6
Policy Options

Subsidies for corn ethanol production coincident with low corn prices and high oil prices have driven the dramatic expansion of corn ethanol production over the last several years. The nation’s subsidy policies have been motivated by the desire to improve energy security and to provide support for farmers as a matter of farm policy. As biofuel production expands, and particularly as new cellulosic alternatives are developed, there is a real opportunity to shape policies to also meet objectives related to water-use and -quality impacts.

This chapter describes the main factors that shape the current policy context and raises some important considerations for future policy. The report does not evaluate specific policy options or make any recommendations about policies to be implemented.

WHAT FACTORS HAVE SHAPED THE CURRENT POLICY CONTEXT?

Several circumstances have favored the development of ethanol as a biofuel over the past 30 years. Following the oil crisis of the mid-1970s, Congress implemented a subsidy to encourage ethanol fuel additives in gasoline that has ranged from $0.40–0.60 per gallon of ethanol produced. This allowed a small ethanol fuels industry to develop in the United States that was profitable, even when the price of oil was low at $30–40 per barrel. Later, ethanol was shown to reduce carbon monoxide emissions in motor vehicles. Ethanol derived from corn kernels was a logical starting point to replace imported petroleum and, in addition, it provided another market for farmers’ products in the United States.

Following Hurricane Katrina in 2005, the price of oil quickly rose to more than $50 per barrel and since then has been well above that price. This caused a “gold rush” of interest in ethanol production because corn prices were low and gasoline prices were high. Ethanol from corn was al-



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6 Policy Options S ubsidies for corn ethanol production coincident with low corn prices and high oil prices have driven the dramatic expansion of corn ethanol production over the last several years. The nation’s subsidy policies have been motivated by the desire to improve energy security and to provide support for farmers as a matter of farm policy. As biofuel production expands, and particularly as new cellulosic alternatives are developed, there is a real opportunity to shape policies to also meet objectives related to water-use and -quality impacts. This chapter describes the main factors that shape the current policy context and raises some important considerations for future policy. The re- port does not evaluate specific policy options or make any recommendations about policies to be implemented. WHAT FACTORS HAVE SHAPED THE CURRENT POLICY CONTEXT? Several circumstances have favored the development of ethanol as a biofuel over the past 30 years. Following the oil crisis of the mid-1970s, Congress implemented a subsidy to encourage ethanol fuel additives in gasoline that has ranged from $0.40-0.60 per gallon of ethanol produced. This allowed a small ethanol fuels industry to develop in the United States that was profitable, even when the price of oil was low at $30-40 per barrel. Later, ethanol was shown to reduce carbon monoxide emissions in motor vehicles. Ethanol derived from corn kernels was a logical starting point to replace imported petroleum and, in addition, it provided another market for farmers’ products in the United States. Following Hurricane Katrina in 2005, the price of oil quickly rose to more than $50 per barrel and since then has been well above that price. This caused a “gold rush” of interest in ethanol production because corn prices were low and gasoline prices were high. Ethanol from corn was al- 55

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56 Water Implications of Biofuels Production in the United States ready a proven technology, so farmers, cooperatives, and large grain com- panies quickly responded to the strong market signal. Production capacity increased dramatically to more than 6 billion gallons in 2007. Still today, this represents only 3.5 percent of U.S. transportation fuel. Congress and the Executive Branch have encouraged even greater pro- duction through the Energy Act of 2005, continuation of the ethanol subsidy at the current rate of $0.51 per gallon, and by direct payments to farmers for corn and soybeans through the Farm Bill. The Department of Energy (DOE) has projected that 30 percent of U.S. transportation fuel could be provided by biofuels, ethanol, and biodiesel from all feedstocks by 2030. There will likely be adjustments brought about by international trade. The use of corn, soybeans, and sugar for liquid fuels is going to be affected by international production and demand for these commodities. International trade in ethanol or biodiesel will affect production of these in the United States to some extent, but the trade volumes initially will be modest at best. In the case of low-value, high-volume crops for cellulosic conversion, these are unlikely to be traded because transportation costs become limiting. Biofuels will be an important component of the nation’s energy port- folio for at least the next several decades (Doering, 2005). As total biofuels production expands to meet national goals, the long-term sustainability of the groundwater and surface water resources used for biofuel feedstocks and production facilities will be key issues to consider. Irrigation of crops creates consumptive use of water in areas where aquifers are being depleted and/or surface water quality is impaired. Policies designed to conserve water and prevent the unsustainable withdrawal of water from depleted aquifers could be formulated. From a water quality perspective, it is vitally important to pursue poli- cies that prevent an increase in total loadings of nutrient and sediments to waters. It may even be possible to design policies in such a way to reduce loadings across the agricultural sector, for example, those that support the production of feedstocks with lower inputs of nutrients (see Chapter 3). Cel- lulosic feedstocks, which have a lower expected impact on water quality in most cases (with the exception of the excessive removal of corn stover from fields without conservation tillage), could be an important alternative to pursue, keeping in mind that there are many uncertainties regarding the large-scale production of these crops. It should be noted that current agricultural production is not an appro- priate benchmark against which to set environmental standards. As noted early, in many regions, water resources have already been stressed. Water quality has not improved markedly in key waterbodies like the lower Mis-

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Policy Options 57 sissippi River and Chesapeake Bay. Gains made in erosion control through various conservation programs are being offset by substitution to corn crops that are more prone to water erosion. Although water quality improvement efforts in some areas have held nutrient levels steady, there has been little progress in improving water quality in key watersheds or in further reducing erosion to meet water quality and soil maintenance targets. Biofuels production is developing within the context of shifting op- tions and goals related to U.S. energy production. There are several fac- tors to be considered with regard to biofuels production that are outside the scope of this report but warrant consideration. These factors include: energy return on energy invested including consideration of production of pesticides and fertilizer, running farm machinery and irrigating, harvesting and transporting the crop; the overall “carbon footprint” of biofuels from when the seed is planted to when the fuel is produced; and the “food vs. fuel” concern with the possibility that increased economic incentives could prompt farmers worldwide to grow crops for biofuel production instead of food production. HOW CAN POLICY REDUCE IMPACTS OF BIOFUEL PRODUCTION ON WATER QUALITY? Staying the current policy path would likely result in the continued trend of expansion of corn-based ethanol production, driven by the economics of input costs and ethanol prices supplemented by the subsidy. If projected future increases in use of corn for ethanol production do occur, the increase in harm to water quality could be considerable. In addition, expansion of corn production on fragile soils or soils that do not hold nutrients can in- crease both loads of nutrients and sediments. Alternative Subsidies Policymakers have options to alter the current subsidy structures to make funds available to ameliorate impacts of ethanol or feedstock pro- duction on water use and quality. For example, one option to consider is a variable subsidy for ethanol that would reduce public expenditures when ethanol production is profitable on a market basis. Money paid to produc- ers would be reduced as ethanol becomes profitable and then increased as ethanol production costs exceed ethanol prices. Such a policy would likely have prevented the financial distress in the ethanol industry in the late 1990s when oil prices were low and corn prices high.

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58 Water Implications of Biofuels Production in the United States The subsidy money saved when ethanol is profitable could be redirected to efforts to reduce water impacts and/or other policy goals. To meet goals regarding overall water use, for example, performance incentives could be developed to encourage producers to increase water recycling in ethanol plants and farmers to adopt improved irrigation technology. Policies to Encourage Biofuels Produced from Cellulosic Alternatives Given the likelihood that cellulosic biofuels often will have less impact on water quality per unit of energy gained, it seems prudent to encourage the transition from corn ethanol to the next generation of biofuels. One of the issues within the current system is that investors will continue to prefer corn ethanol over cellulose because cellulose is riskier (W. Tyner, personal commun., July 12, 2007). This transition will be dependent on the develop- ment of cost-effective technology, and a policy bridge will likely be needed as well. The extent and intensity of water quality problems from biofuels will be partially driven by the conditions under which the cellulosic biofuels indus- try develops. For the foreseeable future, this industry is likely to be driven by subsidies in addition to favorable petroleum and biomass feedstock prices. The current ethanol subsidy of $0.51 per gallon has raised profitability levels allowing rapid payback to ethanol producers irrespective of whether they have increased processing efficiency. In one scenario, with oil at $60 a bar- rel, an ethanol plant could pay $4.82 per bushel for corn and still achieve a 12 percent return on equity (Tyner, 2007). Looking forward to cellulosic-ethanol production, there may be creative alternatives to a simple subsidy per gallon produced. If taxpayer money can be spent on subsidies, it can also be used to provide incentives to encourage both the technology and the production of product and feedstock to meet public objectives. Performance subsidies could be designed to be paid when specific objectives such as energy-conversion efficiency and reducing the environmental impacts of feedstock production—especially water quality—are met. Policies to Encourage Best Agricultural Practices Policies to maximize nutrient-use efficiency could help reduce nutri- ent pollution reaching such water bodies as the Mississippi River and the Chesapeake Bay. About $4 billion is spent annually for voluntary conserva- tion programs and incentives that require farmers to engage in conservation

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Policy Options 59 activities to reduce soil erosion. The largest of these in terms of expenditures is the Conservation Reserve Program (CRP), which is administered by the U.S. Department of Agriculture’s Farm Service Agency. The program initially focused on retirement of highly erosive and other environmentally sensi- tive land from crop production, but the scope of the CRP has been steadily expanded (SWCS, 2003). The Natural Resources Conservation Service’s (NRCS) Environmental Quality Incentives Program (EQIP), which has the largest number of partici- pants and acres under contract, provides financial and technical assistance to farmers and ranchers to implement nutrient management and other prac- tices to improve water quality and reduce erosion. The Conservation Security Program (CSP), introduced with the 2002 Farm Bill, is a stewardship program that complements the CRP and EQIP programs. CSP provides incentives to farmers specifically for improved nutrient management as part of an overall farm plan for reducing the environmental impact of the farming operation. At the watershed or river basin level, some areas produce greater sedi- ment and nutrient loadings than other areas. One option to increase the effectiveness of conservation programs is to target areas that would yield the greatest environmental benefits. The 2002 Farm Bill reduced the op- portunity to target, but the Administration’s proposed 2007 Bill partially restores targeting. The U.S. Environmental Protection Agency and some states have ad- opted a strategy of issuing water quality permits—a concept originally ap- plied to reduce pollutant emissions to the atmosphere. Every polluting entity is allowed to discharge pollutants up to a predetermined limit. Entities that discharge less than their allocated limits generate credits that they can sell (EPA, 2006). Cross-compliance regulations issued in 1985 stipulate that a farmer would forego commodity price supports and other program subsidies if con- servation practices were not followed on highly erosive lands, if grasslands were plowed, or if wetlands were drained, but the regulations have become less restrictive since they were introduced in 1985. Cross-compliance and other more stringent approaches may be necessary to achieve improvements in water quality (GAO, 2003). However, when commodity prices are high and price supports are less essential, a loss of subsidies may not be sufficient motivation for compliance; financial accountability for poor practices may be needed. Because most nutrient pollution comes from non-point sources, it is relatively free of regulatory control. The possibility of increased nutrient pollution could encourage a more directed institutional approach to non-

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60 Water Implications of Biofuels Production in the United States point source pollution by states or the federal government—something like a Total Maximum Daily Load (TMDL) regulation for a multi-state region or large river system. TMDLs are calculations of the maximum amount of a pol- lutant that a waterbody can receive and still meet water quality standards. A paucity of data and difficulty in assigning responsibility for non-point source pollution raise technical and political challenges. Use of the best available science can help make TMDL programs more equitable and ef- fective (NRC, 2001). Although cellulosic crops in general hold soil better than corn, they can also pose problems of nutrient leaching and erosion. The imminent expan- sion of biomass production raises the urgency of this concern. Implications of Biorefineries Process water for corn ethanol production raises both quantity and qual- ity concerns. However, both the impacts and the regulatory opportunity for mitigation are likely to be at the local or state level. With the rapid expansion of ethanol production, some local communities and governments have not anticipated withdrawal levels or discharge volumes and have suffered the resulting water draw-downs and water treatment requirements. Mitigation will require effective withdrawal rules and enforcement and/or enhancement of existing state/federal rules on point discharge. WHAT METRICS CAN BE USED TO INFORM POLICY DECISIONS? Many different metrics can be used to assess real-world consequences of different crop choices. For example, measuring greenhouse gas emis- sions per unit of energy produced can be a useful metric when attempting to capture some of the environmental consequences of biofuels production. Or, measuring petroleum displacement per unit of energy produced can be useful when assessing strategies that are driven by a policy leading to greater energy independence for the United States. The choice of metric is important because different feedstocks will be ranked differently and will have varying strengths and weaknesses depending on the choice of metric. One possible metric to compare the impact of biofuels on water quality, as discussed in Chapter 3, is to compare crops based on inputs of fertilizers and pesticides per unit of the net energy gain captured in a biofuel. Similar metrics could be developed for water quantity; water application rates or consumptive water use could be used depending on the kinds of impacts

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Policy Options 61 being measured. Other measures might incorporate land requirements per unit of biofuel, soil erosion, or impacts of the associated biorefinery. Regulations and voluntary programs have been the traditional policy approach to ameliorating the negative impacts of agricultural production, and the degree to which such practices have been applied has often been the measure of success. Because biofuels could become a dominant driver of agricultural production across the landscape—affecting crop choice, land use, and production practices—it may be appropriate to respond to this change with measures of success that relate specifically to the new driver. For example, feedstocks could be chosen using metrics of energy output per unit of water quality impact and water use, and more performance measures that directly monitor impacts of biofuels production on water resources could be applied. REFERENCES Doering III, Otto C. 2005. Energy systems integration: Fitting biomass energy from agriculture into U.S. energy systems. Pp. 112-130 in Agriculture as a Producer and Consumer of Energy. J. Outlaw, K. Collins, and J. Duffield, eds. Cambridge, MA: CABI Publishing. National Research Council (NRC). 2001. Assessing the TMDL Approach to Water Quality Management. Washington, D.C.: National AcademyPress. Soil Water Conservation Society (SWCS). 2003. Comments on the Interim Rule for the Con- servation Reserve Program, Soil and Water Conservation Society, July 7, 2003. Available online at http://www.swcs.org/en/special_projects/farm_bill_conservation/. Accessed on July 13, 2007. Tyner, W. 2007. U.S. Ethanol Policy—Possibilities for the Future. Purdue Cooperative Exten- sion Bulletin ID-342-W. Available online at http://www.ces.purdue.edu/bioenergy. Ac- cessed on July 13, 2007. U.S. Environmental Protection Agency (EPA) 2006. Water Quality Trading. Available online at http://www.epa.gov/owow/watershed/tradelinks.html. U.S. General Accounting Office. 2003. Agricultural Conservation; USDA Needs to Better Ensure Protection of Highly Erodible Cropland and Wetlands. Washington, D.C.: General Accounting Office.

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