Treatment of sustainable aviation fuel under the 45Z tax credit for clean fuel producers in the Senate GOP budget reconciliation could be detrimental for the domestic market, sources say.
Both the House-passed reconciliation bill, and the proposal by the Senate Finance Committee would preserve 45Z and extend it through 2031, a win for many across the biofuel spectrum. But key differences between the two proposals could have a major impact on the SAF space.
Senators hope to vote on the final reconciliation bill and return it to the House later this week. Until then, senators are debating key provisions of reconciliation, including 45Z and SAF.
The clean fuel production credit is one of the few Inflation Reduction Act credits preserved in this reconciliation. Credits like those to support electric vehicles, clean electricity and clean hydrogen production were cut or will be phased out.
Upon returning from meetings at the White House Monday night, some senators reported that President Donald Trump wanted the entirety of the IRA cut. However, the 45Z credit has significant support from Republicans representing the agriculture sector.
Leaving a GOP conference Monday night, Sen. Jerry Moran, R-Kan., said the Senate Finance Committee's 45Z provision was still under discussion. Leaders indicated in the meeting that they plan to continue the path of the draft released last week. But Moran noted there’s no final text.
Sen. Jerry Moran, R-Kan. (Senate photo)Ahead of the final text, SAF and farm groups are pushing the Senate to adjust pieces of the 45Z provision.
In a letter obtained by Agri-Pulse, 37 farm groups urged Senate Finance members to move toward the House proposal for disincentivizing foreign feedstocks instead of the Senate proposed model.
Under the House reconciliation bill, the credit could only apply to fuels made with feedstocks from the U.S., Canada or Mexico. The Senate version would cut the value of the credit by 20% if the fuel uses feedstocks grown outside the U.S., which farm groups worry is less effective in making domestic feedstocks competitive.
SAF value lowered in Senate proposal
While the House bill does not explicitly mention SAF, the Senate proposal suggests lowering the maximum value of the credit for SAF from $1.75 per gallon to $1. This puts it on the same level as other road fuels like ethanol and renewable diesel.
This cut would be a challenge for the SAF industry given it’s an opt-in fuel under the Renewable Fuel Standard and Low Carbon Fuel Standard programs, Tom Miller, who leads biofuels regulatory affairs for energy giant BP, said on a webinar. This means SAF is starting at a disadvantage in comparison to road fuels. The increased credit value under 45Z was an important incentive for SAF project development.
Renewable diesel production and SAF production have similar economics. However, Bruce Fleming, CEO of Montana Renewables, said that without a premium, producers are less compelled to produce SAF.
“People won't bear the working capital cost. People won't bear the transportation costs and the headaches absent a premium,” Fleming said. “That can come from policy support, that can come from the market, that can come from early adopters, that can come from countries with mandates.”
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Unlike road fuels, SAF producers have to build new infrastructure in the U.S., said Lindsay Fitzgerald, chief advocacy and communications officer at Gevo.
Fitzgerald said the biodiesel blenders tax credit was effective at getting many road fuels on a level playing field by supporting the development of blending infrastructure. The 45Z credit was intended to build off those developments and support options that would reduce carbon intensity.
“Today what matters is carbon intensity and innovation,” Fitzgerald said of the 45Z credit value model. “That’s what this program is rewarding.”
If the Senate proposal isn't changed, Fitzgerald said some refineries could convert to renewable diesel. But without the added incentive, the SAF market is likely to stall. This lowered credit could specifically hinder ethanol to jet facilities, Fitzgerald said.
Lower credit could slow industry growth
SAF is one space in which the ethanol and corn industry see some promise, particularly given consumer demand and the push for sustainability across the globe. But it’s going to take time for the industry, particularly the ethanol-to-jet sector, to scale up, said Matt Ziegler, biofuel policy lead for the National Corn Growers Association.
“Knocking down the value of that credit by 75 cents is certainly detrimental in our eyes," he said.
Geoff Cooper (RFA photo)
Shortly after the Senate text was released, Kurt Kovarik, vice president of federal affairs for Clean Fuels Alliance America, said he could see the credit reduction becoming an impediment to making the fuel competitive or potentially slowing further investment.
Geoff Cooper, president and CEO of the Renewable Fuels Association, echoed concerns about the reduction in the value for SAF under the Senate proposal. He said the original structuring of 45Z presented challenges for alcohol-to-jet production, but cutting the credit will make that even harder.
Under the Senate proposal, ethanol producers can claim the 45Z credit for themselves rather than selling their fuel to an alcohol-to-jet SAF producer, which could undermine growth, Cooper explained.
“If Congress envisioned 45Z helping to drive growth in sustainable aviation fuel and really open the door for alcohol-to-jet made from corn ethanol, we’re not sure that limiting 45Z to $1 for SAF is going to accomplish that goal,” Cooper said.
The SAF industry backs some features, including extension through 2031. The sector has long called for a longer runway for the credit to provide market certainty and encourage investment. This extension is likely to provide that, particularly for independent developers, Miller said.
The Senate version does not phase out transferability for the credit. The House version does. Preserving transferability does add cost but is a win for both renewable road fuels and SAF.
“We have to have it,” said Fleming of Montana Renewables of transferability. “Nobody’s going to operate without it.”
Before the IRA, it was not possible to sell and buy credits. Instead, a producer could allocate credits to an investor through partnership allocation rules. But this was a complex and burdensome process, said Sue Moon, an associate at King and Spalding. Even though the transferability rules are still complex, it was quickly adopted by many producers.
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