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 Jul. 22, 2024 by Roger Cryan, Chief Economist, American Farm Bureau Federation On June 27, the Department of Agriculture (USDA) put out a request for information about "Procedures for Quantification, Reporting, and Verification of Greenhouse Gas Emissions Associated With the Production of Domestic Agricultural Commodities Used as Biofuel Feedstocks." What does that mean and why did they do it? On April 30, the Internal Revenue Service (IRS) announced its guidance on how sustainable aviation fuel (SAF) made with corn or soybeans can qualify, under very limited circumstances, for the Sustainable Aviation Fuel Tax Credit. The guidance is the first time that the IRS has outlined a pathway for any grains to be eligible for this credit (often called the Section 40B credit, for its location in the tax code as part of 2022's Inflation Reduction Act). In December 2023, the IRS put out guidance that provided a similar "safe harbor" for soybean-based fuels that met certain standards under the Environmental Protection Agency's Renewable Fuel Standard, but this is the first time that grain has clearly qualified. This guidance is designated a pilot program that will require a very specific bundle of climate-smart agricultural practices to assure the IRS that the corn and soybeans meet the law's requirement of a 50% greenhouse gas reduction, compared to petroleum-based aviation fuel. So, What Does This Really Mean for Farmers? The good news is that this is a first step by the IRS toward recognizing U.S.-grown grains and oilseeds as potential feedstocks for sustainable aviation fuel. The tax code lays out general eligibility for these credits if the fuel results in 50% less greenhouse gas emissions than petroleum-based fuel; but if the IRS doesn't agree with how you calculated (or documented) your eligibility, you can be charged with tax fraud and hit with very stiff fines and even jail time. So, complying with IRS guidance can often be the only practical way to safely use such credits. Ethanol from sugar was already eligible for this credit; but imported ethanol was arguably the only sugar ethanol that is affordable for this, even with the credit. Sugar ethanol eligibility is based on a United Nations climate impact model that considers U.S. corn and soybean production to have a large negative climate impact from land use change - because it generalizes land clearing for row crops in places like Brazil - while it assumes that Brazilian sugar production has limited negative climate impact from land use change because the area devoted to global sugar production has been relatively steady. Imported ethanol also benefits from a relatively low U.S. tariff. As a result, the only SAF plant currently producing jet fuel from ethanol in the United States will claim credits based on its use of Brazilian sugar ethanol. The April 30 guidance is the first time that any grains have been explicitly included in the Section 40B credit, based on the U.S. Department of Energy's GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) climate model. USDA convinced the IRS to accept a so-called "safe haven" in which very specific sets of cropping practices for corn or soybeans would be assumed to reduce GHG. Specifically, corn growers must have planted a cover crop last fall, planted that corn without tilling, and use a qualifying "enhanced efficiency" fertilizer. Soybean growers must have planted a cover crop last fall and practiced no-till this planting season. Cover crop decisions, of course, were made last fall, tillage decisions have largely been made, and most fertilizer has already been bought or booked, if not already applied. As of April 28, two days before this pilot program was announced, 27% of corn and 18% of soybeans had already been planted, according to USDA's crop progress report, so it is too late for farmers to implement these practices if they haven't already. Those who happened to do what is required for the credit face overwhelming paperwork requirements that dictate very detailed records and documentation of activities that happened months ago, as well as clear segregation of their crop for delivery to the SAF plant. This credit expires at the end of 2024, so the new guidance will only apply through the 2024 crop year. This means that it may reward a few participants in USDA's Climate Smart Commodities program, but that no corn or soy farmers will adopt a sustainable practice directly as a result of this guidance, since most of the relevant decisions were made before the rules were known. The requirement for cover-cropping also leaves out many famers whose soil or local climate simply don't allow for it, and the third-party certification requirements could raise barriers for smaller producers. USDA's Search for Better Science The recent guidance is important for one thing, though: thanks to a hard push by USDA, the Department of Energy has recognized the potential climate benefits of jet fuel from corn within its model and the IRS has accepted at least one narrow set of circumstances under which they can qualify for sustainable fuel credits. It also provides a pathway for soybeans using the GREET model, in addition to the EPA's RFS standards. That the IRS calls this a "pilot program" even though it applies to a tax credit that expires at the end of 2024, indicates that they are working on including corn and soybeans more broadly in GREET model validation - and potentially other grains and oilseeds - in the Clean Fuels Production Credit that picks up where this credit leaves off at the end of this year. The so-called Section 45Z credit will apply in 2025 through 2027, and includes sustainable aviation fuel and other fuels. To read the entire report click here. Tweet |
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