CO2 Production by the U.S. Ethanol Industry and the Potential Value of Sequestration

February 21, 2024

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by Scott Irwin (farmdoc daily) There has long been an interest in the role of biofuels in “decarbonizing” the transportation sector in the U.S. An issue that has been receiving a great deal of attention lately is the potential for ethanol plants to lower their carbon footprint by sequestering CO2 that is generated by the ethanol production process. For example, several efforts are underway to construct pipelines to transport CO2 from ethanol plants to areas with suitable geologic formations for sequestration, a process that has not been without controversy (e.g., Douglas, 2022). Sequestration projects have been spurred by incentives included in the Inflation Reduction Act (IRA) passed by the U.S. Congress in 2022 and signed into law by President Biden. The purpose of this article is to estimate the total CO2 produced by the U.S. ethanol industry and the potential value to the industry of earning tax credits for sequestration.

Analysis

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It is hard to assess the magnitude of CO2 production by U.S. ethanol plants without some frame of reference. To simplify matters, consider the average CO2 available for sequestration over 2015 through 2023 of 44.7 million tons. Since this is based only on dry mill plants, we multiply 44.7 by 1.09 to estimate that 48.7 million tons of CO2 is available, on average, for sequestration from both dry and wet mill ethanol plants. As part of their inventory of U.S. greenhouse gas emissions, the U.S. Environmental Protection Agency (EPA) estimates that 6,048 million tons of CO2 equivalent emissions occurred in 2022. Using this as a benchmark, the total CO2 production of ethanol plants available for sequestration represents slightly less than one percent of total U.S. CO2 equivalent emissions. This helps put into perspective the large size of CO2 production from the relatively small number of ethanol plants operating in the U.S.

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The next question to consider is the potential value of sequestered CO2 to the U.S. ethanol industry. We focus in this article on the direct benefits from the “45Q “ federal tax credit. This credit was first established in 2008 to incentivize the use of carbon capture and sequestration technologies to reduce CO2 emissions from fossil fuel power plants and other large industrial sources (Jones and Marples, 2023). The CO2 is captured at the point of emissions and then permanently sequestered by injecting it into underground saline formations. The dollar amount of the 45Q credit and provisions have been changed several times since 2008, most recently in the Inflation Reduction Act (IRA) of 2022. Starting in 2023, the IRA increased the 45Q credit to $85 per metric ton of CO2 that is geologically sequestered, among other revisions. The credit is equivalent to $77 per 2,000-pound ton.

It is straightforward to compute the maximum possible benefit to the U.S. ethanol industry from the 45Q credit. Simply multiply the earlier estimate of 48.7 million tons of CO2 by $77 per ton, which equals $3.75 billion of additional revenue per year (after-tax). We recently estimated the total (pre-tax) income of U.S. ethanol producers in 2023 to be $4.5 billion (farmdoc daily, February 12, 2024) without consideration of the 45Q credit. While an exact figure cannot be computed, it is safe to conclude that the maximum revenue from the 45Q tax credit would more than double the after-tax income of ethanol producers. This is a very large potential impact by any reasonable standard.

The analysis to this point has not considered the cost of sequestration. Most ethanol plants are located in Corn Belt locations without local access to the required geologic saline formations for injection (Sanchez, et. al, 2018). Hence, CO2 from many ethanol plants would have to be transported by pipeline to locations with the required geologic formations. Ethanol producers would either have to invest large amounts of capital in building the pipelines themselves or pay pipeline operators for access. In addition, there are equipment costs to capture CO2 at the ethanol plant and costs of operating the capture equipment. Finally, many ethanol plants will not generate enough income to offset all of 45Q credits they can potentially generate, and would have to sell excess credits in a new secondary market for credits that was created by the IRA. Buyers in the secondary market would likely demand some kind of discount for the transaction. It is very hard to estimate the total cost of implementing CO2 sequestration at the present time, and the cost is likely to vary substantially across ethanol plants. Conversations with ethanol industry analysts suggest the total cost could be as much as half of the value of the 45Q credits in some cases. But, even with this level of cost, the revenue potential from the credits is still very attractive to most ethanol producers.

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We estimate the maximum potential revenue to be $3.75 billion per year, which would more than likely double the after-tax income of the U.S. ethanol industry. This is a very large potential impact by any reasonable standard, even after considering costs that may be as much as half of the credit value.

References

Douglas, Leah. “U.S. Ethanol Industry Banks on Carbon Capture to Solve Emissions Problem.” Reuters, March 11, 2022. https://www.reuters.com/business/sustainable-business/us-ethanol-industry-banks-carbon-capture-solve-emissions-problem-2022-03-11/

Irwin, S. “Another Strong Year for Ethanol Production Profits in 2023.” farmdoc daily (14):29, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 12, 2024.

Irwin, S. “Trends in the Operational Efficiency of the U.S. Ethanol Industry: 2023 Update.” farmdoc daily (14):28, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 9, 2024.

Jones, A.C., and D.J. Maples. “The Section 45Q Tax Credit for Sequestration.” In Focus, Congressional Research Service, August 25, 2023. https://crsreports.congress.gov/product/pdf/IF/IF11455/1

Mosier, N.S., and K. Ileleji. “How Fuel Ethanol is Made from Corn.” BioEnergy: Fueling America Through Renewable Resources, Purdue Extension, ID-328, December 2006. https://www.extension.purdue.edu/extmedia/id/id-328.pdf

Sanchez, D.L., N. Johnson, S.T. McCoy, P.A. Turner and K.J. Mach. “Near-Term Deployment of Carbon Capture and Sequestration from Biorefineries in the United States.” Proceedings of the National Academies of Science 115(2018):4875-4880. https://www.pnas.org/doi/full/10.1073/pnas.1719695115

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The end of the pipeline? Carbon pipelines are key to ethanol's survival, but regulation challenges have clouded the industry’s future. (Successful Farming)
CO2 pipeline opponents doubt certainty of $1 billion corn-based jet fuel project -- Company reps say there’s a path to profit through carbon reductions, incentives for farmers (South Dakota Searchlight)
Former Minnesota Representative pushes Co2 sequestration over concerns for future of ethanol industry (WDAY Radio Now; includes AUDIO)
VIEWPOINT | Carbon pipeline essential for future of ethanol: Guest column by Tom Buis, CEO of the American Carbon Alliance (Dakota Scout)

Excerpt from Successful Farming: Carbon capture and sequestration (CCS) pipelines for the ethanol industry are one of many proposed solutions to eliminate planet-warming carbon dioxide (CO2) emissions by trapping the gas below ground for thousands of years. This is to comply with the U.S. government’s long-term strategy to reach net-zero emissions no later than 2050, and keep a 1.5° Celsius limit on global temperature rise.

Pipelines would enable ethanol plants to participate in markets with low-carbon fuel standards, including states such as California and Oregon; or countries such as Brazil and Canada, which plan to gradually decrease their fuel supply’s carbon intensity index (CI). Today’s typical ethanol plant has a CI around 55, and CCS would lower that by at least 30 CI points, according to Monte Shaw, executive director of the Iowa Renewable Fuels Association.

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“If you don't find a way to access the 45Q tax credits, you could lose out on 50 or 60 cents per gallon of ethanol compared to your competitors who do access those tax credits,” Shaw says. “If three neighboring ethanol plants are all getting 60 cents a gallon because they're sequestering their carbon and you're not, the market will move past you. They will expand and survive. You will not.”

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For a simple comparison, Elizabeth Burns-Thompson, former vice president of government and public affairs for Navigator, likens ethanol refineries to breweries. During fermentation, starch breaks down into alcohol, releasing bubbles of CO2. Ethanol refineries release CO2 when they ferment starch from the corn kernel.

The CO2 gas is pressurized, between 1,500 and 2,200 psi, until it’s liquefied. For example, 1,000 gallons of CO2 gas condense to 2.5675 gallons of CO2 liquid. Many plants capture this by-product on their own and store it in on-site tanks.

Dry ice manufacturers use this CO2 to process and preserve food, bottling companies to carbonate beverages, and livestock harvesting facilities to clean and more humanely prepare animals for slaughter. However, this has its limitations as more carbon is produced than these peripheral industries need.

“No matter how hard you try, there’s only so many frozen pizzas,” Shaw says.

Pipelines would move this liquified carbon to a network of wellheads at designated sequestration sites before injecting it into pore spaces around 1 to 2 miles below ground. Pore spaces require a few key traits to make proper underground injection wells. The ground must be porous enough for the CO2 to flow through and be absorbed, and an impermeable layer of caprock must top the porous ground to ensure the CO2 stays sequestered.

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“Think of it similar to mineral rights but almost the complete opposite,” says Burns-Thompson, formerly of Navigator. “As opposed to taking something up out of the ground underneath someone's land, you're putting [carbon] into it.”

All of Navigator’s five footprint states but Nebraska have central permit processes, with their own level of rigor; Illinois has legislation specifically dedicated to CO2 pipeline routing. While trying to adhere to each state’s process, the company began to run into problems.

For most conversations, Navigator negotiated along similar lines of other landowner infrastructure development. If agreeable, landowners would sign easement option agreements and receive 30% to 40% of the easement up front, even if the project fell through — the remainder would be delivered when construction began. To cover yield loss and crop damage during construction, the full easement offered 250% of crop yields for the land, according to Burns-Thompson.

Navigator had rights to execute an easement option on a landowner’s ground within a three-year window, after which the land would revert to the owner. Burns-Thompson describes the easement as not purchasing the land, just the right to cross it.

She says Iowa has the highest level of entry to even begin the conversation with landowners. Before approaching landowners within the state, Navigator had to send a packet of information from the Iowa Utilities Board (IUB) with different chapters of the state code, and a map roughly outlining the project. More details would be provided following a countywide meeting held at least 30 days from the packet’s delivery.

“What is unfortunate about this is the IUB also requires an explanation about the eminent domain process in that letter, too,” Burns-Thompson says. “That doesn't always come across as a positive first impression with landowners.”

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“Navigator’s project poses no serious threat to the environment or the inhabitants where it will be sited,” James E. Moore, attorney for Navigator, said in a brief filed with the South Dakota PUC. “While CO2 pipelines are new to South Dakota, they are not a new type of pipeline, and with respect to their design, construction, and operation, they differ very little from other carbon-steel pipelines transporting hazardous liquids. Because Navigator has appropriately accounted for the toxicity of CO2 in the event of a release through careful plume modeling, conservative routing, rigorous operational controls, and well-planned emergency response, the project will be safe.”

Kristie Fiegen, chair of the South Dakota PUC, said Navigator did not provide timely notices to many landowners intersecting the pipeline’s footprint, nor did it adequately disclose plume modeling, demonstrating what could happen in a potential CO2 leak.

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Similar to ethanol’s mixed support in Washington, carbon pipelines have support and opposition from all sides of the political spectrum.

While sequestration isn’t a new technology, environmental groups, such as the Iowa Sierra Club and the Illinois Coalition to Stop CO2 Pipelines, claim not enough is known about large-scale CCS long-term effects, and are concerned about the land and water resources required for increasing ethanol production. Those groups say carbon pipelines will prolong the country's dependence on ethanol and prefer that the U.S. invest in alternative environmental efforts such as solar and wind energy, battery storage, conservation, and efficient energy use.

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Elizabeth Burns-Thompson, formerly of Navigator, says domestic and foreign marketplaces are going to continue to put a premium on low-carbon products. To stay competitive, rural America needs to lean into new technologies. While Navigator might go away, the drive and the impetus to work with carbon is not, she says.

“I don't think that the ethanol industry is going away,” she says. “We don't get to that future we've been aspiring toward — be that SAF, new waves of bio-based plastics, or the hundreds of other things we can turn corn and soybeans into — without critical investment in infrastructure, science, and technology. We can't be scared of these things.” READ MORE

Excerpt from South Dakota Searchlight: The question of time has created a measure of desperation from pipeline opponents, as well. Lawmakers in Pierre are debating Senate Bill 201, which in its current form would offer counties per-mile payments from pipeline companies and certain landowner protections while forcing the state Public Utilities Commission to overrule “unreasonable” local ordinances that restrict pipeline siting.

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In an interview with South Dakota Searchlight, Gevo CEO Patrick Gruber described the viability questions coming in from the anti-pipeline side of the aisle as “bizarre.”

Companies working in the sustainable aviation fuels business are all laboring under the reality of its nascency, in an investment environment with significant uncertainty on the regulations that will govern it.

In that space, Gruber said, Gevo is as solid as a company can be.

“We have $380 million of cash on the balance sheet,” Gruber said. “We are the most liquid company on the planet who does development like this.”

Eric Frey, Gevo’s vice president of finance and strategy, told investors in an online “fireside chat” with Water Tower Research that the company feels it’s been undervalued. He made similar statements the following week in an online presentation for Renmark Financial Communications.

Gevo isn’t the only renewable fuels company to see a drop in stock prices in recent months, Gruber said. But more importantly, the financing for Net-Zero 1 isn’t tied to Gevo’s market gains or losses. It’s a “special purpose vehicle” project, meaning it’s a separate entity for financing purposes, isolated from the company as a whole.

“It’s a different equity set, different investors. It’s infrastructure people, along with us,” Gruber said. “Our stock price is actually irrelevant.”

Gruber and others see sustainable aviation fuel as an inevitability in a world that increasingly values carbon dioxide abatement to reduce emissions of the heat-trapping gas into the atmosphere.

Airlines have made commitments to purchase sustainable fuel as an offset to their carbon footprints. The Biden administration wants to see 400 billion gallons mixed with conventional jet fuel by 2030, and the Inflation Reduction Act lays out per-gallon payments for it, based on carbon score calculations that have yet to be finalized.

Sustainable aviation fuel is produced now, but is sold by just two U.S. companies and represents 0.1% of all jet fuel, with 15.8 million gallons produced in 2022.

At the moment, it is only produced using beef tallow or discarded oil. The Inflation Reduction Act has incentives meant to encourage the production of 3 billion gallons by 2030.

Gruber calls ethanol-to-jet fuel the clearest, most cost-effective source path to a production ramp up: the infrastructure is in place, the product works and corn is abundantly available.

Ethanol as a starting point wins on price and practicality, he said, and “it’s by a lot.”

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Cutting the carbon score is the reason Gevo picked Lake Preston: 71% of the area’s farmers use sustainable practices like no-till agriculture, which could translate to a lower carbon score for its corn. It’s why Gevo founded a company called Verity to track and verify carbon scores from corn plant to final product through on-farm data collection.

It’s also why Gevo aims to build a wind farm near its plant: Turning ethanol into jet fuel is energy intensive – too intensive to turn out a low-carbon product without a renewable energy source.

All those factors are part of securing the $950 million federal loan guarantee, which Gevo first sought last August and expects to have by the end of this year.

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“These tax incentives can go away in a flash,” said Doug Durante of the Clean Fuels Foundation, a biofuels lobbying organization based in Washington, D.C.

Durante sees a simpler path forward for ethanol and emissions reductions: higher blends of ethanol. The Biden administration has pulled back on its push for electric vehicles and heavy cuts to tailpipe emissions by 2030, Reuters reported earlier this month.

With millions of gas-powered vehicles on the road and a slowing demand for EVs, more ethanol makes a lot of sense from a climate perspective, Durante said.

“We’re going to be using trillions of gallons of gasoline for who knows how long,” Durante said. “We only put 15 billion gallons of ethanol in it.”

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On Feb. 19, the New York Times reported that “more than half of the announced major clean energy projects and 67 percent of all announced jobs” have landed in Republican congressional districts.

Encouraging companies to pay farmers more for crops produced using carbon-friendly ag practices, Gruber said, is a win for rural America.

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Lake Preston-area farmer Paul Casper is among them. Casper was an early Gevo backer, and has had Verity software installed in his equipment for three years to help the company prove its worth. Once equipped, he said, the system logs every movement, every spray of fertilizer and anything else he does on his field, with GPS tracking to note where he’s doing it.

“Whenever you start the combine or sprayer up, it’s collecting data,” Casper said.

He was already practicing no- and low-till agriculture across his 4,000 acres by the time he met Gevo representatives. As the years passed, other Lake Preston-area farmers noticed how much Casper’s healthier, undisrupted soil produced, and followed suit.

The Verity software has made him even more vigilant about how many times he goes out into the field. Even without a per-bushel price boost, he said, he’s saving money on fuel.

Moving from fuel savings to a future where sequestration is worth money is Casper’s hope. But he also sees it as a necessity for the ethanol industry that’s propped up farmers in South Dakota for decades.

Staying out of the game, he said, will hurt the state in the long run.

“If you don’t sequester carbon, your competition is going to be doing it. That’s going to put us in a real bad place with regards to selling our corn into ethanol and moving that ethanol out of here,” Casper said. “We need to get this done.” READ MORE

Excerpt from WDAY Radio Now: A Former Minnesota Congressman is urging for support of a Co2 Pipeline to enhance the future of the Ethanol Industry...

Former District 7 Representative Colin Peterson spoke to the Flag's Whats on your Mind about carbon sequestration. The conversation was placed in the context of Low Carbon Fuel Standards passed by several states and in Renewable Aviation Fuel regulations. Peterson says as it stands, the ethanol industry will struggle without serious conversations about sequestration.

"There are some small ways to do it, but the way to do it is to sequester this carbon off of the ethanol plants," said Peterson, saying the byproducts from Ethanol plants are split between Co2 and steam. "It's easy to separate that out, the issue is getting it out to a place you can sequester it [...] there are people running around who are saying there is a way to do this without sequestering the carbon. I just don't think that is true in any kind of scalable level,"

Former Representative Collin Peterson says the pipeline can allow for Ethanol to expand into new markets. He also cited current corn markets risks from American farmers, saying Brazil has stepped in to fulfill California's need for renewable fuel. He says a pipeline would ease some of those concerns. READ MORE; includes AUDIO

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Transportation Fuels Policy tax policy tax credits Sustainability South Dakota Regulations-Federal pipelines North Dakota Nebraska Minnesota markets/sales market forces Legislation-State Iowa Investing Illinois GREET Greenhouse Gases Regulated Emissions and Energy Use in Transportation Model fermentation ethanol/bioethanol EPA (Environmental Protection Agency) environmental policy defossilization corn/maize corn ethanol co-products carbon/CO2 sequestration carbon pipeline Carbon Intensity (CI)/Carbon Footprint carbon emissions Carbon Dioxide (CO2) carbon capture and storage (CCS) BioRefineries/Renewable Fuel Production BioChemicals/Renewable Chemicals 45Q Carbon Oxide Sequestration Tax Credit

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