The Biden administration’s long-awaited guidance for a new tax subsidy for sustainable aviation fuel does little by itself to jump-start the production of SAF made from agricultural feedstocks like corn ethanol. That's because the most important set of rules is yet to come.
The Treasury Department issued 41 pages of guidance Tuesday for the new SAF tax credit, known as 40B, that would allow corn ethanol to qualify if the grain is grown with three practices that are considered climate-smart: no-till, cover crops and energy-efficient fertilizer.
Soy oil would qualify only if the soybeans were grown using no-till and cover crops on the same acreage.
Ag Secretary Tom VilsackSAF producers will be required to have certification that USDA standards for climate-smart agriculture, or CSA, were followed for eligible crops. The certifier would have to audit records from farmers and from the crop’s supply chain.
Farmers could be subject to fines and jail time for fraudulent claims. CSA certificates that would accompany eligible crops would include a statement that the “farmer understands that fraudulent use of the certificate may subject the … farmer and all parties making such fraudulent use to a fine or imprisonment, or both, together with the costs of prosecution.”
A relatively small amount of U.S. corn production would meet all three conditions, and the cover crop requirement would limit eligibility for soybeans. But administration officials say that’s not all that important because SAF isn’t yet being made from corn ethanol anyway. What’s more critical is the guidance that will be issued for a tax credit, called 45Z, that will replace 40B in 2025.
Secretary of Agriculture Tom Vilsack said the 40B guidance lays the groundwork for ensuring that agricultural feedstocks qualify for 45Z. “This is the first time that we will see the recognition of the climate benefits of climate-smart agricultural practices,” he said.
He suggested that more farming practices, and varying commodities, will qualify for the subsidy as more is learned about the impact of conservation measures on greenhouse gas emissions.
The Treasury Department is expected to quickly issue a formal request for information on what should be in the 45Z guidance. The department has not said when it will release that guidance.
The 40B guidance “sends a clear signal to the market and to American agriculture that they are going to be part of this exciting new future and 2025 and beyond,” Vilsack told reporters.
Treasury Secretary Janet Yellen told the House Ways and Means Committee that the tax subsidies will “catalyze innovation in the aviation industry, and incentivize the production of cleaner and more sustainable aviation fuels.” She said the 40B guidance should “provide the clarity that people have been looking for.”
Industry officials told Agri-Pulse that the guidance’s tight restrictions on ag practices reflected resistance from environmental groups and that they expect another pitched battle over the 45Z rules.
Industry officials were particularly frustrated that farmers would be required to employ all of the climate-smart practices for their crops to qualify as eligible SAF feedstocks. "It’s really going to disadvantage producers in some areas of the country in some years,” said one industry official.
But this official is hopeful based on what he heard from the administration that Treasury will loosen the rules for 45Z. He said a senior USDA official told industry groups on Monday that the 45Z guidance won’t be nearly as prescriptive as it is for 40B.
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A tax lobbyist who works in the energy sector told Agri-Pulse that the uncertainty about SAF incentives is slowing investment in the sector and making companies nervous. “People in the sector that either grow the feedstocks or make the fuels or use the fuels are starting to get extremely anxious and upset, because they just don't see this ending well,” the lobbyist said.
The airline industry has committed to using 3 billion gallons annually by 2030, or 10% of its projected fuel needs. Agricultural commodities, used cooking oil and animal fats are the largest near-term sources of feedstocks.
The 45Z rules will take a significant amount of time to develop, too, the lobbyist said. Treasury has “a ton of substantive, technical scientific work to do, which will take time.”
The administration separately released updates to the Energy Department’s GREET model for estimating the carbon intensity of biofuel feedstocks. The changes included an update to how the model accounts for indirect land use changes from biofuel crop production. The model is intended to be used with the 45Z credit.
Both tax credits were created by the Inflation Reduction Act that Democrats pushed through Congress in 2022.
The 40B credit 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. The Treasury Department allows ethanol to qualify as a SAF feedstock, if the three climate-smart farming practices are used in production of the corn.
The 45Z tax credit will be worth a maximum of $1.75 a gallon for SAF.
Geoff Cooper, RFAGeoff Cooper, president and CEO of the Renewable Fuels Association, said he was glad that the GREET model was updated to include the impact of carbon capture and sequestration and use of renewables in biorefineries.
“However, RFA believes less prescription on ag practices, more flexibility, and additional low-carbon technologies and practices should be added to the modeling framework to better reflect the innovation occurring throughout the supply chain,” Cooper said in a release.
He also said that “45Z is where the rubber really meets the road. We look forward to working with USDA and other agencies across the administration to ensure 45Z is implemented in a way that truly swings the door wide open for farmers and ethanol producers to participate in the enormous decarbonization opportunity.”
The American Coalition for Ethanol said in an initial statement that the updated GREET model inflated the impact of land-use change but later backtracked on that assessment. The group said corn farmers and ethanol producers would still "face headwinds to produce qualifying corn ethanol feedstock for SAF given the all or none requirement to bundle CSA practices."
The American Soybean Association said the guidance "goes sideways" for soybeans by requiring farmers to use both conservation tillage and cover crops.
"ASA is very supportive of using climate-smart agriculture practices to improve CI reductions, but specifying only two practices out of a variety of sustainability measures will further restrict soybean oil use as a SAF feedstock. Adding to concerns, no-till and cover cropping are feasible only for soybean farmers in certain parts of the soy growing region, which means regional disparity is likely," the group said.
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