior to the widespread environmental problems caused by MTBE. But the threat of MTBE
contamination lawsuits and the growing list of states and local governments banning MTBE
use, helped to soften opposition. Bio-ethanol production doubled over the period of 2000
to 2004 despite a reduction in the ethanol excise tax credit (now known as the Volumetric
Ethanol Excise Tax Credit – VEETC) to 51 cents per gallon. 5
In 2005, in a sweeping piece of energy legislation, the Congress declined to provide fuel
blenders with protections from MTBE contamination lawsuits – effectively eliminating its
use nationwide – and instituted a national ethanol mandate known as the Renewable Fuels
Standard (RFS) that required a doubling of ethanol production to 7.5 billion gallons by
2012. Demand for ethanol surged.
The law, known as the Energy Policy Act of 2005 (EPACT), also established nearly
$4 billion in programs and incentives to accelerate the commercialization of a new generation
of ethanol from ‘cellulosic’ biomass. Members of Congress have embraced cellulosic
ethanol – produced from agricultural residues such as corn stalks or wheat straw, or dedicated
energy crops such as perennial grasses or fast-growing trees, as an opportunity
to extend the economic development benefits of ethanol production to all 50 states. The
proliferation of cellulosic ethanol provisions in EPACT reflects this enthusiasm – though
many of the law’s programs have yet to be funded (see Table 3.1).
In addition to the benefits that new energy policy legislation provided, there was increasing
concern in the White House about the negative national security implications of US
dependence on foreign petroleum. Immediately following passage of EPACT, President
George W. Bush vigorously threw his support behind biofuels. President Bush shone a
national spotlight on cellulosic ethanol in his 2006 State of the Union address as a solution
to what he described as America’s ‘addiction to oil’, further fueling enthusiasm for the
technology. A growing number of individual states have also begun providing incentives to
attract cellulosic ethanol production, and the newly Democratic Party-controlled Congress
is expected to provide even further inducements sometime this year.
3.3 The US Ethanol Market
The recent surge of new and very supportive government policies, combined with increasing
petroleum prices, has produced an American ethanol boom. Ethanol production in the US
has more than tripled since 2000 (see Figure 3.1). Today, more than 150 ethanol biorefineries
are in operation in the United States with a combined annual capacity of nearly 9 billion
gallons. More than 50 additional facilities are now under construction or expansion with
capacity to double US ethanol production to over 12 billion gallons by 2009. 6
In 2006, ethanol producers enjoyed record profits. Market prices for ethanol exceeded
$5.00 a gallon during the summer months – nearly triple 2005 levels. 7 With an average
production cost of $1.45 per gallon, 8 ethanol plant developers recovered the cost of plant
construction in as little as six months. With the influx of new production, market prices for
ethanol have since returned closer to their historic average of $2.00 per gallon. 9