Biofuels industry urges US administration to fast-track clean fuel tax credit guidance

Source: By Eamonn Brennan, S&P Global • Posted: Thursday, May 16, 2024

Representatives from the US biofuels industry urged the administration to finalize and publish guidance for a significant new renewable fuel production tax credit as soon as possible in a letter published May 15.

The letter, signed by 25 trade associations representing producers, blenders, retailers and feedstock providers, including corn growers, called on US Treasury Secretary Janet Yellen to “move ahead with all possible urgency” to “ensure there is no interruption in the development of these facilities and production of these fuels.”

“The clean fuels marketplace is a complicated ecosystem that is tied in many cases to agricultural inputs and feedstock production, sales of fuel and futures, allocations to third-party marketers and other factors that require many months of advance understanding of the new tax structure,” the letter said. “With [the credit] set to take effect January 1, 2025, our member companies and organizations may face significant headwinds and business risk if this guidance is not published promptly.”

High guidance stakes

The IRC Section 45Z Clean Fuel Production Credit, colloquially known as 45Z, is a federal tax subsidy outlined in the 2022 Inflation Reduction Act designed to incentivize the domestic production of fuels with 50% lower lifecycle greenhouse gas emissions than petroleum. It will replace several expiring tax credits for the production of specific kinds of biofuels but, unlike those past provisions, will be “technology neutral” and designed to subsidize production of any kind of fuel that can meet the GHG reduction target.

According to the Congressional Research Service, the credit is also designed to scale beyond the 50% reduction threshold, up to a maximum of $1/gal for nonaviation fuel and $1.75/gal for aviation fuel. Producers that reduce carbon intensity scores beyond 50% are eligible for an additional 2 cents per point of carbon intensity reduction; a 60% reduction would net an additional 20 cents/gal.

Those subsidies could be significant sources of revenue for biofuels producers, but who exactly will be able to qualify — and what techniques they will need to employ at various stages of the supply chain — remain uncertain.

“U.S. biodiesel and renewable diesel producers are facing uncertainty as the transition from the biodiesel and renewable diesel blender credit to the producer credit,” Clean Fuels Alliance America Vice President of Federal Affairs Kurt Kovarik said. “They are facing difficulties already as they try to negotiate feedstock and fuel offtake contracts for next year. The need for policy certainty is urgent.”

The letter was also signed by the National Corn Growers Association and the Renewable Fuels Association, large groups who lobby on behalf of ethanol producers who are pushing to participate in the IRA’s clean fuel credits despite environmentalists’ suspicions about the carbon emissions and land use complications of ethanol production. US Secretary of Agriculture Tom Vilsack has encouraged corn growers to begin using climate-smart agricultural practices while insisting US agriculture will benefit from the administration’s desire to find and produce more low-carbon fuel.

Hints from the SAF credit fight

A similar dynamic played out in the fight for eligibility for the Inflation Reduction Act’s 40B credit, which specifically incentivized the production of sustainable aviation fuel that met the 50% emissions reduction target. The guidance for that credit, released April 30, was delayed by nearly two months from its initial deadline, the result of a lengthy interagency process to update the Department of Energy’s GREET model to codify how fuel made from corn and soybeans would be scored on a lifecycle GHG emissions scale.

In the end, corn feedstocks needed to be the product of a “bundle” of climate-smart agricultural practices: no-tilling, cover cropping, and enhanced efficiency fertilizer. Without all three, ethanol could not qualify for SAF production credits.

Industry response to the 40B guidance was mixed. While some lamented the need for all three practices and called land use concerns inflated, most groups were pleased the government had for the first time codified the impact of such techniques on emissions reduction.

Mostly, because the timing of the announcement came in the midst of spring planting season, the 40B guidance was seen as symbolic, at least for 2024.

“Treasury’s SAF guidance speaks more to the administration codifying the important role CSA practices play in decarbonizing liquid fuels than the amount of ethanol-to-jet that will qualify for the 40B credit,” American Coalition for Ethanol President Brian Jennings said.

Sustainable aviation fuel could represent a “$36 billion industry,” Vilsack said in April, but the market remains nascent. In 2022, the administration launched the SAF Grand Challenge, which aims to boost SAF production by at least 3 billion gallons/year by 2030 and 35 billion gallons/year by 2050. Currently, however, SAF accounts for just 0.05% of jet fuel worldwide. At the time, Vilsack hinted the 45Z model could look similar to 40B.

“The guidance provided by the Treasury Department is going to provide a clear pathway for how best to qualify for the 40B tax credit, but also create a process to expand opportunities under 45Z,” Vilsack said. “It sends a clear signal to the market that they are going to be a part of this exciting new future in 2025 and beyond.”

“45Z is where the rubber really meets the road,” Renewable Fuels Association President Geoff Cooper said.

|