Various federal incentive programs have been designed to meet the primary objectives noted above: to encourage the production and utilization of ethanol and other biofuels. Additional factors including the implementation of a national Renewable Fuel Standard in 2006 serve as an effective catalyst for increased biofuel production and use. For the purposes of a project impact analysis, only those incentives applicable to the proposed project should be considered. Federal incentives that may be applicable to an ethanol project include the following:
Excise Tax Incentives
Since 1979, the federal government has provided various levels of exemption from federal motor fuel excise taxes for qualified alcohol fuels (specifically those not derived from petroleum, natural gas, coal, or peat). Most ethanol sold in the United States incorporates the federal excise tax incentive (VEETC) as opposed to another mechanism designed to encourage ethanol use, the income tax credit for alcohol fuels.
Income Tax Credit for Alcohol Fuels
Like the federal excise tax noted above, the federal income tax credit for blenders of gasoline and ethanol is currently in the law until 2010. The incentive is presently fifty one cents per gallon. While the credit can be carried forward, it is non-refundable and nontransferable. Therefore, it is of little value to entities that have no federal income tax liability.
Ethanol Production Incentive
Incentives discussed above have focused on mechanisms intended to increase the use of ethanol fuels. These incentives may be of limited value to new ethanol projects. However, various incentives have been crafted to encourage development of production facilities. During the past fifteen years a variety of incentives have been available through federal government programs. These incentive programs are summarized below.
Income Tax Credit
The income tax credit discussed above has generally been considered as an incentive to increase ethanol use. This perception is based on the fact that the application of this incentive is tied to the blending of all components of the finished fuel, i.e., ethanol and gasoline. Although seldom applied as a production incentive, this credit may be narrowly viewed as an incentive for ethanol production.
Income Tax Credit for Small Ethanol Producers
Effective January 1, 1991, certain small fuel ethanol producers are eligible to receive an income tax credit of ten cents for each gallon of qualified (denatured) ethanol fuel produced. The provision limits the qualified ethanol fuel production of any producer for any taxable year to no more than 15 million gallons per year produced at a facility whose total production capacity does not exceed 60 million gallons per year. The tax credit is included in income and is therefore taxable, is nonrefundable and nontransferable, but can be carried forward into future taxable years.
Loans and Loan Guarantee ProgramsFifteen years ago Congress authorized a series of programs to encourage development of alternative energy enterprises in the U.S. Among the primary incentives available through these programs were loans and loan guarantees. The Departments of Energy and Agriculture have administered loan and loan guarantee programs for which ethanol projects were eligible. Under the programs, qualified applicants were eligible for loans or loan guarantees that provided direct financing or guaranteed loans for capital construction. Funding and authorization for the ethanol related provisions of these programs are extremely limited under Department of Energy programs today but USDA programs authorized under the 2002 Farm Bill include several applicable programs.
In past years the Departments of Energy and Agriculture have administered grant programs for which ethanol projects have been eligible. In most cases the grants have been for projects that met specific criteria. However, the availability of grants can often provide leverage for project financing. Because grants are, in effect, a gift, they do not dilute equity or encumber a project with additional debt. The DOE and USDA both administer programs for which plants meeting specific criteria may qualify.
The federal Bank of Cooperatives has been an important source of financing for many ethanol projects built in the Midwest. Ethanol ventures that are structured as cooperatives are eligible for project financing. The Bank of Cooperatives has been active in direct loan and loan guarantee programs during the past decade. The Bank remains an active participant in ethanol ventures today. This source of debt financing is often more accessible to new ethanol ventures than conventional lenders.
On many occasions the federal government has provided commodities to meet specific needs or policy objectives. This mechanism has also been used as a production incentive for ethanol. The Commodity Credit Corporation has provided corn and other commodities to ethanol producers as a production inducement and an inventory control measure. While this mechanism has been used only on a limited basis, it serves as an example of an incentive that can stimulate ethanol production. At present, a federal biofuels production incentive is available for new or expanded ethanol production.
Other Federal Incentives
The primary challenge of encouraging investment in new ethanol production facilities is to create an environment that mitigates risk. Many of the federal incentives are designed to reduce risk in different ways. The value of incentives is often dependent on specific projects. For example, some start-up projects may find incentives most useful if they help attract capital. Companies that are capable of financing projects internally may find market-based incentives like contract preferences to be more valuable. Some incentives are designed to provide a supplement to costs that are typically applicable to all projects. Infrastructure grants and job training grants are examples of these incentives. While these grants may be administered by state agencies, the federal government provides the funding for these programs. Infrastructure incentives simply decrease total project cost to the developer if such costs are borne by other entities. Job training grants typically offset the cost of training new employees for operations at the ethanol facility. Since the skills required might not be generally available in a local labor pool, training costs can be expensive. Job training grants offset the direct cost to the project developer, thereby making funds otherwise spent on this activity available for other project needs.