Posted by: Phillip Fraas
January 28, 2007

As expected, the President, in his annual State of the Union Address delivered last Tuesday, highlighted energy independence as one of the most important issues his administration would work on this year.

This posting discusses what the President said on energy and agriculture; notes developments since the speech; and reviews the options USDA put on the table in its energy and agriculture theme paper in the context of the State of the Union positions.

THE STATE OF THE UNION ADDRESS:

In his discussion of energy independence, the President set three goals that affect agriculture and the farm bill: (1) Expansion of the use of biodiesel fuel; (2) increased production of ethanol from new sources, and (3) a higher Renewable Fuel Standard. Here's what he said:

"We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean-diesel vehicles and biodiesel fuels. We must continue investing in new methods of producing ethanol, using everything from wood chips, to grasses, to agricultural wastes."
"To reach this goal [of cutting imports of oil], we must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017. And that is nearly five times the current target."

What these goals mean for the 2007 farm bill is it should include more research and development funding for biodiesel and cellulosic-based ethanol, and it might include some mechanism to prevent the higher Renewable Fuels Standard from disrupting the markets for corn, by far the most important feedstock for ethanol production today.

FOLLOW-ON DEVELOPMENTS:

The day after the State of the Union Address, USDA announced plans for $1.6 billion in new spending for renewable energy development projects to be included in its farm bill proposal, with a focus on cellulosic energy research and production. Also, USDA said that the President's new Renewable Fuels Standard will contain an automatic "safety valve" to protect against unforeseen increases in the prices of the alternative fuels or their feedstocks. See USDA press release no. 0012-07, January 24, 2007. The safety valve in the new Standard might itself be sufficient to protect corn markets; but it can be anticipated that Congress will take its own steps to ensure that any safety valve meets the needs of traditonal users of corn worried about escalating prices as more corn goes to ethanol production.

That same day, the President also proposed more money for the Energy Department's Advanced Energy Initiative, which does research on ethanol derived from plant residues. He said he would increase 2008 funding for the program to $2.7 billion, roughly 53% more than what was budgeted in 2006. Congress will have to coordinate USDA's request for $1.6 billion in farm bill spending for energy development with this slated increase.

USDA'S THEME PAPER OPTIONS: What the President proposed in the State of the Union and what was announced the next day both are consistent with the options in USDA's theme paper on energy and agriculture. However, the theme paper contains several other ideas that Congress might also consider in drafting the energy title of the new farm bill. Following are the options USDA sketched out in its theme paper:

Raise the Renewable Fuel Standard.
Expand support for research on cellulosic ethanol production.
Extend renewable energy tax credits; provide accelerated depreciation on renewable energy equipment and facility development; and provide a depreciation allowance on land dedicated to renewable energy projects. None of these tax proposals are within the jurisdiction of the congressional agriculture committees and would not be included in the farm bill. Also, under the new pay-as-you-go system of legislating the Congress adopted earlier this month, how to pay for these tax breaks is critical. We should see what the President's budget proposal (to come out in early February) allocates for these items, if anything; then wait and see if Congress puts anything in its own budget resolution (scheduled to be approved in April) for them.
Open up Conservation Reserve Program (CRP) land for biomass harvesting and wind energy. Shouldn't be a major cost item.
Refocus the CCC Bioenergy Program to support use of cellulosic ethanol feedstocks. While funding for the items listed in the State of the Union is almost a given, finding the money for this and some of the other initiatives listed below not in the State of the Union could be difficult. And, money will be the key to whether they end up in the farm bill. Again, one should see what the President's budget and then Congress's budget resolution give the agriculture committees for use in drafting the energy title of the farm bill.
Provide equity financing for first-generation renewable energy plants that use new technology.
Fund development, demonstration, and pre-commercial activities that bridge the gap between basic research into new sources of renewable energy and industry-funded applied research and development to get such new sources into production.
Expand education and outreach for biofuels.
Provide loan financing for new electric power generation and transmission infrastructure needed to accommodate energy produced from renewable resources, such as wind generators.

At this point, it looks very likely that Congress will spend a lot of time and effort drafting the energy title of the new farm bill, and future postings on this blog will report on developments in that drafting.

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USDA's Energy and Agriculture Theme Paper, Part II (post-State of the Union Address)

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