How the Biofuel Tax Credit Works

Fossil Fuels that Aren't Fossils Yet
A soybean field on a farm in LaSalle County, Ill.
A soybean field on a farm in LaSalle County, Ill.
Willard Clay/Photographer's Choice/Getty Images

All fossil fuels are actually biofuels. Petroleum (as well as natural gas and coal) represent the fossilized remains of living organisms, mostly plants, that were trapped beneath the surface of the Earth millions of years ago and have been compressed by the weight of the overlying material into their burnable essence. Oil wells simply bring these fossilized plant remains back to the surface of the Earth where they can be processed into the gasoline that makes internal combustion engines run.

But why wait millions of years for our fuels? The old stuff is running out and produces lots of nasty pollution, particularly carbon emissions, while it burns. Biofuels created from crops also generate carbon emissions, but are generally considered less dangerous to the environment because the amount of carbon released is equal to the amount absorbed while they were grown, which makes them "carbon neutral" -- i.e., they don't introduce new carbon into the atmosphere. On the other hand, fossil fuels release carbon that would otherwise have remained safely buried under the ground.

Current generation biofuels are made primarily from food crops -- corn and soybeans are the favorites because there are well developed methods for turning them into fuel -- but this creates a problem. To produce enough fuel from corn and soybeans to run an entire country's internal combustion engines would require more growing space than is actually available in the country. And every food item that is converted to biofuel means that less is available for food, which drives up food prices. (Remember the law of supply and demand? It's in effect here too.) It isn't just corn and soybeans that are made more expensive, either. It's the price of meat from animals that are given these crops in their feed. Basically, prices go up all along the farming food chain when crops are diverted to biofuel.

Future biofuel production may be able to use inedible parts of crops or crops that are undesirable for food but that will grow in areas that won't normally support edible crops. But that's the future; we need new fuels now and so the U.S. government continues to support biofuels through tax breaks. On the next page, we'll see how those work.

One biofuel that can be used currently in many cars is ethanol, a form of alcohol that when mixed with gasoline is an effective fuel for internal combustion engines. Cars rated for E85, for instance, can use fuels that are 85 percent ethanol and 15 percent gasoline.

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