The biofuel industry is growing optimistic that a broad range of agricultural feedstocks, including soybean oil, will be eligible for a valuable new tax credit intended to stimulate the production of sustainable aviation fuel.
The Treasury Department is expected to issue guidance as soon as September for the new tax credit, known as Section 40B, after the provision in the Inflation Reduction Act that authorized the incentive sought by the airline industry.
The tax credit, which took effect this year and runs through 2024, starts at $1.25 per gallon and can be worth as much as $1.75 per gallon, based on the carbon intensity of the fuel, what it's made from and how it's processed. The 40B credit was designed by Congress to serve as a bridge to a broader clean fuels production credit, known as 45Z, that takes effect in 2025.
The bill left it up to Treasury to make the final decision on the standard that would be used to measure the carbon intensity of the various fuel types that could qualify for the credits. The issue has divided the Biden administration and triggered a lobbying effort that has included the airlines, environmental groups and oil companies as well as biofuel producers.
The law, enacted a year ago, said Treasury could use an existing international standard, known by the acronym CORSIA or a “similar methodology.”
Because of the way it measures the indirect land use effects of growing crops such as corn and soybeans, a CORSIA standard would be difficult for many ag feedstocks to meet. But the airlines joined biofuel producers and oil industry in lobbying Treasury to use the Energy Department’s GREET model instead.
CORSIA is a global standard for aviation fuels by the International Civil Aviation Organization and has been favored, according to sources, by the U.S. Departments of State and Transportation as well as environmental groups.
Patrick Gruber, Gevo Inc.But Patrick Gruber, CEO of Gevo Inc., a Colorado-based company seeking to commercialize the production of SAF made from corn ethanol, is now expressing confidence Treasury has settled on using a “GREET-based system” rather than CORSIA, setting a key precedent for the 45Z credit in the process. Doing otherwise and excluding domestic feedstocks like corn ethanol would be “politically untenable,” he told Agri-Pulse. “If they didn’t do something rational, you’re going to see lawsuit after lawsuit after lawsuit,” Gruber said.
He said the 40B guidance is critical for attracting investment into the sector and will set a precedent for the 45Z requirements as well.
Gevo, which is in the early stages of trying to produce SAF from ethanol, broke ground last year on a facility in South Dakota that is projected to produce 55 million gallons per year and has a memorandum of understanding with Archer Daniels Midland aimed at converting up to 900 million gallons a year of the agribusiness giant’s ethanol production.
Making ethanol-based SAF commercially viable is expected to require further steps to lower the carbon intensity of corn production and ethanol, including carbon capture and sequestration via pipelines.
Paul Winters, director of public affairs and federal communications at Clean Fuels Alliance America, said he’s also been told by agency officials that Treasury will authorize a GREET-based standard, coupled with a separate model developed by Purdue University for measuring environmental impacts of biofuels.
SAF varieties that are similar to conventional biodiesel and renewable diesel “are going to meet the threshold for the tax incentive with those models,” Winters said.
Clean Fuels Alliance represents producers of biodiesel and renewal diesel as well as companies that also — or plan to — produce SAF, which can be made from the same feedstocks, including soybean oil and animal fats.
A bipartisan group of 16 senators, including several committee chairs and members of the Democratic and GOP leadership, signed a letter to Treasury Secretary Janet Yellen in June, urging the department to use the GREET model for the 40B tax credit.
“Failing to do so will prohibit the majority of the current SAF market from benefiting from this incentive, prevent us from making further investments in this technology and hinders carbon reduction,” the letter said.
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Assuming Treasury does go with a GREET-based system, the question is how much demand for agricultural feedstocks the tax incentives will create. SAF is more expensive to produce from feedstocks such as soybean oil than renewable diesel or biodiesel. An executive with Valero Energy Corp., a major refiner, said on an earnings call in 2022 that the cost difference was about 70 cents per gallon.
The new 40B tax credit could close much of that gap, according to a new Rabobank analysis, which found SAF made from conventional feedstocks such as vegetable oils could qualify for a credit of up to $1.57 a gallon, which is 57 cents more than the existing, $1-per-gallon tax credit for biodiesel.
Scott Gerlt, chief economist for the American Soybean Association, told Agri-Pulse he thinks the SAF tax credit will be worth closer to $1.30 a gallon if the fuel is made from soybean oil.
Still, some states are starting to add their own SAF incentives, too, to go with the federal tax credits. Starting this year, airlines that buy SAF in Illinois will be eligible for a tax credit of $1.50 a gallon, with a limit on the amount that can be made from soybean oil. A tax credit enacted recently in Washington state will be worth $1 to $2 a gallon.
Other states, including California, have low-carbon fuel standards that also can promote the use of SAF.
Airlines have pledged to use 3 billion gallons of SAF by 2030, 10% of their projected fuel consumption.
According to Rabobank, U.S. SAF production capacity is expected to total 750 million gallons in 2024 and reach 2.2 billion gallons by 2026. That total will include 500 million gallons from facilities in Paramount, California, and Houston operated by World Energy, a longtime biodiesel producer.
In the long term, SAF made from agricultural feedstocks is likely to face stiff competition from futuristic versions of the fuel that can be made from non-biobased sources, such as fuel that can be produced from electricity.
Still, the growing SAF market should help offset declining demand for corn ethanol in cars as more and more Americans switch to electric vehicles, providing “decades more support for biofuels and their feedstocks,” according to a Rabobank report.
“SAF really couldn’t come at a better time,” report author Owen Wagner, a senior analyst with RaboResearch, told Agri-Pulse.
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