The Treasury Department and Internal Revenue Service (IRS) issued preliminary guidance (link) on the 45Z tax credit 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 (link) that provides the emissions rate table for the 45Z credit.
The updated GREET model will be released soon (link), 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 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.
Energy Dept. comments. “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.”
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.
Reaction:
American Soybean Association (ASA) Support: ASA President Caleb Ragland applauded the guidance, highlighting its benefits for U.S. farmers and the domestic biofuels sector. ASA emphasized the importance of leveraging this opportunity to strengthen rural America and the broader U.S. economy.
National Oilseed Processors Association (NOPA) Endorsement: NOPA acknowledged Treasury’s efforts to prioritize American farmers and energy independence. Concerns had been raised about the surge in imported waste feedstocks like used cooking oil (UCO), which poses a threat to domestic agriculture. ASA and NOPA said the notice published by the Treasury Department addresses these concerns by ensuring imported used cooking oil remains ineligible for the 45Z credit through the GREET model until such time that Treasury can promulgate substantiation regulations for imports.
The National Corn Growers Assn. said farmers, particularly corn growers, have expressed disappointment over the lack of clarity in the Treasury Department’s updated details on the 45Z tax credit. While the recent updates provided some additional information, NCGA President Kenneth Hartman Jr. criticized the guidance for not incorporating growers’ feedback on practical environmental requirements. The group said growers have spent a year presenting data-driven recommendations, arguing that some of the proposed environmental practices are unfeasible in certain climates. The responsibility to refine these guidelines, NCGA added, now falls to the incoming administration to ensure the credit’s effectiveness and usability for the biofuel and farming sectors.
Some biofuel industry representatives expressed disappointment with the guidance:
The Renewable Fuels Association (RFA) President and CEO Geoff Cooper stated that the guidance is still incomplete, noting that important information from the emissions rate table remains unavailable, making it impossible for producers to know whether their fuel is eligible for the credit.
Iowa Renewable Fuels Association Executive Director Monte Shaw was particularly critical, calling the announcement “a story of too little, too late” and emphasizing that it is not a final rule or safe harbor, but merely a notice of intent.
Environmental Groups’ Perspective
Environmental Defense Fund (EDF) expressed concerns about the environmental integrity of the guidance for sustainable aviation fuels (SAF): Mark Brownstein, EDF’s Senior Vice President of Energy Transition, stated that the announcement “underscores just how challenging it is to deliver on this laudable objective and how imperative it is that we continue to do the hard work of getting this right.”
EDF, along with other environmental groups, had previously warned that they would oppose the extension of 45Z if Treasury took a similar approach to its guidance on the 40B tax credit, which they believed allowed pathways for low-integrity SAF to qualify for subsidies.