Order Code RL33564
CRS Report for Congress
Received through the CRS Web
Alternative Fuels and Advanced Technology
Vehicles: Issues in Congress
Updated October 19, 2006
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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Alternative Fuels and Advanced Technology Vehicles:
Issues in Congress
Summary
Alternative fuels and advanced technology vehicles are seen by proponents as
integral to improving urban air quality, decreasing dependence on foreign oil, and
reducing emissions of greenhouse gases. However, major barriers — especially
economics — currently prevent the widespread use of these fuels and technologies.
Because of these barriers, and the potential benefits, there is continued congressional
interest in providing incentives and other support for their development and
commercialization.
In the 109th Congress, alternative fuels and advanced technology vehicles have
received a good deal of attention, especially in the debate over omnibus energy
legislation. High fuel prices, especially in response to hurricanes along the Gulf
Coast and high petroleum prices, have increased that attention. Major topics of
congressional interest include tax incentives for alternative fuel production; the future
of ethanol and the fuel additive MTBE, including the establishment of a renewable
fuels standard (RFS); and research and development of hydrogen fuel and fuel cells.
Other topics include government vehicle purchase requirements, tax credits for
vehicle purchases, promotion of biodiesel fuel, and incentives for hybrid electric
vehicles.
The Energy Policy Act of 2005 (P.L. 109-58, H.R. 6) contains many provisions
relevant to alternative fuels and advanced technology vehicles. Among its
provisions, the act expands existing tax incentives for the purchase of advanced
vehicles, authorizes R&D funding for hydrogen fuel and fuel cells, and requires that
the nationwide gasoline supply contain a minimum amount of ethanol or other
renewable fuel. H.R. 6 was signed by President Bush on August 8, 2005.
In the fall of 2005, hurricanes along the Gulf Coast led to disruptions in refining
capacity and oil supply, which then led to higher gasoline and diesel prices. Since
then, some Members of Congress have been seeking ways to reduce the vulnerability
of the fuel system. Several bills have been introduced to promote further
development of alternative fuels and advanced technology vehicles or to mandate
their sale and use. High crude oil and gasoline prices in spring and summer 2006
have further increased interest in moving away from a petroleum-based transportation
system.
Some energy tax provisions, including tax credits for ethanol and biodiesel,
were inserted into the conference report of the American Jobs Creation Act of 2004
(P.L. 108-357). Among other provisions, the law replaced an existing ethanol tax
exemption with a tax credit and established tax credits for biodiesel.
This report replaces CRS Issue Brief IB10128, Alternative Fuels and Advanced
Technology Vehicles: Issues in Congress, by Brent D. Yacobucci. It will be updated
as events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Congressional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Legislative Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Energy Policy Act of 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fuel Tax Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Ethanol and MTBE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Issues in the Spring/Summer of 2006: MTBE Phase-Out and
Ethanol Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Ethanol Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Vehicle Purchase Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Vehicle Purchase Tax Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Biodiesel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Hydrogen and Fuel Cells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Hybrid Vehicles
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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Alternative Fuels and Advanced Technology
Vehicles: Issues in Congress
Introduction
High crude oil and gasoline prices since autumn 2005 have led to increased
interest in the U.S. fuel supply. Recent congressional interest has focused on
alternatives to petroleum, ways to improve the efficiency of the U.S. transportation
sector, and ways to improve the stability and security of the petroleum supply and
refining sectors.1 High global oil prices (spurred by high demand), a transition from
winter to summer gasoline, and the phase-out of the gasoline additive MTBE have
pushed U.S. gasoline pump prices to historic highs.
Key components of federal policies to reduce fuel consumption include the
promotion of alternatives to petroleum fuels and the promotion of more efficient
vehicles. This report provides an overview of current issues surrounding alternative
fuels2 and advanced technology vehicles3 — issues discussed in further detail in other
CRS reports referred to in each section.
Most Recent Developments
Crude oil and gasoline prices have remained high since autumn 2005 due to
hurricanes in the Gulf Coast, political instability in the Middle East, and a transition
away from the gasoline additive MTBE.
On August 10, 2005, President Bush signed the Safe, Accountable, Flexible,
Efficient Transportation Equity Act: A Legacy for Users (P.L. 109-59, H.R. 3), which
reauthorizes major highway and transit programs. Among other provisions, the act
provides funding for alternative fuel transit buses and establishes a tax credit for the
sale of alternative fuels.
1 For more information on petroleum supply and prices, see CRS Report RL32530, World
Oil Demand and its Effect on Oil Prices, by Robert Pirog. For more information on
legislative proposals to help mitigate high gasoline prices, see CRS Report RL33521,
Gasoline Prices: New Legislation and Proposals, by Carl E. Behrens and Carol Glover.
2 Alternative fuels are fuels produced from sources other than petroleum, including natural
gas, coal-derived fuels, agriculture-based ethanol and biodiesel, and hydrogen.
3 Advanced technology vehicles are vehicles that use technologies other than (or in addition
to) an internal combustion engine, including electric vehicles, fuel cell vehicles, and hybrids.

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On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (P.L.
109-58, H.R. 6), an omnibus energy bill. The act contains provisions on renewable
fuels, hydrogen R&D, and alternative fuel fleet requirements. Among other
provisions, P.L. 109-58 establishes a renewable fuels standard requiring the use of
7.5 billion gallons of renewable fuel in gasoline by 2012. It also provides for MTBE
cleanup, authorizes hydrogen R&D, and provides tax credits for the purchase of
advanced vehicles.
Background and Analysis
Congressional Interest
Legislative Background. A combination of issues — the oil crises of the
1970s, the rise in awareness of environmental issues, concerns over energy security,
increasing vehicle emissions, and high gasoline prices — spurred interest in moving
the United States away from petroleum fuels for transportation and toward alternative
fuels and advanced vehicle technologies.4
The Energy Policy Act of 1992. The 102nd Congress passed the Energy
Policy Act of 1992 (EPAct 1992, P.L. 102-486). Among other provisions, this law
requires the purchase of alternative fuel vehicles by federal agencies, state
governments, and alternative fuel providers. Under EPAct 1992, a certain percentage
— which varies by the type of fleet — of new passenger vehicles purchased for a
federal or state agency or alternative fuel provider fleets must be capable of operating
on alternative fuels, including ethanol, methanol, natural gas, or propane. EPAct
1992 established a tax credit for the purchase of electric vehicles, as well as tax
deductions for the purchase of alternative fuel and hybrid vehicles.
The Energy Policy Act of 2005. There was little congressional action on
energy policy through the late 1990s. In light of high fuel prices in the early 2000s,
continued growth in domestic and global petroleum demand, and other energy policy
concerns, Congress has been working on comprehensive energy legislation since
2001. In the 107th Congress, an energy bill stalled in conference. The 108th Congress
continued the debate over energy legislation. The conference report (H.Rept. 108-
375) included provisions on vehicle tax credits, amendments to vehicle purchase
requirements under the Energy Policy Act of 1992, a requirement that gasoline
contain ethanol or other renewable fuels, and tax credits for ethanol and biodiesel
fuels. However, this bill also stalled. Many of these topics were addressed in the
109th Congress by the Energy Policy Act of 2005 (EPAct 2005, P.L. 109-58, H.R. 6),
which was signed by President Bush on August 8, 2005.
4 For background on alternative fuels, including legislative history, see CRS Report
RL30758, Alternative Transportation Fuels and Vehicles: Energy, Environment, and
Development Issues, by Brent D. Yacobucci. For background on advanced vehicle
technologies, see CRS Report RL30484, Advanced Vehicle Technologies: Energy,
Environment, and Development Issues, by Brent D. Yacobucci.

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Other Legislation. Other laws affecting alternative fuel and advanced
technology vehicles include the Energy Policy and Conservation Act (P.L. 94-163),
which established fuel economy standards for passenger cars and light trucks; the
1990 Amendments to the Clean Air Act (P.L. 101-549), which require cities with
significant air quality problems to promote low emission vehicles; highway
authorization bills, including P.L. 109-59 and P.L. 105-178, which established and
reaffirmed tax incentives for ethanol and other fuels; and numerous laws that
authorize federal research and development on alternative fuels, advanced
technologies, and enabling infrastructure, such as alternative fuel pumps.
Current Issues. Recent events have renewed interest in alternative fuels and
advanced vehicles. For example, high pump prices for gasoline and diesel fuel have
raised concerns over fuel conservation and energy security, including U.S.
dependency on oil imports. In light of this, there is growing interest in more efficient
vehicles or vehicles that abandon the use of petroleum altogether. This is especially
true as the rapid growth in the sales of light trucks — these include sport utility
vehicles (SUVs), mini-vans, and pickups, which tend to have lower fuel economy
than passenger cars — has lowered the overall fuel economy of the new vehicle fleet.
Furthermore, ongoing technological developments in hybrid vehicles, fuel cells,
and hydrogen fuel have raised key policy questions. These questions include whether
more generous tax incentives for hybrid and/or fuel cell vehicles should be
established, the costs associated with production of hydrogen as a major
transportation fuel, and whether research and development funds should be focused
on such potentially high-risk technologies as fuel cells or on near-term technologies,
such as hybrids.
Hurricanes along the Gulf Coast in the fall of 2005 led to fuel supply disruptions
and high retail prices, raising congressional interest in alternatives to petroleum. In
addition, in spring 2006, high crude prices, issues with refining capacity, and
concerns about ethanol supply led to high pump prices, further raising concerns about
the United States’ ability to supply fuel to the transportation sector.
Fuel Tax Incentives
There are three key tax incentives for alternative fuels: (1) a tax credit for
ethanol of $0.51 per gallon, (2) a tax credit for biodiesel of $1.00 per gallon ($0.50
for biodiesel made from recycled products), and (3) a credit of $0.50 per gallon for
the retail sale of alternative fuels other than ethanol and biodiesel (e.g., LPG). In
addition, there are tax credits for small ethanol and biodiesel producers ($0.10 per
gallon).5
There is ongoing interest in tax incentives for the production and purchase of
alternative fuels. Supporters of this approach argue that the market favors
conventional fuels, and that the widespread infrastructure and nearly ubiquitous use
of conventional fuels in automobiles makes it difficult for alternative fuels to
5 For more information on the ethanol tax incentives, see CRS Report RL32979, Alcohol
Fuels Tax Incentives, by Salvatore Lazzari.

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compete without economic incentives. The American Jobs Creation Act of 2004
(P.L. 108-357) replaced a previous excise tax exemption for ethanol-blended fuels
with a tax credit of $0.51 per gallon. This credit will expire at the end of 2010.
In addition to the credit for ethanol-blended gasoline, there has been interest in
promoting biodiesel fuel. P.L. 108-357 provides a tax credit of $1.00 per gallon for
the sale and use of “agri-biodiesel” — biodiesel produced from virgin agricultural
products such as soybean or canola oil. There is a smaller credit of $0.50 per gallon
for biodiesel produced from recycled grease. Under P.L. 108-357 the biodiesel credit
would have expired at the end of 2006, four years before the expiration of the ethanol
credit; the Energy Policy Act of 2005 (P.L. 109-58) extends the biodiesel tax credit
through 2008.
Ethanol and MTBE
Outside of tax incentives, ethanol has been of key interest in recent Congresses,
especially in its role as an alternative to MTBE (methyl tertiary butyl ether).6 MTBE
and ethanol were used (among other purposes) to meet Clean Air Act requirements
that reformulated gasoline (RFG), sold in the nation’s worst ozone nonattainment
areas, contain at least 2% oxygen (by weight), to improve combustion. Under the
RFG program, areas with “severe” or “extreme” ozone pollution (90 counties with
a combined population of 64.8 million) must use reformulated gas; areas with less
severe ozone pollution may opt into the program as well, and many have. In all,
portions of 17 states and the District of Columbia use RFG, and about 30% of the
gasoline sold in the United States is RFG, according to the Environmental Protection
Agency (EPA).7
Before amendment by the Energy Policy Act of 2005, the Clean Air Act
required that RFG contain at least 2% oxygen by weight.8 Refiners met this
requirement by adding a number of ethers or alcohols, any of which contains oxygen
and other elements. Until recently, the most commonly used oxygenate was MTBE
because it was cheaper and easier to use than competing oxygenates. In 1999, 87%
of RFG contained MTBE, a number reduced to about 46% in 2004, according to
EPA. MTBE has also been used since the late 1970s in non-reformulated gasoline
as an octane enhancer, at lower concentrations. As a result, gasoline with MTBE has
been used throughout the United States, whether or not an area has been subject to
RFG requirements.
MTBE contamination creates taste and odor problems in water at very low
concentrations, and some animal studies indicate MTBE may pose a cancer risk to
6 For additional background on the MTBE issue, see CRS Report RL32787, MTBE in
Gasoline: Clean Air and Drinking Water Issues, by James E. McCarthy and Mary Tiemann.
For information on ethanol, see CRS Report RL33290, Fuel Ethanol: Background and
Public Policy Issues, by Brent D. Yacobucci.
7 U.S. Environmental Protection Agency (EPA), Office of Transportation Air Quality
(OTAQ), Staff White Paper: Study of Unique Gasoline Blends (“Boutique Fuels”), Effects
on Fuel Supply and Distribution and Potential Improvements, October 2001.
8 In the case of MTBE, this equates to roughly 11% by volume.

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humans. MTBE leaks, generally from underground gasoline storage tanks, have been
implicated in numerous incidents of ground water contamination. For these reasons,
25 states have taken steps to ban or limit its use, according to the Renewable Fuels
Association.9 The most significant of the bans (in California and New York) took
effect at the end of 2003, leading many to suggest that Congress revisit the issue to
modify the oxygenate requirement and set more uniform national requirements
regarding MTBE and its potential replacements, principally ethanol.
Support for eliminating the oxygenate requirement on a nationwide basis was
widespread among states, the petroleum industry, and some environmental groups.
In general, these stakeholders concluded that gasoline can meet the same low-
emission performance standards as RFG without the use of oxygenates. But
agricultural interests presented a potential obstacle to enacting legislation to remove
the oxygen requirement. According to the U.S. Department of Agriculture, roughly
20% of the nation’s corn crop is used to produce the competing oxygenate, ethanol.10
If MTBE use were reduced or phased out, but the oxygen requirement remained in
effect, ethanol use would have soared, increasing demand for corn. Conversely, if
the oxygen requirement were repealed, not only would MTBE use decline, but so,
likely, would demand for ethanol. Thus, some Members of Congress and governors
from corn-growing states took a keen interest in MTBE legislation and related
oxygenate requirements.
To help promote the market for ethanol if the oxygen standard were eliminated,
a renewable fuels standard (RFS) was suggested. This would require that all gasoline
contain ethanol or other renewable fuel. This concept was supported by agricultural
interests, the oil industry, and some environmental groups. Opponents included
states that do not produce ethanol, due to fears that the mandate could raise gasoline
prices.
The Energy Policy Act of 2005 (P.L. 109-58) contains numerous MTBE and
ethanol provisions. It repeals the Clean Air Act requirement to use MTBE or other
oxygenates. In place of this requirement, the law establishes a renewable fuels
standard. Under the RFS, annual gasoline supply is required to contain 7.5 billion
gallons of ethanol or other renewable fuel by 2012. To prevent “backsliding” on air
quality, the law requires that reductions in emissions of toxic substances achieved by
RFG be maintained, and it authorizes funds for MTBE cleanup.11
Issues in the Spring/Summer of 2006: MTBE Phase-Out and
Ethanol Supply. As a result of P.L. 109-58, the oxygen requirement for RFG was
eliminated on May 6, 2006. This requirement — which gasoline suppliers asserted
9 Renewable Fuels Association, “New Jersey Bans MTBE,” Ethanol Report, Issue #226,
July 15, 2005.
10 U.S. Department of Agriculture, Economic Research Service, Feed Outlook, June 13,
2006.
11 For a detailed comparison of the renewable fuels legislation, see CRS Report RL32865,
Renewable Fuels and MTBE: A Comparison of Selected Provisions in the Energy Policy Act
of 2005 (P.L. 109-58 and H.R. 6), by Brent D. Yacobucci, Mary Tiemann, and James E.
McCarthy.

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was a de facto mandate to use MTBE — was cited by gasoline suppliers as a defense
against liability for MTBE contamination. Therefore, although P.L. 109-58 actually
gives the industry more flexibility, the industry moved quickly to eliminate MTBE
from the gasoline supply in spring 2006. Because MTBE accounted for 11% of the
volume of RFG in areas it was used, the elimination of MTBE increased pressure on
already tight refining capacity. The loss in volume and energy from eliminating
MTBE increased demand for gasoline as well as ethanol. Exacerbating the problem
was the fact that the industry was making the transition from winter gasoline to more
stringent summertime specifications, which adds competition for the highest-quality
gasoline components. These pressures, along with historically high crude oil prices,
led to historically high gasoline prices. Further, some localized areas (e.g., Norfolk,
VA) faced short-term supply disruptions as refineries made the transition.
Ethanol Imports
Corn growers and ethanol producers are supportive of the renewable fuels
standard because of its implications for higher corn and ethanol prices. However,
concern over ethanol imports is growing among some stakeholders. Because of lower
production costs and the availability of government incentives, ethanol prices in
Brazil and some other countries can be significantly lower than in the United States.
To offset the U.S. tax incentive that all ethanol (imported or domestic) receives, most
imports are subject to a relatively small 2.5% ad valorem tariff, but more
significantly an added duty of $0.54 per gallon. This added duty effectively negates
the tax incentive for covered imports and has been a significant barrier to fuel ethanol
imports.
However, under certain conditions imports of ethanol from Caribbean Basin
Initiative (CBI) countries are granted duty-free status.12 This is true even if the
ethanol was produced in a non-CBI country. In this scenario, the ethanol is produced
in another country (historically Brazil or a European country), dehydrated in a CBI
country, then shipped to the United States. This avenue for imported ethanol to avoid
the tariff has been criticized by some stakeholders, including some Members of
Congress. With the establishment of a renewable fuel standard, as well as high U.S.
gasoline and ethanol prices, there may be more interest in importing ethanol, either
through CBI countries or directly from ethanol producers.
Vehicle Purchase Requirements
The Energy Policy Act of 1992 established mandatory alternative fuel vehicle
purchase requirements for various vehicle fleets.13 Under the law, 75% of the
passenger vehicles purchased by federal and state vehicle fleets must be capable of
12 For more information on ethanol imports from CBI countries, see CRS Report RS21930,
Ethanol Imports and the Caribbean Basin Initiative, by Brent D. Yacobucci.
13 For purposes of compliance with EPAct 1992, a vehicle fleet is all of the passenger
vehicles operated by an agency or company.

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operating on alternative fuels; 90% of the vehicles purchased by alternative fuel
providers14 must be alternative fuel vehicles.15
The alternative fuel vehicle provisions of EPAct have been criticized as
ineffective because, while EPAct requires the purchase of vehicles, it did not
mandate the use of alternative fuels. In most cases, the vehicles purchased to meet
the requirement are dual-fuel vehicles (i.e., they can operate on either a conventional
fuel or an alternative fuel). Those vehicles are primarily fueled using gasoline,
because gasoline tends to be less expensive and more widely available than
alternative fuels since the infrastructure to provide alternative fuels is limited
compared with the existing infrastructure for gasoline and diesel fuel.
In addition, despite the vehicle purchase mandate, many agencies have failed to
meet their statutory obligation. As a result, in 2002 the Center for Biological
Diversity filed a lawsuit with the U.S. District Court for the Northern District of
California. In July 2002, the court ruled that several federal agencies failed to meet
their quotas and ordered those agencies to prepare reports on their compliance with
EPAct, which those agencies have completed.16
The Energy Policy Act of 2005 (Section 701) modified the requirements for
EPAct 1992 compliance. All dual-fuel vehicles purchased to meet the EPAct quotas
are required to operate on alternative fuels, unless an agency is granted a waiver by
the Secretary of Energy. In addition, the Secretary of Energy is required to conduct
a study of the effectiveness of the EPAct requirements.
In addition to the requirements for federal, state, and fuel provider fleets, EPAct
grants the Department of Energy (DOE) the authority to extend the requirements to
local government and private fleets. However, as of 2002, DOE had not made a
determination on requirements for local and private fleets. As part of the above
lawsuit, the Center for Biological Diversity also asked the court to force DOE to
promulgate new rules. In ruling on the above case, the U.S. District Court for the
Northern District of California ordered DOE to establish a timeline for a new
rulemaking. DOE compiled a timeline and, on March 4, 2003, it issued a rulemaking
determining that such a program would not promote the goals of EPAct, neither
reducing dependence on foreign oil nor leading to greater use of alternative fuel
vehicles (68 Federal Register 10319).
Vehicle Purchase Tax Incentives
Some supporters of alternative fuel and advanced technology vehicles argue that
tax incentives for the purchase of vehicles and fuels are more effective than any
purchase mandate. In addition to the mandatory purchase requirements, EPAct 1992
14 Alternative fuel providers are businesses that sell or distribute alternative fuels.
15 For more information on vehicle purchase requirements, see CRS Report RL30758,
Alternative Transportation Fuels and Vehicles: Energy, Environment, and Development
Issues, by Brent D. Yacobucci.
16 Center for Biological Diversity v. Abraham, N.D. Cal., No. CV-00027.

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established tax incentives for the purchase of electric vehicles and “clean-fuel
vehicles,” including alternative fuel and hybrid vehicles. The Energy Policy Act of
2005 (Section 1341) significantly expands and extends the vehicle purchase
incentives, establishing tax credits for the purchase of fuel cell, hybrid, alternative
fuel, and advanced diesel vehicles. For passenger vehicles, the credit is worth as
much as $3,400 for hybrids and advanced diesels, and as much as $4,000 for
alternative fuel vehicles, depending on vehicle attributes. The expiration date for the
incentives also varies depending on the technology. In the case of hybrid and
advanced diesel vehicles, the number of vehicles eligible for the credits is limited for
each vehicle manufacturer.17
Biodiesel
Biodiesel is a synthetic diesel fuel produced from oils, including soybean and
canola oils, animal fats, and recycled cooking grease.18 It can be blended with
conventional diesel fuel and used in diesel engines with few or no modifications.
Further, with some engine modifications, it can be used in a nearly pure form.
Because biodiesel can displace conventional diesel without the use of new (and in
many cases costly) vehicles, there is growing interest in its use. Further, because it
can be produced from agricultural products, farmers (especially soybean and canola
farmers) and some environmentalists have a keen interest in its development as a way
to promote rural economies, reduce agricultural wastes, and limit greenhouse gas
emissions. However, biodiesel production is currently expensive: wholesale
biodiesel from virgin oils can cost up to two times more than conventional No. 2
diesel; biodiesel from recycled grease is less expensive but still costs considerably
more than conventional diesel.
The cost barriers for biodiesel production have generated interest in providing
tax incentives for biodiesel, in the form of either a production tax credit or an excise
tax exemption, or both. Further there is interest in developing new technologies to
help reduce production costs. However, the organic oils used as raw materials are
one of the largest costs in production. Therefore, to significantly reduce biodiesel
production costs, the costs of soybean oil and other oils would need to decrease
substantially.
As was stated above, the American Jobs Creation Act provides a tax credit of
up to $1.00 per gallon for the sale and use of “agri-biodiesel” — biodiesel from
virgin agricultural products. The credit is $0.50 per gallon for biodiesel from
recycled grease. In addition, the law provides an excise tax credit for biodiesel
blends (i.e. biodiesel and conventional diesel). Producers are eligible for one credit
or the other, but not both (see “Fuel Tax Incentives,” above). These credits were set
to expire at the end of 2006; the Energy Policy Act of 2005 (P.L. 109-58) extends
17 For more information on vehicle tax incentives, see CRS Report RS22351, Tax Incentives
for Alternative Fuel and Advanced Technology Vehicles, by Brent D. Yacobucci.
18 For more information on biodiesel, see CRS Report RL32712, Agriculture-Based
Renewable Energy Production, by Randy Schnepf, and CRS Report RL30758, Alternative
Transportation Fuels and Vehicles: Energy, Environment, and Development Issues, by
Brent D. Yacobucci.

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these credits through 2008. Further, EPAct 2005 established a credit of $0.10 per
gallon for small agri-biodiesel producers.
Hydrogen and Fuel Cells
Over the past few years, interest has grown substantially in hydrogen fuel and
fuel cells.19 Hydrogen fuel can be produced using any energy source, and has thus
been touted as a way to limit dependence on energy imports. Further, when hydrogen
is used in a fuel cell (a device that produces electricity by converting hydrogen to
water), mostly heat and water are produced, drastically reducing or eliminating
vehicle emissions. However, hydrogen fuel production is currently very expensive,
as are fuel cells. In addition, depending on the original fuel source, overall fuel-cycle
emissions can be a key concern.20
Because of the potential benefits from hydrogen and fuel cells, and because of
the existing technical and cost barriers to their commercialization, the Bush
Administration has strongly supported research and development (R&D). In January
2002, the Administration announced the FreedomCAR initiative, which promotes
cooperative R&D between the “Big Three” American auto manufacturers
(DaimlerChrysler, Ford, and General Motors) and the federal government. While the
partnership is conducting research on many technologies, hydrogen and fuel cell
vehicles are a key focus. Further, in his January 2003 State of the Union address,
President Bush announced the Hydrogen Fuel Initiative, which increased federal
spending on hydrogen fuel and stationary fuel cell R&D. Overall, the President is
requesting $1.8 billion between FY2004 and FY2008 for both initiatives, including
a $720 million increase in funding from earlier appropriations.21
Opponents of the initiatives argue that hydrogen fuel and fuel cells may never
be commercialized and that the initiatives draw funding away from near-term
technologies such as hybrid vehicles. Further, some argue that research and
development alone will not reduce petroleum dependence and that Congress should
instead consider tightening fuel economy standards for all vehicles.
Congress agreed to increase funding for hydrogen and fuel cell research from
$185 million in FY2003 to $231 million in FY2004, $254 million in FY2005, and
$258 million in FY2006. The Energy Policy Act of 2005 authorizes a total of $3.3
billion through FY2010 for fuel cell and hydrogen R&D.
19 For background information on hydrogen and fuel cells, see CRS Report RL32196, A
Hydrogen Economy and Fuel Cells: An Overview, by Brent D. Yacobucci and Aimee E.
Curtright.
20 For example, depending on the technology used, processing coal into hydrogen could lead
to significantly higher emissions of toxic compounds and carbon dioxide.
21 For more information on the Administration’s initiatives, see CRS Report RS21442,
Hydrogen and Fuel Cell Vehicle R&D: FreedomCAR and the President’s Hydrogen Fuel
Initiative, by Brent D. Yacobucci.

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Hybrid Vehicles
Hybrid gasoline/electric (and diesel/electric) vehicles are becoming increasingly
popular in the United States. Hybrids combine a gasoline (or diesel) engine with an
electrical motor system to improve efficiency.22 If their use becomes more
widespread, they could help improve the overall efficiency of the vehicle fleet and
could help limit oil consumption. Further, they could do so without significant
changes to existing infrastructure, which has been a key barrier to the expanded use
of alternative fuel vehicles. By the end of 2006, Ford, DaimlerChrysler, General
Motors, Honda, Nissan, and Toyota will offer vehicles with hybrid powertrains. At
the present time, only hybrid passenger cars, SUVs, and pickups are available in the
United States, but hybrid versions of other vehicle models and classes are expected
in the near future.
Because of their energy and environmental benefits, some states have provided
drivers of hybrid vehicles an exemption from high occupancy vehicle (HOV) lane
requirements. Under TEA-21 (which expired on September 30, 2003), states had the
authority to grant HOV exemptions for so-called “Inherently Low Emission
Vehicles” (ILEVs). The ILEV standard requires that a vehicle have no evaporative
emissions, a standard that is not met by any current hybrid. However, because of the
reduced emissions and improved fuel economy of hybrid vehicles, there has been
congressional interest in explicitly granting states the right to exempt them from
HOV lane requirements. While not addressing hybrids directly, the final version of
the highway reauthorization act (P.L. 109-59) permits states to exempt certain high-
efficiency vehicles from HOV restrictions.
Further, as was stated above, the Energy Policy Act of 2005 expanded the
incentives for the purchase of hybrid vehicles (see “Vehicle Purchase Tax
Incentives,” above).
Legislation
109th Congress
P.L. 109-59 (H.R. 3, Young)
Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for
Users. A bill authorizing funding for federal highway programs, transit programs,
and highway safety. Among other provisions, the bill allows states to exempt certain
alternative fuel and high-efficiency vehicles from HOV restrictions. The bill also
provides assistance to municipalities for the purchase of alternative fuel buses and
refueling infrastructure. Introduced February 9, 2005; passed House March 10, 2005;
passed Senate May 17, 2005; became P.L. 109-59 August 8, 2005.
22 For more information on hybrid vehicles, see CRS Report RL30484, Advanced Vehicle
Technologies: Energy, Environment, and Development Issues, by Brent D. Yacobucci.

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CRS-11
P.L. 109-58 (H.R. 6, Barton)
Energy Policy Act of 2005. Title VII modifies existing requirements for
alternative fuel fleets. Title VIII authorizes $3.3 billion over five years for hydrogen
and fuel cell R&D. Title XV requires renewable fuels in gasoline (4.0 billion gallons
in 2005, increasing to 7.5 billion gallons in 2012); eliminates RFG oxygen
requirement; and authorizes funding for MTBE cleanup. Passed House April 21,
2005; passed Senate June 28, 2005; became P.L. 109-58 August 10 2005.
H.R. 626 (Camp)
Volume Enhancing Hardware Incentives for Consumer Lowered Expenses
(VEHICLE) Technology Act of 2005. Would extend existing tax credit for electric
vehicles. Would establish tax credits for the purchase of alternative fuel and hybrid
vehicles. Would modify the tax deduction for alternative fuel refueling
infrastructure. Similar language inserted into P.L. 109-58. Introduced February 8,
2005; referred to House Ways and Means.
S. 971 (Hatch)
Clean Efficient Automobiles Resulting from Advanced Car Technologies
(CLEAR ACT) Act of 2005. Would extend existing tax credit for electric vehicles.
Would establish tax credits for the purchase of alternative fuel and hybrid vehicles.
Would modify the tax deduction for alternative fuel refueling infrastructure. Similar
language inserted into P.L. 109-58. Introduced April 28, 2005; referred to Senate
Finance.
108th Congress
H.R. 6 (Tauzin)
Energy Policy Act of 2003. Title VII would have established an excise tax
credit for ethanol and biodiesel fuels, a tax credit for biodiesel production, and tax
credits for the purchase of alternative fuel, fuel cell, and hybrid vehicles. Title VIII
would have authorized $2.15 billion over five years for hydrogen and fuel cell R&D.
Title XV would have required renewable fuels in gasoline (3.1 billion gallons in
2005, increasing to 5.0 billion gallons in 2012); banned MTBE after 2014 unless the
President determined otherwise (states can choose to authorize its use); eliminated
the RFG oxygen requirement, and authorized funding for MTBE cleanup. Introduced
April 7, 2003; referred to several committees; passed House April 11; passed Senate
July 31; conference Report (H.Rept. 108-375) adopted by House November 18, 2003.
Motion to invoke cloture failed in Senate November 21, 2003.
H.R. 4520, P.L. 108-357 (Thomas)
American Jobs Creation Act of 2004. Amended the tax code to comply with
World Trade Organization rulings on the Foreign Sales Corporation (FSC).
Conference report includes provisions on ethanol and biodiesel tax incentives.
Introduced June 4, 2004; passed House June 17, 2004; passed Senate July 15, 2004;
became P.L. 108-357 October 22, 2004.

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For Additional Reading
California Energy Commission. ABCs of AFVs: A Guide to Alternative Fuel
Vehicles. Sacramento, CA. November 1999.
Electric Drive Transportation Association. Technology/Vehicle Overview.
Washington, DC. Updated July 2006. [http://www.electricdrive.org]
Fuel Cells 2000. Online Fuel Cell Information Center. Washington, DC. Updated
July 2006. [http://www.fuelcells.org/]
Methanol Institute. Methanol Institute Homepage. Washington, DC. Updated May
2006. [http://www.methanol.org/]
National Biodiesel Board. Biodiesel Basics. Jefferson City, MO. Updated July
2006. [http://www.biodiesel.org/resources/biodiesel_basics/]
National Hydrogen Association. General Information. Washington, DC. Updated
July 2006. [http://www.hydrogenus.org/general/]
Natural Gas Vehicle Coalition. About NGVs. Washington, DC. Updated May 2003.
[http://www.ngvc.org/about_ngv/index.html]
Propane Vehicle Council. Propane Vehicle Council. Washington, DC. Updated
July 2006. [http://www.propanevehicle.org/]
Renewable Fuels Association. Ethanol Industry Outlook 2006. Washington, DC.
February 2006. [http://www.ethanolrfa.org/industry/outlook/]
U.S. Department of Energy, Clean Cities Program. Alternative Fuels Data Center.
Washington, DC. Updated May 2006. [http://www.eere.energy.gov/afdc//]
U.S. Department of Energy. Fuel Cell Report to Congress. Washington, DC.
February 2003.
——. National Hydrogen Energy Roadmap. Washington, DC. November 2002.
U.S. General Accounting Office. Energy Policy Act of 1992: Limited Progress in
Acquiring Alternative Fuel Vehicles and Reaching Fuel Goals. Washington,
DC. February 2000. RCED-00-59.
——. Tax Incentives for Petroleum and Ethanol Fuels. Washington, DC.
September 2000. RCED-00-301R.

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