Ethanol Blog: Biofuels Groups Ask IRS to Get Carbon Scoring Right in Implementing Clean Fuel Tax Credit

by Todd Neeley (DTN Progressive Farmer) A new clean fuel production tax credit created by the Inflation Reduction Act could pave the way for significant growth in biofuels including ethanol, sustainable aviation fuel and biodiesel, if the IRS takes steps to adopt the right greenhouse gas lifecycle emissions model.

The new credit has been touted as a technology-neutral credit under Section 45Z. It applies to fuel sold from Dec. 31, 2024, to Dec. 31, 2027, and is granted to fuel that meets a certain emissions-reduction factor.

The Inflation Reduction Act provides a credit of 20 cents per gallon and up to $1 per gallon if certain requirements are met. When it comes to sustainable aviation fuel, the act provides a base credit of 35 cents per gallon or up to $1.75 under certain conditions.

The amount of the tax credit granted would depend on a fuel's individual GHG emissions score.

American Coalition for Ethanol CEO Brian Jennings said in comments submitted to the IRS last Friday that the tax credit would be good for agriculture.

"Proper implementation of the new 45Z tax credit will incentivize U.S. ethanol companies and farmers to invest in production processes and practices to reach these net-zero carbon intensity goals in a meaningful timeframe to address the current climate challenges," ACE said in its comments.

ACE said although the tax credit is new, the ethanol industry's work in greenhouse gas emissions reductions is not. In particular, the group said the industry's participation in California's low-carbon fuel standard has set the tone for the industry's readiness to take advantage of the new tax credit.

"When individual emission rates are determined by treasury and IRS for implementation of 45Z, many producers will have CI (carbon intensity) scores that reduce GHGs compared to gasoline by as much as 70%," ACE said in the comments.

Jennings said in the comments ACE supports the use of the GREET model to make determinations about emission rates as directed in the Inflation Reduction Act. However, he said certain emissions factors related to feedstock production (i.e., corn farming for corn-based ethanol) are not yet fully incorporated in the model and should be considered.

Jennings wrote in the comments that scientific evidence supporting the benefits of "climate-smart" agricultural practice need to be considered by the IRS when implementing the new tax credit.

"Demonstrating scientific rigor of GHG benefits related to climate-smart farming practices at relevant landscape scale," Jennings said in the comments, "is critical to increase confidence levels in existing models and enable farmers and ethanol producers to monetize the farm-level GHG reductions in regulated low-carbon or clean fuel markets and through the new 45Z tax credit."