Biofuel Groups Urge Flexibility in 45Z CSA Requirements

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October 16, 2024

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by Erin Voegele (Biomass Magazine) The USDA on Oct. 15 held a third virtual listening session as part of its public consultation on climate-smart agriculture for biofuel feedstocks. During the event, representatives of the U.S. biofuel sector advocated for flexibility in climate smart agriculture (CSA) requirements for the 45Z Clean Fuels Production Credit.

The USDA on June 26 launched a request for information (RFI) seeking public comments on procedures for quantifying, reporting and verifying the effect of climate-smart farming practices on the greenhouse gas (GHG) emissions associated with U.S.-grown biofuel feedstocks. Although not specific to the 45Z tax credit, the RFI is expected to help inform development of the climate smart ag components of GHG modeling currently under development for the tax credit.

In addition to accepting written comments as part of the RFI, the USDA also hosted three virtual listening sessions, including those held on Oct. 1, Oct. 8 and Oct. 15.

The American Coalition for Ethanol and Growth Energy were among the groups to provide comments during the Oct. 15 event.

In his comments, ACE CEO Brian Jennings encouraged USDA to continue engaging with the U.S. Treasury Department and leverage ACE’s Regional Conservation Partnership Program projects to help inform more accurate and updated GHG credit values for CSA practices.

“ACE is proud to partner with USDA on two Regional Conservation Partnership Program (RCPP) projects to improve upon model-generated credit values for biofuel feedstocks produced with climate-smart ag (CSA) practices,” said Jennings during his comments.

Within his comments, Jennings stressed that models and credit values for CSA practices should be routinely updated. He also said 45Z should allow individual CSA practices and stacking of agricultural practices rather than requiring an all-or-none bundled approach or arbitrarily caping agriculture practice GHG credit values. In addition, Jennings noted that the USDA has a long track record of stewarding federal taxpayer funds for commodity and conservation programs and said the agency’s protocols are sufficient for verifying the same practices for federal tax incentives, including the 45Z credit.

Growth Energy General Counsel Joe Kakesh also participated in the listening session, stressing the importance of giving farmers flexibility when it comes to implementing and incentivizing practices that can lower the carbon intensity (CI) of renewable fuel production, including CSA.

During his comments, Kakesh called on USDA, Treasury and the U.S. EPA to give farmers and renewable fuel producers credit for every CI-reducing technology they implement at the plant and on the farm, specifically when administering the 45Z credit.

“Robust decarbonization cannot be achieved unless the full range of CI-reduction technologies – both on-farm and at the plant – is recognized, and unless farmers and biofuel producers are provided the flexibility to implement CI-reduction technologies that reflect current practices and spur future innovation,” Kakesh said. “45Z provides an opportunity to do this. We urge USDA, Treasury, EPA, and other agencies working on Section 45Z guidance to expand options to realize the full CI-reduction potential of biofuels under Section 45Z, and to provide guidance before January 1, 2025, to allow stakeholders to take full advantage of the credit from day one.” READ MORE

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Farm groups urge more flexibility for climate-smart practices in upcoming 45Z guidance (Agri-Pulse)

Excerpt from AgWeb: “USDA is trying to put some guidance together to help the Department of Treasury with the final 45Z rules,” explains Mitchell Hora, founder of Continuum Ag. “This administration has been keen on climate smart ag and climate smart commodities. But climate smart ag and low carbon feed stocks for biofuels are not the same thing.”

Hora says the distinction between the two will help ensure farmers are able to pursue the largest incentive. Whereas bundles were used with 40B and other previous programs, Hora contends 45Z needs to use the Department of Energy’s GREET model.

“If bundles are used, it stifles farmer innovation—it waters down the impact,” he says.

As an example, he offers a farm from northeast Iowa.

When implementing no-till, cover crops, and manure, the farm averages a 250 bu. yield. With a bundled approach, there’s $0.00 incentive. However, using the GREET model, there’s a -4.6 carbon intensity score equating up to $1.82/bu value.

“We have to get this done right. The weight of this decision is massive. The ripple effect 45Z could have is tremendous.”

Continuum Ag has scored more than 330 million bushels using the GREET model.

“It takes five minutes, is very scalable, and we’re offering it for free,” he says.

Hear more in Hora’s latest conversation on AgriTalk with host Chip Flory. READ MORE; includes AUDIO

Excerpt from AEGIS Hedging/OilPrice.com: Renewable diesel and biodiesel producers currently receiving a $1.00/gallon blending credit could see value drop to roughly $0.39/gallon for low carbon-intensity feedstocks and receive no credit value for soybean oil and canola oil, according to AEGIS analysis of current guidelines.

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The ambiguity has stalled investments in new and existing renewable fuels projects and threatens to set back the rapid development of sustainable aviation fuel (SAF) expected to take off next year.

Unsure of the ultimate credit value to be received next year, biofuel producers are cutting back purchases of renewable feedstocks like soybean oil.

The halt in buying comes as the US is poised to harvest a record soybean crop, threatening to roil returns for US farmers, spurring calls to include a domestic feedstock requirement to govern eligibility for credits.

The Clean Fuel Production Credit

Set forth in the Inflation Reduction Act (IRA) in 2022, the Clean Fuel Production Credit, or 45Z, intended to spur investment in low-carbon renewable fuels and drive increased production of SAF.

The 45Z allocates a baseline $0.20/gallon up to $1.00/gallon for renewable fuels contingent on the fuel’s greenhouse gas emissions (GHG) factor. A fuel must reduce GHG emissions by at least 50% to qualify for the baseline credit.

SAF gets a $0.35/gallon baseline up to a maximum $1.75/gallon.

The 45Z takes the place of the more emissions-neutral blenders’ tax credit (BTC) which provided $1.00/gallon for all biodiesel and renewable diesel blended into the fuel pool.

Current guidelines show credit value for biodiesel and renewable diesel averaging around $0.39/gallon for low carbon intensity feedstocks such as distillers corn oil (DCO), used cooking oil (UCO), and tallow, according to AEGIS estimates. Soybean oil and canola oil would not qualify for the 45Z (see table).

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Uncertainty Centers on GREET

The crux to determine how much credit value is ultimately earned by US producers lies in the climate model ultimately adopted to establish emissions rates.

The US Department of Energy’s Argonne National Laboratory Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) is the preferred model to determine the ultimate life cycle analysis (LCA) of various feedstocks, farm practices, transportation impacts, and production processes.

The lower the emissions rate of a particular fuel pathway, the more credit value is earned by the producer.

Soybean oil is the most abundant renewable feedstock source available in the US, making up roughly 33% of the total feedstock slate across the renewable diesel and biodiesel sector. Canola is rapidly gaining share at 16% of the total feedstock slate.

Yet under current GREET modeling, soybean oil and canola oil do not qualify for 45Z crediting, putting US farmers at an enormous disadvantage to lower carbon-intensity (CI) imports like UCO and tallow.

US imports of UCO surged by more than 756% since 2022 and have grown more than 2.5X in the past year alone, with imports accounting for roughly 60% of all UCO used for renewable-fuel consumption (see graph).

The bulk of US UCO imports have been sourced from China. Chinese imports have come under increased scrutiny amid suspicions of virgin edible oil content.

With nearly half of soybean oil typically slated for renewable fuel consumption, US farmers could see a significant drop in demand for their feedstock, prompting calls for a domestic feedstock requirement to be added to the 45Z to even the playing field.

The GREET model in its current form could devastate US farmers and many US biofuel producers.

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Changes to various emissions scores could further advantage crop-based feedstocks, while the de-bundling of CSA, as well as the addition of additional CSA practices would make more of the US crop eligible for the 45Z.

This would be good news for farmers and producers, while additional updates could drive even greater profitability.

Crossing the Election

The IRA and its associated funding and tax cuts are a likely target for US Republicans, driving fears that the 45Z could be cut or watered down under a Republican administration.

The IRA eked out a narrow margin in 2022, passing along strict party lines with all 220 House Democrats voting for it and all 207 Republicans against.

Donald Trump has commented that he aims to scrub the IRA and rescind any unspent funds.

On the other side of the aisle, Vice President Harris cast the tie-breaking vote for the IRA, which, despite its name, became the largest climate-spending bill in history.? It seems almost certain the IRA would be implemented in-full under a Harris administration.

Despite the rhetoric, if elected, a Trump administration is unlikely to materially alter the IRA, particularly the 45Z, as a swath of key stakeholders ranging from big oil to big Ag have made substantial investments to date and may require section 45 credits to remain profitable. The bulk of these projects also reside in red states and due to lucrative conditions for prevailing wage and apprenticeship provisions under the IRA, spur job growth in the renewable fuels sector.

Killing the IRA or repealing portions of the Act would require an act of congress.

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Despite various calls for a domestic feedstock requirement, based on our analysis, the USDA is unlikely to pursue this stipulation.

The USDA will likely unbundle CSA practices and add additional practices to ensure that the bulk of the US crop is eligible for credits.

Under a second Trump term, we see the potential for tariffs on foreign feedstock to even the playing field with US crop-based feedstocks. This may be augmented with favorable changes to the GREET model for crop-based feedstocks.

Under Harris, crop-based feedstocks would require more favorable terms under the GREET model in the absence of any limitations on foreign feedstock.

There is also the possibility for an extension of the BTC for 2025. Veterans of the industry have seen several extensions and even retroactive extensions of the BTC over the years, so this remains on the table in the form of HR 9060. READ MORE