TESTIMONY

John B. Campbell
Vice President
Industrial Products Ag Processing Inc. (AGP)

before the

Senate Committee on Agriculture, Nutrition, and Forestry

July 16, 1997

Good Morning, Mr. Chairman and members of the Committee. My name is John Campbell and I represent Ag Processing Inc (AGP), a regionally federated cooperative owned by cooperatives representing 350,000 farmers. AGP is a diversified processing and marketing organization specializing in soybean processing, vegetable oil refining, and livestock feed and pet food manufacturing. Our cooperative is involved in the renewable fuel industry in two sectors: ethanol and biodiesel. I will focus my remarks today on biodiesel.

Biodiesel is a clean burning, oxygenated fuel made from methyl esters derived from soybean and other vegetable oils. It can also be made through the transesterification of recycled waste cooking oils. The fuel is fully compatible with diesel fuel and current diesel engine technology. Blends of biodiesel even improve engine performance while reducing engine wear and emissions.

Though biodiesel is relatively new to the U.S., biodiesel has been used in Europe on a commercial basis for several years. In fact, Europe is far ahead of the U.S. in biodiesel use. Over 300 million gallons of biodiesel have been produced there. All major European engine manufacturers accept biodiesel for use in their vehicles. In Germany, it is sold pure and blended during fueling. In France, all petroleum diesel fuel is blended with 5% biodiesel before it is sold.

Biodiesel offers significant environmental benefits for air, water, earth, and energy. When blended with petroleum diesel, it reduces emissions of particulate matter, hydrocarbons, carbon monoxide and visible smoke. As a renewable fuel derived from agricultural feedstocks, like ethanol, it reduces the net amount of carbon dioxide in the atmosphere, mitigating the "Greenhouse Effect." A recent European life-cycle analysis found that "for each kilogram of biodiesel fuel burned in a diesel engine, up to three kilograms of CO2 are consumed, not produced." Furthermore, biodiesel is non-toxic, biodegradable and, in an aquatic environment, has the same solubility as sugar. Because diesel engines are, and for the foreseeable future will remain, the most energy and fuel efficient engine technology available, biodiesel could have an important role to play in the "new generation of vehicles" that industry and government are researching.

Biodiesel's other energy benefit lies in the production of biodiesel itself. Life-cycle analysis has shown that the production of biodiesel from soybeans offers a total net energy gain. Based on national averages, the energy used in growing and harvesting soybeans, extracting and refining soybean oil, and esterification of oil into fuel, consumes about 92,000 Btus per gallon of biodiesel produced. A gallon of biodiesel contains about 133,000 Btus. That leaves a net energy balance of approximately 41,000 Btus for every gallon produced. And this figure does not include assigning any value for the two co-products produced in this process - soy meal and glycerine. Factoring in replacement values for those products increases the net energy benefit to over 98,000 Btus per gallon.

Equally important to our Nation's future is the contribution biodiesel can make to national security. Our intelligence, defense and commerce agencies have consistently warned that "petroleum imports threaten to impair the national security." Unfortunately, as you well know, it is difficult to capture the public's attention on an issue like this until it becomes a crisis. The reason that we haven't experienced a serious crises from our growing dependency on imported petroleum in the past 20 years is due entirely to U.S. military strength. It is ironic that this strength, as well as policies pursued by multinational oil companies and our own government, has increased the share of oil imports from the Persian Gulf region to nearly double what is was since the first oil shock in 1973.

Unfortunately, most of the public is unaware of the extent of our increasing dependence on foreign oil. Nor does the public know the true cost of this addiction. Not only the explicit costs such as the $280 billion added to America's balance-of-trade deficit since 1990, now 41% of the nation's total balance-of-trade deficit, but the implicit costs hidden in the foreign tax credit, the Overseas Private Investment Corporation (OPIC) and U.S. military expenditures.

Foreign tax credits cost the U.S. Treasury an estimated $4 billion annually, allow multinational oil companies to realize significant tax savings, serve as a disincentive to domestic production of petroleum and renewable energy sources, and lead inevitably to greater reliance on oil imports. OPIC supported investments in foreign oil and natural gas ventures, such as the $100 million dollar insurance package for a Saudi Arabian petrochemical plant, surely leads to U.S. job losses, greater foreign oil dependence and an increase in the balance of payments deficit. Estimates of the cost of maintaining military control over the Persian Gulf are $50 billion ($9/barrel) annually. Every billion dollars spent on foreign oil costs America an estimated 10 to 25 thousand jobs. When you add all those numbers up it's a lot of money, and a lot of jobs.

The question is, if national leaders are aware of the costs of our growing vulnerability, why are our public policies crafted to exacerbate the problem? We should not be surprised about our growing dependence on foreign energy when we are responsible for everything that has made it happen. Not only have renewable fuels had to battle for every little piece of the energy pie, but our domestic oil and gas industry is a mere shadow of its former self. Our growing dependence on foreign energy is the predictable consequence of layer upon layer of institutionally biased legislation and regulation, combined with the benign neglect of our home-based resources.

Our cooperative, along with other biodiesel producers, have gone out on the proverbial limb with biodiesel despite the fact that there is no direct or indirect subsidy or mandate for its use. We have done this because we know the benefits to the America's soybean farmers and the Nation's energy security. Policy makers will eventually recognize that we are digging a deep hole for America by ignoring domestic renewable fuels. As former Secretary of Energy Donald Hodel has stated, "We are sleep walking into a disaster."

Shortly after the Persian Gulf conflict, in an attempt to deal with the imported petroleum dependence problem, Congress passed the Energy Policy Act (EPACT) of 1992. Unfortunately, as is too often the case, implementation of this important legislation has differed markedly from Congressional intent. The stated intent of EPACT is to strengthen U.S. energy security by reducing the amount of imported oil used by the transportation sector by 10% by 2000 and 30% by 2010. The Department of Energy, or DOE, readily admits that it sees no way to meet those goals given the current tools. For example, ethanol now captures less than 1% of the gasoline market. Traditional renewables such as ethanol, and new renewables such as biodiesel, are not likely to capture a large market share under current conditions no matter what. They are hardly the demons painted by big multinational oil interests and self-styled budget hawks.

If EPACT is going to achieve its legislative mandate to reduce foreign energy dependence, both Congress and the Administration need to revisit its provisions and implementation. DOE and the Administration are focused on the requirement for public fleets to purchase certified alternative fuel vehicles, or AFVs. The mandates and incentive structures of the AFV purchase requirements, however, essentially exclude biodiesel as an option for EPACT fleet owners and operators. DOE allows State fleets to earn EPACT purchase credits on heavy-duty diesel engine AFVs only after they have fulfilled their light-duty purchase requirements. Furthermore, in order to promote the inclusion of heavy-duty AFVs in the federal fleet, under a recent Presidential Executive Order, the Administration offered triple credits for heavy-duty AFVs, but limited these credits to dedicated AFVs. Examples of dedicated AFVs are propane and natural gas vehicles.

Lost in this exercise is the fact that, under EPACT, regulated fleets are not required to use any alternative fuel. I repeat, public fleets are forced to buy vehicles that manufacturers are indirectly forced to produce, but there is no requirement for them to actually use the fuels that the vehicles are certified to run on. During the rulemaking process, several states requested that DOE allow them, under the Alternative State Plans provision, to use petroleum displacement as a measure of compliance. Their sound logic was that DOE would be pleased with State plans that actually used alternative fuels. DOE flatly rejected these proposals. At the same time, DOE maintains a bias against renewable fuels because they argue that they cannot control or even compile data on the level of renewable fuel use in flexible-fueled AFVs.

The other major provision of EPACT, one that could result in a significant displacement of imported petroleum, is the replacement fuels program. Congress authorized the Secretary of Energy to establish "a program to promote the development and use...of domestic replacement fuels...to the maximum extent practicable...[to] ensure the availability of those replacement fuels that will have the greatest impact in reducing oil imports, improving the health of our Nation's economy and reducing greenhouse gas emissions." But DOE has demonstrated no interest in developing a viable replacement fuels program.

The infant biodiesel industry has struggled with DOE, and at times EPA and USDA, to accept and promote biodiesel as a viable alternative fuel for heavy-duty vehicles. At every turn, these regulatory agencies have resisted giving this new renewable fuel a chance to prove itself. For over twenty-eight months, DOE has been "considering" proposals put forward by the biodiesel industry through petitions, regulatory comments and letters to DOE officials from industry members and more than 70 members of Congress, including a majority of the members of this Committee, requesting that fuel mixtures containing 20% or more biodiesel be declared an alternative fuel. To date, DOE has taken no formal action on these requests.

Given the lax structure of the current EPACT program, DOE's failure to embrace biodiesel blended fuels, such as B20, in EPACT programs is difficult to understand. Including B20 as an EPACT alternative fuel will not directly impact the budgets or spending of any public agency at any level of government. It will not create a new subsidy or tax break for farmers or biodiesel fuel producers. It will not require any public or private fleet to purchase B20 or B20 certified flexible-fueled vehicles. All B20 will do is give public regulated fleets more choice and greater flexibility to meet the minimal requirements of EPACT.

For companies like ours, waiting in limbo for over twenty-eight months while DOE formally "considers" the B20 requests is nothing short of deliberate economic torture. We have financial commitments to build and operate biodiesel production facilities. We have payrolls to meet. We have potential customers waiting to use our fuel to meet EPACT requirements who can only look elsewhere for their alternative fuel vehicles. These commitments are based on the hard earned capital of our members. We cannot make commitments to develop and market renewable fuels, like biodiesel, if we cannot expect the appropriate federal agencies to deal honestly, fairly and quickly with regulatory issues and to show regulatory forbearance toward the complicated process of bringing a new fuel to market. Unfortunately, that kind of consideration has been sorely lacking.

Because of the lack of cooperation with biodiesel and other flexible fuels, the American Soybean Association, the National Biodiesel Board, and the biodiesel industry are supporting legislation that will be introduced by Senators Johnson and Grams to correct EPACT to: designate B20 as an EPACT alternative fuel; permit the optional inclusion of heavy-duty AFVs, off-road vehicles and marine vessels that run on alternative fuels; and help equalize EPACT's incentives for all alternative fuels and vehicles.

The bottom line is simple. If domestic renewable fuels are to compete with the direct and indirect subsidies provided to multinational oil interests, and the dedicated alternative fuel technologies they own and support, Congress must create a level playing field by providing equivalent incentives for renewables. This applies whether we are discussing implicit or explicit tax breaks, production subsidies, fuel efficiency standards or fuel use requirements.

Mr. Chairman, it is our hope that this hearing will spark interest in revisiting the relevant provisions of the Clean Air Act, the Energy Policy Act and the tax code. With guidance from Congress, the Administration and various Federal Agencies such as DOE, IRS, EPA and USDA, need to review their policies on domestic renewables. Increased reliance on oil from unstable regions of the world is our current path, but it doesn't have to be that way. Promoting conservation, recycling, and leveling the playing field by equalizing incentives for domestic renewable fuels can provide greater national security, less pollution, lower trade deficits, and more jobs at home.