Tax Credits Give Biofuels a Boost

The United States faces a great crisis with the rising cost of gasoline and diesel. Congress must work toward finding a short-term solution to high energy costs, and at the same time we must begin to move our nation to the next generation of automotive fuel. Well-crafted tax policy plays an important role in both efforts.

There is a bipartisan group of 10 Senators who are developing legislation that will help American families and businesses by lowering gas prices, reducing our dependence on foreign oil in the long term and strengthening our economy.

Widespread production and distribution of an alternative fuel to replace foreign-imported petroleum may be years away, but we can get there more quickly by using federal tax credits to encourage private industry’s investment. And while high fuel prices impose a constraint on our nation’s economy, it also offers an economic opportunity in the development of an alternative-fuel industry. Federal tax credits and other smart tax policy could help that industry grow — and grow quickly.

By some estimates, the United States sends more than $1 billion a day overseas for petroleum. That is an enormous amount to bleed away from our domestic economy, and it accounts for a significant portion of our annual trade deficit.

Through the use of tax incentives, we could keep more of that money here in the United States and encourage American entrepreneurs to invest in the research, development and commercialization of bringing alternative fuels to the marketplace. We already use tax incentives to spur biofuels and production of hybrid vehicles, as well as traditional oil production.

A thriving alternative-fuel industry could be close. Last year, I chaired a field hearing of the Senate Agriculture, Nutrition and Forestry Committee in Fargo, N.D., where Jason Hill, a University of Minnesota researcher, said that we are close to fully developing cellulosic ethanol — a fuel drawn from plentiful, easily replaced sources such as prairie grass. We have plenty of prairie grass in places such as North Dakota.

But we also know that private industry needs more capital to bring cellulosic ethanol to the pump. Tax credits are a way to help private industry find the capital it needs to invest in new ventures.

Imagine what an economic boon it would be to our nation if we could take the more than $1 billion that we spend every day on imported petroleum and instead invest that money at home in laboratory research of advanced alternative fuels, the construction of fuel-manufacturing plants, and the building of a network of alternative-fuel-distribution stations.

I know Congress can write bipartisan tax policy to encourage production of alternative, renewable fuels. We did it in this year’s farm bill, which was passed twice over President Bush’s veto, and included more than $1.25 billion for renewable and alternative fuels, including $400 million in tax credits devoted to the production of cellulosic ethanol.

It is worth repeating that the next generation of fuel could be years away from widespread use and distribution. And to address high gas prices for the short term, our nation should increase domestic production of petroleum, step up conservation efforts and put a brake on the upward pressure of oil prices from speculative investors.

But one part of the answer for a long-term solution to our energy crisis is a tax policy that encourages private industry to invest in producing alternative fuels, such as biodiesel and cellulosic ethanol, as well as the distribution system we need to deliver those fuels to the wider commercial market.

Sen. Kent Conrad (D-N.D.) is a member of the Finance Subcommittee on Energy, Natural Resources and Infrastructure.