Farmers and 45Z Tax Credit: 45Z Tax Credit Offers a Market for Ag and Carbon Scores, Demands Data and Trust

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May 14, 2024

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by Chris Clayton (DTN Progressive Farmer) Farmers are still planting their 2024 spring crops, but their local biofuel plants are going to be increasingly focused on the carbon intensity score of those crops as well.

The initial Treasury Department guidance for the 40B Sustainable Aviation Fuel (SAF) tax credit released April 30 created some confusion over how it would work. But the guidance also laid the groundwork for what biofuel plants should do to get ready for the next tax credit, the 45Z Clean Fuel Production Credit.

Unlike the SAF credit, the 45Z credit isn't just focused on jet fuel but can provide as much as $1 a gallon for any biofuel with a carbon intensity score 50% lower than a petroleum-based fuel.

With the 45Z starting in 2025:

-- At least some ethanol plants will want to quickly qualify for 45Z based on their in-house efforts to lower emissions. The plant operators will want to know more about the farming practices surrounding the 2024-25 crops used for feedstocks.

-- Farmers should expect biofuel plants to offer a premium for reducing carbon intensity through no-till practices or nutrient management plans that lower fertilizer inputs.

-- Farmers will have to share more data about their farming practices. In return, companies signing contracts with farmers based on practices or carbon scores also need to respect their relationships with farmers.

INCENTIVES TO PARTICIPATE

The 45Z could eliminate the demands of "additionality" -- additional climate-smart practices -- but reward farmers for the practices they are already doing to sequester carbon.

"There's no better time to be a no-till, cover-crop farmer," said Roger Wolf, director of conservation for the Iowa Soybean Association. "And the investments being made, it's kind of a coming of age."

For farmers who have not reduced tillage or considered cover crops, opting into an ethanol program adds to the financial incentives that are starting to stack up climate-smart practices, which includes a mix of USDA pilot climate-smart projects, conservation programs and state cover-crop incentives.

All of this is ramping up as farm inputs remain high and the average price of corn next year is $4.40 a bushel.

The bet is that the lower farm-gate price could give more farmers more reasons to adopt new practices and a willingness to share some data in the process. The 45Z has a chance to kickstart a more nationwide low-carbon biofuels market.

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For the first time, a big chunk of the agricultural supply chain has a government incentive to develop relationships with farmers who are already engaged in these kinds of practices. Farmers who have the history and data to show their conservation practices can plug that information into an ethanol plant's carbon-intensity score.

Depending on climate and soil, no-till production alone in most parts of the country can result in seven to 10 points in a carbon intensity (CI) score. Stacking practices on that baseline can push some producers to lower CI scores.

To receive a 45Z tax credit, a biofuel plant must show its fuels have a CI score at least 50% lower than petroleum. Beyond that, every point of CI reduction is worth 2 cents a gallon. A 60% reduction compared to petroleum is worth 20 cents a gallon.

A group of farmers that provide feedstock for an ethanol plant and score a 10% reduction or better with their farming practices can help push that facility over the goal line to qualify and boost the 45Z tax credit.

PILOT PROJECTS AND PARTNERSHIPS

At least some ethanol plants are already testing carbon intensity of farm practices in different ways. The American Coalition for Ethanol (ACE) is working with 14 ethanol plants across a 10-state region to generate more data on measuring the carbon intensity of corn production using climate-smart practices. The ethanol facilities were chosen to help take a broad measure of data by looking at a range of practices, soil types and climates.

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In another example, Southwest Iowa Renewable Energy (SIRE) is participating in USDA's climate-smart commodities project with Gevo, which is looking to produce jet fuel.

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Partnerships are developing in other ways. Continuum Ag is working with Siouxland Energy in Sioux Center, Iowa, on a CI project. Red Trail Energy in Richardton, North Dakota, has partnered in a similar project with Indigo Ag.

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Going beyond farming practices, the 40B and 45Z tax credits also will stir the pot when it comes to carbon capture and sequestration.

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The climate-smart pilot projects were meant to offer the first widespread incentives for farmers to lower greenhouse gas emissions or sequester carbon. USDA's goal is to sign up at least 60,000 farmers and enroll 25 million acres, which could sequester or reduce more than 60 million metric tons of carbon dioxide in the process.

Along with the pilot projects, USDA also received $19 billion from the Inflation Reduction Act to further push carbon sequestration and reduce greenhouse gas emissions through the Natural Resources Conservation Service (NRCS) programs.

States have cover crop programs for producers as well, such as Iowa's first-time incentive of $30 an acre.

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DTN also is developing a "Sustainability Marketplace" platform where farmers can sell commodities grown with climate-smart practices to buyers looking for those qualities.

DATA DEMANDS AND PRIVACY

Much of the work on the 45Z will rely on plugging increasingly more data into computer modeling built around the Department of Energy's Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies (GREET) model.

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"Agriculture is all about relationships and building trust. My trust was with Company A, not with B or C. So as each new company becomes involved -- and hearing other people's stories about how this hasn't gone well for them -- you're losing trust and credibility. Each time you are introducing me to a new, unknown company."

As biofuel producers and agribusinesses are going around the country wanting CI scores, Bissell (Aimee Bissell, a director for the Iowa Soybean Association) said they need to be more inclusive about how they think about their relationships with farmers.

"If you want us to buy into this, then probably let us be involved in how it is created and you will probably have a better outcome," she said. READ MORE

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More money per acre for less work with new Indigo Ag carbon program updates (Indigo Ag)

Excerpt from Indigo Ag:

The only company to consistently generate high-quality, registry issued carbon credits adds incentives, simplifies enrollment

BOSTON, June 5, 2024 /PRNewswire/ -- Indigo Ag today announced major updates to its carbon program which will maximize financial returns for farmers and agribusiness partners, simplify the participation process, and open doors to new sustainability markets stretching from carbon and Scope 3 programs to realizing the value of biofuel tax credits like 45Z.

"This announcement represents years of investment to repeatedly generate and realize the true potential of high-integrity, nature-based, certified carbon credits," said Dean Banks, Indigo Ag CEO. "The tireless work of Indigo's engineering and science teams means farmers can now be onboarded in minutes not days. In addition, farmers can now also dramatically increase their ability to sequester carbon per acre while maintaining the scientific rigor that warrants a significant premium. We're thrilled to help farmers make more money!"

Among the significant changes to the program is the increasing value per acre. More precise at capturing what is happening on the farm, Indigo's Carbon program will produce more carbon impact per acre starting with the upcoming 4th carbon crop. With enhanced data and model performance, many fields are expected to see a notable increase in credit generation, in some cases as much as 40-60%. Additionally, carbon credit prices have increased from $20-$40 per credit to as high as $80 per credit, with 75% of the weighted price for a carbon credit crop going back to the farmer.

Indigo Ag's data collection experience is also set to become 80% more efficient with farmers now able to submit data in as little as 30 minutes, compared to the previous multi-day processes.

"Indigo Ag's continued investment in science and technology translates to more profit per acre for farmers," said Jed Miller, Chief Strategy Officer, Ag Partners Coop. "Their commitment to accessibility enables any farmer to join the sustainability marketplace, unlocking consistent and dependable revenue streams."

The overall detailed program updates include:

More Value:

On average, more dollars per acre back to the farmer due to higher carbon generation with an updated and expanded model, scientifically validated and recently approved by the Climate Action Reserve (CAR)
Higher carbon credit prices, putting even more dollars back in growers' pockets.
A guaranteed minimum payment to qualifying farmers who plant cover crops for the first time

Easier to Use:

A streamlined data submission experience
Intuitive crop management plan interface for a more user-friendly experience
Farmers no longer need to provide many years of historical data. Instead, they share how a typical crop is managed and grown in a 5-year rotation.

More Opportunities:

Nationwide program availability across the continental US opens doors to new markets
Direct path to participate in Scope 3 opportunities when enrolled in Carbon by Indigo provides more flexibility, ensuring that farmers and agribusiness partners can capitalize on the growing demand for sustainable practices

"A lot of companies talk about carbon credits; Indigo doesn't just talk. They do what they say, and they deliver," said Greg Fynboh, Minnesota Farmer and Indigo Ag Carbon program participant.

To date, farmers participating in Indigo Ag's sustainability solutions have collectively earned more than $12 million.

Indigo Ag's carbon calculator makes it easy for farmers to understand their investment and potential benefits. Growers interested in participating can sign up with a trusted partner or directly through Indigo Ag.

About Indigo Ag

Indigo Ag is the innovative leader and trusted partner in sustainable agriculture and biological solutions. Powered by science and technology, Indigo helps farmers and agribusinesses optimize today's yields and profitability, while nourishing the soil for better tomorrows.

The company's biotrinsic® natural microbial solutions help farmers maximize crop performance by empowering plants to combat environmental and biological stresses and improve nutrient access. Indigo's Sustainability solutions include its carbon and sustainable crop programs that enable farmers to choose how to best profit from their sustainable practices while promoting practices that help land keep its value for future generations. Indigo is the largest and fastest growing issuer of nature-based, registry issued agricultural soil carbon credits in the world and currently the only company offering high quality agricultural carbon credits and scope 3 emissions reductions at scale to help corporations reach their sustainability goals. The company's state-of-the-art digital software facilitates greater efficiency, accuracy and profitability for crop transactions.

Established in 2013 and operating in 14 countries around the world, Indigo Ag turns on-the-farm sustainable practice into value for farmers, agribusinesses, and corporations, creating a world with thriving farmers and environmentally prosperous companies. READ MORE