Farm groups are warning the Biden administration against requiring farmers to implement specific groups of climate-smart farming practices in order for their crops to qualify for a valuable new clean fuels tax credit
Rules for a temporary tax credit, known as 40B, for sustainable aviation fuel that expires Dec. 31 require corn farmers to follow three separate practices, no-till, cover crops and use of energy-efficient fertilizer. The Treasury Department is currently considering rules for the 45Z tax credit, which will replace 40B on Jan. 1 and apply to renewable diesel and other biofuels in addition to SAF.
The 45Z credit, which came from the Inflation Reduction Act, will apply to the domestic production of clean transportation fuels between 2025 and 2027.
The 40B guidance allowed oils using corn and soy feedstocks to qualify for the credit if the crops are grown using the bundles of climate-smart practices. Corn ethanol qualifies if the grain is grown with no-till, cover crops and energy-efficient fertilizer. Soybeans are required to be grown using no-till and cover crops.
Agriculture Secretary Tom Vilsack announced a request for information earlier this year that received 260 comments. USDA then held three consultations with stakeholders. The focus of these discussions was on the quantification, reporting and verification of greenhouse gas emissions tied to agriculture-based biofuel feedstocks.
The RFI and consultations were not tied specifically to upcoming 45Z guidance, but as Vilsack said in announcing these efforts, it could help shape USDA’s input to Treasury on the credits.
In public comments, USDA received input largely pushing for a more flexible approach to climate-smart agriculture practices and no bundling requirements. Other comments from some environmental groups urged against the use of agricultural feedstocks entirely.
“USDA aims to support a comprehensive, science-based strategy to improve data, models and tools needed to quantify the impact of conservation practices on greenhouse gas emissions and carbon sequestration, and could set the foundation for the 45Z tax credit and other future policies, ensuring that future resources are directed to the most effective practices,” a department spokesperson said in a statement.
Mitchell Hora, an Iowa farmer and CEO of ContinuumAg, an agricultural consulting company, said 45Z has the potential to have dramatic ripple effects through the agriculture industry at home and abroad. However, if bundling requirements remain in effect, it could stifle this opportunity.
Only about 3% of corn and 7% of soybeans would qualify for 40B under the bundling requirements, Hora said.
Mitchell HoraUSDA has a lengthy list of climate-smart practices. Hora said, and it would be more beneficial to let farmers select from a greater range of these rather than complying with a one-size-fits-all bundle.Hora proposed a GREET model based-feedstock calculator method that would let farmers choose from a longer list of practices. He said using the bundled approach required for the 40B credit doesn't necessarily yield the lowest carbon intensity (CI) score. It rewards some producers over others who may be able to achieve lower scores with alternative practices, he said.
Given the limitations for producers under the bundling approach, there could be a greater reliance on carbon pipelines for biofuel producers to lower CI scores, Hora added.
The bundling concept assumes that practices will work together in every environment across the country. However, from an agronomic perspective, this is not always the case, said Sean Arians, vice president of sustainable production and value chain engagement at the National Corn Growers Association.
Arians said cover crops, for example, don’t always have the same agronomic or economic benefits in northern states as in other states. Arians said the consequence of the bundling could be that fewer farmers are incentivized to participate.
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“We’re really kind of picking winners and losers based off of geographies that are more conducive to longer growing seasons, that can grow cover crops and qualify for the three practices,” Arians said. “That's not helpful when we're looking at the demand for SAF, and especially the opportunity to utilize ethanol in the SAF. We're limiting the potential impact that renewable fuels can have in the SAF program.”
Sean AriansSteffen Mueller, principal economist at the Energy Resources Center at the University of Illinois at Chicago, said the bundling requirement included in 40B was a good first step and raised the right issues.
However, with 45Z, he said more practices should be added and there could be more variations in how practices are measured. Some climate-smart practices are difficult to measure and will need default values when considering carbon reductions or credits, he said. Other practices such as energy-efficient fertilizer could have individualized measurements and could be a grower-level variable for credit purposes.
Some environmental groups, like the Environmental Defense Fund, World Wildlife Fund and World Resources Institute, have raised concerns with even using agricultural commodities as biofuel feedstocks.
Those groups said in comments to USDA that more research is necessary to understand the tie between climate-smart practices and direct carbon reduction, and how increased biofuel demand could impact land use.
WWF urged USDA to avoid using the GREET model for measuring carbon intensity of biofuel feedstocks. In its comments, the group said the GREET model underestimates emissions impacts of induced land use change. Using this model could allow biofuel tax programs to be a driver of conversion of grasslands and other threatened habitats, which undermine the climate value. Rather, the agency should rely on the International Civil Aviation Organization's CORSIA model, WWF said.
Farm groups argue the CORSIA model unfairly penalizes U.S. crops for environmental impacts in other countries.
EDF did applaud agency efforts to better understand emissions attached to agricultural production and to increase interest in carbon reduction programs. To further increase adoption of climate-smart practices, EDF also recommends moving away from the bundled approach given geographic variabilities and the unique needs of each farming operation.
“EDF recognizes that agriculture’s unique production system creates enormous variability and poses difficulties in understanding the climate impacts of individual production methods,” the group wrote in its comments.
“But with credible measurement, monitoring, reporting, and verification (MMRV), combined with appropriate incentives, we are confident that new policies led by this administration can lead to additional carbon savings from the production of agricultural feedstocks while enhancing the productivity and profitability of our nation’s farms.”
Despite the opposition of farm groups to building requirements, Hora said USDA officials continue to talk about expanding the use of that approach.
“They are hearing loud and clear that bundles are a bad idea,” Hora said. “But for some reason, it keeps coming up … It would be the number-one thing that would ruin 45Z and the SAF opportunity.”
An argument for keeping the bundled system is that it’s easier for farmers. However, Brad McDonald, a farmer and chief operating officer of ContinuumAg, said that’s not actually the case, as producers would have to provide a similar level of documentation and evidence to verify the practices were implemented as they would to run a CI score through a model.
He said the goal should be increasing the percentage of acres using climate-smart practices, rather than trying to define and increase the number of “climate-smart farmers.” If the 45Z guidance takes on the same bundled approach, farmers will not be properly incentivized to implement these practices.
“The solution here is not to expand bundles,” Brad said. “The solution here is to abandon bundles."
From conversations with members of USDA, Hora said the agency appears to be trying to put together a rule on climate-smart agriculture that Treasury can point to for 45Z. He said the goal appears to be developing a climate-smart concept that can be applied beyond the SAF tax credit, which is a positive idea but has led to hold-ups in the upcoming guidance.
Steffen Mueller
Mueller, the University of Illinois at Chicago economist, said if USDA “gets it right,” there’s a massive opportunity for agriculture, sustainability and reducing emissions through the transportation sector through biofuels. While he said the 40B guidance on bundling was not perfect, it was a positive step, and he applauded USDA for taking in all the comments and input for 45Z.
“It’s a big task, it’s a big exercise,” Mueller said about establishing the guidelines. “You got to start somewhere, they started with the bundling requirements. They were far from perfect, but again, they were a step forward.”
NCGA's Arians noted that the tax credit itself goes to the ethanol producer rather than the farmer, but there’s interest at NCGA and other farm groups in ensuring that farmers can participate and get a cut of the incentive.
“We know they're listening and appreciate the work that they have done to create opportunities for us to share those concerns, but until the final rule comes out, we don't really know how impactful we were on those conversations,” Arians said.
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