The U.S. renewable fuels industry is grappling with uncertainty over a new, potentially profitable tax credit, with the lack of clear regulatory guidance holding back investment and threatening the growth of biofuel projects.
Renewable diesel and biodiesel producers, who currently receive a $1.00 per gallon blending credit, could see the value of this credit drop to about $0.39 per gallon for low carbon-intensity feedstocks. In some cases, such as with soybean oil and canola oil, no credit would be awarded at all, according to an analysis by AEGIS. Adding to this uncertainty, the upcoming presidential election could result in changes to the Inflation Reduction Act (IRA), further complicating the industry’s financial outlook.
This regulatory ambiguity has already stalled investments in both new and existing renewable fuel projects, putting at risk the rapid development of sustainable aviation fuel (SAF), which was expected to take off next year.
With the future value of the credits uncertain, biofuel producers are scaling back purchases of renewable feedstocks like soybean oil. This comes at a time when the U.S. is on track to harvest a record soybean crop, potentially destabilizing returns for U.S. farmers and fueling calls to introduce a domestic feedstock requirement for eligibility for credits.
The Clean Fuel Production Credit
The Clean Fuel Production Credit (45Z), part of the IRA passed in 2022, was designed to encourage investment in low-carbon renewable fuels and boost SAF production. The 45Z provides a baseline credit of $0.20 per gallon, which can go up to $1.00 per gallon, depending on the greenhouse gas (GHG) emissions reductions of the fuel. To qualify for the baseline credit, a fuel must reduce GHG emissions by at least 50%.
Sustainable aviation fuel (SAF) qualifies for a higher baseline of $0.35 per gallon, with a potential maximum credit of $1.75 per gallon.
The 45Z credit replaced the previous blenders’ tax credit (BTC), which awarded $1.00 per gallon for all biodiesel and renewable diesel blended into the fuel pool. Under the current guidelines, biodiesel and renewable diesel derived from low-carbon feedstocks, such as distillers corn oil, used cooking oil, and tallow, would earn an average credit of around $0.39 per gallon. However, soybean oil and canola oil would not qualify for 45Z credits under these rules, potentially disadvantaging U.S. farmers.
Uncertainty Surrounds GREET Model
The key factor in determining how much credit producers will receive lies in the emissions model used to calculate life cycle analysis (LCA) for various feedstocks. The U.S. Department of Energy’s Argonne National Laboratory developed the Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) model, which assesses emissions rates based on feedstocks, farm practices, and production processes.
The lower the emissions rate of a feedstock, the higher the credit value for producers. Soybean oil, which makes up about a third of the feedstock used in the renewable diesel and biodiesel sectors, currently does not qualify for 45Z credits under the GREET model. This puts U.S. farmers at a disadvantage compared to imported, low-carbon feedstocks like used cooking oil (UCO) and tallow.
U.S. imports of UCO have surged dramatically, with imports growing by more than 750% since 2022. China has been the largest supplier of UCO, although these imports have faced scrutiny due to concerns about the potential inclusion of virgin edible oil content.
With nearly half of U.S. soybean oil typically used for renewable fuel, U.S. farmers could face a significant drop in demand, prompting calls for a domestic feedstock requirement to ensure U.S. crops are eligible for the 45Z credit.
Potential Updates to the GREET Model
Recent updates to the GREET model suggest some adjustments that could benefit U.S. crop-based feedstocks. The U.S. Departments of Energy and Treasury released limited guidance on the updated 40B SAF-GREET 2024 model in October, which establishes pathways for SAF to qualify for a $1.25 per gallon credit. This credit requires the use of climate-smart agriculture (CSA) practices, such as cover crops and no-till farming, which could reduce emissions for soybean oil and corn ethanol.
Under the updated model, the credit for soybean oil in SAF production could rise to $0.44 per gallon, compared to $0.26 per gallon under the previous guidance. This could imply a $0.15 per gallon credit for renewable diesel made from soybean oil, which would increase to $0.25 per gallon with CSA practices.
These changes could be a lifeline for U.S. farmers and biofuel producers, providing new opportunities for profitability. However, the final shape of the 45Z credit will depend on the political and regulatory decisions made in the coming months.
The Impact of the Election
The fate of the IRA—and the 45Z credit—may depend heavily on the outcome of the 2024 presidential election. Republicans have signaled that they may seek to cut or scale back portions of the IRA, which passed narrowly in 2022 with a strictly partisan vote. Former President Donald Trump has suggested scrapping the IRA and rescinding unspent funds if he returns to office, while Vice President Kamala Harris cast the tie-breaking vote to pass the legislation.
If elected, Trump is unlikely to make significant changes to the 45Z credit, given the widespread investments in renewable fuels from key stakeholders, including big oil and agriculture, as well as job creation in red states. However, Republicans may attempt to leverage their position to negotiate for tax breaks and a shift in federal spending priorities toward infrastructure and manufacturing.
Alternatively, a second term for President Biden would likely see the full implementation of the IRA, with a continued focus on expanding climate-friendly policies and renewable energy.
Looking Ahead
As the U.S. prepares for the 60th presidential election, the future of the biofuel industry hangs in the balance. While changes to the 45Z credit are expected, their impact on feedstock pricing and the broader renewable fuels market remains unclear. Updates to the GREET model could benefit U.S. farmers and help level the playing field for crop-based feedstocks. At the same time, the possibility of tariffs on foreign feedstocks under a Trump administration could provide protection for U.S. farmers.
The road ahead will be volatile, but opportunities to manage risks and capitalize on emerging trends will remain for U.S. producers. A final determination on the 45Z credit is expected only after the new president takes office in 2025, as the Treasury Department continues to prioritize other issues in its 2024 agenda. Meanwhile, industry stakeholders are closely monitoring regulatory and policy developments to navigate the evolving landscape.
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