As seen in the review of major biofuel producers, a common policy instru­ment used to support the industry is direct government program funding, in the form of contracts, loans, grants, or fiscal guarantees. It is difficult to evaluate the effectiveness of direct funding by comparing different countries, where synergistic policies (such as renewable fuel mandates, excise tax ex­emptions, etc.) or simply more favorable market conditions may play a role in determining capacity. However, within a single country it may be easier to see the impact of direct funding on the establishment of biofuel cap­acity. The bioethanol industry in the USA has been chosen for an analysis of the effectiveness of direct funding towards establishing biofuel produc­tion capacity. For the purpose of this study, direct funds are considered to be funds earmarked for all aspects of research, development and demon­stration, including all biofuel production as well as biomass production for general energy purposes. When different funding sources were considered, the only real criteria applied to warrant their inclusion in this study were (1) that the funds be applicable to research, development, and demonstra­tion (RD&D) projects for bioethanol, including construction or modification of production facilities, and (2) that bioethanol is accounted as an eligible product. Funding sources that recognized bioethanol as a co-product of mate­rial or bioenergy generation were also included. Estimates of the cumulative, total funding available to support the bioethanol industry are shown in Fig. 2. Canada is included in this graphic for comparison’s sake.

In Fig. 2, direct funds available in each state are indicated by the shading on the map, from blue (base levels of cumulative funding provided by the federal government as of 2005) to light or dark red (additional state fund­ing, depending upon the cumulative amount of funds available as of 2005). Existing bioethanol production capacity for 2005 is indicated by the yel­low circles, logarithmically sized according to the scale indicated. Additional bioethanol production capacity expected to be online as of 2007 is indicated by the dark orange circles, again plotted logarithmically. The graph indicates that bioethanol production is likely to be found where funding is available for infrastructure development, biomass procurement, and plant operation. Each of the major bioethanol-producing states has followed a different ap­proach in creating these incentives. Each approach represents a successful strategy for attracting the industry and expanding bioethanol production capacity.

In Illinois, the primary incentive offered to bioethanol producers is the Illinois Renewable Fuels Development Program, which offers up to US $ 5.5 million per facility in grants for the construction or retrofitting of renewable fuels plants, provided that they are a minimum of 114 million L in capacity and that the total grant award does not exceed 10% of total construc­tion costs, or US $ 0.026 L-1 of additional biofuels capacity created [73]. Both bioethanol and biodiesel production facilities are currently the primary re­cipient of these funds. In addition, the Renewable Energy Resources Program offers funding at various levels to promote the development and adoption of renewable energy within the state. With two new plants under construction in 2006, the total funding available to the bioethanol industry is estimated at approximately US$ 30.15 million [23]. Currently, Illinois has five operat­ing facilities with a capacity of 5.1 billion Lyear-1, while two new facilities are under construction [18].

In Iowa, a number of innovative programs are in place. The Iowa Re­newable Fuel Fund’s Financial Assistance Program offers a combination of forgivable and traditional low-interest loans for projects involving biomass and alternative fuel technologies, while the Alternative Fuel Loan Program of­fers zero-percent interest loans for up to half the cost of biomass or alternative fuels related fuel production projects, up to a maximum of US $ 250 000 per facility [74]. Approximately 20% of the money awarded under this program is in the form of forgivable loans, while the remaining 80% are low-interest loans. A number of other incentives, including the Ethanol Infrastructure Cost-Share Program, provide incentives for installation or conversion of E85 refueling stations [75].

In Minnesota, the chief incentive is the Ethanol Production Incentive. Originally, this incentive provided direct payments to producers at a rate of approximately US $ 0.052 US L-1 bioethanol, although the passage of bill SF 905 (2003) has reduced this amount to US $ 0.034 L-1 from 2004-2007. In 2007, the original incentive will be restored and producers may be reim­bursed for lost incentive if funds are available. The total fund available is US $ 37 million, although there is a cap of US $ 3 million per producer, which essentially means that producers of more than 15 million L year-1 are ineli­gible for extra incentive [76]. Perhaps due to this restriction in funding, the program has resulted in the establishment of 15 individual facilities by 2006 with a total production capacity of 1.9 billion Lyear-1 [18]. The Ethanol Pro­duction Incentive expires June 30, 2010 [77]. Ethanol infrastructure grants are also available to help upgrade service stations for dispensation of E85 fuels [23]. Minnesota has also enacted legislation for a bioethanol blend man­date, currently enforcing a 10% bioethanol blend for consumers (to increase to 20% bioethanol in 2013) [77].

In South Dakota, the Ethanol Production Incentive is designed as a dir­ect payment of US $ 0.052 L-1, with a maximum of US $ 1 million annually or US $ 10 million in total to any single facility. Unlike the incentives described for Minnesota, Illinois, or Nebraska, this particular program is targeted spe­cifically at bioethanol from cereal grains and expires this year [22]. While this level of support is lower than in many other states, South Dakota also has an excise tax exemption on bioethanol which provides additional financial in­centive for production. Currently, South Dakota has 11 operating facilities, with four additional plants under construction and a total production cap — acityof 2.2 billion L year-1 [18].

In Nebraska, the main program is the Ethanol Production Incentive, which offers a tax credit of US $ 0.048 L-1 bioethanol for up to 60 million L of annual production per facility, or 473 million L in total production over the course of a 96-month consecutive period [78]. This credit, which will expire in 2012, is limited to a total of US $ 22.5 million. As a tax credit, these funds can be con­sidered to be defrayed costs in direct support of the industry [23]. Nebraska currently has a production capacity of 1.8 billion L annually in ten facilities, with three new installations currently under construction [18].

As these examples demonstrate, a range of policy tools have been deployed in areas with significant bioethanol production capacity. The tools of pro­duction incentives, tax exemptions, direct loans, and cost-share schemes are shown to be effective in attracting capacity to individual jurisdictions, and the tools are shown to be flexible in achieving different results. The Min­nesota example, in particular, shows the potential impacts of small changes to policy. By limiting the capacity to which the incentive applied, the state gov­ernment was able to spur the creation of many individual facilities, which will in turn have a direct impact on jobs and the local economy. It is important to remember, however, that each of these strategies build upon the US fed­eral government’s strong commitment to research and development. Without that commitment, the rapidly improving technology that makes these facili­ties possible would not exist. However, it is interesting to note the differences that small amounts of local funding might have on productivity.

In Fig. 3, the relation between state funding for biofuels is compared to ac­tual bioethanol production capacity, using the funding data and bioethanol production capacities for 2003 and 2005. The two years of data are dif­ferentiated by the shaded and white circles. In 2003, a strong correlation was found between state-level funding and bioethanol production capacity (r2 = 0.85). This indicates that direct funding likely played a role in attract­ing new bioethanol capacity, and thus it could be concluded that this is an effective policy tool. By 2005, the changes in production capacity and dir­ect funding levels in many states has reduced this correlation significantly (r2 = 0.64). It may be postulated that a shift is taking place, in which the amount of funding available to capital projects has become less import­ant in relation to some other factor, such as feedstock availability or mar-

ket influences. Indeed, follow-up analyses using corn production data [79, 80] indicate that in the same period, the relation between bioethanol pro­duction capacity and corn harvest figures on a state level show the op­posite trend. In 2003, the correlation between the two was fairly weak (r2 = 0.58), while in 2005, this correlation had grown stronger (r2 = 0.83). In 2003, availability of corn seemed to be less important than direct fund­ing for bioethanol facilities. It may be postulated that the rapid growth in bioethanol capacity seen to 2005, coupled with strong prices for bioethanol, has made feedstock availability more important than funding for construc­tion purposes.

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