The Treasury Department and Internal Revenue Service (IRS) issued preliminary guidance on the 45Z tax credit on Friday, which was created by the 2022 Inflation Reduction Act (IRA/Climate Act), including the addition of sorghum as a crop that could qualify as a feedstock for a fuel that can claim the 45Z credit if certain climate smart agriculture (CSA) practices are followed.
The program aims to incentivize the production of clean transportation fuels, including sustainable aviation fuel (SAF). Today’s announcement was a “notice of intent to propose regulations” for 45Z, meaning some important details of interpreting the tax code will be left to the incoming Trump administration.
Treasury also released a notice that provides the emissions rate table for the 45Z credit. And the updated GREET model will also be released soon, according to the Department of Energy.
In the long-awaited guidance, the U.S. is moving to curb imports of used cooking oil, which have been flooding into the country, for biofuels production. The guidance would prevent foreign supplies used to make biofuels from qualifying for the tax credit. This decision is seen as a win for U.S. farmers. The guidance notes Treasury and IRS concern with UCO relative to the “improper identification” of substances included that are not UCO such as virgin palm oil. There is no mention of imported UCO being eligible relative to the 45ZCF-GREET model.
Of note: There is a question whether the CORSIA model could be used for imported UCO, but it cannot be measured for GHG reductions under the 45ZCF-GREET model.
“This tax credit is essential to U.S. competitiveness and to reduce emissions in the transportation sector with more affordable, cleaner fuel,” Deputy Energy Secretary David Turk said. “The final guidance released today provides clarity and certainty to America’s world-leading biofuel industry.”
Ag Groups Criticize the Guidance for Lacking Details
U.S. biofuels and corn groups criticized the overall guidance as lacking details on what qualifies for tax credits.
- Geoff Cooper, chief executive officer of ethanol trade group Renewable Fuels Association, said it fell short of expectations and doesn’t give producers of corn-based U.S. ethanol the certainty they seek.
- Emily Skor, CEO of ethanol lobbying group Growth Energy, said the guidance “still lacks the critical details that are needed to help ensure that American biofuel producers and their farm partners can lead the world in clean fuel production.”
- The National Corn Growers Association said more clarity is needed about the specific environmental practices that will be required for accessing the credit. “What a missed opportunity for growers,” said President Kenneth Hartman Jr., an Illinois farmer.
The Only Real News
The only real news from the Treasury Dept. seems to be that foreign origin used cooking oil will not qualify for 45Z tax incentives under the so-called GREET model, a Department of Energy tool used to determine the full sweep of greenhouse gases emitted from the transportation and energy industries.
But some question whether the CORSIA model could be used for imported UCO, but it cannot be measured for GHG reductions under the 45ZCF-GREET model. The globally accepted Corsia standard established by the United Nations governing body for aviation, green jet fuel made with foreign feedstocks would have access to the credit, some note.
Others say UCOs still qualify for the Renewable Fuel Standard (RFS) program and California’s LCFS. Fuel made with UCO is highly valued in low-carbon fuel markets like California because of its relatively small carbon footprint. Some details and alerts:
Renewable Fuel Standard (RFS)
Under the RFS program administered by the Environmental Protection Agency (EPA), used cooking oil is an approved feedstock for producing renewable fuel. Specifically: UCO falls under the “Biomass-Based Diesel” category of the RFS. Fuels produced from UCO must demonstrate a life cycle greenhouse gas emissions reduction of at least 50% compared to petroleum diesel. Biofuel producers using UCO can generate Renewable Identification Numbers (RINs), which are credits used for RFS compliance.
California Low Carbon Fuel Standard (LCFS)
UCO also qualifies under California’s LCFS program: It is considered a low-carbon intensity feedstock for renewable diesel production. UCO-derived renewable diesel can generate LCFS credits due to its lower carbon intensity compared to petroleum diesel. The California Air Resources Board (CARB) has approved fuel pathways for renewable diesel produced from UCO. However, it’s important to note that there are some recent developments and potential changes regarding UCO in these programs:
- EPA has been conducting audits of supply chain documentation for imported UCO used in renewable fuel production. This is to ensure the legitimacy of UCO sources and prevent potential fraud.
- CARB is proposing new requirements for feedstock traceability and sustainability certification, although these may focus more on crop-based feedstocks rather than waste oils like UCO.
- There are discussions about potentially capping the use of certain biofuel feedstocks in the LCFS, but these proposals have primarily focused on crop-based oils rather than waste oils like UCO.
Soybean oil futures for March jumped by the exchange limit in Chicago on Friday, surging 7%, the most since June 2023.
Additional Details About Friday’s Announcement
The guidance states: “Under section 45Z, a fuel must be “suitable for use” as a transportation fuel. Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible. Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable.
Additionally, natural gas alternatives such as renewable natural gas (RNG) would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.
Electricity is not included in the definition of transportation fuel used in the guidance so electricity production is not eligible for the 45Z credit.
“Today’s guidance states that Treasury intends to propose rules for incorporating the emissions benefits from climate-smart agriculture (CSA) practices for cultivating domestic corn, soybeans, and sorghum as feedstocks for SAF and non-SAF transportation fuels. These options would be available to taxpayers after Treasury and the IRS propose regulations for the section 45Z credit, including rules for CSA, and the 45ZCF-GREET model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.”
Treasury said that it and IRS intend to define several key concepts and provide “certain rules” in a future rulemaking to:
- Make clear their intent to provide that the “the producer of the eligible clean fuel is eligible to claim the 45Z credit. Consistent with the statute, compressors and blenders of fuel would not be eligible.”
- Provide that under 45Z, a fuel must be “suitable for use” as a transportation fuel. “Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft.”
Treasury and IRS also expect there will be a requirement for “unrelated party certification of CSA crops, including information related to chain of custody of CSA crops throughout the biofuel supply chain.”
Treasury noted the CSA pilot program that was launched in relation to the SAF credit (40B) which had limited benefit for corn and soybean producers as it required corn producers to use three CSA practices —no-till farming, planting cover crops, and applying enhanced efficiency nitrogen fertilizer — on the same acres and soybean producers to use two practices — no-till farming and planting cover crops. “Treasury has received and continues to consider substantial feedback from stakeholders on that pilot program,” the agency said.
USDA is currently developing voluntary technical guidelines for CSA reporting and verification. Treasury and IRS will consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the section 45Z credit. USDA has sent to the Office of Management Budget (OMB) an interim final rule that would set voluntary technical guidelines for CSA reporting and verification. “Treasury and IRS will consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the section 45Z credit,” Treasury said.
Comments on the guidance are due by April 10.
