May 13, 2024

By Gianna Kinsman, Capstone Energy analyst  

The Biden Administration has ushered in a new era for sustainable aviation fuel policy— a big test for climate smart agriculture’s (CSA) role in tackling climate change, and a notable foreshadowing of the future biofuel policy landscape.  

On April 30^th, the Treasury released the sustainable aviation fuel (SAF) 40B-GREET model, which opened the door for soy and corn-based biofuel to be eligible for tax credits when used in sustainable aviation fuel. The new guidance updates the model, Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies—or GREET—with additional data and clarity on how taxpayers can seek sustainable aviation fuel tax credits. 

The Biden Administration has ushered in a new era for sustainable aviation fuel policy— a big test for climate smart agriculture’s (CSA) role in tackling climate change, and a notable foreshadowing of the future biofuel policy landscape.  

The developments provide additional flexibility for crop-based SAF production. Biorefineries can qualify for tax credits if the inputs are sourced from soy and corn farms that use certain “climate-smart” conservation practices, like no-till agriculture and cover cropping. 

Climate Smart Agriculture’s Big Test 

We think the model will be a bellwether for climate-smart agriculture—practices, and technologies designed to boost productivity while reducing greenhouse gas emissions. The tax credit of $1.25 a gallon, established by the Inflation Reduction Act (IRA), applies to fuels that reduce greenhouse gas emissions by 50% relative to traditional jet fuel. Fuel producers that exceed that level receive one extra cent for each percentage point above 50%, up to a possible credit of $1.75 a gallon. 

The GREET model guidance specifies that the Carbon Intensity (CI) score for SAF from the US corn alcohol-to-jet ethanol pathway may be reduced by 10 gCO2e/MJ by bundling three agricultural practices: no-till farming, cover crops, and enhanced-efficiency nitrogen fertilizer. For US soybean hydroprocessed esters and fatty acids (HEFA) pathway SAF, the CI score is reduced by five points by bundling two climate-smart agricultural practices: no-till farming and planting cover crops.  

The verifiability of these practices will be put to the test. The guidance notably specifies traceability and verification requirements, which had caused delays for the interagency working group made up of the US Department of Agriculture (USDA), Environmental Protection Agency (EPA), Federal Aviation Administration (FAA), Department of Energy (DOE), and Internal Revenue Service (IRS) developing this modeling and guidance. The guidance requires the SAF producer to collect the necessary certificate from the farmers and maintain compliance with recordkeeping and traceability requirements, while an unrelated party certifier is required to ensure these requirements are met. The CSA certifier’s responsibilities include auditing these records and verifying traceability. One certification team member must be a USDA Technical Service Provider or Certified Crop Advisor. The provisions also require farmers to sign a letter of intent to continue practicing no-till and cover cropping, with stringent no-till requirements that allow only a periodic tillage every five or ten years. The CSA farmer must directly contract with the SAF producer, or, if using an intermediary, the SAF producer must comply with recordkeeping practices regarding the intermediary, including the quantity of feedstock received and delivered along the supply chain. Finally, intermediaries and the SAF producer must also comply with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) traceability requirements.  

The verifiability of these practices will be put to the test. The guidance notably specifies traceability and verification requirements, which had caused delays for… developing this modeling and guidance.

Given these significant new traceability burdens and the all-or-nothing bundling approach to these practices, the reaction from SAF industry participants and representative trade associations has been broadly two-pronged: optimism that climate-smart agricultural practices have been incorporated into the tax policy for sustainable aviation fuel and disappointment at the stringency of requirements for the implementation of the practices themselves as well as the traceability provisions.  

We believe the interagency working group will consider unbundling these practices over the next several months as it develops 45Z guidance and adds additional eligible climate-smart agriculture practices, more in line with the breadth of practices currently recognized by USDA. 

The Foreshadowing of the 45Z Tax Credit Details   

We also believe the release of the (SAF) 40B-GREET model foreshadows what’s to come for the much-anticipated details of the 45Z tax credit, which will run from 2025 through 2027. 

The Inflation Reduction Act (IRA) included the creation of a new clean fuel production tax credit under section 45Z to support clean energy production.  SAF producers expect to benefit from the 45Z tax credit. However, guidance on how to claim and qualify for the credits has been slow coming.  This has left biofuel producers anxiously awaiting a sense of certainty on how to deploy capital investments to capture carbon for the credit or lower their carbon intensity (CI) score.  

We believe members of the working group have clearly signaled that this 40B guidance is a precursor to separate guidance for the 45Z credit, which provides a $1.75/gal base value for an SAF CI mediated multiplier that requires the CI score of the SAF to be below 50. The IRS’ announcement of the GREET model and guidance explicitly states, “To credit CSA practices in the Clean Fuel Production Credit (45Z), which becomes available in 2025, the agencies will do further work on modeling, data, and assumptions, as well as verification. A new 45Z-GREET will be developed for use with the 45Z tax credit.”  

USDA Secretary Tom Vilsack also stated, “Today’s announcement is an important stepping-stone as it acknowledges the important role farmers can play in lowering greenhouse gas emissions and begins to reward them through that contribution in the production of new fuels. This is a great beginning as we develop new markets for sustainable aviation fuel that use homegrown agricultural crops produced using climate-smart agricultural practices. USDA will continue to work with our federal agency partners to expand opportunities in the future for climate-smart agriculture in producing sustainable aviation fuel.” Previously, in a Congressional fireside chat on April 26^th, Secretary Vilsack reportedly called the 40B guidance a “placeholder.”  

We expect that the 45Z guidance will be released in Q4 of 2024 and will closely track the dynamics surrounding further guidance development as stakeholders press the Treasury and the interagency working group on these climate-smart agriculture provisions and other related issues. 

Getting the methodology right could spur innovation, investment, and new revenue streams for biofuel producers while lowering emissions and tackling climate change.

Getting the methodology right could spur innovation, investment, and new revenue streams for biofuel producers while lowering emissions and tackling climate change. Sustainable aviation fuel is a major component of the air travel industry’s plan to reduce emissions. However, EPA data show only 24.5 million gallons of SAF were consumed in 2023. That’s far from the Biden administration’s goal of 3 billion gallons of SAF production annually by 2030. 

As always, the devil is in the details. Capstone will closely follow developments for our investor and corporate clients.  

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