Farmers and biofuel producers eagerly await new 45Z tax credit set to take effect in 2025

Sustainable aviation fuel could emerge as the next opportunity for substantial growth in U.S. biofuels production with proper market and regulatory incentives. Agricultural feedstocks are poised to play a leading role in the supply chain for domestic SAF production. However, any meaningful growth opportunities will be largely dependent on favorable policies and adequate incentives for farmers and the wider biofuels industry.

According to a new report from CoBank’s Knowledge Exchange, the anticipated guidance for the 45Z tax credit, also known as the Clean Fuel Production Credit, will be a determining factor for the extent of agriculture’s role in SAF production. Authorized in the Inflation Reduction Act, the 45Z tax credit is intended to encourage domestic production of clean transportation fuels. It replaces the 40B tax credit for SAF production and is set to take effect Jan. 1, 2025. 

“The 40B tax credit guidance for SAF fell short in effectively incentivizing farmers to adopt the prescribed set of on-farm conservation practices required to be eligible for the credit,” said Jacqui Fatka, farm supply and biofuels economist with CoBank. “Farmers are hoping the new guidance offers more flexibility to employ practices that are applicable to their individual operations. The 40B guidance reflected a one-size-fits-all approach, which is certainly not the case for farms spanning the entire country.”

RURAL AMERICA REVITILIZATION

The advent of low-carbon biofuels ushered in an era of new market opportunities for U.S. farmers, beginning with ethanol in 2005 and continuing more recently with biodiesel and renewable diesel. Increased demand for corn and soybean oil for use in the production of cleaner-burning transportation fuels has supported farm incomes and strengthened rural economies, particularly during periods of low commodity prices. SAF is unlikely to offer a short-term solution for lower commodity prices but does provide longer-term opportunities to revitalize rural America.

Farmers and renewable fuel producers are also hoping for longer-term policies that provide more market certainty. The Inflation Reduction Act only authorized the 45Z tax credit for three years beginning in 2025. “The lack of longer-term incentives, as well as a lack of offtake agreements from the airline sector, will limit adoption and growth in the market,” Fatka added.

Federal and state policy initiatives designed to reduce greenhouse gas emissions and imports of foreign oil have successfully bolstered domestic production of renewable transportation fuels in the past. The Energy Policy Act of 2005 authorizing the Renewable Fuel Standard set the stage for rapid expansion of ethanol production.

The Sustainable Aviation Fuel Grand Challenge, announced by the Biden administration in September 2021, set production goals of 3 billion gallons of SAF by 2030 and 35 billion gallons by 2050 to satisfy 100% of domestic airline fuel demand. 

According to the latest government dashboard of SAF projects, between 2.6 billion and 4.9 billion gallons of SAF may be produced annually by 2030, creating a clear pathway to achieve the SAF Grand Challenge near-term goal. However, it will be dependent on policy initiatives and market conditions that give biofuel producers the flexibility to expand production capacity of both renewable diesel and SAF.

While the 45Z tax credit is set to take effect on Jan. 1, 2025, the final guidance has yet to be issued. The government is finalizing an updated Greenhouse Gases, Regulated Emissions and Energy Use in Technologies model, which could include improved accounting for climate-smart ag practices. According to Fatka, the delay is causing uncertainty for farmers, biofuel producers and other market participants.

“Biofuel producers are unlikely to move forward on any expansion plans until the new guidance is published,” said Fatka. “And the delay creates more uncertainty for farmers as they make decisions about planting, input purchases and conservation programs for 2025.” 

Read the report, Charting the Path Forward for SAF at https://tinyurl.com/5a73wfvx.