1. Nicholas Horelik 8/4/08 2008 WISE Intern Tufts University Sponsored by the American Institute of Chemical Engineers 1

2. Introduction 2

3. Outline Definitions and Scope Industry Players Policy Objectives Describing the Recent Growth Policy and Market Causes of Recent Growth Historically Recently Current and Future Challenges Conclusions 3

4. “Biofuels” Broadly:Any fuel derived from biomass For This Presentation:Ethanol Other biofuels are worth mentioning, but in analyzing past policy, ethanol provides the most information Biodiesel Algae-Derived Fuels Other Alcohols 4

5. Industry Players Ethanol Producers Corn mills in the Midwest Sell ethanol as well as other valuable co-products Fuel Blenders and Retailers RBOB mixed with ethanol for reformulated gasoline Vehicle Makers Regular Vehicles Low blends of gasoline and ethanol: E10 or lower Flexible Fuel Vehicles (FFVs) High blends: E85 5

6. Policy Objectives Replace 30% of Gasoline Use by 2022 According to the RFS, most of the replacement will come from ethanol Half of this ethanol will be from cellulosic feedstocks Economic Catch 22 No Demand? No Infrastructure is Built No Infrastructure? No Demand Develops 6

7. Significant Recent Growth 7

8. Use of E85 in Vehicles 8

9. What Brought About This Growth? Market Conditions High gasoline prices made ethanol competitive State and Federal Policies Tax preferences kept the industry solvent Regulations and mandates created the demand Historically, indirect policies and market conditions have had the greatest effects… 9

10. First: Historical Context 10

11. Pre-1970s Ethanol Developments Early 1900s Ethanol was relatively ubiquitous 1907 – Texas oil becomes popular Early 1930s Gasoline-Ethanol Blends Marketed Lead replaces ethanol as the octane booster of choice The Great Depression + Dustbowl Incentives for Farmers Proposed Shot down by the petroleum lobbies World War II Ethanol Production Increased Used for non-fuel purposes But ethanol never actually caught on… 11

12. The Energy Crises of the 1970s 1. Oil Embargo 1973 2. Instability in the Middle East in 1979 Policies Promoting Alternative Fuels Enacted Taxes, R&D Money, Investment Incentives By 1984, there were 163 ethanol plants producing 510 million gallons annually

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14. Ethanol Growth Stalls 1. The Oil Glut of the 1980s 2. Reagan Non-intervention Investment incentives not renewed Gasoline was more competitive By 1985, only 74 plants were still in operation (45% of previous year) The ethanol industry did not gain a stable foothold, but the seeds were planted…

15. Setting the Stage for Today’s Growth Lead phased out by 1986 Replaced with MTBE and other ethers Oxygenate requirements – Clean Air Act Amendments MTBE gained widespread use CAFE standards – EPCA1974, EPACT1992 FFVs produced and purchased by fleets Taxes preferences remained Ethanol import tariff 15

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17. Why Biofuels Are Attractive Again 1. Energy Prices Are Rising Again Global Growth Raises Oil Demand China and India Slowed US Economy 2. Environmental Concerns Global Climate Change and CO 2 But that’s not why production capacity jumped in recent years…

18. MTBE Phased Out

19. Keeping the Demand Strong 1. Federal Mandates The Renewable Fuel Standard Blenders and refiners can be fined for not using the mandated amount 2. Fleet Requirements Executive Order 13423 in 2007 Annual 10% increases in non-petroleum consumption 19

20. Current and Future Challenges Building Up Distribution Infrastructure Shipping methods expensive, at capacity Getting Away From Corn Many concerned about food prices Economic Troubles Arguably, subsidies are required to keep many producers solvent 20

21. Looking To the Future You can subsidize to maintain solvency, but only increased demand will actually make the market move The demand created by MTBE is now saturated Next Steps: All gasoline blended with 10% ethanol All gasoline blended with 20% ethanol Move to higher blends such as E85 Cellulosic MUST become viable for any of this to happen…

22. Conclusions Regulations and mandates are the most effective way for government policy to affect market demands Even though it can affect prices negatively It is imperative to maintain government aid and regulations if the ethanol industry is to obtain a permanent foothold before gas prices fall Specifically for new infrastructure Other alternative fuels shouldn’t be ignored Perhaps the market should decide which renewable environmentally friendly alternative is the most advantageous 22

23. Thank You 23