Key Takeaways

• The Biden administration’s proposed 45Z tax credit under the Inflation Reduction Act aims to enhance clean fuel production and bolster farm income.
• Uncertainties loom as the incoming Trump administration may alter or delay the implementation of the credit, impacting the biofuel sector.
• USDA’s proposals include new feedstock options and practices, but further advocacy will be needed to finalize guidelines and secure industry support.

USDA’s Plans for Biofuel Industry Faces Uncertainty

The biofuel industry is cautiously optimistic regarding the Biden administration’s framework for the 45Z tax credit. This initiative, which became effective on January 1, aims to incentivize clean fuel production and enhance agricultural income but faces potential challenges under the incoming Trump administration.

The Department of Treasury, along with the USDA and Department of Energy, outlined the implementation of the 45Z tax credit, replacing expired biofuel credits. Treasury’s proposed guidance recognized agriculture’s role in fuel production, hinting at excluded eligibility for imported used cooking oil. Meanwhile, the USDA’s interim rules on climate-smart agriculture expanded eligible feedstocks to include sorghum and removed a bundling requirement for qualifying practices, offering greater flexibility for farmers.

The USDA also introduced a feedstock carbon intensity calculator, providing localized estimates for different crops and practices. This tool is projected to integrate with the DOE’s GREET model to assess carbon intensity and establish credit values.

If the USDA’s guidelines are finalized and incorporated into Treasury’s 45Z framework, they could yield significant benefits for both farmers and biofuel producers. However, with the transition of power, much depends on how the Trump administration chooses to navigate these proposed changes.

Geoff Cooper, president of the Renewable Fuel Association, commented on the need for the new administration to piece together the plans left by its predecessor. The incoming Trump administration has already begun to shift the landscape by issuing an executive order to review existing policies under the Inflation Reduction Act, creating an atmosphere of uncertainty for biofuel advocates.

Economist Scott Irwin pointed out that the newly labeled “Scarlet Letter” associated with IRA tax credits may challenge the industry’s efforts to push for these policies in Congress. Nonetheless, various stakeholder groups expressed satisfaction with USDA’s interim rule, suggesting it reflects responsiveness to feedback regarding flexibility and practice requirements.

Industry leaders highlighted particular wins, such as the inclusion of sorghum–a significant crop for biofuel production–in the USDA guidelines. They believe this acknowledgment signals a balanced approach to sustainable agricultural practices. Additionally, the county-level scoring in the USDA calculator allows for more precise evaluation, which could enhance economic opportunities for farmers.

Under planned structures, producers could access potential credits worth up to $1 per bushel based on implemented practices. Even though the newly calculated credits for biodiesel and renewable diesel are lower compared to the previous 40A biodiesel blenders credit, there is optimism about easing agricultural production scores, potentially boosting credit values.

However, challenges persist, including uncertainties from the USDA’s approach to supply chain management. Many industry groups prefer a book-and-claim strategy over the mass-balance approach currently proposed by the USDA. Advocates believe this alternative could facilitate better tracking and trading of climate-smart agriculture certifications.

Advocacy from stakeholders will continue, focusing on urging the next agriculture secretary to adopt these technical guidelines from the USDA and to persuade the Trump Treasury Department on the final incorporation of the carbon intensity calculator into the credit system.

Despite the turbulence caused by the shift toward a new administration, those in the biofuel sector continue to see potential in the framework laid out and remain hopeful for bipartisan support, particularly from lawmakers representing biofuel-producing regions. Nevertheless, many in the industry are already feeling the pinch of regulatory delays, as clarity around the 45Z credit is crucial for making necessary investments and ensuring competitive margins in the ever-evolving clean fuel market.

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