Little to No Ethanol Will Qualify for US Aviation Fuel Credit

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May 30, 2024

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by Leah Douglas and Jarrett Renshaw (Reuters) Little to no ethanol will qualify for U.S. sustainable aviation fuel (SAF) subsidies under a new pilot program by President Joe Biden's administration, which toughened climate requirements at the last minute, according to a Reuters review of government data and people familiar with the matter.

The issue could hurt the biofuel industry, which sees SAF as ethanol’s best chance at growth since electric cars have cut into its market as a gasoline additive. It could also hinder Biden's goal of producing 30 billion gallons of SAF by 2030. He once promised 95% of SAF - a biofuel that can be made from oils, waste, or grains - would come from farmers.

Details about how little ethanol will qualify for the subsidies under the pilot program, and how the requirements were raised at the final hour, have not previously been reported.

At issue is a $1.25/gallon production tax credit embedded in the 2022 Inflation Reduction Act reserved for SAF that demonstrates a 50% reduction in lifecycle greenhouse gas emissions compared to regular jet fuel.

Under the pilot program finalized on April 30, ethanol producers seeking to claim that credit must verify their corn comes from farms using three climate-friendly farming practices in tandem: not tilling the soil, planting cover crops, and using higher efficiency fertilizers.

U.S. Agriculture Secretary Tom Vilsack touted the program as "a great beginning as we develop new markets for sustainable aviation fuel that use home grown agricultural crops."

But a Reuters review of data from the U.S. Department of Agriculture (USDA) suggests almost no U.S. corn farmers use all three practices at the same time. Officials at five farm and biofuel trade groups told Reuters few, if any, ethanol-makers will be able to meet the standard.

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The pilot program covers ethanol produced in 2023 and 2024, and will be replaced by a new program in 2025 that biofuel groups hope will be less restrictive.

"I see this (pilot) as a marker, a signal and think it was a good first step," said Patrick Gruber, CEO of biofuel producer Gevo.

LAST-MINUTE CHANGE

The White House had been set to ditch the requirement that all three farming methods be used at the same time, but reversed course after Treasury Department officials said bundling the practices would boost compliance and increase environmental benefits, according to two sources familiar with the discussions.

Bundling the practices also helped balance rural and farm interests with environmental concerns, the sources said.

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The USDA does not collect data on how many farmers use all three required climate-friendly practices together, but data suggests the overlap is slim.

Nationally, continuous no-till is used on about 33% of cropland acres, efficient fertilizer application on about 26%, and cover crops on about 6%, according to a 2022 USDA report.

There is no breakdown by crop or for corn destined for ethanol production facilities.

"It’s a very small number of operations that would qualify," said Matt Ziegler, policy director with the National Corn Growers Association.

The climate-smart requirements also present hurdles for farmers who grow soybeans, another potential SAF feedstock.

Josh Gackle, a North Dakota farmer and head of the U.S. Soybean Association, said the cover crop requirement is particularly problematic in his region, where long winters and short growing seasons make it harder for him to grow the off-season crop than his peers in Iowa or Nebraska.

"We just want to make sure that the rules across the growing regions are right so all places can participate," Gackle said. READ MORE

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The fight for E15 and how it helps agriculture [Podcast] (Feed & Grain; includes transcript)
How the Sustainable Aviation Fuel tax credit impacts the grain industry: This initiative aims to encourage the use of biofuels, with direct effects on the grain industry due to increased demand for biofuel-compatible crops. (Feed & Grain)

Excerpt from Feed & Grain: Cooper - 08:38: But you're right, ethanol is hands down better for the environment than gasoline. There is not any legitimate scientific debate about the science overwhelmingly shows Ethanol reduces greenhouse gas emissions relative to gasoline. It reduces the tailpipe pollutants of things like nitrogen oxides and particulate matter and all those pollutants that contribute to poor air quality and human health problems, asthma, lung disease.

Ethanol reduces those emissions and there is an enormous body of science and research That shows that unfortunately we do continue to see people raising lots of myths and misinformation about the use of ethanol and its impacts on the environment. The big myth we hear is that boy if we're going to be using more corn for ethanol then we're going to have to massively expand our cropland in this country and we're going to have to cut down forest and we're going to have tear up native prairie grassland To plant more corn, to produce this ethanol. And if we do those things, then it negates any environmental benefit that ethanol would have.

Well, that's completely ridiculous. And when you look at the data, when you look at what has happened in this country, as we have vastly expanded production and use of ethanol, crop land continues to fall year after year after year. That trend began long before biofuels were around, and that trend has continued. In the biofuel’s era, so we are producing more corn and we're certainly producing more ethanol, but that increased supply of corn is not coming from additional acres. It’s coming from increased efficiency and higher yield and growing more corn on the same number of acres or on less land than we did several decades ago.

Kilger - 10:40:

Well, plus it assumes that, you know, that corn is just gone, which isn't true because ethanol does very useful byproducts like DDGs that are incredibly useful for the feed industry. And from what I understand, the technology with those is getting better and better too. So, they're producing higher quality byproducts. So, it's not like it's just gone. It’s there.

Cooper - 11:04:

That's right, and that's a great point that again is so often overlooked. When we take a 56-pound bushel of corn and run it through an ethanol plant, we're getting multiple products out the back end of that facility. Ethanol is only one of those. We get about close to three gallons of bushel of ethanol when you put that bushel of corn in a facility.

But you're also getting 15 or 16 pounds back as animal feed. Distillers’ grains and other co-products where the protein that was in that corn is concentrated and so is the fiber and some of the other nutrients that livestock and poultry need in their diets. And that co-product, distillers’ grains, has been a hugely successful and popular feed ingredient both here domestically in the U.S., but also worldwide.

We export close to one third of the distillers’ grains that this industry produces. We’re also producing corn oil, distillers corn oil, that itself is a valuable feed ingredient for poultry and certain other species, but it's also a feedstock that is used to produce renewable diesel fuel and biodiesel. So, these are just some of the things that are coming out the backside of an ethanol plant. And again, most people don't understand that these are really bio-refineries that are producing a wide array of products, not just ethanol.

Kilger - 12:29:

Yeah, it's a very efficient use of corn because we get so much out of it versus just, you know, a single use product. So, it's also good for agriculture, especially farmers because let's face it, producers have been hit with a lot over the last 10 years and they tend to get the short end of the stick when commodity prices go up and down. And lately it's, they've been trending down. So, this is helpful. Is that part of your message of like, hey, this is good for our rural communities and our producers?

Cooper - 13:04:

Absolutely it is and we are joined at the hip with agriculture and in fact I mean the ethanol industry would not exist today if not for the fact that 20 to 25 years ago we had farmers across the country coming together pooling their resources to build ethanol facilities in their rural communities as a way of developing a new market.

I mean I think we all remember what the corn market looked like in the 1990s and early 2000s, it was a surplus driven marketplace. We had high surplus levels, large record levels of carry out, low prices for corn, prices that were below the cost of production. And rather than continuing to rely on the government for income, asking the government to help keep these farms whole. Farmers got together and built from the ground up a new market for their product. They created a new market that has substantially added value.

To the products they're producing on the farm, and we look at the fact that there are roughly five billion bushels, five and a half billion bushels of corn going into the ethanol industry today. Again, not just making ethanol but stores grains and all those other products. And we think about where the corn market would be without that additional demand. There’s been a number of studies and analyses and economists that have looked at this and they have concluded that foreign prices aren't great right now, as you mentioned, but would be in real trouble.

Without the existence of robust demand for the ethanol industry, some studies have found that probably $1.50 to $2 or roughly one third of corn price that we've seen the past few years is attributable to demand from ethanol. So, it has been a real success story for rejuvenating the farm economy. And not only does it provide a new market for farmers and help raise their basis prices for corn, but it creates jobs in these communities as well. READ MORE

Excerpt from Feed & Grain: The introduction of the sustainable aviation fuel tax credit influences the grain industry by altering crop production costs and potential revenue streams. As you transition to crops suitable for biofuel, initial investments in new agricultural technologies and practices may increase production costs. However, these changes can lead to higher crop yields and improved crop resilience, potentially increasing your overall revenue over time.

The demand for biofuel-compatible crops is expected to rise, providing you with new market opportunities. This shift not only opens up domestic markets but also international ones, as global demand for sustainable aviation fuel grows. Access to these new markets can significantly enhance your business prospects, positioning you to capitalize on the growing trend towards renewable energy sources.

The increased demand for specific crops used in sustainable aviation fuel production typically leads to higher crop prices. This price surge can result in increased income for you as a farmer, provided the cost of production does not outweigh the price benefits. It is crucial for you to monitor these economic dynamics closely to maximize the financial benefits of participating in the sustainable aviation fuel market.

Environmental benefits and trade-offs

The adoption of SAF significantly reduces greenhouse gas emissions compared to traditional jet fuels. By utilizing biofuels derived from crops, SAF can lower carbon emissions during flight, contributing to the aviation industry's carbon neutrality goals. This shift not only aligns with global climate change initiatives but also enhances your reputation as a sustainable practitioner in the agricultural sector.

While SAF promotes reduced carbon emissions, it raises concerns regarding soil health and biodiversity. The increased cultivation of biofuel crops can lead to monoculture practices, potentially depleting soil nutrients and reducing biodiversity. It is essential for you to implement sustainable farming practices that maintain soil health and promote biodiversity, ensuring that the environmental benefits of SAF do not come at the cost of agricultural sustainability.

Comparatively, SAF offers a cleaner alternative to traditional jet fuel, which is derived from fossil fuels and is a significant source of carbon emissions. The transition to SAF not only helps in mitigating climate change but also reduces dependence on non-renewable energy sources. This transition provides you with an opportunity to contribute to a sustainable future, aligning your agricultural practices with global energy and environmental objectives.

Policy and regulation considerations

The SAF tax credit is bolstered by various government incentives, which mandate specific production standards and sustainable practices for eligibility. These regulations ensure that the biofuels produced contribute effectively to environmental goals. It is crucial for you to stay informed about these evolving requirements to fully benefit from the incentives offered.

Input from both the agricultural and biofuel sectors has been instrumental in shaping the policies surrounding sustainable aviation fuel. This feedback loop helps refine the incentives and ensures they are practical and beneficial for all stakeholders involved. Engaging with these discussions can provide you with insights into future industry trends and regulatory changes.

Looking forward, continuous adjustments in legislation and the introduction of new tax credits are anticipated as the demand for sustainable aviation fuel grows. These changes will likely focus on enhancing the efficiency and sustainability of biofuel production processes. Keeping abreast of these legislative developments is essential for maximizing the potential benefits of your involvement in sustainable aviation fuel production.

Looking ahead: SAF's role in sustainable agriculture

As SAF continues to evolve, technological innovations play a crucial role in enhancing the efficiency and scalability of SAF production. Advances in biotechnology and chemical engineering are expected to improve the conversion rates of biomass to fuel, reducing overall production costs and making SAF more competitive with conventional fuels. These technological strides not only bolster the economic viability of SAF but also encourage wider adoption across the aviation industry.

To meet the growing demand for sustainable aviation fuel, scaling production and diversifying feedstock sources are essential. Expanding the range of suitable raw materials, including non-food crops and agricultural residues, can significantly increase the volume of available biomass for SAF production. This expansion not only helps in stabilizing supply chains but also reduces competition for food resources, aligning with sustainable agricultural practices.

The potential for sustainable aviation fuel to make a global impact is immense, particularly when combined with robust industry collaboration. By fostering partnerships between agricultural sectors, biofuel producers, and aviation companies, the SAF market can achieve greater integration and efficiency. These collaborations are vital for sharing knowledge, optimizing resource use, and driving innovation, ultimately contributing to the reduction of greenhouse gas emissions on a global scale.

Throughout this exploration of SAF tax credits and their intersection with the grain industry, we've navigated the comprehensive impacts, from economic implications for grain producers to the broader environmental benefits. The dialogue has underscored how these tax incentives are pivotal in steering both the aviation and agricultural sectors towards more sustainable horizons, weaving through the complexities of crop production shifts, market evolution, and the critical balance between agricultural and environmental health. In fostering this evolution, the article has pinpointed the essential role of government policies, technological advancements, and sector-wide collaboration in nurturing a future where green practices are not just aspirational but foundational.

Looking forward, the trajectory of the SAF incentive highlights an exciting pathway for advancing sustainable agricultural methods, expanding biofuel feedstock diversity, and catalyzing global efforts in reducing carbon footprints. It prompts a call to action for stakeholders across the spectrum to engage deeply with these initiatives, suggesting that the pursuit of sustainability within the aviation fuel sector holds untapped potential to drive significant economic and environmental transformations. The journey towards such impactful change will hinge on continued innovation, informed policy-making, and the collective will to invest in practices that bolster sustainability for the betterment of our global community. READ MORE