5 Things to Know About the New Sustainable Aviation Fuel Credits

Jacqui Fatka

May 7, 2024

The Inflation Reduction Act’s tax incentives were designed to expand production of sustainable aviation fuel (SAF) and lower-carbon fuels, and after completing the rulemaking process which incorporates public comments, the U.S. Department of Treasury released guidance on April 30, 2024. Retroactive for 2023 and 2024, the guidance specifically addresses the 40B tax incentive for SAF if the fuel reduces lifecycle greenhouse gas emissions by at least 50%.

The guidance also sets the stage for the roll out of Section 45Z, the Clean Fuel Production Credit. Effective at the start of 2025, 45Z provides a new tax credit for fuels based on their carbon intensity (CI) score against a baseline level. With the Biden administration’s goal to reach 3 billion gallons of annual SAF production by 2030, it will take both federal and state tax incentives to push commercial-scale production of SAF.

Here is the good, the bad, and the unknown for the new SAF tax guidance:

1. The guidance recognizes that climate-smart agricultural practices can reduce carbon emissions.

Good: For the first time ever, the Treasury Department recognizes that the use of cover crops, no-till or strip till and nitrogen efficiency stabilizers reduce carbon emissions.

Bad: The 40B tax credit takes a “check the box” approach. It requires corn farmers to use all three – cover crops, no-till and nitrogen stabilizers – and soybean farmers to use cover crops and no-till. 40B fails to account for the regional and soil topography challenges of adopting the specified actions and leaves off other beneficial practices including applying manure fertilizer and nitrogen reduction techniques.

Unknown: Although the Treasury Department updated the GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) life cycle analysis, the department admits more is needed. It has promised to develop a new 45Z-GREET model for the 45Z tax credit later this year. Stakeholders hope this update will eliminate the prescriptive approach and instead allow for specific CI reductions based on each verified practice at the farm level. If so, farmers could see CI reductions up to 30 points or maybe even more which can allow producers to capture higher value premiums as each CI point reduction offers an increased tax benefit.

2. The tax incentives offer SAF producers premium opportunities and increases their ability to pay more for feedstocks.

Good: The 10-point reduction in CI scores resulting from climate-smart agriculture practices equates to roughly 3.5 cents per point, or $0.35 per gallon. One gallon of SAF equals roughly 1.7 gallons of ethanol. This equates to an estimated $0.20/ethanol gallon tax credit value or $0.60/bushel.

Bad: Although the 40B tax credit is for the 2023 and 2024 calendar years, as of today very little market opportunity exists because commercial-scale production of SAF is minimal. Currently, the largest facility producing SAF is Georgia-based LanzaJet, at just 10 million gallons per year, and it is importing Brazilian sugarcane as a feedstock.

Unknown: Although farmers do the work of implementing climate-smart agricultural practices, the tax credit goes to the SAF processor that will then be able, but not required, to pass it on to farmers. Farmers hope to capture one-third to one-half of the tax credit value. At 200 bushels/acre, a corn farmer could create $120/acre value but may only garner $40 of it with the rest going to the SAF producer or others in the supply chain. Although this will not be enough to stimulate on-farm practice changes at scale, it is a start. States can also adopt incentives to encourage more SAF production such as a Nebraska, Illinois, Minnesota and Washington already have.

3. The data requirements are purposefully robust to avoid fraud.

Good: Companies are already in place to help with the rigorous data requirements for verification and traceability. At the field level, farmers must have an implementation plan and document their findings of applications and yield data, with third-party authorization.

Bad: Third-party verification adds another cost to the supply chain. Farmers with inadequate documentation could face penalties.

Unknown: The 45Z program is expected to require the same detailed level of documentation from farmers but is not known for certain. In looking to 2025 requirements, the documentation of crops planted in the 2024 growing season will be the potential feedstocks for the 2025 production of lower carbon fuels.

4. The guidance limits stacking voluntary carbon markets with tax incentives.

Good: Farmers who participate in U.S. Department of Agriculture (USDA) conservation programs such as the Environmental Quality Incentives Program or the Conservation Stewardship Program can continue to receive payments.

Bad: Participants in voluntary carbon markets who receive outcome-based payments cannot stack those payments with the tax incentive. A farmer participating in the Climate Smart Commodities pilot program at USDA cannot participate in any other voluntary carbon market.

Unknown: The limit is on outcome-based carbon programs, not the funding provided through USDA’s climate-smart partnerships or similar programs that offer a flat fee for implementation of cover crops. If this limitation is included in the 45Z guidance, it could significantly hinder ag participation in carbon programs.

5. Sales must be directly between a farmer and an SAF producer.

Good: Registered SAF producers that want to use the climate-smart agriculture reduction for producing SAF from crops must contract directly with USDA’s farmers participating in the pilot program. A USDA climate-smart agricultural producer may provide multiple separate certificates verifying the total volume sold to the SAF producer.

Bad: Grain buyers such as local grain cooperatives may not participate in purchasing CSA grain if the 40B requirements are carried forward in the 45Z program.

Unknown: If 45Z allows a grain elevator to purchase a certain percentage of CSA grain and sell it to a SAF producer, does it need to be segregated? If CSA-certified grain is blended with non-CSA grain, can a blended assumption be certified by the grain elevator if it sells to a SAF producer?

The biofuels industry says the 40B guidance is a good first step in establishing the opportunity for grain and oilseed producers to capitalize on new market demands for low carbon fuels. However, Congressional members say it falls short of the goals of the Inflation Reduction Act and could limit new market opportunities for farmers and the industries who serve them. Although the 40B guidance offers some good and bad for the biofuels industry, changes within 45Z guidance are needed to curate the right incentives to help increase SAF supplies for use in 2025–2027. However, many unknowns still lie ahead.