FIGURE 1-1 Relative costs of processing steps in the NREL bioethanol process of 1991. Source: Wyman, 1999.

The purpose of the Clean Air Act Amendments of 1990 was to improve the nation's air quality. Title I requires certain levels of oxygen in automotive fuel, which can be met with the addition of oxygenates, such as ethanol, to gasoline in areas that exceed public health standards for ozone and carbon monoxide (so-called nonattainment areas) as set by the Environmental Protection Agency.

The Energy Policy Act of 1992, Section 502(a), directs DOE to "establish a program to promote the development and use in light duty motor vehicles of domestic replacement fuels" and further states that the "program shall promote the replacement of petroleum motor fuels with replacement fuels to the maximum extent practicable." The program "shall, to the extent practicable, ensure the availability of those replacement fuels that will have the greatest impact of reducing oil imports, improving the health of our nation's economy and reducing greenhouse gas emissions."

Another issue related to the environmental and national security concerns addressed by Congress is the issue of externalities. Externalities include, for example, environmental damage caused by unpenalized or unregulated pollution. Environmental damage is not reflected in the cost to the polluter or the price of the product. An acknowledged role of government is to ensure that externalities are somehow incorporated into decisions about the investment and use of products and their production. For example, government regulations on the manufacture, use, and composition of fuels do incorporate some externalities into the price structure of fuels. The committee recognizes that changes in government regulations for biomass-based fuels could substantially change the relative market values of renewable and fossil fuels but has declined to speculate on possible changes. The projected market values in this report assume that no changes will be made in government policies with respect to externalities.

Another traditional role of government is supporting basic science and long-range R&D-especially in areas that are considered important to national policy but may not be of current interest to industry. The private sector has no incentive to invest in R&D on many long-range technologies although it is in society' s interest to prepare for an uncertain future by investigating promising advanced technologies. Underinvestment by the private sector may be attributable to the inability of a firm or a small group of firms to capture the return on its investments in R&D or to the incentive structure of a given sector of the economy that may inhibit investment in innovation, especially for the long term (PCAST, 1997).


The OFD is pursuing strategic objectives to encourage the development of a bioethanol industry. Ethanol production is expected to progress from the exploitation of niche feedstock opportunities, such as agricultural residues (e.g.,

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