Pending Treasury Department rules for a new biofuels tax credit could determine whether farmers can earn significant new income from conservation practices and whether ethanol can qualify as a feedstock for sustainable aviation fuel, a potentially massive new market.
The new clean fuels production credit, known as 45Z, was included in the Inflation Reduction Act to subsidize a shift to lower-carbon biofuels. The value of the credit — an especially high priority for the airline industry, which has ambitious goals for reducing greenhouse gas emissions — is tied to the carbon intensity, or CI, of the biofuel.
“What this means for the renewable fuels market and for the commodities that play into that is massive, massive dollars,” said Mitchell Hora, a corn grower in southeastern Iowa. “On our operation, it would add about $160 per acre.”
Hora, who talked about the 45Z credit at the annual Agri-Pulse Ag and Food Policy Summit last month, said his farm near Washington, Iowa, has reduced its carbon intensity score by about 29 points, which is how he calculates his estimate of the potential financial benefit of $160 an acre.
The tax credit is potentially “massive for the farm industry, for family farms, and finally able to get farmers a scoreboard for sustainability. Show us how to score points with the GREET model, and financially reward us for the more points that we garner into the industry,” he said.
The lower the CI, the more the credit is worth, up to $1 per gallon in the case of motor vehicles and $1.75 a gallon in the case of sustainable aviation fuel. To qualify, a biofuel's greenhouse gas emissions must be below 50 kilograms of carbon dioxide equivalent per million BTUs.
But the impact of the credit on Hora, other farmers and to biofuels — including ethanol - depends on critical regulations the Internal Revenue Service is writing. Among the key issues: whether the credit will take into account the impact of cover crops and other conservation practices on the carbon intensity score of the corn used to produce ethanol.
Another issue is whether the carbon intensity of SAF will be determined using a model approved by the International Civil Aviation Organization or one closer to the GREET model developed by the Energy Department. The ICAO model would largely rule out agricultural feedstocks such as corn and soybeans, because it analyzes those crops' impact on global land use. Industry experts say the Biden administration is sharply divided over the SAF issue; the State and Transportation departments are said to favor the ICAO model, while USDA and the Energy Department favor GREET.
Both the agriculture and SAF issues are critical to the future of the ethanol industry, which is already working on reducing its carbon intensity through the use of renewable power and the development of pipelines to sequester the carbon dioxide the plants produce. The average ethanol plant has a carbon intensity score under the GREET model of 55 to 60, said Devin Mogler, senior vice president for sustainability and communications with Green Plains Inc., an Omaha-based ethanol producer.
Getting credit for cover crops, split applications of nitrogen and other practices that store soil carbon or reduce nitrous oxide emissions from fields could reduce the score by as much as 25 points, he said. That’s where the potential benefits to farmers like Hora — who is also the CEO of Continuum Ag — come in. Depending on the rules for the 45Z credit, ethanol plants could conceivably pay farmers significantly higher prices for low-carbon corn than for conventional corn.
“We believe there's a big opportunity here,” Mogler said in a recent presentation to the Commodity Futures Trading Commission and its agricultural advisory board. “Of course, the devil is always in the details when it comes to regulatory rulemaking. So, we need Treasury to allow for that sort of specificity and that granularity to allow climate-smart ag practices to contribute here. We believe congressional intent was to spur investment and decarbonization across all facets of the energy landscape.”
The National Corn Growers Association, in comments filed with the IRS, said the agency should ensure that the 45Z credit use the most recent version of GREET and reflect “biofuel production processes and agriculture production practice changes that have the greatest impacts” on ethanol’s carbon intensity (CI) score.
Growth Energy, a leading ethanol industry group, also said in its comments that the regulations should require the GREET-based emissions rates used for the credit to be updated annually.
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Growth Energy also spells out five agricultural practices that should be used to determine the carbon intensity score of ethanol: Cover crops, reduced tillage, manure application, improved fertilizer practices, and usage of “green” or low-carbon ammonia for fertilizer. Green ammonia can be produced using renewable energy to produce ammonia from the nitrogen that’s in the air; anhydrous ammonia is made from natural gas.
According to Growth Energy, cover crops alone could reduce ethanol's carbon emissions by 20 kilograms per million BTUs. No-till practices could shave emissions another 3.4 kgs or more.
“I think there's real value here and real opportunity to transform the way we do agriculture,” said Mogler.
A lobbyist whose clients include oil refiners, as well as biofuel interests, said it’s not clear where the IRS is ultimately going to land on the issues. The lobbyist, who didn’t want to be named because of the sensitivity of the issue to his clients, said the tax credit is unusual because the 45Z credit brings together industries that often have been at odds with each other and has pit departments and agencies against each other.
The administration also is risking a backlash from Congress if it pursues restrictions on the credit that exclude biofuels.
“You can see the opportunity for mayhem that exists here,” he said.
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