Ethanol Refining and Production
According to the Renewable Fuels Association, about 60% of the corn used for ethanol is processed in "wet" milling plants (a chemical extraction process) and the other 40% is processed by "dry" mills (a grinding process). The basic steps of both processes are as follows. First, the corn is processed, with various enzymes added to separate fermentable sugars. Next, yeast is added to the mixture for fermentation to make alcohol. The alcohol is then distilled to fuel-grade ethanol that is 85-95% pure. Finally, for fuel and industrial purposes the ethanol is denatured with a small amount of a displeasing or noxious chemical to make it unfit for human consumption.(5) In the U.S. the denaturant for fuel ethanol is gasoline.
Ethanol is produced largely in the Midwest corn belt, with more than 88% of production occurring in five states: Illinois, Iowa, Nebraska, Minnesota and Indiana. Because it is generally less expensive to produce ethanol close to the feedstock supply, it is not surprising that the top five corn-producing states in the U.S. are also the top five ethanol-producers. (See Table 2.) Most ethanol use is in the metropolitan centers of the Midwest, where it is produced. When ethanol is used in other regions, shipping costs tend to be high, since ethanol-blended gasoline cannot travel through pipelines.
2. Corn Production and Ethanol Capacity, by State, 1999
This geographic concentration is an obstacle to the use of ethanol on the East and West Coasts. The potential for expanding production geographically is a motivation behind research on ethanol, since if regions could locate production facilities closer to the point of consumption, the costs of using ethanol could be lessened. Furthermore, if regions could produce fuel ethanol from local crops, there would be an increase in regional agricultural income.
Ethanol production is also concentrated among a few large producers. The top five companies account for approximately 66% of production capacity, and the top ten companies account for approximately 82% of production capacity. (See Table 3.) Critics of the ethanol industry in general--and specifically of the ethanol tax incentives--argue that the tax incentives for ethanol production equate to "corporate welfare" for a few large producers.(6)
Overall, domestic ethanol production capacity is approximately 1.8 billion gallons per year, and this capacity is expected to increase to 2.3 billion by 2001.(7)
3. Top 10 Ethanol
Producers by Capacity, 1999
Source: Renewable Fuels Association, Ethanol Industry Outlook 1999 and Beyond.
In addition to the primary ethanol output, the corn wet milling generates corn gluten feed, corn gluten meal, and corn oil, and dry milling creates distillers grains. Corn oil is used as a vegetable oil and is higher priced than soybean oil. Approximately 12 million metric tons of gluten feed, gluten meal, and dried distillers grains are produced in the United States and sold as livestock feed annually. A major market for corn gluten feed and meal is the European Union, which imported nearly 5 million metric tons of gluten feed and meal during FY1998.
Revenue from the ethanol byproducts help offset the cost of corn. The net cost of corn relative to the price of ethanol (the ethanol production margin) and the difference between ethanol and wholesale gasoline prices (the fuel blending margin) are the major determinants of the level of ethanol production. Currently, the ethanol production margin is high because of the low price of corn. At the same time, the wholesale price of gasoline is increasing against the price of ethanol, which encourages the use of ethanol as an octane enhancer.
Approximately 1.4 billion gallons of ethanol fuel were consumed in the United States in 1998, mainly blended into E10 gasohol. While large, this figure represents only 1.2% of the approximately 120 billion gallons of gasoline consumption in the same year. According to DOE, ethanol's market share is unlikely to increase significantly between the present and 2005, and is forecast to increase to approximately 2% by 2020.(8)
The most significant barrier to wider use of fuel ethanol is its cost. Even with tax incentives for ethanol producers (see the section on Economic Effects), the fuel tends to be more expensive than gasoline per gallon. Furthermore, since fuel ethanol has a somewhat lower energy content, more fuel is required to travel the same distance. This energy loss leads to an approximate 3% decrease in miles-per-gallon vehicle fuel economy with gasohol.
However, ethanol's chemical properties make it very useful for some applications, especially as an additive in gasoline. Major stimuli to the use of ethanol have been the oxygenate requirements of the Reformulated Gasoline (RFG) and Oxygenated Fuels programs of the Clean Air Act.(9) Oxygenates are used to promote more complete combustion of gasoline, which reduces carbon monoxide and volatile organic compound (VOC) emissions.(10) In addition, oxygenates can replace other chemicals in gasoline, such as benzene, a toxic air pollutant (see the section on Air Quality).
The two most common oxygenates are ethanol and methyl tertiary butyl ether (MTBE). MTBE, primarily made from natural gas or petroleum products, is preferred to ethanol in most regions because it is generally much less expensive, is easier to transport and distribute, and is available in greater supply. Because of different distribution systems and blending processes (with gasoline), substituting one oxygenate for another can lead to significant cost increases.
Despite the cost differential, there are several possible advantages of using ethanol over MTBE. Ethanol contains 35% oxygen by weight--twice the oxygen content of MTBE. Furthermore, since ethanol is produced from agricultural products, it has the potential to be a sustainable fuel, while MTBE is produced from natural gas and petroleum, fossil fuels. In addition, ethanol is readily biodegradable, eliminating some of the potential concerns about groundwater contamination that have surrounded MTBE (see the section on MTBE).
Both ethanol and MTBE also can be blended into otherwise non-oxygenated gasoline to raise the octane rating of the fuel, and therefore improve its combustion properties. High-performance engines and older engines often require higher octane fuel to prevent early ignition, or "engine knock." Other chemicals may be used for the same purpose, but some of these alternatives are highly toxic, and some are regulated as pollutants under the Clean Air Act.(11) Furthermore, since these additives do not contain oxygen, they do not result in the same emissions reductions as oxygenated gasoline.
In purer forms, ethanol can also be used as an alternative to gasoline in vehicles specifically designed for its use, although this only represents approximately 0.2% of ethanol consumption in the U.S. The federal government and state governments, along with businesses in the alternative fuel industry, are required to purchase alternative-fueled vehicles by the Energy Policy Act of 1992.(12) Blends of 85% ethanol with 15% gasoline (E85), and 95% ethanol with 5% gasoline (E95) are currently considered alternative fuels by the Department of Energy.(13) The small amount of gasoline added to the alcohol helps prevent corrosion of engine parts, and aids ignition to help start engines in cold-weather.
4. Estimated U. S.
Consumption of Fuel Ethanol, MTBE and Gasoline
Source: Department of Energy, Alternatives to Traditional Transportation Fuels - 1998 Advance Data.
aA major drop in E95 consumption occurred between 1997 and 1998 because of a significant decrease in the number of E95-fueled vehicles in operation (347 to 14), due to the elimination of an ethanol-fueled bus fleet in California.
bGasoline consumption includes ethanol in gasohol and MTBE in gasoline.
Approximately 1.9 million gasoline-equivalent gallons (GEG)(14) of E85, and 59 thousand GEG of E95 were consumed in 1998, mostly in Midwestern states.(15) (See Table 4.) One reason for the relatively low consumption of E85 and E95 is that there are relatively few vehicles on the road that operate on these fuels. In 1998, approximately 14,000 ethanol-fueled vehicles were in use,(16) as compared to approximately 210 million gasoline- and diesel-fueled vehicles that were on the road in 1996.(17) One obstacle to the use of alternative fuel vehicles is that they are generally more expensive than conventional vehicles, although this margin has decreased in recent years with newer technology. Another obstacle is that, as was stated above, fuel ethanol is generally more expensive than gasoline or diesel fuel. In addition, there are very few fueling sites for E85 and E95, especially outside of the Midwest.
Research and Development in Cellulosic Feedstocks
For ethanol to play a more important role in U.S. fuel consumption, the fuel must become price-competitive with gasoline. Since a major part of the total production cost is the cost of feedstock, reducing feedstock costs could lead to lower wholesale ethanol costs. Therefore, there is a great deal of interest in the use of cellulosic feedstocks, which include low-value waste products, such as recycled paper, or dedicated fuel crops, such as switch grass. A dedicated fuel crop is one that would be grown and harvested solely for the purpose of fuel production.
However, as the name indicates, cellulosic feedstocks are high in cellulose, and cellulose cannot be fermented. Cellulose must first be broken down into simpler carbohydrates, and this can add an expensive step to the process. Therefore, research has focused on both reducing the process costs for cellulosic ethanol, and improving the availability of cellulosic feedstocks.
During FY1997, DOE's Office of Fuels Development spent approximately $9.4 million for cellulosic ethanol process research, and approximately $1.7 for research on cellulosic feedstocks.(18) Furthermore, DOE has supported pilot programs for cellulosic ethanol, such as a plant in Jennings, Louisiana, that will produce ethanol from bagasse.(19) USDA currently spends approximately $8.6 million for alcohol fuels research.(20)
Given that a major constraint on the use of ethanol as an alternative fuel, and as an oxygenate, is its high price, ethanol is not currently competitive with gasoline as a fuel. Wholesale ethanol prices, before incentives from the federal government and state governments, are generally twice that of wholesale gasoline prices. The primary federal incentive to support the ethanol industry is the 5.4 per gallon exemption that blenders of gasohol (E10) receive from the 18.4 federal excise tax on motor fuels.(21) Because the exemption applies to blended fuel, of which ethanol comprises only 10%, the exemption provides for an effective subsidy of 54 per gallon of pure ethanol. (See Table 5.)
5. Price of Pure Ethanol Relative to Gasoline
Source: Hart's Oxy-Fuel News; Energy Information Agency, Petroleum Marketing Monthly.
aThis is the average price for pure ("neat") ethanol.
bThis is the average rack price for regular conventional gasoline (i.e. non-oxygenated, standard octane).
It is argued that the ethanol industry could not survive without the tax exemption. An economic analysis conducted in 1998 by the Food and Agriculture Policy Research Institute, in conjunction with the congressional debate over extension of the tax exemption, concluded that ethanol production from corn would decline from 1.4 billion gallons per year, and stabilize at about 290 million gallons per year, if the exemption were eliminated.(22)
The tax exemption for ethanol is criticized by some as a corporate subsidy,(23) because, in this view, it encourages the inefficient use of agricultural and other resources, and deprives the Highway Trust Fund of needed revenues.(24) The General Accounting Office estimates that the tax exemption will lead to approximately $10.4 billion in foregone Highway Trust Fund revenue over the 22 years from FY1979 to FY2000.(25) The petroleum industry opposes the incentive because it results in reduced use of petroleum.
Proponents of the tax incentive argue that ethanol leads to better air quality, and that substantial benefits flow to the agriculture sector due to the increased demand for corn created by ethanol. Furthermore, they argue that the increased market for ethanol leads to a stronger U.S. trade balance, since a smaller U.S. ethanol industry would lead to increased imports of MTBE to meet the demand for oxygenates.(26)
One of the main motivations for ethanol use is improved air quality. Ethanol is primarily used in gasoline to meet minimum oxygenate requirements of two Clean Air Act programs. Reformulated gasoline (RFG) is used to reduce vehicle emissions in areas that are in severe or extreme nonattainment of National Ambient Air Quality Standards (NAAQS) for ground-level ozone.(27) Ten metropolitan areas, including New York, Los Angeles, Chicago, Philadelphia, and Houston, are covered by this requirement, and many other areas with less severe ozone problems have opted into the program, as well. In these areas, RFG is used year-round. By contrast, the Oxygenated Fuels program operates only in the winter months in 20 areas(28) that are listed as carbon monoxide (CO) nonattainment areas.(29)
EPA states that RFG has led to significant improvements in air quality, including a 17% reduction in volatile organic compounds (VOCs) emissions from vehicles, and a 30% reduction in toxic emissions. Furthermore, according to EPA "ambient monitoring data from the first year of the RFG program (1995) also showed strong signs that RFG is working. For example, detection of benzene (one of the air toxics controlled by RFG, and a known human carcinogen) declined dramatically, with a median reduction of 38% from the previous year."(30)
However, the need for oxygenates in RFG has been questioned recently. Although oxygenates lead to lower emissions of VOCs, and CO, they may lead to higher emissions of nitrogen oxides (NOX). Since all three contribute to the formation of ozone, the National Research Council recently concluded that while RFG certainly leads to improved air quality, the oxygenate requirement in RFG may have little overall impact on ozone formation.(31)
More importantly, evidence that the most widely-used oxygenate, methyl tertiary butyl ether (MTBE) contaminates groundwater has led to a push by some to eliminate the oxygen requirement in RFG. MTBE has been identified as an animal carcinogen, and there is concern that it is a possible human carcinogen. In California, MTBE will be banned as of December 31, 2002, and the state is lobbying Congress for a waiver to the oxygen requirement (see section on MTBE). Other states, such as states in the Northeast, are also seeking waivers.
If the oxygenate requirements were eliminated, some refiners claim that the environmental goals of the RFG program could be achieved through cleaner, although potentially more costly, gasoline that does not contain any oxygenates.(32) These claims have added to the push to remove the oxygen requirement and allow refiners to produce RFG in the most cost-effective manner, whether or not that includes the use oxygenates. However, some environmental groups are concerned that an elimination of the oxygenate requirements would compromise air quality gains resulting from the current standards, since oxygenates also displace other harmful chemicals in gasoline.
While the potential ozone benefit from oxygenates in RFG has been questioned, there is little dispute that the winter Oxy-Fuels program has led to lower emissions of CO. The Oxy-Fuels program requires oxygenated gasoline in the winter months to control CO pollution in NAAQS nonattainment areas for the CO standard. However, this program is small relative to the RFG program.(33)
The air quality benefits from purer forms of ethanol can be substantial. Compared to gasoline, use of E85 and E95 can result in a 30-50% reduction in ozone-forming emissions. And while the use of ethanol also leads to increased emissions of acetaldehyde, a toxic air pollutant, as defined by the Clean Air Act, these emissions can be controlled through the use of advanced catalytic converters.(34) However, as was stated above, these purer forms of ethanol have not seen wide use.
Another potential environmental benefit from ethanol is the fact that it is a renewable fuel. Proponents of ethanol argue that over the entire fuel-cycle(35) it has the potential to reduce greenhouse gas emissions from automobiles relative to gasoline, therefore reducing the risk of possible global warming.
Because ethanol (C2H5OH) contains carbon, combustion of the fuel necessarily results in emissions of carbon dioxide (CO2), the primary greenhouse gas. However, since photosynthesis (the process by which plants convert light into chemical energy) requires absorption of CO2, the growth cycle of the feedstock crop can serve--to some extent--as a "sink" that absorbs some of these emissions. In addition to CO2 emissions, the emissions of other greenhouse gases, may increase or decrease depending on the fuel cycle.(36)
According to Argonne National Laboratory, using E10, vehicle greenhouse gas emissions (measured in grams per mile) are approximately 1% lower than with the same vehicle using gasoline. With improvements in production processes, by 2010, the reduction in greenhouse gas emissions from ethanol relative to gasoline could be as high as 8-10% for E10, while the use of E95 could lead to significantly higher reductions.(37)
However, other studies have called into question the efficiency of the ethanol production process.(38) If true, then the overall reductions in greenhouse gas emissions would be diminished, due to higher fuel consumption during the production process.
Another frequent argument for the use of ethanol as a motor fuel is that it reduces U.S. reliance on oil imports, making the U.S. less vulnerable to a fuel embargo of the sort that occurred in the 1970s, which was the event that initially stimulated development of the ethanol industry. According to Argonne National Laboratory, with current technology the use of E10 leads to a 3% reduction in fossil energy use per vehicle mile, while use of E95 could lead to a 44% reduction in fossil energy use.(39)
However, other studies contradict the Argonne study, suggesting that the amount of energy needed to produce ethanol is roughly equal to the amount of energy obtained from its combustion, which could lead to little or no reductions in fossil energy use.(40) Thus, if the energy used in ethanol production is petroleum-based, ethanol would do nothing to contribute to energy security. Furthermore, as was stated above, fuel ethanol only displaces approximately 1.2% of gasoline consumption in the United States. This small market share led GAO to conclude that the ethanol tax incentive has done little to promote energy security.(41) Furthermore, since ethanol is currently dependent on the U.S. corn supply, any threats to this supply (e.g. drought), or increases in corn prices, would negatively affect the cost and/or supply of ethanol. This happened when high corn prices caused by strong export demand in 1995 contributed to an 18% decline in ethanol production between 1995 and 1996.
Policy Concerns and Congressional Activity
Recent congressional interest in ethanol fuels has mainly focused on three sets of issues: 1) implementation of Phase 2 of the RFG program; 2) a possible phase-out of MTBE; and 3) the alcohol fuel tax incentives.
Phase 2 Reformulated Gasoline
As of January 1, 2000, under Phase 2 of the RFG program, the summer volatility standard for RFG will be tightened in order to further reduce evaporation of gasoline and emissions of VOCs. Because of its physical properties, ethanol has a higher volatility than MTBE, and the gasoline used to make ethanol-blended RFG will have to be less volatile and therefore more expensive. Thus, the price of ethanol-blended RFG will increase relative to MTBE-blended RFG. Industry spokespersons argue that under Phase 2, the increased cost of ethanol-blended RFG may make it unable to compete with gasoline containing other additives.
Although this reduced volatility requirement is set by the Clean Air Act, the Environmental Protection Agency (EPA) is currently reviewing whether credits from ethanol's improved performance on carbon monoxide emissions are possible as an offset to its higher volatility. Furthermore, several members of the Illinois delegation to Congress have communicated to the Environmental Protection Agency their concerns over the future of gasohol under Phase 2.(42) EPA plans to make a decision early in 2000, so that ethanol and gasoline producers will be able to prepare for the summer season.
Since MTBE, a possible human carcinogen, has been found in groundwater in some states (especially in California), there has been a push both in California and nationally to ban MTBE.(43) In March 1999, California's Governor Davis issued an Executive Order requiring that MTBE be phased out of gasoline in the state by December 31, 2002. In July 1999, an advisory panel to EPA recommended that MTBE use should be "reduced substantially."(44)
A possible ban on MTBE could have serious consequences for fuel markets, especially if the oxygenate requirements remain in place. Since ethanol is the second most used oxygenate, it is likely that it would be used to replace MTBE. However, there is not currently enough U.S. production capacity to meet the potential demand. Therefore, it would likely be necessary to phase out MTBE over time, as opposed to an immediate ban. Furthermore, the consumer price for oxygenated fuels would likely increase because ethanol, unlike MTBE, cannot be shipped through pipelines and must be mixed close to the point of sale, adding to delivery costs. Increased demand for oxygenates could also be met through imports from countries such as Brazil, which is a leader worldwide in fuel ethanol production, and currently has a surplus.(45)
While a ban on MTBE would seem positive for ethanol producers, it could actually work against them. Because MTBE is more commonly used in RFG, and because current ethanol production could not meet total U.S. demand for oxygenates, there is also a push to suspend the oxygenate requirement in RFG, which would remove a major stimulus to the use of fuel ethanol.
A number of bills in the 106th Congress address the MTBE and oxygenate issues, but movement on any of these bills has been stymied by the conflicting views of the ethanol and petroleum industries and by the varying interests of the states. H.R. 11 (Bilbray), which would waive the oxygen requirement in RFG, and allow California to set its own standards for RFG, has had the most activity recently. Approved by the House Commerce Committee Subcommittee on Health and the Environment, it has near-unanimous support of the California delegation.(46) The bill has been criticized by some because it would lead to a "patchwork" of fuel regulations, while others have supported the bill because it addresses the MTBE issue in the areas most affected by the chemical. S. 266 (Feinstein) contains similar language.
Several other bills address these issues, but have seen less activity. Two bills, H.R. 1367 (Franks) and H.R. 1398 (Pombo), would ban MTBE nationally. Likewise, S. 1037 (Boxer) would phase-out MTBE nationally, and would immediately ban MTBE in areas where groundwater has been affected. Furthermore, H.R. 1705 (Pallone) and S. 645 (Feinstein) would waive the oxygen requirement for RFG if all other program requirements are met, and if the resulting gasoline produces no worse emissions. Also, S. 1886 (Inhofe and Feinstein) would allow individual states to apply for waivers from the oxygenate requirements, if all other requirements of the RFG program are met.
In addition to the bills that have been introduced, draft legislation has been circulated by Senator Daschle that would phase-out MTBE nationwide, and would eliminate stipulations on the oxygen requirement in RFG. Furthermore, the legislation would require an increased market for renewable fuels from 1.3% of the national fuel market in 2001 to 2.1% by 2009. MTBE and oil producers oppose the legislation because they believe that it would "replace one mandate with another mandate."(47)
Alcohol Fuel Tax Incentives
As stated above, the exemption that ethanol-blended fuels receive from the excise tax on motor fuels is controversial. The incentive allows fuel ethanol to compete with other additives, since the wholesale price of ethanol is so high. Proponents of ethanol argue that this exemption lowers dependence on foreign imports, promotes air quality, and benefits farmers.(48)
Opponents of the tax incentives argue that the incentives promote an industry that could not exist on its own, and reduce potential fuel tax revenue. Despite objections from opponents, Congress in 1998 extended this tax exemption through 2007, but at slightly lower rates (P.L. 105-178). However, two bills, H.R. 446 (Bentsen) and H.R. 1470 (Visclosky), would repeal the ethanol tax exemptions.(49)
A few other bills in the 106th Congress also address ethanol-related issues. H.R. 1395 (Hunter) would prohibit gasoline imports to California and would suspend RFG and oxygenate requirements in the state when the retail price of gasoline exceeds certain limits. Three related bills--S. 935 (Lugar), H.R. 2819 (Udall), and H.R. 2827 (Ewing)--would authorize $49 million per year for biomass research administered by the U.S. Departments of Agriculture and Energy.
As a result of the current debate over the future of MTBE in RFG, and the RFG program in general, the future of the U.S. ethanol industry is uncertain. A ban on MTBE would greatly expand the market for ethanol, while an elimination of the oxygenate requirement would remove a major stimulus for its use. Any changes in the demand for ethanol will have major effects on corn producers, who rely on the industry as a partial market for their products.
The current size of the ethanol industry is depends significantly on federal laws and regulations that promote its use for air quality and energy security purposes, as well as tax incentives that lessen its cost to consumers. Without these, it is likely that the industry would shrink substantially in the near future. However, if fuel ethanol process costs can be decreased, or if gasoline prices increase, ethanol could increase its role in U.S. fuel consumption.
4. (back)Detailed explanations are available in CRS Report RS20271, Support Programs for Major Crops: Description and Experience and CRS Report 98-744, Agricultural Marketing Assistance Loans and Loan Deficiency Payments.
11. (back)Lead was commonly used as an octane enhancer until it was phased-out through the mid-1980s (lead in gasoline was completely banned in 1995), due to the fact that it disables emissions control devices, and because it is toxic to humans.
22. (back) Food and Agriculture Policy Research Institute. Effects on Agriculture of Elimination of the Excise Tax Exemption for Fuel Ethanol, Working Paper 01-97, April 8, 1997. http://www.fapri.missouri.edu
27. (back)Ground-level ozone is an air pollutant that causes smog, adversely affects health, and injures plants. It should not be confused with stratospheric ozone, which is a natural layer some 6 to 20 miles above the earth and provides a degree of protection from harmful radiation.
30. (back)Margo T. Oge, Director, Office of Mobile Sources, U.S. EPA, Testimony Before the Subcommittee on Energy and Environment of the Committee on Science, U.S. House of Representatives. September 14, 1999.
43. (back)For more information, see CRS Report 98-290 ENR, MTBE in Gasoline: Clean Air and Drinking Water Issues.