Alternative Fuels and Advanced Technology
Vehicles: Issues in Congress
Updated May 2, 2007
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Alternative Fuels and Advanced Technology Vehicles:
Issues in Congress
Summary
Alternative fuels and advanced technology vehicles are seen by proponents asintegral to improving urban air quality, decreasing dependence on foreign oil, andreducing emissions of greenhouse gases. However, major barriers — especiallyeconomics — currently prevent the widespread use of these fuels and technologies.Because of these barriers, and the potential benefits, there is continued congressionalinterest in providing incentives and other support for their development andcommercialization.
In the 110th Congress, alternative fuels and advanced technology vehicles havereceived a good deal of attention, especially in discussions over U.S. energy security.In his Jan. 24, 2007, State of the Union Address, President Bush called for theincreased use of renewable and alternative motor fuels to 35 billion gallons annuallyby 2017. U.S. consumption was roughly five billion gallons in 2006. Therefore,such an initiative would mean a seven-fold increase in the use of these fuels over 11years.
In the fall of 2005, hurricanes along the Gulf Coast led to disruptions in refiningcapacity and oil supply, which then led to higher gasoline and diesel prices. Sincethen, some Members of Congress have been seeking ways to reduce the vulnerabilityof the fuel system. High crude oil and gasoline prices in spring and summer 2006further increased interest in moving away from a petroleum-based transportationsystem.
The 109th Congress passed the Energy Policy Act of 2005 (P.L. 109-58, H.R. 6),which contains many provisions relevant to alternative fuels and advancedtechnology vehicles. Among its provisions, the act expanded existing tax incentivesfor the purchase of advanced vehicles, authorized R&D funding for hydrogen fueland fuel cells, and required that the nationwide gasoline supply contain a minimumamount of ethanol or other renewable fuel. H.R. 6 was signed by President Bush onAug. 8, 2005.
Contents
Introduction......................................................1Most Recent Developments..........................................1Background and Analysis...........................................2
Congressional Interest..........................................2
Legislative Background.....................................2Current Issues.............................................3Fuel Tax Incentives............................................3Ethanol and MTBE............................................4
Issues in the Spring/Summer of 2006: MTBE Phase-Out and
Ethanol Supply........................................6
Cellulosic Biofuels.............................................6Ethanol Imports...............................................7Vehicle Purchase Requirements...................................8Vehicle Purchase Tax Incentives..................................9Biodiesel...................................................10Hydrogen and Fuel Cells.......................................11Hybrid Vehicles .............................................12For Additional Reading............................................12
Alternative Fuels and Advanced Technology
Vehicles: Issues in Congress
Introduction
High crude oil and gasoline prices since autumn 2005 have led to increasedinterest in the U.S. fuel supply. Recent congressional interest has focused onalternatives to petroleum, ways to improve the efficiency of the U.S. transportationsector, and ways to improve the stability and security of the petroleum supply andrefining sectors.1 In spring 2006, high global oil prices (spurred by high demand),a transition from winter to summer gasoline, and the phase-out of the gasolineadditive MTBE pushed U.S. gasoline pump prices to historic highs.
Key components of federal policies to reduce fuel consumption include thepromotion of alternatives to petroleum fuels and the promotion of more efficientvehicles. This report provides an overview of current issues surrounding alternativefuels2 and advanced technology vehicles3 — issues discussed in further detail in otherCRS reports referred to in each section.
Most Recent Developments
In his January 24, 2007, State of the Union address, President Bush called foran increase in the use of alternative and renewable fuels to 35 billion gallons in 2017.U.S. consumption was approximately 5 billion gallons in 2006. This proposal wouldmean a seven-fold increase in the use of these fuels over 11 years. Proponentssupport the proposal as a bold effort to reduce reliance on foreign oil. Detractorsquestion the feasibility of such a rapid increase in U.S. consumption of non-petroleum fuels.
Crude oil and gasoline prices were high between autumn 2005 and summer2006 due to strong world demand for petroleum, political instability in the Middle
1
For more information on petroleum supply and prices, see CRS Report RL32530, WorldOil Demand and its Effect on Oil Prices, by Robert Pirog. For more information onlegislative proposals to help mitigate high gasoline prices, see CRS Report RL33521,Gasoline Prices: New Legislation and Proposals, by Carl E. Behrens and Carol Glover.
Alternative fuels are fuels produced from sources other than petroleum, including naturalgas, coal-derived fuels, agriculture-based ethanol and biodiesel, and hydrogen.
Advanced technology vehicles are vehicles that use technologies other than (or in additionto) an internal combustion engine, including electric vehicles, fuel cell vehicles, and hybrids.
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East, hurricanes in the Gulf Coast, and a transition away from the gasoline additiveMTBE. However, petroleum and gasoline prices have recently dropped significantly.On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (P.L.109-58, H.R. 6), an omnibus energy bill. The act contains provisions on renewablefuels, hydrogen R&D, and alternative fuel fleet requirements. Among otherprovisions, P.L. 109-58 established a renewable fuels standard requiring the use of7.5 billion gallons of renewable fuel in gasoline by 2012. It also provided for MTBEcleanup, authorized hydrogen R&D, and provided tax credits for the purchase ofadvanced vehicles.
Background and Analysis
Congressional Interest
Legislative Background. A combination of issues — the oil crises of the1970s, the rise in awareness of environmental issues, concerns over energy security,increasing vehicle emissions, and high gasoline prices — spurred interest in movingthe United States away from petroleum fuels for transportation and toward alternativefuels and advanced vehicle technologies.4
The Energy Policy Act of 1992. The 102nd Congress passed the EnergyPolicy Act of 1992 (EPAct 1992, P.L. 102-486). Among other provisions, this lawrequires the purchase of alternative fuel vehicles by federal agencies, stategovernments, and alternative fuel providers. Under EPAct 1992, a certain percentage — which varies by the type of fleet — of new passenger vehicles purchased for afederal or state agency or alternative fuel provider fleets must be capable of operatingon alternative fuels, including ethanol, methanol, natural gas, or propane. EPAct1992 established a tax credit for the purchase of electric vehicles, as well as taxdeductions for the purchase of alternative fuel and hybrid vehicles.
The Energy Policy Act of 2005. There was little congressional action onenergy policy through the late 1990s. In light of high fuel prices in the early 2000s,continued growth in domestic and global petroleum demand, and other energy policyconcerns, Congress began working on comprehensive energy legislation in 2001. Inthe 107th Congress, an energy bill stalled in conference. The 108th Congresscontinued the debate over energy legislation. The conference report (H.Rept. 108-375) included provisions on vehicle tax credits, amendments to vehicle purchaserequirements under the Energy Policy Act of 1992, a requirement that gasolinecontain ethanol or other renewable fuels, and tax credits for ethanol and biodieselfuels. However, this bill also stalled. Many of these topics were addressed in the
4
For background on alternative fuels, including legislative history, see CRS ReportRL30758, Alternative Transportation Fuels and Vehicles: Energy, Environment, andDevelopment Issues, by Brent D. Yacobucci. For background on advanced vehicletechnologies, see CRS Report RL30484, Advanced Vehicle Technologies: Energy,Environment, and Development Issues, by Brent D. Yacobucci.
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109th Congress by the Energy Policy Act of 2005 (EPAct 2005, P.L. 109-58, H.R. 6),which was signed by President Bush on August 8, 2005.
Other Legislation. Other laws affecting alternative fuel and advancedtechnology vehicles include the Energy Policy and Conservation Act (P.L. 94-163),which established fuel economy standards for passenger cars and light trucks; the1990 Amendments to the Clean Air Act (P.L. 101-549), which require cities withsignificant air quality problems to promote low emission vehicles; highwayauthorization bills, including P.L. 109-59 and P.L. 105-178, which established andreaffirmed tax incentives for ethanol and other fuels; and numerous laws thatauthorize federal research and development on alternative fuels, advancedtechnologies, and enabling infrastructure, such as alternative fuel pumps.Current Issues. Recent events have renewed interest in alternative fuels andadvanced vehicles. For example, high pump prices for gasoline and diesel fuel haveraised concerns over fuel conservation and energy security, including U.S.dependency on oil imports. In light of this, there is growing interest in more efficientvehicles or vehicles that abandon the use of petroleum altogether. This is especiallytrue as the rapid growth in the sales of light trucks — these include sport utilityvehicles (SUVs), mini-vans, and pickups, which tend to have lower fuel economythan passenger cars — has lowered the overall fuel economy of the new vehicle fleet.Furthermore, ongoing technological developments in hybrid vehicles, ethanolfuel, fuel cells, and hydrogen fuel have raised key policy questions. These questionsinclude whether more generous tax incentives for hybrid and/or fuel cell vehiclesshould be established, the costs and environmental impacts associated withproduction of ethanol or hydrogen as major transportation fuels, and whether researchand development funds should be focused on such potentially high-risk technologiesas fuel cells or on near-term technologies, such as hybrids.
Hurricanes along the Gulf Coast in the fall of 2005 led to fuel supply disruptionsand high retail prices, raising congressional interest in alternatives to petroleum. Inaddition, in spring 2006, high crude prices, issues with refining capacity, andconcerns about ethanol supply led to high pump prices, further raising concerns aboutthe United States’ ability to supply fuel to the transportation sector.
Fuel Tax Incentives
There are three key tax incentives for alternative fuels: (1) a tax credit forethanol of $0.51 per gallon, (2) a tax credit for biodiesel and renewable diesel of$1.00 per gallon ($0.50 for biodiesel made from recycled products), and (3) a creditof $0.50 per gallon for the retail sale of alternative fuels other than ethanol andbiodiesel (e.g., LPG). In addition, there are tax credits for small ethanol andbiodiesel producers ($0.10 per gallon).5
5
For more information on tax and non-tax incentives for ethanol and biodiesel, see CRSReport RL33572, Biofuels Incentives: A Summary of Federal Programs, by Brent D.Yacobucci. For a detailed discussion of ethanol tax incentives, see CRS Report RL32979,
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There is ongoing interest in tax incentives for the production and purchase ofalternative fuels. Supporters of this approach argue that the market favorsconventional fuels, and that the widespread infrastructure and nearly ubiquitous useof conventional fuels in automobiles makes it difficult for alternative fuels tocompete without economic incentives. The American Jobs Creation Act of 2004(P.L. 108-357) replaced a previous excise tax exemption for ethanol-blended fuelswith a tax credit of $0.51 per gallon. This credit will expire at the end of 2010.In addition to the credit for ethanol-blended gasoline, there has been interest inpromoting biodiesel fuel. P.L. 108-357 provides a tax credit of $1.00 per gallon forthe sale and use of “agri-biodiesel” — biodiesel produced from virgin agriculturalproducts such as soybean or canola oil. There is a smaller credit of $0.50 per gallonfor biodiesel produced from recycled grease. Under P.L. 108-357 the biodiesel creditwould have expired at the end of 2006, four years before the expiration of the ethanolcredit; the Energy Policy Act of 2005 (P.L. 109-58) extended the biodiesel tax creditthrough 2008. In addition, P.L. 109-58 expanded the credit to include “renewablediesel,” which is produced from a different process than biodiesel and results in afuel with somewhat different chemical characteristics. In recent guidance on the taxcredit, the Internal Revenue Service ruled that renewable diesel includes syntheticdiesel fuel produced from vegetable oils at petroleum refineries.6 Most biodieselproducers are small plants. Many biodiesel producers are concerned that thisdecision could lead to a shift away from biodiesel production to renewable dieselproduction at large refineries.
Ethanol and MTBE
Outside of tax incentives, ethanol has been of key interest in recent Congresses,especially in its role as an alternative to MTBE (methyl tertiary butyl ether).7 MTBEand ethanol were used (among other purposes) to meet Clean Air Act requirementsthat reformulated gasoline (RFG), sold in the nation’s worst ozone nonattainmentareas, contain at least 2% oxygen (by weight), to improve combustion. Under theRFG program, areas with “severe” or “extreme” ozone pollution (90 counties witha combined population of 64.8 million8) must use reformulated gas; areas with lesssevere ozone pollution may opt into the program as well, and many have. In all,portions of 17 states and the District of Columbia use RFG, and about 30% of the
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Alcohol Fuels Tax Incentives, by Salvatore Lazzari.
U.S. Internal Revenue Service, Notice 2007-37: Renewable Diesel, April 23, 2007.
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For additional background on the MTBE issue, see CRS Report RL32787, MTBE inGasoline: Clean Air and Drinking Water Issues, by James E. McCarthy and Mary Tiemann.For information on ethanol, see CRS Report RL33290, Fuel Ethanol: Background andPublic Policy Issues, by Brent D. Yacobucci.
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As classified under the old 1-hour ozone standard that will be replaced with a new, 8-hourstandard.
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gasoline sold in the United States is RFG, according to the Environmental ProtectionAgency (EPA).9
Before amendment by the Energy Policy Act of 2005, the Clean Air Actrequired that RFG contain at least 2% oxygen by weight.10 Refiners met thisrequirement by adding a number of ethers or alcohols, any of which contains oxygenand other elements. Until recently, the most commonly used oxygenate was MTBEbecause it was cheaper and easier to use than competing oxygenates. In 1999, 87%of RFG contained MTBE, a number reduced to about 46% in 2004, according toEPA. MTBE has also been used since the late 1970s in non-reformulated gasolineas an octane enhancer, at lower concentrations. As a result, gasoline with MTBE hasbeen used throughout the United States, whether or not an area has been subject toRFG requirements.
MTBE contamination creates taste and odor problems in water at very lowconcentrations, and some animal studies indicate MTBE may pose a cancer risk tohumans. MTBE leaks, generally from underground gasoline storage tanks, have beenimplicated in numerous incidents of ground water contamination. For these reasons,25 states have taken steps to ban or limit its use, according to the Renewable FuelsAssociation.11 The most significant of the bans (in California and New York) tookeffect at the end of 2003, leading many to suggest that Congress revisit the issue tomodify the oxygenate requirement and set more uniform national requirementsregarding MTBE and its potential replacements, principally ethanol.
Support for eliminating the oxygenate requirement on a nationwide basis waswidespread among states, the petroleum industry, and some environmental groups.In general, these stakeholders concluded that gasoline can meet the same low-emission performance standards as RFG without the use of oxygenates. Butagricultural interests presented a potential obstacle to enacting legislation to removethe oxygen requirement. According to the U.S. Department of Agriculture, roughly20% of the nation’s corn crop is used to produce the competing oxygenate, ethanol.12If MTBE use were reduced or phased out, but the oxygen requirement remained ineffect, ethanol use would have soared, increasing demand for corn. Conversely, ifthe oxygen requirement were repealed, not only would MTBE use decline, but so,likely, would demand for ethanol. Thus, some Members of Congress and governorsfrom corn-growing states took a keen interest in MTBE legislation and relatedoxygenate requirements.
9
U.S. Environmental Protection Agency (EPA), Office of Transportation Air Quality(OTAQ), Staff White Paper: Study of Unique Gasoline Blends (“Boutique Fuels”), Effectson Fuel Supply and Distribution and Potential Improvements, October 2001. In the case of MTBE, this equates to roughly 11% by volume.
Renewable Fuels Association, “New Jersey Bans MTBE,” Ethanol Report, Issue #226,July 15, 2005.
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U.S. Department of Agriculture, Economic Research Service, Feed Outlook, June 13,2006.
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To help promote the market for ethanol if the oxygen standard were eliminated,a renewable fuels standard (RFS) was suggested. This would require that all gasolinecontain ethanol or other renewable fuel. This concept was supported by agriculturalinterests, the oil industry, and some environmental groups. Opponents includedstates that do not produce ethanol, due to fears that the mandate could raise gasolineprices.
The Energy Policy Act of 2005 (P.L. 109-58) contains numerous MTBE andethanol provisions. It repealed the Clean Air Act requirement to use MTBE or otheroxygenates. In place of this requirement, the law established a renewable fuelsstandard. Under the RFS, annual gasoline supply is required to contain 7.5 billiongallons of ethanol or other renewable fuel by 2012. To prevent “backsliding” on airquality, the law requires that reductions in emissions of toxic substances achieved byRFG be maintained, and it authorizes funds for MTBE cleanup.13
Issues in the Spring/Summer of 2006: MTBE Phase-Out and
Ethanol Supply. As a result of P.L. 109-58, the oxygen requirement for RFG waseliminated on May 6, 2006. This requirement — which gasoline suppliers assertedwas a de facto mandate to use MTBE — was cited by gasoline suppliers as a defenseagainst liability for MTBE contamination. Therefore, although P.L. 109-58 actuallygave the industry more flexibility, the industry moved quickly to eliminate MTBEfrom the gasoline supply in spring 2006. Because MTBE accounted for 11% of thevolume of RFG in areas where it was used, the elimination of MTBE increasedpressure on already tight refining capacity. The loss in volume and energy fromeliminating MTBE increased demand for gasoline as well as ethanol. Exacerbatingthe problem was the fact that the industry was making the transition from wintergasoline to more stringent summertime specifications, which adds competition forthe highest-quality gasoline components. These pressures, along with historicallyhigh crude oil prices, led to historically high gasoline prices. Further, some localizedareas (e.g., Norfolk, VA) faced short-term supply disruptions as refineries made thetransition.
Cellulosic Biofuels
Ethanol, the most significant biofuel in the United States, is usually producedfrom corn. However, corn is a key animal feed, and is also used for humanconsumption. Further, corn is a resource-intensive crop, requiring significant use ofchemical fertilizers and generally grown on prime farmland. There is growinginterest in developing biofuels that require less energy to produce and have a smallerenvironmental footprint.
Biofuels produced from cellulosic materials such as fast-growing trees, prairiegrasses, or agricultural wastes are seen as a potential strategy for reducing theenvironmental impact of biofuels while expanding the United States’ ability to
For a detailed comparison of the renewable fuels legislation, see CRS Report RL32865,Renewable Fuels and MTBE: A Comparison of Selected Provisions in the Energy Policy Actof 2005 (P.L. 109-58 and H.R. 6), by Brent D. Yacobucci, Mary Tiemann, and James E.McCarthy.
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displace petroleum fuels. The potential supply of these feedstocks is abundant,which is why it is expected that future expansion of the U.S. biofuels industry willbe in this area.
However, breaking down cellulose and converting it into fuel requires complexchemical processing. Starches (such as corn) and sugars (such as cane sugar) areeasily fermented into alcohol, while cellulose must be broken down into sugars orstarches through enzymatic or thermochemical processes before fermentation.Alternatively, biomass can be converted into synthesis gas, which can then be usedto produce fuels. Regardless of the pathway, processing cellulose into fuels iscurrently prohibitively expensive relative to other conventional and alternative fueloptions. Therefore, R&D has focused on lowering the costs of enzymatic and otherprocessing techniques.
Further, questions remain about the feasibility of these fuels, as well as theultimate environmental footprint — many of the proposed feedstocks have neverbeen grown on a large scale. Therefore, R&D is also focused on increasing the yieldof potential biofuel crops, developing harvesting techniques, and finding ways tolimit the environmental impact of dedicated energy crops.
The Energy Policy Act of 2005 includes provisions to promote the developmentof cellulosic biofuels. These include an authorization for increased research anddevelopment funding at the Department of Energy; grants, loans, and loan guaranteesfor the development of cellulosic biofuels; per-gallon incentives for the first 1 billiongallons of domestic production; and a mandate that gasoline contain at least 250million gallons of cellulosic ethanol annually starting in 2013.
On December 20, 2006, President Bush signed the Tax Relief and Health CareAct of 2006 (P.L. 109-432). Among other provisions, this tax law establishes a 50%depreciation allowance for cellulosic ethanol plants placed in service before January1, 2013, subject to certain limitations.
Ethanol Imports
Corn growers and ethanol producers are supportive of the renewable fuelsstandard because of its implications for higher corn and ethanol prices. However,concern over ethanol imports is growing among some stakeholders. Because of lowerproduction costs and the availability of government incentives, ethanol prices inBrazil and some other countries can be significantly lower than in the United States.To offset the U.S. tax incentive that all ethanol (imported or domestic) receives, mostimports are subject to a relatively small 2.5% ad valorem tariff, but moresignificantly an added duty of $0.54 per gallon. This added duty effectively negatesthe tax incentive for covered imports and has been a significant barrier to fuel ethanolimports.
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However, under certain conditions imports of ethanol from Caribbean BasinInitiative (CBI) countries are granted duty-free status.14 This is true even if theethanol was produced in a non-CBI country. In this scenario, the ethanol is producedin another country (historically Brazil or a European country), dehydrated in a CBIcountry, then shipped to the United States. This avenue for imported ethanol to avoidthe tariff has been criticized by some stakeholders, including some Members ofCongress. With the establishment of a renewable fuel standard, as well as high U.S.gasoline and ethanol prices, there may be more interest in importing ethanol, eitherthrough CBI countries or directly from ethanol producers.
In addition to the concerns over imports of duty-free ethanol from CBIcountries, there is growing concern that a large portion of ethanol otherwise subjectto the duties is being imported duty-free through a “manufacturing drawback.”15 Ifa manufacturer imports an intermediate product, then exports the finished product ora similar product, then that manufacturer may be eligible for a refund (drawback) ofup to 99% of the duties paid. There are special provisions for the production ofpetroleum derivatives.16 In the case of fuel ethanol, the imported ethanol is used asa blending component in gasoline, and jet fuel (considered a like commodity) isexported to qualify for the drawback.17 Some critics estimate that as much as 75%or more of the duties were eligible for the drawback in 2006. Therefore, criticsquestion the effectiveness of the ethanol duties and the CBI exemption.
On December 20, 2006, President Bush signed the Tax Relief and Health CareAct of 2006 (P.L. 109-432). Among other provisions, the act extended the duty onimported ethanol through December 31, 2008.
Vehicle Purchase Requirements
The Energy Policy Act of 1992 established mandatory alternative fuel vehiclepurchase requirements for various vehicle fleets.18 Under the law, 75% of thepassenger vehicles purchased by federal and state vehicle fleets must be capable ofoperating on alternative fuels; 90% of the vehicles purchased by alternative fuelproviders19 must be alternative fuel vehicles.20
For more information on ethanol imports from CBI countries, see CRS Report RS21930,Ethanol Imports and the Caribbean Basin Initiative, by Brent D. Yacobucci.
For more information on drawbacks, see U.S. Customs Service, Drawback: A Refund forCertain Exports, Washington, February 2002.
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19 U.S.C. 1313(p).
Peter Rhode, “Senate Finance May Take Up Drawback Loophole As Part Of Energy Bill,”EnergyWashington Week, April 18, 2007.
For purposes of compliance with EPAct 1992, a vehicle fleet is all of the passengervehicles operated by an agency or company.
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Alternative fuel providers are businesses that sell or distribute alternative fuels.
For more information on vehicle purchase requirements, see CRS Report RL30758,Alternative Transportation Fuels and Vehicles: Energy, Environment, and Development
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The alternative fuel vehicle provisions of EPAct 1992 have been criticized asineffective because, while EPAct 1992 requires the purchase of vehicles, it did notmandate the use of alternative fuels. In most cases, the vehicles purchased to meetthe requirement are dual-fuel vehicles (i.e., they can operate on either a conventionalfuel or an alternative fuel). Those vehicles are primarily fueled using gasoline,because gasoline tends to be less expensive and more widely available thanalternative fuels since the infrastructure to provide alternative fuels is limitedcompared with the existing infrastructure for gasoline and diesel fuel.
In addition, despite the vehicle purchase mandate, many agencies have failed tomeet their statutory obligation. As a result, in 2002 the Center for BiologicalDiversity filed a lawsuit with the U.S. District Court for the Northern District ofCalifornia. In July 2002, the court ruled that several federal agencies failed to meettheir quotas and ordered those agencies to prepare reports on their compliance withEPAct, which those agencies have completed.21
The Energy Policy Act of 2005 (Section 701) modified the requirements forEPAct 1992 compliance. All dual-fuel vehicles purchased to meet the EPAct quotasare required to operate on alternative fuels, unless an agency is granted a waiver bythe Secretary of Energy. In addition, the Secretary of Energy is required to conducta study of the effectiveness of the EPAct requirements. Further, Section 703 ofEPAct 2005 allows state and fuel provider fleets to petition the Department of Energy(DOE) to waive the vehicle purchase requirement if the fleet certifies other fuel-saving measures (e.g., using higher-efficiency conventional vehicles or hybrids).In addition to the requirements for federal, state, and fuel provider fleets, EPAct1992 grants the DOE the authority to extend the requirements to local governmentand private fleets. However, as of 2002, DOE had not made a determination onrequirements for local and private fleets. As part of the above lawsuit, the Center forBiological Diversity also asked the court to force DOE to promulgate new rules. Inruling on the above case, the U.S. District Court for the Northern District ofCalifornia ordered DOE to establish a timeline for a new rulemaking. DOE compileda timeline and, on March 4, 2003, it issued a rulemaking determining that such aprogram would not promote the goals of EPAct, neither reducing dependence onforeign oil nor leading to greater use of alternative fuel vehicles (68 Federal Register10319).
Vehicle Purchase Tax Incentives
Some supporters of alternative fuel and advanced technology vehicles argue thattax incentives for the purchase of vehicles and fuels are more effective than anypurchase mandate. In addition to the mandatory purchase requirements, EPAct 1992established tax incentives for the purchase of electric vehicles and “clean-fuelvehicles,” including alternative fuel and hybrid vehicles. The Energy Policy Act of2005 (Section 1341) significantly expanded and extended the vehicle purchase
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Issues, by Brent D. Yacobucci.
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Center for Biological Diversity v. Abraham, N.D. Cal., No. CV-00027.
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incentives, establishing tax credits for the purchase of fuel cell, hybrid, alternativefuel, and advanced diesel vehicles. For passenger vehicles, the credit is worth asmuch as $3,400 for hybrids and advanced diesels, and as much as $4,000 foralternative fuel vehicles, depending on vehicle attributes. The expiration date for theincentives also varies depending on the technology.22
In the case of hybrid and advanced diesel vehicles, the number of vehicleseligible for the credit is limited for each vehicle manufacturer. Starting the secondcalendar quarter after a manufacturer sells the 60,000th vehicle eligible for the credit,the credit for that manufacturer’s vehicles is reduced. Currently, only Toyota hassold enough vehicles to trigger a phaseout. For Toyota (and Lexus) hybrids purchasedafter September 31, 2006, the credit is reduced by 50%; the credit is reduced to 25%for vehicles purchased after March 31, 2007, and is zero for vehicles purchased afterSeptember 31, 2007. Other manufacturers have yet to hit the 60,000 vehicle mark.23
Biodiesel
Biodiesel is a synthetic diesel fuel produced from oils, including soybean andcanola oils, animal fats, and recycled cooking grease.24 It can be blended withconventional diesel fuel and used in diesel engines with few or no modifications.Further, with some engine modifications, it can be used in a nearly pure form.Because biodiesel can displace conventional diesel without the use of new (and inmany cases costly) vehicles, there is growing interest in its use. Further, because itcan be produced from agricultural products, farmers (especially soybean and canolafarmers) and some environmentalists have a keen interest in its development as a wayto promote rural economies, reduce agricultural wastes, and limit greenhouse gasemissions. However, biodiesel production is currently expensive: wholesalebiodiesel from virgin oils can cost up to two times more than conventional No. 2diesel; biodiesel from recycled grease is less expensive but still costs considerablymore than conventional diesel.
The cost barriers for biodiesel production have generated interest in providingtax incentives for biodiesel, in the form of either a production tax credit or an excisetax exemption, or both. Further there is interest in developing new technologies tohelp reduce production costs. However, the organic oils used as raw materials areone of the largest costs in production. Therefore, to significantly reduce biodieselproduction costs, the costs of soybean oil and other oils would need to decreasesubstantially.
For more information on vehicle tax incentives, see CRS Report RS22351, Tax Incentivesfor Alternative Fuel and Advanced Technology Vehicles, by Brent D. Yacobucci. For more information on the hybrid vehicle tax credit, see Internal Revenue Service,Summary of the Credit for Qualified Hybrid Vehicles, at [http://www.irs.gov/newsroom/article/0,,id=157557,00.html], updated December 20, 2006.
For more information on biodiesel, see CRS Report RL32712, Agriculture-BasedRenewable Energy Production, by Randy Schnepf, and CRS Report RL30758, AlternativeTransportation Fuels and Vehicles: Energy, Environment, and Development Issues, byBrent D. Yacobucci.
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As was stated above, the American Jobs Creation Act provides a tax credit ofup to $1.00 per gallon for the sale and use of “agri-biodiesel” — biodiesel fromvirgin agricultural products. The credit is $0.50 per gallon for biodiesel fromrecycled grease. In addition, the law provides an excise tax credit for biodieselblends (i.e., biodiesel and conventional diesel). Producers are eligible for one creditor the other, but not both (see “Fuel Tax Incentives,” above). These credits were setto expire at the end of 2006; the Energy Policy Act of 2005 (P.L. 109-58) extendsthese credits through 2008. Further, EPAct 2005 established a credit of $0.10 pergallon for small agri-biodiesel producers.
Hydrogen and Fuel Cells
Over the past few years, interest has grown substantially in hydrogen fuel andfuel cells.25 Hydrogen fuel can be produced using any energy source, and has thusbeen touted as a way to limit dependence on energy imports. Further, when hydrogenis used in a fuel cell (a device that produces electricity by converting hydrogen towater), mostly heat and water are produced, drastically reducing or eliminatingvehicle emissions. However, hydrogen fuel production is currently very expensive,as are fuel cells. In addition, depending on the original fuel source, overall fuel-cycleemissions can be a key concern.26
Because of the potential benefits from hydrogen and fuel cells, and because ofthe existing technical and cost barriers to their commercialization, the BushAdministration has strongly supported research and development (R&D). In January2002, the Administration announced the FreedomCAR initiative, which promotescooperative R&D between the “Big Three” American auto manufacturers(DaimlerChrysler, Ford, and General Motors) and the federal government. While thepartnership is conducting research on many technologies, hydrogen and fuel cellvehicles are a key focus. Further, in his January 2003 State of the Union address,President Bush announced the Hydrogen Fuel Initiative, which increased federalspending on hydrogen fuel and stationary fuel cell R&D. Overall, the President isrequesting $1.8 billion between FY2004 and FY2008 for both initiatives, includinga $720 million increase in funding from earlier appropriations.27
Opponents of the initiatives argue that hydrogen fuel and fuel cells may neverbe commercialized and that the initiatives draw funding away from near-termtechnologies such as hybrid vehicles. Further, some argue that research anddevelopment alone will not reduce petroleum dependence and that Congress shouldinstead consider tightening fuel economy standards for all vehicles.
For background information on hydrogen and fuel cells, see CRS Report RL32196, AHydrogen Economy and Fuel Cells: An Overview, by Brent D. Yacobucci and Aimee E.Curtright.
For example, depending on the technology used, processing coal into hydrogen could leadto significantly higher emissions of toxic compounds and carbon dioxide.
For more information on the Administration’s initiatives, see CRS Report RS21442,Hydrogen and Fuel Cell Vehicle R&D: FreedomCAR and the President’s Hydrogen FuelInitiative, by Brent D. Yacobucci.
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Congress agreed to increase funding for hydrogen and fuel cell research from$185 million in FY2003 to $266 million in FY2004, $305 million in FY2005, and$335 million in FY2006. The Energy Policy Act of 2005 authorizes a total of $3.3billion through FY2010 for fuel cell and hydrogen R&D.
Hybrid Vehicles
Hybrid gasoline/electric (and diesel/electric) vehicles are becoming increasinglypopular in the United States. Hybrids combine a gasoline (or diesel) engine with anelectrical motor system to improve efficiency.28 If their use becomes morewidespread, they could help improve the overall efficiency of the vehicle fleet andcould help limit oil consumption. Further, they could do so without significantchanges to existing infrastructure, which has been a key barrier to the expanded useof alternative fuel vehicles. By the end of 2007, Ford, DaimlerChrysler, GeneralMotors, Honda, Nissan, and Toyota will offer vehicles with hybrid powertrains. Atthe present time, only hybrid passenger cars, SUVs, and pickups are available in theUnited States, but hybrid versions of other vehicle models and classes are expectedin the near future.
Because of their energy and environmental benefits, some states have provideddrivers of hybrid vehicles an exemption from high occupancy vehicle (HOV) lanerequirements. Under TEA-21 (which expired on September 30, 2003), states had theauthority to grant HOV exemptions for so-called “Inherently Low EmissionVehicles” (ILEVs). The ILEV standard requires that a vehicle have no evaporativeemissions, a standard that is not met by any current hybrid. However, because of thereduced emissions and improved fuel economy of hybrid vehicles, there has beencongressional interest in explicitly granting states the right to exempt them fromHOV lane requirements. While not addressing hybrids directly, the final version ofthe highway reauthorization act (P.L. 109-59) permits states to exempt certain high-efficiency vehicles from HOV restrictions.
Further, as was stated above, the Energy Policy Act of 2005 expanded theincentives for the purchase of hybrid vehicles (see “Vehicle Purchase TaxIncentives,” above).
For Additional Reading
California Energy Commission. ABCs of AFVs: A Guide to Alternative Fuel
Vehicles. Sacramento, CA. November 1999.Electric Drive Transportation Association. Technology/Vehicle Overview.
Washington, DC. Updated December 2006. [http://www.electricdrive.org]Fuel Cells 2000. Online Fuel Cell Information Center. Washington, DC. Updated
December 2006. [http://www.fuelcells.org/]
For more information on hybrid vehicles, see CRS Report RL30484, Advanced VehicleTechnologies: Energy, Environment, and Development Issues, by Brent D. Yacobucci.
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Methanol Institute. Methanol Institute Homepage. Washington, DC. Updated May
2006. [http://www.methanol.org/]National Biodiesel Board. Biodiesel Basics. Jefferson City, MO. Updated December
2006. [http://www.biodiesel.org/resources/biodiesel_basics/]National Hydrogen Association. General Information. Washington, DC. Updated
December 2006. [http://www.hydrogenassociation.org/general/]Natural Gas Vehicle Coalition. About NGVs. Washington, DC. Updated December
2006. [http://www.ngvc.org/about_ngv/index.html]Propane Education and Research Council. Propane Vehicle Fleets. Washington,
DC. Updated May 2007. [http://www.propanecouncil.org/trade/fleet/index.cfm]Renewable Fuels Association. Ethanol Industry Outlook 2007. Washington, DC.
February 2007. [http://www.ethanolrfa.org/industry/outlook/]U.S. Department of Energy, Clean Cities Program. Alternative Fuels Data Center.
Washington, DC. Updated September 2006. [http://www.eere.energy.gov/afdc//]U.S. Department of Energy. Fuel Cell Report to Congress. Washington, DC.
February 2003.——. National Hydrogen Energy Roadmap. Washington, DC. November 2002.U.S. General Accounting Office. Energy Policy Act of 1992: Limited Progress in
Acquiring Alternative Fuel Vehicles and Reaching Fuel Goals. Washington,DC. February 2000. RCED-00-59.——. Tax Incentives for Petroleum and Ethanol Fuels. Washington, DC.September 2000. RCED-00-301R.
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