U.S. policymakers have attempted to overcome this economic impediment by enacting an increasing number of policies since the late 1970s, at both the state and federal levels, to directly support U.S. biofuels production and use. This report describes agriculture-based biofuels and the evolution of the U.S. biofuels sector with a focus on the role that federal policy has played in shaping its development. In the presence of government policy, demand for ethanol derives from four potential uses: 
as an oxygenate additive in gasoline to help improve engine combustion and cleaner burning of fuel; as an additive to gasoline to enhance its octane level and engine performance; as an additive to gasoline at blend ratios of up to 10% ethanol and 90% gasoline (known as E10), to meet federally mandated minimum usage requirements under one of the RFS categories for qualifying ethanol biofuels; or as a substitute for gasoline at ethanol-to-gasoline blend ratios greater than E10. Aided by these events, the U.S. ethanol industry steadily grew during its first two decades—rising from an estimated 175 million gallons in 1980 to 1.8 billion gallons in 2001, when ethanol production was using about 7% of the U.S. corn crop. It also fueled a "food-versus-fuel" debate about the potential for continued expansion in corn use for ethanol to have unintended consequences in other agricultural and environmental markets. Uncertainties Cloud Biofuels Future

In addition to the ethanol blend wall, the expanded RFS2 is likely to play a dominant role in the development of the U.S. biofuels sector, but with considerable uncertainty regarding spillover effects in other markets and on other important policy goals. In 2012 ( Figure 1 ), U.S. biodiesel consumption represented about 1.5% (in diesel-equivalent units) of national diesel transportation fuel use of about 46.8 billion gallons. The renewal of the tax credit and the expanded RFS2 biodiesel usage mandate of 800 million gallons in 2011 revived the industry and spurred record production of 967 million gallons in 2011 ( Figure 9 ). However, EPA also announced that no waiver would be granted for E15 use in model year 2000 and older light-duty motor vehicles, as well as in any motorcycles, heavy duty vehicles, or non-road engines. However, two factors prevent a blend wall expansion to 15%. Federal Programs That Support Biofuels

		Federal Biofuels Policies Have Encouraged Rapid Growth ...

Federal biofuels programs have proven critical to the economic success of the U.S. biofuels industry, primarily ethanol and biodiesel, whose output has grown rapidly in recent years. Initially, federal biofuels policies were developed to help kick-start the biofuels industry during its early development, when neither production capacity nor a market for the finished product were widely available. Federal policy played a key role in underwriting the initial investments in biofuels production capacity as well as in helping to close the price gap between biofuels and cheaper petroleum fuels. Federal outlays in 2012 are estimated sharply lower, at about $1.3 billion, due to the expiration of several biofuels tax credits. Oversight and implementation of federal biofuels policies is spread across several government agencies, but the primary responsibility lies with EPA, USDA, and DOE. For most of the past three decades, three types of federal programs have provided the core support for the U.S. biofuels industry: blending and production tax credits to lower the cost of biofuels to end users, an import tariff to protect domestic ethanol from cheaper foreign-produced ethanol, and volume-specific usage mandates to guarantee a market for biofuels irrespective of their cost. In addition, the biofuels industry has been supported by several indirect policies in the form of research grants to stimulate the development of new technologies, and grants, loans, and loan guarantees to facilitate the development of biofuels feedstocks as well as market and distribution infrastructure.
Since the late 1970s, U.S. policymakers at both the federal and state levels have authorized a variety of incentives, regulations, and programs to encourage the production and use of agriculture-based biofuels—i.e., any fuel produced from biological materials. Initially, federal biofuels policies were developed to help kick-start the biofuels industry during its early development, when neither production capacity nor a market for the finished product was widely available. Federal policy (e.g., tax credits, import tariffs, grants, loans, and loan guarantees) has played a key role in helping to close the price gap between biofuels and cheaper petroleum fuels. Now, as the industry has evolved, other policy goals (e.g., national energy security, climate change concerns, support for rural economies) are cited by proponents as justification for continuing or enhancing federal policy support.
The U.S. biofuels sector responded to these government incentives by expanding output every year from 1980 through 2011 (with the exception of 1996), with important implications for the domestic and international food and fuel sectors. Production of the primary U.S. biofuel, ethanol (derived from corn starch), has risen from about 175 million gallons in 1980 to nearly 14 billion gallons in 2011. U.S. biodiesel production (derived primarily from vegetable oil), albeit much smaller, has also shown strong growth, rising from 0.5 million gallons in 1999 to a record 969 million gallons in 2012. Despite the rapid growth of the past decades, total agriculture-based biofuels consumption accounted for only about 8% of U.S. transportation fuel consumption (9.7% of gasoline and 1.5% of diesel) in 2012.
Federal biofuels policies have had costs, including unintended market and environmental consequences and large federal outlays (estimated at $7.7 billion in 2011, but declining to $1.3 billion in 2012 with the expiration of the ethanol blender's tax credit). Despite the direct and indirect costs of federal biofuels policy and the relatively small role of biofuels as an energy source, the U.S. biofuels sector continues to push for federal involvement. But critics of federal policy intervention in the biofuels sector have also emerged. Current issues and policy developments related to the U.S. biofuels sector that are of interest to Congress include
Many federal biofuels policies require routine congressional monitoring and occasional reconsideration in the form of reauthorization or new appropriations. The 10% ethanol-to-gasoline blend ratio—known as the "blend wall"—poses a barrier to expansion of ethanol use. The Environmental Protection Agency (EPA) issued waivers to allow ethanol blending of up to 15% (per gallon of gasoline) for use in model year 2001 and newer light-duty motor vehicles. However, the limitation to newer vehicles, coupled with infrastructure issues, could limit rapid expansion of blending rates. The slow development of cellulosic biofuels has raised concerns about the industry's ability to meet large federal usage mandates, which in turn has raised the potential for future EPA waivers of mandated biofuel volumes and has contributed to a cycle of slow investment in and development of the sector.
In 2012, the expiration of the blender tax credit, poor profit margins (due primarily to high corn prices), and the emerging blend wall limitation have contributed to a drop-off in ethanol production and have generated considerable uncertainty about the ethanol industry's future.