Comparative Economics of Carbon Sequestration for Iowa Ethanol Plants

June 22, 2023

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(Iowa Renewable Fuels Association/Decision Innovation Solutions) Iowa currently has 42 ethanol plants with listed annual capacity of 4.669 billion gallons per year. Iowa’s ethanol plants produced an estimated 4.5 billion gallons of ethanol in 2022. There are several wet mill plants, but most of them are dry mill plants. Iowa’s ethanol production currently is very competitive with ethanol production in other states and even in other countries. Iowa’s ethanol plants have great access to corn as a feedstock for ethanol production and relatively good access to truck and rail distribution of ethanol to end markets. In addition, Iowa has significant feed demand for the dried and wet distiller’s grains that are co-products of ethanol production and has good demand for the corn oil and distiller’s corn oil co-products of its ethanol plants. Iowa currently has four ethanol plants that capture CO2 for utilization (beverage, dry ice, refrigeration, etc.). Iowa has 34 ethanol plants representing 3.892 billion gallons per year of ethanol production that are on the announced CO2 pipeline projects that are expected to service Iowa.

The recently enacted Inflation Reduction Act contains provisions in Section 45Z that create tax credits for clean fuel production. These credits apply to clean fuels produced after 2024 and generally sold before 2028. It is a new general business credit for clean transportation fuel that is produced at a qualifying facility and sells for qualifying purposes.

These fuels must meet certain emissions standards.

For ethanol, the credit-per-gallon amount can be up to $1.00 if wage and apprenticeship requirements are met. The credits are based on the fuel’s carbon intensity score with a CI score of 50 (based on the GREET model) being the trigger point, and the credit potential increasing as the CI score declines toward zero. So, essentially, each reduction in the CI score of the fuel below 50 generates a 2 cents per gallon production tax credit with the tax credit being maximized at $1.00 per gallon if the CI score is zero. The estimated average CI score for Iowa’s dry mill ethanol plants is in the mid-50s and it is widely believed that the CI score for Iowa’s ethanol plants can be reduced by 30 CI points through carbon capture and sequestration via a pipeline to secure underground storage facilities. Two of the proposed CO2 pipelines that would service Iowa transport the CO2 to storage facilities in Illinois. The other CO2 pipeline would transport the CO2 from Iowa ethanol facilities (and some other facilities such as nitrogen fertilizer production) to a storage facility in North Dakota.

The production tax credit for clean fuels production referred to as the 45Z credit has the potential to be a “game-changer” for the location of ethanol production. The incentive to capture up to 60 cents per gallon of tax credit incentive ($60 million per year for a 100 million gallon per year production facility) by implementing CCUS strategies could stimulate new plant development at locations that enable implementation of CCUS strategies but could also stimulate expansion of ethanol capacity at existing plants that would have access to CCUS capability.

Over the past 13-plus years, gross operating margins for Iowa’s ethanol plants have varied from a high of $1.35 per gallon to a low of -$0.06 per gallon. The average gross operating margin over the past 13.5 years has been $0.31 per gallon. Operating margins have declined over the full 15-year period of 2007-2022 but have shown a flat trend since the middle of 2014 with quite a bit of variability during that period. The most recent calculated gross operating margin based on data from January 2023 indicates a gross operating margin of $0.147 per gallon.

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But there is a downside to the 45Z tax credits. The credits are available to clean fuel production anywhere in the United States. As many as 65 ethanol plants in the U.S. have access to carbon capture and sequestration through direct injection at the ethanol plant site and need no pipeline for transportation. A number of ethanol plants are already doing this, such as the ADM ethanol plant in Decatur, Illinois. In addition, there are 38 ethanol plants outside of Iowa representing 3.3 billion gallons of ethanol per year that are on the CO2 pipelines that have been announced.

The 45Z tax credits create a tremendous incentive for ethanol plants to capture and sequester CO2. It is estimated that the additional gross margin that can be generated by accessing the full value of 45Z tax credits through CO2 sequestration via pipeline will enable existing ethanol plants that will have pipeline access to expand production by 30% with a payback period of 1.5 to 2.5 years and new construction of ethanol plants to have a full payback within 5 to 7 years. If Iowa’s ethanol plants are not able to get access to CO2 capture and sequestration via pipeline, then the scenario in which 75 percent of Iowa’s ethanol production is displaced by ethanol production in states outside of Iowa that have access to carbon capture and sequestration via pipeline could occur within 5 to 10 years.

Iowa ethanol plants are competitive within the current market structure of energy and ethanol markets and are well positioned to provide feed byproducts of ethanol to local livestock and poultry feeders. But long periods of potentially negative operating margins due to competitors having access to the 45Z tax credits and Iowa’s ethanol producers not having access would eventually “right-size” the ethanol market by forcing producers with negative margins to shutter their plants and reduce the supply of ethanol produced in Iowa.

Loss of 75% of the Iowa ethanol industry would result in an eventual decline in revenues from ethanol plants (ethanol, DDGs, and DCO) of more than $10.3 billion per year. These losses would reverberate throughout the Iowa economy as corn prices would adjust downward, costs to get DDGs delivered to Iowa feeders would increase and DCO would be less available (or more costly) to Iowa-produced biodiesel and renewable diesel production facilities and for feed use. READ MORE

Carbon capture drives future for Iowa farmers (The Messenger)

Economic projections questioned during South Dakota carbon pipeline hearing (Iowa Capital Dispatch)

Judge says Summit should reveal to stakeholders its deals with ethanol plants: The carbon dioxide pipeline company is resisting the proposed order (Iowa Capital Dispatch)

Carbon capture will ensure resiliency for ethanol (Nonpareil Online)

THE FUTURE OF BIOFUELS DEPENDS ON CARBON CAPTURE (Iowa Renewable Fuels Association; includes IRFA Comments to Iowa Utilities Board (IUB))

Excerpt from The Messenger: Some may have yet to hear much about carbon capture or how carbon management can help farmers and our rural communities thrive. While the technology has been used safely for decades – the expansion of CO2 projects is new to many of us. That is why the Smart Carbon Network is working to separate fact from fiction and tell the true story of how carbon capture can benefit the economy, the ag community, and the environment.

Carbon capture makes it possible to capture the carbon dioxide from ethanol production. That does several things. First, carbon capture keeps ethanol competitive and helps our state fill the growing demand for lower-carbon fuels. It puts Iowa in the driver’s seat as the world seeks to cut transportation emissions.

Second, it increases demand for Iowa corn and ethanol, enhancing their value, while boosting farm incomes. Long-term demand for lower-carbon biofuels ensures dependable local markets for farmers to sell grain and buy feed.

Third, an efficient transportation system allows increased opportunity for captured CO2 for commercial use, including carbonated beverages, food processing, and water treatment, as well as connection to safe and permanent underground storage.

Most importantly, CCUS will create thousands of jobs and drive billions of dollars of investment across the state, growing local rural economies and helping small businesses flourish.

Some might say these opportunities sound great, but what about the impact on my land and the safety of my family and community? Good question. I’m a farmer and a family man. I care about my land and my neighbors. I was pleased to learn that CCUS is well-tested, well-regulated, and has an impressive safety record. The lines are buried underground so they won’t upset the beauty of the natural landscape or the ability to farm over them.

There’s a lot at stake for our communities. That’s why we’re bringing together experts with unique perspectives to help sort out the facts. Once those facts are all on the table, I hope you’ll agree we have less to be concerned and far more to be excited for with CCUS.

Joe Heinrich is executive director of the Smart Carbon Network. READ MORE

Excerpt from Iowa Capital Dispatch:

The project would create about 430 jobs in South Dakota during the construction phase, 20 jobs during operation, and $1.3 million in sales and gross receipts taxes during initial construction. That’s according to Jonathon Muller, a private economics and policy consultant. He testified Wednesday about the economic benefits of the project before the state’s three elected public utilities commissioners.

Muller testified that landowners would receive about $10,200 per impacted acre, factoring in easement payments for the right of way and crop damage payments.

“Unquestionably, it will increase personal income, employment, and output in South Dakota,” Muller said.

Jared McEntaffer is CEO of Dakota Institute, a nonprofit economic research organization that conducted an economic impact study on the pipeline. His study suggests the ethanol industry could grow, creating demand for up to 15% more corn if the state approves both of the carbon capture pipeline projects proposed to cross South Dakota. The other project is scheduled for a permit hearing in September.

“Based on our findings,” McEntaffer said, “yeah, it would have positive economic impacts.”

Brian Brinkman is the manager of the Valero ethanol plant in Aurora, which hopes to connect to the pipeline. He testified that not going forward with the project would leave the plant behind competitors.

“Low carbon fuels have better value,” Brinkman said. “If we don’t do this, other plants will.”

The proposed 1,300-mile, approximately $3 billion Heartland Greenway pipeline is proposed by Navigator CO2. The pipeline would link 21 ethanol plants (including three in South Dakota) and several fertilizer plants across five states. The project would include 111.9 miles of pipeline in eastern South Dakota, crossing five counties. The estimated cost of the South Dakota portion of the project is $142 million. An additional $37 million would be spent on capture facilities.

The pipeline would capture carbon dioxide emitted by the plants and transport it in liquefied form for underground storage in Illinois, or for commercial and industrial uses. The project would be eligible for up to $1.3 billion in annual federal tax credits, which are intended to help fight climate change by incentivizing the removal of heat-trapping carbon dioxide from the atmosphere.

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Brian Jorde, representing landowners, said the studies did not consider alternative carbon sequestration methods, like buying only sustainably grown corn for the production of ethanol.

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Jorde also attacked Muller’s study for not taking into account the impact on future land values from the loss of business and housing developments, or the money spent by opponents to pay for lawyers or to attend hearings.

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Craig Schaunaman farms near Aberdeen and attended the hearing in opposition to the project, even though it’s the other pipeline — proposed by Summit Carbon Solutions — that would cross his land.

Schaunaman said he has new development popping up all around his property. He’s concerned about how a hazardous pipeline would impact the value of the property – potentially steering away would-be developers. READ MORE

Excerpt from Iowa Capital Dispatch:

The specific terms of a pipeline company’s contracts with ethanol plants in Iowa are key to a decision about whether it deserves a permit to build, an administrative law judge has decided.

As such, the judge said last week that Summit Carbon Solutions should be required to provide that information to the Iowa Farm Bureau Federation and the Sierra Club of Iowa, which have sought the information for more than a year.

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Summit challenged the proposed order with the Iowa Utilities Board, which is poised to begin a final evidentiary hearing on the company’s hazardous liquid pipeline permit request in less than two weeks. It’s unclear when the board will make a decision about the order.

Summit has provided redacted versions of the contracts under a protective agreement that limits their disclosure to only attorneys representing the groups, according to IUB documents. Those attorneys must keep the information confidential.

The company argues that specific details of its arrangements with ethanol plants are not germane to its permit process and that it doesn’t trust certain attorneys to keep them secret.

But Toby Gordon, an administrative law judge for the Iowa Department of Inspections and Appeals who was tasked by the board to decide the dispute, said the contract details are necessary to verify the economic benefits of the project.

Summit’s witness testimony includes claims that ethanol plants will generate 10 to 35 cents of additional revenue per gallon if they connect to Summit’s proposed pipeline system.

The company has indicated it would connect to at least 13 ethanol facilities in Iowa that would be eligible for generous federal tax credits that reward them for capturing their carbon dioxide emissions or for producing low-carbon fuels. It would also enable the producers to sell their ethanol in low-carbon markets.

Summit says its $5.5 billion project — which would span more than 700 miles in Iowa — would help ensure the long-term viability of ethanol production in the state and would benefit the state’s agriculture.

More than half of Iowa’s corn is used to produce ethanol.

“It is these economic benefits that have been promoted as a basis for the assertion that the pipeline project ‘promotes the public convenience and necessity,’” Gordon wrote, citing a state requirement for permit approval. “This is the question the IUB must determine following a hearing on the merits.”

Companies that have proposed two other carbon dioxide pipelines in Iowa have indicated they will be paid by ethanol plants based on the amount of carbon dioxide they transport away from them.

Summit’s arrangements with the facilities are different: The company will be paid a portion of their additional revenues.

The company has declined to publicly reveal what percentage it will take.

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The board recently denied a landowner’s motion to dismiss Summit’s permit petition, which was based on the argument that the project is not a hazardous liquid pipeline.

All of the proposed carbon dioxide pipelines will transport the greenhouse gas as a “supercritical fluid” — which has properties of gases and liquids.

A district court judge in Iowa rejected the argument in a separate case that concerned a pipeline land survey, calling it “frivolous” and “nonsensical.” The judge noted that supercritical carbon dioxide has a higher pressure and temperature than liquid carbon dioxide.

The IUB agreed with the judge’s conclusions and said state lawmakers — when they codified regulations for “liquefied carbon dioxide” pipelines — surely intended to include Summit’s project.

“For the legislators to enact a law not covering the most common method of transporting carbon dioxide by pipe creates an absurd result,” the IUB said. READ MORE