Why Is It Taking So Long to Get the Necessary Guidance on the 45Z Tax Credit Program?

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September 24, 2024

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•by Jim Wiesemeyer (AgWeb) ... There are a few key reasons why guidance on the 45Z clean fuel production tax credit program is taking a long time to be issued:

• Complexity of the program: The 45Z credit is a new, technology-neutral credit based on carbon intensity scores, which is more complex than previous biofuel tax credits. Developing the emissions rate tables and carbon intensity scoring methodology is technically challenging.

• Interagency coordination: The Treasury Department and IRS need to coordinate with other agencies like the Department of Energy to develop the emissions rate tables and carbon intensity methodologies.

• Stakeholder input: The government is likely taking time to gather and incorporate input from various industry stakeholders on how to structure and implement the credit.

• Technical details: Determining specifics like eligible fuels, feedstocks, and how to calculate and verify carbon intensity scores requires careful consideration.

• Transition from existing credits: The 45Z credit will replace several existing biofuel credits in 2025, so the transition needs to be carefully managed.

• Limited resources: The Treasury and IRS have been working on implementing many new tax provisions from recent legislation, potentially straining their resources.

• Desire for accuracy: Given the credit's importance for clean fuel investment, the government likely wants to ensure the guidance is comprehensive and accurate before releasing it.

• Impact of delay. The lack of full guidance is causing uncertainty for fuel producers trying to plan investments and production for when the credit takes effect in 2025. However, the government has issued some initial guidance on registration requirements to help producers prepare.

The 45Z Clean Fuel Production Credit differs from previous fuel production credits in several ways:

• Technology-neutral approach: Unlike previous credits that targeted specific types of fuels, the 45Z credit is technology-neutral and applies to any transportation fuel that meets the emissions reduction criteria.

• Carbon intensity-based: The credit amount is calculated based on the fuel's carbon intensity score, rather than a flat rate per gallon. Fuels with lower emissions receive a larger credit.

• Producer credit vs blender credit: The 45Z credit goes to the fuel producer, whereas some previous credits like the $1/gallon biodiesel tax credit went to fuel blenders.

• Emissions rate requirement: To qualify, fuels must have an emissions rate no greater than 50 kg of CO2e per mmBTU.

• Registration requirement: Producers must be registered with the IRS before claiming the credit, which is a new requirement.

• Limited duration: The 45Z credit is currently set to apply only to fuels produced from 2025-2027, whereas some previous credits were repeatedly extended.

• Replaces multiple credits: The 45Z credit will replace several existing fuel credits that are set to expire, including those for biodiesel, renewable diesel, and alternative fuels.

• Potentially larger credit amounts: For fuels meeting certain labor requirements, the credit could be up to $1.75 per gallon for sustainable aviation fuel or $1.00 per gallon for other fuels, which is potentially higher than some previous credits.

The 45Z Clean Fuel Production Credit has several important implications for sustainable aviation fuel (SAF) production:

• Incentivizes SAF production: The 45Z credit provides a significant financial incentive for producers to manufacture SAF, with a maximum credit of $1.75 per gallon for aviation fuels that meet certain requirements.

• Technology-neutral approach: Unlike previous credits that targeted specific fuel types, the 45Z credit is technology-neutral. This means any SAF that meets the emissions reduction criteria can qualify, potentially spurring innovation in SAF production methods.

• Carbon intensity-based: The credit amount is calculated based on the fuel's carbon intensity score. SAF with lower emissions receives a larger credit, encouraging producers to minimize the carbon footprint of their production processes.

• Replaces previous credits: The 45Z credit will replace several existing fuel credits set to expire, including the current sustainable aviation fuel credit (Section 40B).

• Registration requirement: SAF producers must register with the IRS before claiming the credit, which is a new requirement compared to previous fuel credits.

• Emissions reduction threshold: To qualify for the credit, SAF must have an emissions rate no greater than 50 kg of CO2e per mmBTU.

• Potential for higher credit amounts: For SAF meeting certain labor requirements, the credit could be up to $1.75 per gallon, which is potentially higher than some previous credits.

• Uncertainty due to delayed guidance: The lack of final guidance on how to calculate carbon intensity scores is causing uncertainty for SAF producers and potentially delaying investments in new production facilities.

• Impact on feedstock choices: The credit may influence which feedstocks are used for SAF production, depending on how carbon intensity is calculated for different agricultural inputs.

• Transition period: The shift from the current SAF credit (Section 40B) to the new 45Z credit in 2025 is creating some challenges for producers in planning future production and sales. READ MORE

Related articles

Limiting 45Z Credits to U.S. Feedstocks Has Risks, Says Vilsack (Successful Farming)
Biofuel Producers Shutting Down Without 45Z Guidance: Biofuels made from soybean oil add roughly $1.30 in value to a bushel of soybeans, experts say. (Successful Farming)

Firms Slow Soybean Buying on Stalled U.S. Biofuels Policy (AgWeb)
Cargill, Bunge slow soybean buying on stalled US biofuels policy (Bloomberg)
Rep. Flood frustrated on lack of 45Z guidance (Brownfield Ag News; includes AUDIO)

Excerpt from Successful Farming: Brad Wilson said if the U.S. Department of the Treasury doesn’t issue regulations on the 45Z Clean Fuel Production Credit soon, the 45-billion-gallon-a-year biodiesel plant he manages in northwest Iowa may have to idle.

“You’re going to be selling at a huge loss and just rolling the dice, hoping when the final guidelines come out from Treasury the credit value is enough to cover the loss,” said Wilson, President of Western Iowa Energy, a biodiesel plant located in Wall Lake, Iowa. “There’s no way we are going to take that risk in today’s market.”

Iowa Renewable Fuels Association Executive Director Monte Shaw said some plants are already shutting down.

“Biomass-based diesel fuels” — a catch-all term that includes biodiesel, renewable diesel, and sustainable aviation fuel — are often made from soybean oil. According to Clean Fuels Alliance America (Clean Fuels), a trade association that represents producers of these fuels, biomass-based diesel currently adds $1.30 in value to a bushel of soybeans, and if plants are forced to idle it will have a direct impact on soybean oil demand.

“We anticipate somewhere between 25% to 75% of the industry idling by the end of this year or into January if there is no guidance,” said Kurt Kovarik, vice president of federal affairs for Clean Fuels. The organization estimates a 25% industry shutdown would correlate to 250 million pounds of unprocessed soybean oil.

Why Shutdowns?

The biomass-based diesel industry has enjoyed a tax credit on and off for several years. Today biodiesel and renewable diesel in this category can claim a $1-per-gallon credit. The credit is factored into purchasing and sales decisions and can mean the difference between operating at a loss or profit. Starting in January this credit expires and the industry will qualify for the 45Z Clean Fuel Production Credit, created by the Inflation Reduction Act.

How much a biofuel plant will be eligible to claim under the 45Z credit is tied to the company’s ability to reduce carbon emissions. Until Treasury finalizes how carbon intensity (CI) scores can be measured, no company knows for sure how much they will be able to claim. Rumors abound on when Treasury will release guidance, including that it may be after 2025 has already begun.

This makes it impossible for biodiesel and renewable diesel producers to know whether they are purchasing feedstocks like soybean oil at a profitable price. The same is true for booking fuel sales. READ MORE

Excerpt from AgWeb: The lack of guidance for a new clean-fuel tax credit is causing biofuels producers to put off some purchases of soyoil for early next year. -- The lack of guidance for a new clean-fuel tax credit is causing biofuels producers, including Cargill and Bunge, to put off some purchases of soyoil for early next year, Bloomberg reported, citing people familiar with the matter. That’s damping demand for soybeans.

By mid-October, most fuel retailers had procured only about 10% of their biodiesel feedstocks for the first quarter of next year, said David Fialkov, executive vice president of government affairs for NATSO, a trade group for truck stops and transportation energy centers. That compares with more than 80% by that time over the past decade.

The industry is waiting for the Treasury Department to issue guidance for the 45Z clean fuel production credit that will begin in January. Thorny issues dividing the industry include whether the tax incentive will be available for low-carbon fuels made from foreign-sourced biofuel ingredients, like animal fat waste and used cooking oil that compete with soybeans and other U.S.-grown crops. Another big uncertainty is the outcome of U.S. presidential and congressional elections on Nov. 5, and how that could impact the domestic biofuels policy. READ MORE