The ABCs of 45Z: Take Time Now to Prepare for Low-Carbon Market Opportunities

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August 02, 2024

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By Heather Gieseke (AgWeb) 3 tips if you are considering regenerative practices and you have the ability to deliver your crops to a biofuels plant. -- ... While there’s still a lot to figure out, it’s clear farmers who produce low-carbon fuels will benefit from greater opportunities ahead — including financial incentives and higher demand for crops with a smaller carbon footprint. To be able to take advantage of those opportunities when they arise, take time now to prepare.

What to Know Now
Each biofuels plant will manage this low-carbon market opportunity differently. There are a lot of factors in play for both facilities and farmers. But if you have implemented, or are considering, regenerative practices and you have the ability to deliver your crops to a biofuels plant, you should:

1. Document your practices.

...

2. Reach out to the processing destinations local to you.

...

3. Hire a firm to help you calculate your current carbon intensity (CI) score.

...

New Terms In the World of Carbon Markets:

Carbon Intensity Score
A CI score is a measurement of greenhouse gas emissions divided by the amount of energy needed to produce something. A CI score is critical to determine the value of low-carbon products such as ethanol, soy biodiesel or sustainable aviation fuel (SAF). The lower the CI score, the fewer the emissions. Carbon neutral means zero emissions occurred during the product’s production. CI scores can also be negative. Crops with a lower CI are generally grown with practices such as reduced tillage, cover crops and nitrogen management strategies.

45Z
This provision in the Inflation Reduction Act provides a tax-credit incentive for producing low-emission biofuels. It only runs from 2025 to 2027 but could potentially be extended. This credit will likely be passed on as a premium to farmers for low-carbon grains and oilseeds to compensate for sustainable practices with verifiable data.

GREET
The Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model standardizes the measurement of carbon emissions across transportation supply chains. We are waiting for an updated version of the GREET model to support 45Z CI calculations. READ MORE

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NACS Joins Association Letter On 45Z Tax Credit: The letter discussed maximizing consumer benefits while minimizing unnecessary cost increases. (Convenience.org)
Vilsack optimistic on 45Z guidance getting completed (Brownfield Ag News)
USDA Seeks Easier Rules For Crops to be Used in Green Fuels (Bloomberg)
Ethanol Blog: Ag Secretary Vilsack Promotes Ethanol as Key to Sustainable Aviation Fuel Amid Policy Debates (DTN Progressive Farmer)
Open Mic: Emily Skor, CEO Growth Energy -- Treasury Department’s decision on what sustainable agriculture practices will be required for the pending 45Z rule is critical for the industry’s future and if the Biden administration’s climate goals will ultimately be met. (Agri-Pulse; includes AUDIO)

Excerpt from Brownfield Ag News: Tom Vilsack says he’s optimistic the Department of Treasury can identify practices that result in guidance for the 45Z tax credit that works better for U.S. producers.

“I’m very hopeful that we are able to make the case for more crops to be included, and for more practices and more combinations of practices, but not necessarily only a single set of practices in combination, as is the case in 40B,” he says.

Some Senators want to ban foreign producers from qualifying for the 45Z tax credit, but he says there’s a better approach.

“I think the better way is for us to basically provide the level and support domestically that makes the choice from both an environmental and business position the easier choice, and that’s why we’re putting money behind the RCPP program,” he says.

Vilsack says not it could also be harmful to trade.

“Since 20 to 25 to 30% of what we grow and raise in this country has to be sold to somebody else, you have to be conscious of the impact and effect that that might have on all of those other opportunities,” he says.

As for the timeline, Vilsack says…

“I think everybody’s working towards that goal of end of the year, beginning of next year focus.”

Vilsack was the special keynote speaker at the American Coalition for Ethanol’s annual conference in Omaha, Nebraska. READ MORE

Excerpt from DTN Progressive Farmer:

The 45Z Clean Fuels Production Tax Credit, which is supposed to go into effect on Jan. 1, 2025, will require biofuels to have a carbon intensity (CI) score of at least 50% lower than petroleum. Every point below that 50% level generates 2 cents a gallon. A 60% reduction, for instance, would generate 20 cents a gallon.

But USDA, EPA and other agencies are still weighing in with Treasury on how that tax credit should work. USDA had a comment period this summer that generated 260 comments from farmers and biofuel groups.

Farm groups, however, also wrote Treasury Secretary Janet Yellen last month, calling on Treasury to ditch the bundling of climate-smart practices on farms, stating that requirement "adds layers of complexity and costs that many farmers simply cannot bear and will not pursue if not paid a premium."

The groups added, "The implementation of no-till farming, cover cropping and enhanced-efficiency fertilizers requires significant upfront investments in both time and resources. Without a greater incentive, many farmers may simply be unable to implement these bundled practices based on economic limitations alone."

Vilsack said USDA is pushing for a 45Z verification that will give farmers "flexibility and choice to choose from a menu of actions." That's going to require making the case to Treasury and the federal agency process exploring how the GREET model will incorporate these emission projections.

"We understand very well the significance and importance of the next several months of this process," Vilsack said.

Vilsack said USDA and the biofuels industry will need to identify farm practices that lower emissions "with enough specificity and verification that they know they're real." He added, "I don't think there's any question we can do that, and I'm very hopeful that we are able to make the case for more crops to be included, and for more practices and more combinations of practices, but not necessarily only a single set of practices."

PILOT PROJECTS TESTING GHG REDUCTIONS

Vilsack also credited ACE for starting a Regional Conservation Partnership Program pilot project back in 2021 that has since been expanded to 14 ethanol plants in 10 states. That project looks to measure and verify the value of conservation tillage, nutrient management, cover crops and other practices in sequestering carbon and reducing greenhouse gas emissions from crop production.

Brian Jennings, CEO of ACE, said the project is expanding from 18,000 acres to 100,000 acres, but already meetings with farmers in seven states have led to potentially 250,000 acres of interest.

"Meaning farmer interest is approaching five times the available funding," Jennings said. "Farmers are optimistic about selling low-carbon corn to ethanol producers who can benefit from that in the future."

USDA also is spending $300 million to develop a more national look at measuring, monitoring, verifying and reporting agricultural sequestration and emissions.

While the 45Z credit starts in January, there are also questions about whether Treasury will get the rule and guidance out before the end of the year.

"The hope is that it would be," Vilsack said. "You know, things can change, and timelines can slip, as they have from time to time. But I think the goal here, I think everybody's working towards that goal of end of the year -- beginning of next year."

TRADE AND BANNING FOREIGN FEEDSTOCKS

Farm groups and a bipartisan group of 15 U.S. senators also have called on Treasury to mandate the use of domestic feedstocks for the 45Z, which would block situations such as an SAF plant in Georgia importing sugarcane-based ethanol from Brazil. Speaking to reporters, Vilsack said there are trade implications on U.S. products if feedstocks from other countries were blocked.

"When you start essentially creating walls around your products and protecting your products, it sounds good from a political perspective, but that's not how it's interpreted in the rest of the world," Vilsack said. "And since 20 to 25 to 30% of what we grow and raise in this country has to be sold to somebody else, you have to be conscious of the impact and effect that that might have on all of those other opportunities."

BIOFUEL INVESTMENTS "A CHOICE"

Vilsack also delved into politics, saying administration support for E15 infrastructure, efforts at EPA to reject small-refinery exemptions, incentives for sustainable aviation fuel and tax credits to lower emissions are policy choices.

"There are some who would like us to make different choices," Vilsack said. He pointed to the controversial Heritage Foundation Project 2025 plan, which calls for dropping climate-smart agriculture incentives, as well as not enforcing the Renewable Fuel Standard and eliminating most of the Inflation Reduction Act incentives.

"You need to pay attention to this because they are proposing a very different set of choices," he said.

Vilsack said the House version of the farm bill also has provisions that are "very consistent with the (Project) 2025."

During his time in office, former President Donald Trump also supported ethanol and signed an executive order allowing year-round E15, but it was blocked in federal court. Trump, in an economic speech this week, brought back calls to "drill, baby drill" as a solution to spur the economy.

The House farm bill includes language that would strip the agriculture secretary's authority to use the Commodity Credit Corp. (CCC) fund. Vilsack used that fund for $3.1 billion to create the Partnership for Climate-Smart Commodities. He also used $1 billion to boost trade through the Regional Agricultural Promotion Program.

"These are all choices," Vilsack said.

The secretary also told ACE members, "The vice president will continue to be a strong supporter of this industry."

Asked about actions Vice President Kamala Harris has taken to support biofuel producers, Vilsack said cabinet members such as himself work at the discretion of the president and vice president. If they are displeased about a policy move, they let department heads know about it.

"So, I'm quite confident, given everything that has been done, of the support of the president and vice president," he said. READ MORE