New Treasury Tax Guidelines Open Door for Corn and Soy in Sustainable Aviation Fuels

By Claire Brown

Updated May 3, 2024 1:10 pm ET|WSJ PRO

The Treasury will now accept an emissions model that puts corn and soy-based biofuel in range for a tax credit. PHOTO: SCOTT OLSON/GETTY IMAGES

The guidance is a boon for biorefineries, but some observers worry it is based on unproven assumptions

The Biden administration cleared the path for ethanol and soy-based biofuel to be eligible for tax credits when used in sustainable aviation fuels, according to new Treasury Department guidance released this week. 

Biorefineries can qualify for tax credits if the inputs are sourced from corn and soy farms that use certain “climate-smart” conservation practices, like no-till agriculture and cover cropping.

The tax credit of $1.25 a gallon, established by the Inflation Reduction Act of 2022, applies to fuels that reduce greenhouse gas emissions by 50% compared with conventional jet fuel. Producers of fuel that exceeds that level receive one extra cent for each percentage point above 50%, up to a $1.75 possible credit.

Some producers have been able to claim the tax credit since 2023. Those that source feedstock eligible under the new guidance can claim the credit retroactively for 2023.

At issue in the government’s decision was whether biofuels derived from corn and soy achieve the 50% minimum emissions reduction threshold.

While different methods of accounting for biorefinery-level emissions are largely in agreement, they diverge on agriculture-related inputs like changes in land use and the impact of conservation practices, said Nik Pavlenko, fuels program lead at the International Council on Clean Transportation, a research organization.

For example, under one emissions model corn saves 10% to 15% of emissions compared with conventional jet fuel, Pavlenko said. A different model favored by the industry is more generous, putting corn closer to the 50% threshold, he said. The Treasury will accept a version of the accounting method that puts 50% in reach for corn and soy, making fuel made from those feedstocks potentially eligible for the tax credit.

Sustainable aviation fuel is a large component of the air travel industry’s plan to reduce emissions, as battery- or hydrogen-powered planes remain a distant prospect. Yet in 2023, just 24.5 million gallons of SAF were consumed in the U.S., according to the Environmental Protection Agency. The Biden administration has set a goal of producing 3 billion gallons of SAF domestically by 2030.

Karen Huggard, vice president of government affairs at the National Air Transportation Association, a trade group, said that the Treasury tax credit so far has had the biggest impact in attracting investors to some emerging and nascent SAF producers, and in helping existing domestic producers expand their operations.

Treasury’s decision paves the way for ramped-up domestic production of sustainable aviation fuel, which will help airlines inch toward emissions goals and offer a potential new revenue stream for ethanol producers who anticipate losing business as drivers purchase electric vehicles and reduce their reliance on gasoline blended with ethanol. 

Environmentalists have expressed concern that by stimulating demand for corn and soy as fuel sources, the new guidelines could lead to deforestation and increased use of farmland for fuel production. “Powering planes with crop-based biofuels is anything but sustainable,” said Dan Lashof, director of World Resources Institute, U.S., in a statement after the guidance was released this week.

Others are skeptical of the emissions mitigation potential of “climate-smart” agriculture practices. The guidelines incorporate a pilot project that grants emissions-reduction credit to producers that purchase from qualifying farms, but Pavlenko called the figures “arbitrary.” 

“The key issue moving forward is on climate-smart ag: Right now, what they’ve found with the pilot program inspires very little confidence. Any legitimate path forward for it will have to rely on a much more rigorous scheme that involves monitoring, reporting, and verification, and actual measurement of CO2 changes. Otherwise, we can’t be confident in those numbers,” he said. 

The guidance issued Tuesday applies to a credit that will expire at the end of 2024, but Huggard said she hopes it forecasts the Treasury’s thinking on a similar tax credit that will roll out in 2025. “It’ll likely see some polishing as it goes forward, but it’s an initial policy that allows for agriculture to be included in SAF credits and SAF programs,” she said. (Click here for the original article in the WSJ PRO)