KEEP ETHANOL TAX CREDIT, ENCOURAGE BIOMASS-USA

WASHINGTON, May 17 (Reuters) - President George W. Bush's energy package,unveiled on Thursday, encourages use of "biomass" fuels, made from crops,trees or even landfill gases, and the retention of a tax break forethanol, the best-known of the so-called biofuels.Biomass is organic matter that can be broken down into chemicalbuilding blocks and used as an energy source to produce heat, fuel orelectricity. Farm state lawmakers and grower groups are eager to see morecrops used for fuel to help offset low grain prices.While the Bush administration's energy task force report suggested waysto spur development and use of renewable fuels, it set no targets fortheir future contribution to the U.S. energy mix."They can provide a reliable source of energy at a stable price, andthey can also generate income for farmers, landowners, and others whoharness them," the 163-page report said.Renewable energy, excluding hydropower, now provides 4 percent of U.S.energy, split evenly between electric generation and transportation fuels.The lumber and paper industries already use wood scraps to heatbuildings and fuel boilers to produce steam for manufacturing.As an inducement to develop the home-grown fuel, ethanol already has anexcise tax exemption worth 5.3 cents a gallon at the pump. Ethanol isdistilled from corn and used in a 9-to-1 blend with gasoline.The White House report suggested a tax credit for use of methane gasfrom landfills. It also proposed extension and expansion of the 1.7cents-per-kilowatt tax credit for electricity generated by wind orbiomass, and use of $1.2 billion from oil and gas drilling in the ArcticNational Wildlife Refuge to pay for research into alternative andrenewable energy sources including wind, biomass, solar and geothermal.Senate Democrats called the linkage of Arctic refuge drilling fees withrenewable fuel research an obvious attempt to defuse opposition to openingthe refuge to exploration."We really gain twice," argued Alaska Republican Frank Murkowski, aproponent of refuge drilling.He said the proposal effectively would convert fossil fuels intoalternative fuels in coming decades.The two most common biofuels, the report said, were ethanol andbiodiesel, a diesel-engine fuel that can be made from vegetable oils,animal fat or algae."Ethanol is the most widely used biofuel and its production hasincreased sharply since 1980, rising from 200 million gallons a year to1.9 billion gallons," the report said."Today, many states are considering phasing out the use of MTBE (methyltertiary butyl ether), an oxygenate additive for gasoline. If they do so,that will likely spur greater reliance on ethanol," it said.Backers say ethanol can play a useful role by increasing the oxygencontent of fuels and reducing harmful carbon monoxide emissions. Criticssay it can add to ozone pollution.Ethanol production could reach a record 2 billion gallons this year, anindustry trade group said. The Renewable Fuels Association said two dozenethanol plants went into production in the past two years and 40 more werescheduled for construction over the next two years."With the president's support, we are prepared to expand ethanol's rolein providing clean, domestic fuels," said Eric Vaught, president of theassociation.Earlier this week, Sen. Tom Harkin, Iowa Democrat, introduced a bill tophase out MTBE in three years and maintain the federal requirement to useoxygenated fuels in smoggy areas. California officials have asked for awaiver from the requirement to use oxygenated fuels because of problemswith MTBE.At present, there are 450,000 alternative-fuel vehicles in the UnitedStates and more than 1.5 million so-called flexible-fuel vehicles, whichcan use gasoline or gasoline blends.Ethanol plants consume more than 650 million bushels of corn a year, atiny percentage of the nearly 10 billion bushels of corn grown by Americanfarmers.The task force report also recommended a temporary income-tax creditfor people who purchase new hybrid or fuel-cell vehicles from 2002-07.Sen. Richard Lugar, an Indiana Republican who chairs the SenateAgriculture Committee, has backed legislation that would spend $49 millionannually on biofuels research for a six-year period.