Alternative Fuels and Advanced Technology Vehicles: Issues in Congress

Alternative Fuels and
Advanced Technology Vehicles:
Issues in Congress
Updated February 1, 2008
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division

Alternative Fuels and Advanced Technology Vehicles:
Issues in Congress
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
In the 110th Congress, alternative fuels and advanced technology vehicles have
received a good deal of attention, especially in discussions over U.S. energy security.
In his January 24, 2007, State of the Union Address, President Bush called for the
increased use of renewable and alternative motor fuels to 35 billion gallons annually
by 2017. U.S. consumption was roughly five billion gallons in 2006. Therefore,
such an initiative would mean a seven-fold increase in the use of these fuels over 11
On December 19, 2007, President Bush signed the Energy Independence and
Security Act of 2007 (EISA, P.L. 110-140). EISA requires an increase in renewable
fuel consumption to 9.0 billion gallons in 2008 and 36 billion gallons in 2022.
Further within the 36-billion-gallon requirement, by 2022 the new law mandates the
use of 21 billion gallons of “advanced biofuels,” defined as fuel derived from
renewable biomass other than corn starch, with 50% lower lifecycle greenhouse gas
emissions compared to petroleum fuels.
The 109th Congress passed the Energy Policy Act of 2005 (EPAct 2005, P.L.
109-58), which contains many provisions relevant to alternative fuels and advanced
technology vehicles. Among its provisions, the act expanded existing tax incentives
for the purchase of advanced vehicles, authorized R&D funding for hydrogen fuel
and fuel cells, and required that the nationwide gasoline supply contain a minimum
amount of ethanol or other renewable fuel. EPAct 2005 was signed by President
Bush on August 8, 2005.

In troduction ......................................................1
Most Recent Developments..........................................1
Background and Analysis...........................................2
Congressional Interest..........................................2
Legislative Background.....................................2
Current Issues.............................................3
Fuel Tax Incentives............................................3
Ethanol and MTBE............................................4
Cellulosic Biofuels.............................................6
Ethanol Imports...............................................7
Vehicle Purchase Requirements...................................8
Vehicle Purchase Tax Incentives.................................10
Biodiesel ...................................................10
Hydrogen and Fuel Cells.......................................11
Hybrid Vehicles .............................................12
For Additional Reading............................................13

Alternative Fuels and
Advanced Technology Vehicles:
Issues in Congress
High crude oil and gasoline prices over the past few years 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 In spring 2006, high oil global oil prices (spurred by high demand)
and refinery constraints in the domestic gasoline supply pushed U.S. gasoline pump
prices to historic highs. In fall 2006 and winter 2007, gasoline prices eased
somewhat, but in spring 2007 returned to those highs, where they have remained.
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
On December 19, 2007, President Bush signed the Energy Independence and
Security Act of 2007 (EISA, P.L. 110-140).4 EISA requires an increase in renewable
fuel consumption to 9.0 billion gallons in 2008 and 36 billion gallons in 2022.
Further, within the 36-billion-gallon requirement, the new law mandates the use of

21 billion gallons of “advanced biofuels,” defined as fuel derived from renewable

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: Issues for the 110th Congress, 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.
4 For more information on EISA, see CRS Report RL34294, Energy Independence and
Security Act of 2007: A Summary of Major Provisions.

biomass other than corn starch, with 50% lower lifecycle greenhouse gas emissions
compared to petroleum fuels.
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 alternative5
fuels and advanced vehicle technologies.
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 fleet 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 began working on comprehensive energy legislation in 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), which
was signed by President Bush on August 8, 2005.
The Energy Independence and Security Act of 2005. Continued
pressure on energy prices and concerns over energy security after passage of EPActth
2005 led to continued discussion of energy policy in the 110 Congress. On
December 19, 2007, President Bush signed the Energy Independence and Security
Act of 2007 (EISA, P.L. 110-140). Among other provisions, EISA expanded the

5 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.

renewable fuel mandate in EPAct 2005, and significantly tightened federal fuel
economy (CAFE) standards.
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;6 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.
EISA requires an increase in fuel economy from passenger cars and light trucks to

35 miles per gallon (mpg) combined in 2020 from roughly 25 mpg today.

Ongoing technological developments in hybrid vehicles, ethanol fuel, 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 and environmental impacts associated with production of
ethanol or hydrogen as major transportation fuels, 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. As crude oil and
gasoline prices returned to historic highs in 2007 and 2008, these supply concerns
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 and renewable diesel 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

6 For more information on fuel economy standards, see CRS Report RL33413, Automobile
and Light Truck Fuel Economy: The CAFE Standards.

biodiesel (e.g., LPG). In addition, there are tax credits for small ethanol and
biodiesel producers ($0.10 per gallon).7
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
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) extended the biodiesel tax credit
through 2008. In addition, P.L. 109-58 expanded the credit to include “renewable
diesel,” which is produced from a different process than biodiesel and results in a
fuel with somewhat different chemical characteristics. In recent guidance on the tax
credit, the Internal Revenue Service ruled that renewable diesel includes synthetic
diesel fuel produced from vegetable oils at petroleum refineries.8 Most biodiesel
producers are small plants, and many biodiesel producers are concerned that this
decision could lead to a shift away from biodiesel production to renewable diesel
production at large refineries.
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).9 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 million10) must use reformulated gas; areas with less

7 For more information on tax and non-tax incentives for ethanol and biodiesel, see CRS
Report RL33572, Biofuels Incentives: A Summary of Federal Programs, by Brent D.
Yacobucci. For a detailed discussion of ethanol tax incentives, see CRS Report RL32979,
Alcohol Fuels Tax Incentives, by Salvatore Lazzari.
8 U.S. Internal Revenue Service, Notice 2007-37: Renewable Diesel, April 23, 2007.
9 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.
10 As classified under the old 1-hour ozone standard that was replaced with a new, 8-hour

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).11
Before amendment by the Energy Policy Act of 2005, the Clean Air Act
required that RFG contain at least 2% oxygen by weight.12 Refiners met this
requirement by adding a number of ethers or alcohols, any of which contains oxygen
and other elements. Until about 2003, 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
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.13 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 (USDA),
roughly 20% of the nation’s corn crop was used in 2006/2007 to produce the
competing oxygenate, ethanol.14 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

10 (...continued)
standard in 2004.
11 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.
12 In the case of MTBE, this equates to roughly 11% by volume.
13 Renewable Fuels Association, “New Jersey Bans MTBE,” Ethanol Report, Issue #226,
July 15, 2005.
14 USDA estimates the in 2007/2008, that percentage will increase to 24%. U.S. Department
of Agriculture, Economic Research Service, Feed Outlook, January 15, 2008.

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
The Energy Policy Act of 2005 (P.L. 109-58) contains numerous MTBE and
ethanol provisions. It repealed the Clean Air Act requirement to use MTBE or other
oxygenates. In place of this requirement, the law established 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.15 The Energy
Independence and Security Act of 2007 (P.L. 110-140) expanded this mandate,
requiring the use of 9.0 billion gallons of renewable fuels in transportation fuel16 in

2008, and 36 billion gallons in 2022.

Cellulosic Biofuels
Ethanol, the most significant biofuel in the United States, is usually produced
from corn. However, corn is a key animal feed, and is also used for human
consumption. Further, corn is a resource-intensive crop, requiring significant use of
chemical fertilizers and generally grown on prime farmland. There is growing
interest in developing biofuels that require less energy to produce and have a smaller
environmental footprint.
Biofuels produced from cellulosic materials such as fast-growing trees, prairie
grasses, or agricultural wastes are seen as a potential strategy for reducing the
environmental impact of biofuels while expanding the United States’ ability to
displace petroleum fuels. The potential supply of these feedstocks is abundant,
which is why it is expected that future expansion of the U.S. biofuels industry will
be in this area.
However, breaking down cellulose and converting it into fuel requires complex
chemical processing. Starches (such as corn) and sugars (such as cane sugar) are
easily fermented into alcohol, while cellulose must be broken down into sugars or
starches through enzymatic or thermochemical processes before fermentation.

15 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.
16 While the original mandate in P.L. 109-58 covered only gasoline, the expanded mandate
applies to all transportation fuels.

Alternatively, biomass can be converted into synthesis gas,17 which can then be used
to produce fuels. Regardless of the pathway, processing cellulose into fuels is
currently prohibitively expensive relative to other conventional and alternative fuel
options. Therefore, R&D has focused on lowering the costs of enzymatic and other
processing techniques.
Further, questions remain about the feasibility of these fuels, as well as the
ultimate environmental footprint — many of the proposed feedstocks have never
been grown on a large scale. Therefore, R&D is also focused on increasing the yield
of potential biofuel crops, developing harvesting techniques, and finding ways to
limit the environmental impact of dedicated energy crops.
The Energy Policy Act of 2005 included provisions to promote the development
of cellulosic biofuels. These include an authorization for increased research and
development funding at the Department of Energy; grants, loans, and loan guarantees
for the development of cellulosic biofuels; per-gallon incentives for the first 1 billion
gallons of domestic production; and a mandate that gasoline contain at least 250
million gallons of cellulosic ethanol annually starting in 2013.
On December 20, 2006, President Bush signed the Tax Relief and Health Care
Act of 2006 (P.L. 109-432). Among other provisions, this tax law established a 50%
depreciation allowance for cellulosic ethanol plants placed in service before January

1, 2013, subject to certain limitations.

The Energy Independence and Security Act of 2007 expanded the renewable
fuel mandate in EPAct 2005, and established specific requirements for “advanced
biofuels” — defined as fuels produced from feedstocks other than corn starch, and
with 50% lower lifecycle greenhouse gas emissions than petroleum fuels. Of the 36
billion gallons of renewable fuel required in 2022, 21 billion gallons must be
advanced biofuels; within that mandate, there are specific carve-outs for cellulosic
biofuels and biomass-based diesel fuels.
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

17 A mixture of hydrogen and carbon monoxide that can be used to produce a variety of
chemicals and fuels.

However, under certain conditions imports of ethanol from Caribbean Basin
Initiative (CBI) countries are granted duty-free status.18 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. In recent years, these imports have
reached as high as 5% of the U.S. ethanol market. 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.
In addition to the concerns over imports of duty-free ethanol from CBI
countries, there is growing concern that a large portion of ethanol otherwise subject
to the duties is being imported duty-free through a “manufacturing drawback.”19 If
a manufacturer imports an intermediate product, then exports the finished product or
a similar product, then that manufacturer may be eligible for a refund (drawback) of
up to 99% of the duties paid. There are special provisions for the production of
petroleum derivatives.20 In the case of fuel ethanol, the imported ethanol is used as
a blending component in gasoline, and jet fuel (considered a like commodity) is
exported to qualify for the drawback.21 Some critics estimate that as much as 75%
or more of the duties were eligible for the drawback in 2006. Therefore, critics
question the effectiveness of the ethanol duties and the CBI exemption.
On December 20, 2006, President Bush signed the Tax Relief and Health Care
Act of 2006 (P.L. 109-432). Among other provisions, the act extended the duty on
imported ethanol through December 31, 2008, but did not address the duty drawback
provisions or the CBI preference.
Vehicle Purchase Requirements
The Energy Policy Act of 1992 established mandatory alternative fuel vehicle
purchase requirements for various vehicle fleets.22 Under the law, 75% of the
passenger vehicles purchased by federal and state vehicle fleets must be capable of

18 For more information on ethanol imports from CBI countries, see CRS Report RS21930,
Ethanol Imports and the Caribbean Basin Initiative, by Brent D. Yacobucci.
19 For more information on drawbacks, see U.S. Customs Service, Drawback: A Refund for
Certain Exports, Washington, February 2002.
20 19 U.S.C. 1313(p).
21 Peter Rhode, “Senate Finance May Take Up Drawback Loophole As Part Of Energy Bill,”
EnergyWashington Week, April 18, 2007.
22 For purposes of compliance with EPAct 1992, a covered vehicle fleet is one operated by
an agency or company in a metropolitan area with at least 20 passenger vehicles in one

operating on alternative fuels; 90% of the vehicles purchased by alternative fuel
providers23 must be alternative fuel vehicles.24
The alternative fuel vehicle provisions of EPAct 1992 have been criticized as
ineffective because, while EPAct 1992 requires the purchase of vehicles capable of
operating on alternative fuels, 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.25
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. Further, Section 703 of
EPAct 2005 allows state and fuel provider fleets to petition the Department of Energy
(DOE) to waive the vehicle purchase requirement if the fleet certifies other fuel-
saving measures (e.g., using higher-efficiency conventional vehicles or hybrids).
On January 28, 2008, President Bush signed the National Defense Authorization
Act for Fiscal Year 2008 (P.L. 110-181). Among other provisions, the law amends
the definition of “alternative fuel vehicle.” Under the new definition, fleets covered
by EPAct 1992 will be granted credits for the purchase of hybrid, advanced diesel,26
and fuel cell vehicles, in addition to those alternative fuel vehicles already allowed.
In addition to the requirements for federal, state, and fuel provider fleets, EPAct
1992 grants the 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

23 Alternative fuel providers are businesses that sell or distribute alternative fuels.
24 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.
25 Center for Biological Diversity v. Abraham, N.D. Cal., No. CV-00027.
26 Light-duty diesel vehicles that meet specified emissions standards.

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


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
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 expanded and extended 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.27
In the case of hybrid and advanced diesel vehicles, the number of vehicles
eligible for the credit is limited for each vehicle manufacturer. Starting the second
calendar quarter after a manufacturer sells the 60,000th vehicle eligible for the credit,
the credit for that manufacturer’s vehicles is reduced. Currently, only Toyota and
Honda have sold enough vehicles to trigger a phaseout. For Toyota (and Lexus)
hybrids purchased after September 30, 2006, the credit was reduced by 50%; the
credit was reduced to 25% for vehicles purchased after March 31, 2007, and is zero
for vehicles purchased after September 30, 2007. Honda’s phaseout began January
1, 2008, and the credit for Honda vehicles will reach zero on January 1, 2009. Other
manufacturers have yet to hit the 60,000 vehicle mark.28
Biodiesel is a synthetic diesel fuel produced from oils, including soybean and29
canola oils, animal fats, and recycled cooking grease. 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

27 For more information on vehicle tax incentives, see CRS Report RS22351, Tax Incentives
for Alternative Fuel and Advanced Technology Vehicles, by Brent D. Yacobucci.
28 For more information on the hybrid vehicle tax credit, see Internal Revenue Service,
Summary of the Credit for Qualified Hybrid Vehicles, at [
article/0,,id=157632,00.html], updated December 11, 2007.
29 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.

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
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) extended
these credits through 2008. Further, EPAct 2005 established a credit of $0.10 per
gallon for small agri-biodiesel producers, and a $1.00-per-gallon credit for
“renewable diesel” — diesel fuel produced from biomass through a different process
than the biodiesel production process. While these tax credits generally do not make
biomass-based diesel fuels less expensive than conventional diesel, they do help
make them more cost-competitive.
Hydrogen and Fuel Cells
Over the past few years, interest has grown substantially in hydrogen fuel and
fuel cells.30 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.31
Because of the potential benefits from hydrogen and fuel cells, and because of
the existing technical and cost barriers to their commercialization, the Bush

30 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.
31 For example, depending on the technology used, processing coal into hydrogen could lead
to significantly higher emissions of toxic compounds and carbon dioxide.

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 (Chrysler,
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 requested $1.8
billion between FY2004 and FY2008 for both initiatives, including a $720 million
increase in funding from earlier appropriations. Over that time, Congress
appropriated a total of $1.4 billion for the initiatives.32 The Energy Policy Act of
2005 authorizes a total of $3.3 billion through FY2010 for fuel cell and hydrogen
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. As noted earlier,
Congress did tighten fuel economy standards for all vehicles in the Energy
Independence and Security Act of 2007 (P.L. 110-140).
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.34 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 January 2008, Ford, General Motors, Honda, Nissan,
Mazda, and Toyota offered 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

32 Congress agreed to increase funding for hydrogen and fuel cell research from $185 million
in FY2003 to $266 million in FY2004, $305 million in FY2005, $335 million in FY2006,
$335 million for FY2007, and approximately $400 million for FY2008.
33 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.
34 For more information on hybrid vehicles, see CRS Report RL30484, Advanced Vehicle
Technologies: Energy, Environment, and Development Issues, by Brent D. Yacobucci.

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).
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 January 2008. []
Fuel Cells 2000. Online Fuel Cell Information Center. Washington, DC. Updated
January 2008. []
Methanol Institute. Methanol Institute Homepage. Washington, DC. Updated
January 2008. []
National Biodiesel Board. Biodiesel Basics. Jefferson City, MO. Updated December

2006. []

National Hydrogen Association. General Information. Washington, DC. Updated
January 2007. []
Natural Gas Vehicle Coalition. About NGVs. Washington, DC. Updated August

2007. []

Propane Education and Research Council. Propane Vehicle Fleets. Washington,
DC. Updated May 2007. []
Renewable Fuels Association. Ethanol Industry Outlook 2007. Washington, DC.
February 2007. []
U.S. Department of Energy, Clean Cities Program. Alternative Fuels Data Center.
Washington, DC. Updated September 2007. [
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.
U.S. Internal Revenue Service. Hybrid Cars and Alternative Fuel Vehicles. Updated
December 11, 2007. [,,id=157632,