The Background

To displace significant quantities of petroleum, ethanol must be produced from a far more abundant feedstock than existing grain crops. Cellulosic crops like fast growing trees and grasses, or agricultural and forestry residues fit the bill. The key obstacle to rapid commercialization is that ethanol made from cellulose is and, unless the price of corn rises dramatically, will continue to be more expensive than ethanol made from corn for quite some time.

To overcome this barrier, Congress developed a simple strategy. Mandate the production of 250 million gallons of cellulosic ethanol by 2013, a level of production requiring six to ten plants.

To attract investors, Congress guaranteed a significant market years in advance. By not establishing financial incentives, Congress expected competition to minimize any price premium. And the second wave of cellulosic ethanol plants should be cost competitive with grain ethanol.

Then, at the last minute, Congress seemed to snatch defeat from the jaws of victory. The Conference Committee added a sentence to Title XV, Section 1501 that expanded the legal definition of the term "cellulosic ethanol". "The term also includes any ethanol produced in facilities where animal wastes or other waste materials are digested or otherwise used to displace 90 percent or more of the fossil fuel normally used in the production of ethanol."

The addition was the result of a single, well-connected entrepreneur who is constructing an ethanol plant fueled by methane generated by the digestion of manure produced in a nearby cattle feedlot.

This single sentence changes everything. The average person reasonably would assume that a cellulosic ethanol mandate requires the production of ethanol from cellulose. That was clearly Congress' objective. But the new definition allows a corn-derived ethanol to be defined as producing cellulosic ethanol if waste materials supply 90 percent of the ethanol facility's energy needs.

Waste materials already fuel several ethanol plants. Several new plants may adopt a similar strategy of substituting lower cost cellulosic wastes like wood wastes for high priced natural gas. Indeed, it is quite possible that by 2008 or 2009 at the latest, the nation will meet its Congressionally-mandated 2013 deadline for producing 250 million gallons of cellulosic ethanol, without actually deriving a single gallon of ethanol from cellulose!

Recently, the Environmental Protection Agency (EPA) relied on the offensive sentence to draft regulations that would add insult to injury. The EPA argued that since the sentence in question contains the phrases "waste materials" and "otherwise used", waste heat from a fossil fueled boiler or power plant should qualify.

If EPA's recommendations become final, a corn-based ethanol plant fueled by the waste heat from a coal-fired power plant will be considered cellulosic ethanol plant for purposes of the mandate.

This is preposterous. But it is simply a consequence of the confusion sown when Congress added this sentence at the 11th hour.

The Next Step

The first order of business when Congress reconvenes should be to delete this debilitating sentence. If it does not do so, the mandate is dead. Which means Congress will have to achieve the goal by enticing cellulosic ethanol producers with substantial financial incentives. That could prove quite expensive for taxpayers and might end up rewarding larger companies with good political access.

If Congress proves unwilling to make the needed changes, we will have to plead with the EPA to do the right thing when it issues its final regulations.

The EPA, of course, must work with the law's actual text. But whenever feasible, it should interpret that text to be consistent with the law's intent and goals. No one can deny that the intent of Congress was to have 250 million gallons of ethanol produced from cellulosic feedstock by 2013. Can the EPA design an interpretation faithful to the text but also consistent with this section of the law's clear objective?

I believe it can, if we keep in mind that the creation of a cellulosic ethanol industry is a two-step process.

Before we can convert large quantities of cellulosic material into ethanol we must first develop systems to grow, harvest, transport and store large quantities (hundreds of millions of tons a year) of cellulosic material. At present, outside the timber industry, such systems do not exist.

The Energy Policy Act may already take this two step process into account. It offers an incentive to cellulosic ethanol by valuing 1 gallon of cellulosic ethanol -- equivalent to 2.5 gallons of grain ethanol -- for purposes of meeting the 7.5 billion gallon, 2012 mandated production level.

However, Congress eliminates this 2.5 to 1 incentive in 2013, when the cellulosic ethanol mandate kicks in. EPA should follow Congress' lead and cease permitting fuel cellulose to substitute for feedstock cellulose when the 2013 mandate goes into effect.

This makes sense. We can use the next five years to create the harvesting and transportation and storage systems to allow cellulose to become a key transportation fuel feedstock. But the goal is not to expand the market for cellulose or wastes as a fuel but for cellulose as a feedstock. Thus the 2013 mandate is a feedstock only mandate.

When cellulose is used as a fuel it does not inevitably follow that it will be used as a feedstock. But when cellulose is used as a feedstock, the unused portions will almost certainly be used as a fuel to provide the energy for the conversion process as well.

EPA closed its public comment period November 12 but has, as of this writing, not yet issued final regulations. Your elected member of Congress, of course, will accept your comments at any time. We need to make this issue visible with both the Executive and the Legislative branches of the federal government so a mistake made in the middle of the night 15 months ago can be corrected.


David Morris is vice president of the Minneapolis-based Institute for Local Self-Reliance. He has been an advisor or consultant to the energy agencies of Presidents Ford, Carter, Clinton and George W. Bush. He is also the author of The Carbohydrate Economy and more recently, Driving Our Way to Energy Independence.