Alternative fuels subsidies are small in size but with interesting potential
This is the fourth part to a series of posts on this topic. Scroll to the end to find the most recent posts.
Biodiesel and Alternative Fuels
In this last analysis of Build Back Better’s (BBB) major climate provisions, we examine the bill’s provisions for biodiesel and alternative fuels (low-carbon transportation fuels). These are perhaps the most important and least advertised provisions in BBB, because the technological opportunities for low-carbon transportation fuels are generally poorly appreciated. Most individuals can easily grasp the concept of replacing a gasoline-powered vehicle with an electric one, but in truth there is a lot more potential for reducing emissions globally by finding cleaner fuels that can utilize existing infrastructure—vehicles, engine technology, fuel pumps, etc. What would BBB do about this oft-overlooked climate opportunity?
Policies in BBB for Biodiesel and Alternative Fuels
One of the notable things about BBB is its quantity-over-quality approach to policy. Nearly every identifiable opportunity to do something about climate has at least some subsidy directed toward it, and biodiesel and alternative fuels are no exception. In this analysis, we examine three key provisions: an extension of existing incentives for biodiesel and alternative fuels estimated to cost $15.2 billion; a tax credit for clean fuels production that is estimated to cost $9.7 billion; and a tax credit for clean hydrogen production estimated to cost $9.2 billion. There are some smaller policies that we forgo examining in this, such as $90 million for sustainable aviation fuels and $106 million for second generation biofuels.
Analysis
Biodiesel
The Congressional Budget Office (CBO) projects the cost of the biodiesel credits to be a total of $15.2 billion through the life of the program (sunsetting in 2026). At its peak year of 2026, the program would result in $3.8 billion of revenue loss. The total annual capacity of biodiesel production in the United States currently is 2.5 billion gallons, of which approximately 1.8 billion gallons are used. An earlier Energy Information Administration (EIA) analysis estimated that an extension of biodiesel tax credits would increase production by about 33 percent, but this did not materialize, likely due to the pandemic constraining demand. This analysis assumes that this expansion is essentially fulfilled, and biodiesel production increases by approximately a third.
The remaining third of the tax credits evaluated by the CBO would go to alternative fuels at a rate of $0.50 per gallon equivalent, but most of these are fossil fuels with only modest greenhouse gas emission reductions compared to gasoline or conventional fuels. Compressed natural gas (CNG), for example, is the largest alternative fuel consumed in the United States but has only approximately 6-11 percent lower lifecycle greenhouse gas emissions than gasoline. The primary benefit of these subsidies will be manifested in reduced criteria pollution from vehicles—nitrogen oxides, smog, carcinogens, etc.—but are less relevant for an analysis focused on greenhouse gas emissions.
For simplicity, this analysis assumes that the effect of the tax credit will increase biodiesel production by 32 percent, in line with the EIA’s expectations and projected capacity, and increase alternative fuels consumption to 2.6 billion gallons per year. This results in $2.5 billion of subsidies to biodiesel, and $1.3 billion of subsidies to alternative fuels, or $3.8 billion total in the peak year of 2026. We assume that each gallon of biodiesel results in 74 percent lower greenhouse gas emissions than conventional diesel, and that each gallon of alternative fuel has 15 percent lower greenhouse gas emissions—roughly in line with the benefit of using propane or CNG instead of diesel.
Sources: EIA AEO 2021, EIA Alternative Fuel Vehicle Database and RSI estimates based on the CBO’s estimated budgetary effects of HR 5376.
Under these assumptions, transportation emissions would fall by 7.5 million metric tons in the peak subsidy year of 2026, approximately 0.4 percent of transportation emissions. Because BBB’s tax credits would expire in 2026, it is unclear if this production would be maintained through 2030. However, since much of these subsidies would go to new production of alternative fuels, the policy is more likely to have a lasting impact—as investors are unlikely to invest capital in new production facilities that would only operate for a few years. The subsidy cost relative to the emission benefits would result in an abatement cost of approximately $509 per ton, which is modestly higher than past estimates of biodiesel-specific subsidies costing between $150 and $420 per ton of abatement.
Clean Fuels
BBB includes a tax credit for low-carbon transportation fuels of up to $1.00 per gallon for transportation fuels and up to $1.75 per gallon specifically for aviation fuels. To qualify for this credit, transportation fuel has to have emissions of 50 kilogram (kg) carbon dioxide equivalent (CO2e) per million British thermal units (Btu), and aviation fuels 35 kg CO2e per million Btu or better. The current average is 71 kg CO2e for motor gasoline, and 72 kg CO2e for jet fuel, so the subsidy roughly applies to fuels that have 30 percent better emissions profile for conventional transportation and 50 percent better emissions profile for aviation.
The total cost of the credit is $9.7 billion through 2031, going into effect in 2027. For this analysis we assume that all subsidy claimants are eligible for the full credit, and that half of the credit goes to ground transportation and the other half to aviation. This would put the produced quantity of fuels roughly in line with the Biden administration’s hoped-for 3 billion gallons of clean aviation fuel production.
Sources: R Street Estimate based on CBO cost estimate of BBB.
Because clean transportation fuels are a nascent industry, we assume that all of the supported clean fuel production is new production. Over the course of the subsidy, we estimate it to support 4.9 billion gallons of clean transportation fuel (conventional) and 2.8 billion gallons of clean aviation fuel. This results in a total net of 26.4 million metric tons of CO2e avoided, with an abatement cost of the policy of $368 per ton. In the peak year of 2030, the policy results in 6.3 million metric tons lower transportation emissions. Projected transportation emissions in 2030 are 1.7 billion metric tons, so the clean fuel subsidies result in 0.3 percent lower transportation emissions, and about 0.1 percent of overall U.S. emissions.
While this policy alone contributes only minimally to the emission targets of the administration, it should be noted that because this is a new technology, it makes more economic sense to support this production because this may lead to future cost declines, whereas subsidizing technologies that are already mature and produced at scale have limited opportunities for increased efficiency from additional subsidy. Furthermore, the potential for alternative fuels that function with existing gasoline and diesel-based infrastructure could have significantly more opportunity for developing nations to reduce emissions.
Clean Hydrogen
One emerging opportunity for a low-carbon fuel is hydrogen produced using clean energy—currently most hydrogen is produced using fossil fuels. The median emissions for producing 1 kg of hydrogen is 9 kg of CO2e. BBB aims to support hydrogen with lower emissions rates, and hydrogen with 0.15 kg CO2e or lower per kg of hydrogen is eligible for a credit of up to $3.00 per kg when meeting other criteria for eligibility—U.S. produced, union produced, etc. The total subsidy is $9.2 billion, and for our analysis we assume that all of this goes to hydrogen production that is zero emission and eligible to claim the full credit of $3.00 per kg. Because clean hydrogen is an emerging industry, we assume the entirety of the tax credit subsidizes new production. This results in an emission abatement of 27.6 million metric tons CO2e from 2022-2031, and an abatement cost of $333 per ton.
Source: R Street estimates based on CBO cost estimates of BBB.
In 2030 the clean hydrogen production approaches its peak at 560 thousand metric tons, which avoids approximately 5 million metric tons of CO2e, or 0.3 percent of transportation emissions projected in 2030 and 0.1 percent of total 2030 emissions. Similar to the credit for alternative fuels, the subsidy for clean hydrogen is weak as a near-term emissions reduction policy but could hold potential to spur production of a fuel type that will be in high demand in the future.
Conclusion
BBB’s policies supporting alternative fuels are unlikely to come anywhere near approaching the level of policy needed to reach the ambitious emission targets set out by the Biden administration for 2030, but compared to other subsidy policies in BBB they may hold more potential because the subsidized technologies are not yet mature—meaning the subsidies have more potential to improve economies of scale or accelerate the decline of other cost-factors for early-stage technology. Alternative fuels especially are of interest because they may hold more potential for decarbonizing transportation emissions in developing countries that are unlikely to have the sophisticated infrastructure in place needed for widespread electric vehicle adoption. On paper, supporters of President Joe Biden’s emission targets may be skeptical of alternative fuel subsidies that seem to accomplish little, but in reality, these are the policies most likely to jumpstart opportunities for energy transition that could be rapidly taken up beyond U.S. borders.
Image credit: Drpixel
INTRODUCTION – Build Back Better: How Much Bang for the Buck?
PART 1 – The Costs and Benefits of Nuclear Power Subsidies
PART 2 – The Inefficiency of Renewable Energy Subsidies
PART 3 – EV Subsidies Likely to Have Minimal Impact
PART 4 – Alternative fuels subsidies are small in size but with interesting potential
CONCLUSION – BBB Series Summary and Conclusion
