Producers of biodiesel and renewable diesel who say federal biofuel mandates have not been enough to expand their markets sufficiently face a new challenge at the end of the year — the expiration of a $1-a-gallon tax subsidy that has helped maintain the industry for several years.
The blenders’ tax credit, known as 40A for the section of the law authorizing it, is slated to be replaced with a broader tax incentive created by the Inflation Reduction Act that would vary in value depending on the carbon intensity of the fuel.
The new 45Z clean fuel credit, which takes effect Jan. 1, is a mixed bag for the U.S. industry. The credit will vary widely depending on the feedstock used to produce the fuel, and it won’t be anywhere close to $1 a gallon when it comes to biodiesel and renewable diesel.
On the other hand, the 45Z credit will be limited to domestically produced fuel. Imported biodiesel and renewable diesel can qualify for the existing blenders’ tax credit.
Enter a bipartisan group of House members, led by Ohio Republican Mike Carey and New Hampshire Democrat Ann Kuster. They have introduced legislation to extend the existing 40A tax credit through 2025. The 40A credit goes to facilities that blend biofuels with petroleum diesel, not necessarily to the producer of the fuel, as will be the case with 45Z.
“Biodiesel is a homegrown resource that can support our long-term energy independence and support farmers, producers and energy workers right here in Ohio,” Carey said in a press release. “With America’s energy dominance in at stake, we’re working across the aisle to strengthen our supply of biodiesel for the years to come.”
The bill is mostly supported by fuel marketers and the trucking industry, all of which could benefit from the credit and lower fuel prices.
The groups endorsing the legislation include NATSO, which represents travel centers and truck stops, SIGMA: America’s Leading Fuel Marketers, the National Association of Convenience Stores, the American Trucking Associations, and the Truckload Carriers Association.
“Tax incentives for biodiesel and renewable diesel blending have worked to successfully extend fuel supply and incentivize fuel retailers to invest in low-carbon alternative fuels at a cost that is attractive to consumers,” said Doug Kantor, general counsel for the convenience stores group. “This legislation is key to supporting our industry’s continued investment in advanced renewable fuels.”
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The Clean Fuels Alliance America, which represents producers of biodiesel, renewable diesel and sustainable aviation fuel, hasn’t taken a position. A spokeswoman for the American Soybean Association, Wendy Brannen, said her group was not taking a position on the bill.
Paul Winters, a spokesman for Clean Fuels, said his group is currently monitoring the Treasury Department’s implementation of the 45Z credit and may take a position on the 40A extension if Treasury doesn’t issue guidance for the 45Z credit in a timely manner.
The 45Z guidance will include requirements for how climate-smart farming practices affect the value of the credit.
Winters said industry representatives met with Treasury officials recently to say they need the 45Z guidance or assurance of legal safe harbors by Sept. 1. Without clarity on 45Z, producers can’t sign off-take agreements for their product because there is no way to assign value to it, he said.
“Our focus is on pressuring Treasury to get the guidance and safe harbor out for 45Z. … That is what all of our members agree on,” said Winters.
University of Illinois economist Scott Irwin said the effort to extend the existing 40A “tells you everything you need to know about winners and losers of the shift” from today's credit to 45Z.
Scott Irwin, University of IllinoisLosers include blenders of imported biodiesel and renewable diesel, which won’t qualify for 45Z. “We don’t know much it will slow down imports but I would say it would put a serious dent in them because they’re not going to be competitive on price,” Irwin said.
On the other hand, winners from 45Z include domestic producers that import feedstocks with low carbon scores, including used cooking oil and animal fats. Imports of animal fat and vegetable oil more than doubled between 2020 and 2023, according to USDA. Meanwhile, imports of used cooking oil went from less than 300 million pounds in 2021 to more than 3 billion pounds in 2023, according to American Soybean Association economist Scott Gerlt.
The 45Z credit is expected to be worth more than 60 cents a gallon for both biodiesel and renewable diesel if it’s made from used cooking oil or animal fats, and more than 70 cents a gallon if produced from corn oil that’s a byproduct of ethanol production. The credit is estimated to be worth closer to 30 cents a gallon for biodiesel or renewable diesel made from soybean oil.
Soybean oil and other plant-based oils are “going to be at a considerable disadvantage” to those feedstocks with lower carbon scores, Irwin said.
Nevertheless, Irwin doubts there would be sufficient political support in Congress or from the Biden administration to extend the 40A credit, which isn't tied to carbon scores.
“That would be disavowing one of the important components of the IRA act in their Green New Deal. I just don't see that having traction and the momentum in Congress,” he said.
According to the Energy Information Administration, 2.59 billion gallons of renewable diesel were produced in 2023, up from 1.5 billion gallons in 2022. Biodiesel production grew from 1.62 billion gallons in 2022 to 1.7 billion gallons last year.
Production of renewable diesel continued to grow in the first four months of this year, reaching 986 million gallons, compared to 726 gallons during the same period in 2023, EIA said. Biodiesel production was relatively flat during the same period.
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