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Biofuels get boost from tax credits, infrastructure funding in surprise US Senate budget proposal

Highlights

Allocates $500 million to biofuel infrastructure improvements

SAF tax credit could ease price gap with renewable diesel

Biofuel producers who have at times felt overlooked in the wake of the Biden administration's push for vehicle electrification cheered incentives for low-carbon fuels included in a surprise climate investment deal reached by the US Congress.

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The so-called Inflation Reduction Act of 2022, if passed, would make available $369 billion in energy security and climate change spending over the next decade. The legislation includes funding and key tax credits to boost biofuel production, as part of a deal unveiled late July 27 between Senator Joe Manchin, Democrat-West Virginia, and Senate Majority Leader Chuck Schumer of New York for a party-line budget reconciliation bill.

"At long last, we are pleased to see the new Senate bill on climate change, which recognizes the important role renewable fuels like ethanol can play in a lower-carbon future for this nation," Renewable Fuels Association President and CEO Geoff Cooper said in a statement.

The bill would make $500 million in grant funding available on a competitive basis for projects aimed at increasing the sale and use of biofuels through infrastructure improvements. Projects that aid with blending, storing, supplying or distributing fuels made from agricultural feedstocks would be eligible, with an eye on getting higher biofuel blends to market.

The grants would help cover the costs to install or upgrade fuel dispensers, storage tanks and related equipment needed to dispense higher blends of ethanol and biodiesel. They could also be put toward the construction or retrofitting of distribution systems for ethanol and biodiesel, according to the bill's text.

Tax credits

The legislation also extends the $1/gal tax credit for biodiesel, renewable diesel and alternative fuels through 2024 and creates a new tax incentive through 2024 for sustainable aviation fuel.

S&P Global Commodity Insights viewed the SAF tax credit as potentially helpful to closing SAF's price gap relative to renewable diesel.

S&P Global assessed US renewable diesel without credits at $3.31/gal July 28, compared with SAF without credits at $4.06/gal. The average price gap between the fuels in July was around 72 cents/gal, up from a June average of about 61 cents/gal.

The Biden administration in September 2021 announced an initiative to cut US aviation emissions by 20% by spurring production of 3 billion gal/year of SAF by 2030. The administration further set a target of meeting all US aviation fuel demand with SAF by 2050, requiring an estimated 35 billion gal/year of the low-carbon fuel.

The SAF credit in the Senate deal would be at $1.25/gal plus an additional 1 cent/gal for every percentage point by which the life cycle greenhouse gas emissions reduction of the fuel compared with petroleum-based jet fuel exceeds 50%, granting producers a maximum incentive of $1.75/gal.

Lifecycle GHG methodology

Leading US bioenergy producers took issue with an earlier version of the SAF tax credit proposed in the draft Build Back Better Act, asserting that it relied on an outdated model for assessing lifecycle carbon emissions to determine program eligibility.

Specifically, they argued that that the bulk of the model developed by the International Civil Aviation Organization referenced in the legislation was seven to 15 years old and had not kept pace with innovation in biofuel production.

The new tax credit proposal for SAF would rely on the most recent carbon offsetting and reduction scheme for international aviation adopted by the ICAO or any similar methodology that satisfies certain Clean Air Act criteria.

The Renewable Fuels Association deemed the new lifecycle GHG methodology an improvement but still imperfect.

"Although the GREET model is still not explicitly mentioned for SAF under the provision, the language reverts to the House language and allows for both the ICAO methodology or a 'similar' methodology that meets the requirements of Clean Air Act Section 211," a spokesman said in an email.

After 2024, the Senate deal lays out a new clean fuel production credit for 2025 through 2027 that would apply to all low-carbon fuels, starting at 20 cents/gal for on-road transportation and 35 cents/gal for aviation.

On-road transportation fuels could receive up to a $1/gal credit while SAF would again be eligible for a maximum credit of $1.75/gal if certain labor requirements are met. Those amounts would be adjusted for inflation each year.

RFS

Under the bill, the Environmental Protection Agency would receive additional funds to carry out certain tasks tied to its annual obligation to determine the amount of renewable fuel that must be mixed with gasoline and diesel under the Renewable Fuel Standard program.

The bill sets $5 million aside for the EPA to develop tests and protocols to gauge the environmental and public health effects of fuels and fuel additives, perform analyses to regularly update regulations and guidance for determining a fuel's lifecycle GHG emissions and to evaluate the impacts of transportation fuels on low-income and disadvantaged communities.

Another $10 million would be allocated to the EPA for new grants to industry players and related activities to support investments in advanced biofuels.

"For the US to meet its climate goals, we must quickly expand the volume of low-carbon biofuels available across the entire transportation sector – on the ground, in the air, and at sea," Growth Energy CEO Emily Skor said. "These provisions can jumpstart that climate progress, while delivering more savings at the pump, greater long-term energy security, and a welcome economic boon to rural communities."