The Honorable Jeff Bingaman United States Senate 703 Hart Senate Office Building

Washington, DC 20510-3102 Subject: CBO report: Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals Senator Bingaman; I have read subject report and found several serious errors in the methodology employed in the CBO’s analysis. As a result of these errors the CBO’s conclusions as to the cost to replace one gallon of gasoline with ethanol and the cost to remove on metric ton of GHG CO2 equivalent using the VEETC are incorrect. The CBO computes a cost of $1.78 to replace one gallon of gasoline with ethanol. The correct figure is a savings of $5.71 for each gallon of gas replaced with domestically produced ethanol. To reduce GHGs by one metric ton, instead of the $754.72 cost the CBO computed, it is a savings of $1,468.51. This is using the CBO’s assumption that the VEETC is responsible for 32% of the current ethanol production. I have attached an Excel Spreadsheet which includes all of my calculations. The CBO analysis contains the following major errors:
1. Cost reduction of Ethanol blended with gasoline due to the Excise tax credit – not included. The

VEETC affects (reduces) the cost of gasoline/ethanol blended fuel sold by blenders and to gasoline retailers and therefore reduces the cost of any fuel containing ethanol sold to consumers. This was not included in the CBO’s analysis. Correcting for failing to include the cost reduction to blended ethanol due to the VEETC, changes what the CBO computed as a cost into a savings. This therefore changes the cost to remove any amount of CO2 equivalent GHGs to a net savings rather than a cost as the CBO computed.
2. Use of the heat content of ethanol compared to gasoline to factor the miles per gallon of ethanol

relative to gasoline. For ‘heavier’ blends of ethanol, such as E85, the BTU content of ethanol relative to that of gasoline has been used to predict fuel efficiency of ethanol. Since ethanol contains roughly 35% fewer British Thermal Units per gallon than gasoline the fuel efficiency of ethanol is 35% less than that of gasoline when computed on a BTU content basis. (It is by no means necessary however, that E85 vehicles be less fuel efficient than engines operating on gasoline, as was demonstrated in the Dept of Energy’s 1998 Ethanol Vehicle Challenge 1). However, for ‘lighter’ blends of ethanol (such as E10) the ratio of BTUs in ethanol versus BTUs in gasoline turns out to not be a good predictor of fuel efficiency. Most ethanol consumed in the U.S. is consumed as a 10% Ethanol blend. For blends of 10% Ethanol it is better to use an empirically based measure of fuel efficiency. The fuel efficiency decrement for ethanol established by reliable empirical studies is approximately 1.4% to 2.0% rather than the 35% decrement, based on relative heat content, used by the CBO (references and links provided in Excel spreadsheet file). 3. No recognition of the reduction of the price of gasoline due to increased fuel supply from Ethanol. Although the CBO states in their report that “Policies that support the production of

6% of the fuel supply causing a reduction in the price of gas of 2. References (with links) to sources of data (e. whether they are public or private sector impacts). include calculations of cost to replace one gallon of gasoline and cost to remove one metric ton of GHGs based upon an assumption that 75% of the Ethanol production is due to the presence of the Excise tax credit to blenders. “Summary”) That statement notwithstanding. I have attached an Excel spreadsheet file which includes all of my assumptions and calculations for review by your analysts. ethanol production is attributable to the Excise tax credit. 4. The attached file can also be downloaded from: https://sites. While the CBO did recognize increased excise tax receipts due to increased demand for gasoline needed in the production of ethanol. The impact of these tax revenues to just the Federal government is six times the impact of the increase in excise taxes recognized by the CBO. studies establishing the fuel efficiency decrement for 10% ethanol) are included in the file. Ethanol. by increasing the supply of transportation sector fuel. increased production of ethanol has probably resulted in some reduction in the price of gasoline" (page 3 of the report) I did not apply an arbitrary limit on this analysis of ethanol’s economic cost impacts (i. The recognition of this factor increases the savings to the consumer due to the VEETC stimulating additional ethanol production. the annual targets are scheduled to rise through 2022. it failed to recognize increased tax revenues to local. long term (used in a previous CBO report2). state and local. I provided computations that are based on the CBO’s assumption that the VEETC is responsible for 32% of the current ethanol production. has lowered the price of gasoline (and ethanol) as would an additional supply of any commodity. note that the CBO states in their report: “Federal biofuel mandates require vendors of motor fuels to produce or blend specified minimum volumes of the different fuels with gasoline and diesel which computes ethanol's additional 7.xls . the CBO concluded only 32% of the U. Unrecognized increased tax revenues to governments . I would submit that any attempt to evaluate the costs and benefits or any legislation that does so limit its range is invalid as a measure of the effectiveness of any legislation. Just correcting for neglecting to include the reduction in the cost of blended fuel due to the VEETC changes the final answer from a cost to a savings. state and the federal government due to the increased economic activity from the domestic production of ethanol.e. In the past. Regarding the percentage of Ethanol production attributable to the Excise Tax Credit.biofuels lead to other effects and raise other issues that are not addressed in this report.g. I did however.S. This file includes a summary sheet which shows the inclusion of various assumptions in several columns to show the impact of including different sets of assumptions. There has been considerable discussion and analysis of the affect on the price of gas of changes in supply of and demand for transportation For example. Nonetheless. I used a conservative estimate of gasoline’s Price Elasticity.9%. those requirements have not directly increased the quantity of biofuels sold in the United States because the combination of underlying economic conditions…”…(page VIII.federal.

pdf). the energy balance ratio could reach 26 BTUs of ethanol per BTU of inputs used. As processors master the logistics of handling bulky biomass. Their main interest is in maintaining as much control over the price of gasoline as possible.usda. significantly (about $. The energy output for these plants is near 2. the price at which blenders sell ethanol to gasoline retailers would go up.g. Note that Energy Balance ratios on the order of 26 to 1 are in the range of those expected for cellulosic ethanol production. I seriously doubt that the oil companies would be interested in investing additional capital to increase the efficiency of ethanol production. a loss ( $. There is much that can be done to improve efficiency and reduce the carbon footprint of starch based ethanol. even using the conservative byproduct allowance. you would be passing a greater expense (factored by the Gasoline retailers Operating Margin. Combined Heat and Power plant configuration and the use of biomass (e. I would expect that the oil companies (which also are a big presence in gasoline retailing) would then negotiate price reductions on ethanol that would put many ethanol producers in a weak financial position.50 per gallon). Thus. Incorporation of cellulosic .Some have said that because of the tariff on Brazilian ethanol the VEETC is not necessary. the oil companies would be in a position to acquire them. With higher prices for ethanol. corn cobs) to provide some or all of the heat inputs in ethanol production will dramatically decrease starch based ethanol’s carbon footprint. Acquiring the ethanol suppliers would enable the oil companies to maintain greater control over the pricing of the final product. and this price rise would be passed through to $. Ethanol producers are beginning to make these changes but this process will only continue if ethanol producers are not struggling financially. The VEETC reduces the price at which blenders sell ethanol to gasoline retailers. Note also. Using corn cobs as biomass for heat inputs in the production of ethanol can dramatically reduce the fossil fuel inputs to the ethanol production process leading to energy balance ratios of up to 26 to 1 (as opposed to current rations of roughly 2 to 1). See: http://www. While you would reduce the Federal excise tax receipts due to the VEETC. “Some dry mills are already using up to 50 percent biomass power.63 per gallon of ethanol blended) on to the consumer. instead of a gain. A vibrant and independent domestic ethanol industry is essential to facilitate the most rapid adoption of cellulosic ethanol. that these Energy Balance rations can be achieved with starch based ethanol more cheaply and more quickly with starch based ethanol than is likely to be achieved with cellulosic ethanol. As the financial positions of the ethanol producers deteriorated.18 per gallon of ethanol blended) would be realized.” I do not think letting ethanol production fall into the hands of the oil companies would be good for the country as the oil companies would not be interested in making investments to achieve efficiency improvements in the production of ethanol. to the consumer/taxpayer. jeopardizing their ability to obtain loans for operating capital. If the VEETC was terminated. The development of cellulosic ethanol will be greatly facilitated by the presence of profitable starch based ethanol producers who will be able to effect a much more rapid adoption of cellulosic ethanol by incorporating production of same into their ongoing production operations. It is imperative that we maintain support of a strong and growing domestic ethanol industry.8 times energy inputs.

assumptions or sources of data used in this analysis please call me at (586) 445-1582. See Department of . or contact me by email at: hendersonbill65@yahoo.ethanol production into ongoing ethanol production operations will result in a much quicker introduction of cellulosic ethanol than if we were to build such capacity anew. The efficient handling of biomass feedstocks for fuel (for ethanol production) will require experience and some trial and error to develop the necessary expertise. of Energy. As stated above. I hope this analysis in some small way. student teams from 12 universities from the United States and Canada were challenged to optimize a stock Chevrolet Malibu to run on E85. a corn farmer. My only purpose in sending you this analysis is to help individuals charged with making decisions affecting government policy and legislation to be fully informed as to the issue at hand. federal report proposed a value of -0. CBO Jan 2008. Sincerely.pdf ) 2. Allowing the starch based ethanol industry to die (or fall into the hands of the oil producers) would only consign the ethanol industry to a much slower adoption of efficiency improvements which would slow the development and adoption of cellulosic ethanol. Letting the starch based ethanol industry die (or stagnate in the hands of oil companies) would be terribly short sighted. it will take ten to fourteen years (perhaps longer) for cellulosic ethanol to reach the scale of production we are at now with starch based ethanol.transportation. If you have any questions regarding the calculations. sponsored by the I am not. in the city portion of the dynamometer testing. helps in accomplishing that end. adoption of biomass fuel and other efficiency improvements in starch based ethanol production will make starch based ethanol production nearly as efficient (and much sooner) as cellulosic ethanol. all the vehicles demonstrated a higher fuel efficiency than the stock Malibu. MI 48066 1. Effects of Gasoline Prices on Driving Behavior and Vehicle Markets. ethanol producers are beginning to incorporate use of biomass fuel sources into their operations. Maintaining a robust domestic ethanol industry is essential to building greater energy and economic security as well as achieving GHG reductions in as short a time as possible. It is interesting to note that in the 1998 Ethanol Vehicle Challenge. nor is anyone in my family. Bill Henderson Roseville.anl. That is why the adoption of efficiency improvements for starch based ethanol production is so important. ( Additionally. Even with an independent starch based industry in place.38 for long-run price elasticity. Dept. Ongoing efforts by ethanol producers to incorporate biomass as a fuel source will prepare ethanol producers for use of biomass provided by cellulosic feedstocks which will be an important part of the process of manufacturing cellulosic based ethanol.S. with the best schools showing efficiency improvements of 13 to 15%. “Most vehicles tested on the dynamometer exceeded the fuel efficiency of the stock Malibu. Cellulosic ethanol will only become profitable as it is produced in large volumes. In fact. Natural Resources Canada and General Motors Inc. I am not invested in ethanol production nor is anyone in my family. Note 6: “A 1996. A healthy and profitable domestic ethanol industry will foreshorten the time required to bring cellulosic ethanol to commercially viable levels of production by incorporating cellulosic ethanol into ongoing production operations.

Office of Policy and International Affairs. Policies and Measures for Reducing Energy Related Greenhouse Gas Emissions: Lessons from Recent Literature.Energy. DOE/PO-0047 (July 1996) .

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