Policy Paper | Developing an Advanced Biofuels Industry: State Policy Options

Executive Summary

The two years since this project was first proposed have been the most turbulent in U.S. economic history since the Great Depression. The prospects for the advanced biofuels industry rose high and fell hard with the economy. A year ago, with the bottom of the recession still months away, what would we have been able to recommend to state policymakers? Did the lessons we had learned observing the rapid development of the advanced biofuels industry prior to the recession have any relevance to realities faced by state policymakers in the depths of recession? Where was the industry, or the broader economy, heading, and what could state policymakers do about it?

At the end of 2009, the industry still has significant challenges before it, but there are many signs of progress that were not evident nine months ago. The federal government has expanded and accelerated its advanced biofuels initiatives, and, as the economy has stabilized, private investment in the biofuels industry is increasing. A number of advanced biofuel plants are on schedule to begin producing fuels in 2010 and 2011. However, the fiscal capacity of most state governments remains the worst that it has been in decades, limiting their capacity to expand financial incentives for developing local advanced biofuels industries.

The purpose of this project was to determine what incentives best support the commercialization of environmentally sustainable, low carbon, renewable biofuel technologies, to identify ways federal and state incentives can work together, and to determine how states can position themselves to help meet federal biofuels mandates.

Toward that end, in 2008, EESI convened an advisory committee of experts from across the country from academia, finance, industry, non-governmental organizations, trade associations, and federal, state, and regional government agencies. The committee provided guidance and input for the research through the summer of 2008. EESI also conducted literature reviews and interviews with state agency officials and other experts in the field. A first draft was circulated to the advisory committee in the fall of 2008 - as the economy began to tumble.

This final report builds upon our findings from 2008 and supplements them with observations from 2009 – as the economy began to stabilize. It tells the story of the past two years of political and economic turbulence as it has impacted the advanced biofuels industry and suggests ways that states can support the development of this vital industry from this point forward.

From this vantage point, we have seen a more favorable trend in the second half of 2009 and significant infusions of federal support, but also we find that the advanced biofuels industry is still sputtering due to a host of uncertainties that lie before it. Most feedstocks and conversion technologies for advanced biofuels are still in the process of research, development, and demonstration. Some feedstock and conversion systems are further along than others, but the much costlier and higher risk stage – commercialization – is still ahead for most. Further, the future markets for advanced biofuels and the federal regulatory environment remain uncertain, and thus, financing for the commercialization of advanced biofuels production often remains difficult to obtain. Even in times when credit markets are functioning, a new start up industry would have had difficulty finding sufficient financing to cross the “valley of death” between pilot projects and full-scale commercialization. However, with today’s frozen credit markets, risk-averse lenders are even less willing to finance this kind of enterprise.

The federal government, with its capacity to effect change on a national, economy-wide scale, is in the strongest position to address these uncertainties and create an environment in which the industry can succeed. However, federal policies, so far, have had only mixed results, and the politics of biofuels at the national level are adding to uncertainty about the industry’s future. State policy interventions can make a critical difference now.

Every state has a stake in the development of the advanced biofuels industry, and most states are already quite involved in promoting development of their own industries. Developing sustainable local industries to serve local markets can contribute importantly to a variety of state goals: economic development, job creation, rural development, energy security, environmental protection, and climate change mitigation. Every state has the potential to develop advanced biofuels using its own unique combination of natural and human resources. Because the development of appropriate, sustainable bioenergy feedstocks (and thus, conversion technologies) is shaped fundamentally by local geography, resources, and ecosystems, state governments can play (and are playing) a critical role guiding the development of the industry in a manner that also advances state priorities.

Although the economic crisis has severely eroded the fiscal environment for most states, many have nonetheless continued to develop and implement biofuels initiatives and incentives in 2009. The motivations and opportunities for developing state biofuels industries remain just as compelling in the depths of this economic recession as before, if not more so.

This report recommends the following state policy options for these lean and uncertain times:

• Inventory bioenergy resources and markets, and develop a long range plan. Assessments and planning help identify local opportunities, resources, capacities, competitive advantages, and priorities. These processes can engage diverse local stakeholders and build critical political support from the outset.
• Develop sustainable feedstock production guidelines. Biomass should be produced in ways that sustain ecosystems, enhance biological diversity, maintain healthy air and water quality, and complement food, feed, and fiber production. Developing sustainability guidelines can promote a long term, holistic, landscape level view. The process helps identify the most important local environmental, economic, and social values and helps avoid unintended harms. The process is also important for engaging local stakeholders and building local political support.
• Research and develop locally appropriate feedstocks and conversion technologies. One of the biggest R&D challenges facing the advanced biofuels industry today is to develop many different locally appropriate systems for growing, harvesting, transporting, storing, and converting feedstocks to biofuels. In forested areas, developing local markets for forestry residues can provide revenue to support much needed forest stewardship programs and additional income from logging activities, while providing inexpensive feedstock for local advanced biofuels industries.
• Create easement programs for sustainable feedstock production. This approach provides financial incentives to land owners to develop cellulosic feedstocks on marginal lands in ways that complement other local land use and environmental priorities.
• Establish minimum renewable fuel standards. This approach helps create stable local markets for locally produced biofuels. It is most effective for promoting local economic development when it is linked to local biofuel production goals.
• Enact a low carbon fuel standard (LCFS). An LCFS can also help create stable local markets for locally produced biofuels. It can be designed to be more technology neutral and allow greater flexibility for producers than volumetric mandates. This approach is best done at the national level or with other states.
• Promote interagency cooperation. Interagency cooperation can help accelerate and improve statewide planning and coordination. It can reduce delays, transaction costs, and regulatory uncertainty for the siting, construction, and operation of biorefineries.
• Cooperate with other states. Interstate cooperation can provide opportunities to pool resources and coordinate policies, influence larger markets, benefit from economies of scale, reduce cross-border leakage effects, and exert greater influence on federal policy.
• Provide tax incentives for producers and retail distributors. Tax incentives can help overcome high upfront costs for producers and retail distributors. They work best when they are long term, transferable, and can be carried over to future years.
• Leverage state resources to promote federal and private partnerships. Relatively small amounts, wisely invested, can help leverage far greater investments from the federal government and private industry.

States have a critical role to play in addressing energy, economic, and environmental security concerns and helping develop sustainable advanced biofuels industries. States can help fill the gaps, address the many uncertainties facing the industry, and provide leadership beyond federal policies. They are key stakeholders in this national policy initiative, with rich, diverse natural and human resources within their borders that can be brought to bear developing sustainable, local solutions to meet both local and national needs.

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