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Inflation Reduction Act charts a new course for US biofuels industry

  • Featuring
  • Corey Lavinsky
  • Commodity
  • Agriculture Energy Transition Oil
  • Topic
  • US Policy

On Aug. 16, US President Joe Biden signed the Inflation Reduction Act of 2022 into law, providing incentives to various sectors, including the biofuels industry. The Act does not replace the existing Renewable Fuel Standard, so the EPA will continue setting volumetric blending mandates each year.

Though ethanol is mentioned only thrice in the lengthy law, ethanol producers will benefit from its carbon capture, utilization and storage provisions, clean fuel production credits, and incentives for ethanol-based sustainable aviation fuel. In addition, cellulosic ethanol manufacturers celebrated the revival of a previously-expired $1.01/gal second generation biofuels credit.

Many US ethanol producers plan to use carbon capture technologies to reduce the life cycle carbon intensity of their fuel. Lowering a fuel's CI score increases its value, particularly in low-carbon markets such as California and Oregon.

Summit Carbon Solutions, Navigator CO2 and Wolf Carbon Solutions are among the companies planning pipelines to transport CO2 captured from ethanol plants and store it underground. As of August, Summit and Navigator each had 32 facilities signed up for their networks. Summit announced that Iowa landowners have signed more than 1,200 voluntary easements for its pipeline.

The new law extends and expands the tax credit for CCUS, commonly known as the 45Q tax credit, for projects that begin construction between 2023 and 2032. 45Q tax credits are based on the volume of qualified carbon oxides captured and sequestered.

Last renewed in 2018, the new law bumps up the value of the credit to $85/mt for sequestration and $60/mt if the carbon oxide is utilized, presuming that the facility complies with prevailing wage and apprenticeship requirements. The credits are 80% lower if the requirements are not met.

The minimum volume thresholds needed for facilities to qualify for the credit have also changed. Prior to the law, an ethanol plant needed to emit more than 100,000 mt/year of carbon oxide to qualify. Now it is only 12,500 mt/year. The new provisions apply to facilities and equipment placed in service after Dec. 31.

Two lesser-known biofuels credits that expired at the end of 2021 were revived retroactively: the alternative fuel mixture credit and the 2G biofuels credit.

The alternative fuel mixture credit is a 50 cents/gal tax credit that rewards the use of fuels such as propane and compressed natural gas in a motor vehicle, motorboat or aircraft. The law removed liquified hydrogen as an alternative fuel as it is now covered by other provisions.

The 2G biofuels credit provides up to $1.01/gal for the production of 2G biofuels. Qualified feedstock includes any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis as well as any cultivated algae, cyanobacteria or lemna. These credits were also extended to the end of 2024.

IRA benefits also extend to biodiesel, renewable diesel and SAF

The on-again, off-again $1/gal federal biomass-based diesel blending credit was set to expire on Dec. 31, but was extended to Dec. 31, 2024. The credit mostly applies to blending biodiesel and renewable diesel, but SAF is eligible for the credit as well.

The new law gives SAF a more valuable credit than biodiesel and renewable diesel starting in 2023. The new $1.25/gal SAF blending credit applies toward SAF that reduces emissions by at least 50% compared to standard jet fuel. An additional 1 cent/gal will be given for each percentage point over 50% to a max of $1.75/gal.

The life cycle GHG emissions reduction percentage shall be defined in accordance with CORSIA or "any similar methodology" which satisfies the criteria of the Clean Air Act. The SAF needs to be dispensed in the US to qualify.

Under the new law, any feedstock currently used to produce SAF under an approved pathway meeting the requirements of ASTM (American Society for Testing and Material) International Standard D7566 or the Fischer Tropsch provisions of ASTM International Standard D1655, Annex A1 is still eligible.

However, the law's restrictive definition of SAF specifically excludes fuel co-processed with a feedstock which is not biomass from receiving the blending credit. Further, the SAF cannot be derived from palm fatty acid distillates or petroleum.

Several new multifuel facilities are expected to come online over the next few years that will produce both renewable diesel and SAF. The new blending credit scheme will likely induce producers to increase their expected SAF output if they can sell the fuel at a higher price than renewable diesel.

US refiners jump on the renewable fuel bandwagon

Blending credits will be replaced by a clean fuel production credit in 2025. Ethanol, biodiesel, renewable diesel and SAF will all be eligible for the credit. The credit will apply to fuel produced at a qualified facility sold to an unrelated person for use in the production of a fuel mixture, for use in a trade or business, or sold at retail.

The amount of the credit will depend on the facility's compliance with prevailing wage and apprenticeship requirements. The base credit for transportation fuel produced at a qualified facility which does not satisfy the wage and apprenticeship requirements is 20 cents/gal. It is $1/gal if the requirements are satisfied. For SAF, the amounts are 35 cents/gal and $1.75/gal, respectively.

The base credits will then be multiplied by an emissions factor for the fuel, which will be the quotient of an amount equal to 50 kg of CO2e/MMBtu, minus the emissions rate for such fuel, divided by 50 kg of CO2e/MMBtu. The government is required to publish a table annually with the emissions rate for different types of transportation fuels.

Through a combination of tax credits and competitive grants for SAF and biofuel infrastructure projects, the US biofuels industry fared very well with this landmark legislation.