The US renewable fuels industry is increasingly mired by a lack of regulatory guidance surrounding a new, potentially lucrative tax credit.
Renewable diesel and biodiesel producers currently receiving a $1.00/gallon blending credit could see value drop to roughly $0.39/gallon for low carbon-intensity feedstocks and receive no credit value for soybean oil and canola oil, according to AEGIS analysis of current guidelines.
The looming election casts further uncertainty on the margin environment for 2025 as parts of the Inflation Reduction Act could be targeted for cuts.
The ambiguity has stalled investments in new and existing renewable fuels projects and threatens to set back the rapid development of sustainable aviation fuel (SAF) expected to take off next year.
Unsure of the ultimate credit value to be received next year, biofuel producers are cutting back purchases of renewable feedstocks like soybean oil.
The halt in buying comes as the US is poised to harvest a record soybean crop, threatening to roil returns for US farmers, spurring calls to include a domestic feedstock requirement to govern eligibility for credits.
The Clean Fuel Production Credit
Set forth in the Inflation Reduction Act (IRA) in 2022, the Clean Fuel Production Credit, or 45Z, intended to spur investment in low-carbon renewable fuels and drive increased production of SAF.
The 45Z allocates a baseline $0.20/gallon up to $1.00/gallon for renewable fuels contingent on the fuel’s greenhouse gas emissions (GHG) factor. A fuel must reduce GHG emissions by at least 50% to qualify for the baseline credit.
SAF gets a $0.35/gallon baseline up to a maximum $1.75/gallon.
The 45Z takes the place of the more emissions-neutral blenders’ tax credit (BTC) which provided $1.00/gallon for all biodiesel and renewable diesel blended into the fuel pool.
Current guidelines show credit value for biodiesel and renewable diesel averaging around $0.39/gallon for low carbon intensity feedstocks such as distillers corn oil (DCO), used cooking oil (UCO), and tallow, according to AEGIS estimates. Soybean oil and canola oil would not qualify for the 45Z (see table).
Uncertainty Centers on GREET
The crux to determine how much credit value is ultimately earned by US producers lies in the climate model ultimately adopted to establish emissions rates.
The US Department of Energy’s Argonne National Laboratory Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) is the preferred model to determine the ultimate life cycle analysis (LCA) of various feedstocks, farm practices, transportation impacts, and production processes.
The lower the emissions rate of a particular fuel pathway, the more credit value is earned by the producer.
Soybean oil is the most abundant renewable feedstock source available in the US, making up roughly 33% of the total feedstock slate across the renewable diesel and biodiesel sector. Canola is rapidly gaining share at 16% of the total feedstock slate.
Yet under current GREET modeling, soybean oil and canola oil do not qualify for 45Z crediting, putting US farmers at an enormous disadvantage to lower carbon-intensity (CI) imports like UCO and tallow.
US imports of UCO surged by more than 756% since 2022 and have grown more than 2.5X in the past year alone, with imports accounting for roughly 60% of all UCO used for renewable-fuel consumption (see graph).
The bulk of US UCO imports have been sourced from China. Chinese imports have come under increased scrutiny amid suspicions of virgin edible oil content.
With nearly half of soybean oil typically slated for renewable fuel consumption, US farmers could see a significant drop in demand for their feedstock, prompting calls for a domestic feedstock requirement to be added to the 45Z to even the playing field.
The GREET model in its current form could devastate US farmers and many US biofuel producers.
With so much at stake, something has to give.
Updates to the Model
The most recent update to the GREET model provides clues to what may ultimately take shape as the USDA and Treasury Department grapple with the complexities of issuing a nationwide, emissions-based tax credit.
Both the Departments of Energy and Treasury released limited guidance alongside an updated 40BSAF-GREET 2024 model in October.
The 40B SAF credit pilot program in effect for 2023-2024 establishes eligible pathways for SAF to qualify for a $1.25/gallon credit requiring the use of a bundled of climate smart agriculture (CSA) including, cover crops, no-till farming, and enhanced efficiency fertilizers. The inclusion of CSA would lower soybean oil CI by 5kg/MMBtu and by 10kg/MMBtu for corn ethanol.
The 40BSAF-GREET 2024 model presents profitable pathways for soybean oil in the production of SAF, at $0.26/gallon of credit value, according to AEGIS estimates. The inclusion of CSA would drive 45Z value to $0.44/gallon.
Using this model to infer 45Z values for soybean oil-derived renewable diesel would imply $0.15/gallon, and $0.25/gallon with CSA compared to no value under previous modeling.
Changes to various emissions scores could further advantage crop-based feedstocks, while the de-bundling of CSA, as well as the addition of additional CSA practices would make more of the US crop eligible for the 45Z.
This would be good news for farmers and producers, while additional updates could drive even greater profitability.
Crossing the Election
The IRA and its associated funding and tax cuts are a likely target for US Republicans, driving fears that the 45Z could be cut or watered down under a Republican administration.
The IRA eked out a narrow margin in 2022, passing along strict party lines with all 220 House Democrats voting for it and all 207 Republicans against.
Donald Trump has commented that he aims to scrub the IRA and rescind any unspent funds.
On the other side of the aisle, Vice President Harris cast the tie-breaking vote for the IRA, which, despite its name, became the largest climate-spending bill in history.? It seems almost certain the IRA would be implemented in-full under a Harris administration.
Despite the rhetoric, if elected, a Trump administration is unlikely to materially alter the IRA, particularly the 45Z, as a swath of key stakeholders ranging from big oil to big Ag have made substantial investments to date and may require section 45 credits to remain profitable. The bulk of these projects also reside in red states and due to lucrative conditions for prevailing wage and apprenticeship provisions under the IRA, spur job growth in the renewable fuels sector.
Killing the IRA or repealing portions of the Act would require an act of congress. This likely means that first, Republicans would have to retain control of the House, while sweeping the Executive and Senate.
We believe Republicans are more likely to use their position on the IRA to drive bargaining and earn concessions on tax breaks and reallocating funding as Trump aims to drive federal spending toward infrastructure and manufacturing under a new government-efficiency commission.
Trump, if elected, could resort to his favorite economic instrument to quickly protect US industries and interests—tariffs. Tariffs were central to Trump’s first term and can be implemented under executive order.
Trump has called for high tariffs on all foreign goods. If foreign feedstock is hit with higher tariffs, this could bridge the gap between US soybeans and foreign UCO and tallow, acting as a protectionist measure for US farmers.
Where do we go from here?
The cabinet members appointed by the next president will determine the ultimate form of the GREET model adopted to guide the 45Z credit.
We do not expect to see final guidance on the 45Z credit issued until a new president takes office. The Treasury Department has prioritized other credits over 45Z for its 2024 agenda.
We view neither candidate as a material threat to the 45Z credit given the potential for significant disruptions to the biofuel industry, US farmers, and substantial investment on the sidelines.
Despite various calls for a domestic feedstock requirement, based on our analysis, the USDA is unlikely to pursue this stipulation.
The USDA will likely unbundle CSA practices and add additional practices to ensure that the bulk of the US crop is eligible for credits.
Under a second Trump term, we see the potential for tariffs on foreign feedstock to even the playing field with US crop-based feedstocks. This may be augmented with favorable changes to the GREET model for crop-based feedstocks.
Under Harris, crop-based feedstocks would require more favorable terms under the GREET model in the absence of any limitations on foreign feedstock.
There is also the possibility for an extension of the BTC for 2025. Veterans of the industry have seen several extensions and even retroactive extensions of the BTC over the years, so this remains on the table in the form of HR 9060.
While we have discussed the 45Z credit in isolation, the ultimate changes will have material impacts on additional credits like RINs and LCFS and feedstock pricing. We anticipate the shift to the 45Z credit will drive increased arbitrage prospects for US producers.
The road to recalibration will prove volatile, with abundant opportunities to derisk.
AEGIS continues to closely monitor regulatory and policy developments as the US braces for its 60th Presidential Election.
