The Inflation Reduction Act (IRA) presents multiple opportunities for the ethanol industry aimed at carbon reduction.
The Inflation Reduction Act introduces a new era for the ethanol industry, and a few new acronyms. Besides extending the provisions of 45Q-Carbon Capture and Sequestration (CCS), the IRA established a new program, 45Z-Clean Fuel Production Credit, adding incentives for sustainable aviation fuel (SAF) and other advanced fuels and provides funds for HBIIP (Higher Blends Infrastructure Incentive Program) and other USDA programs aimed at climate-smart farming.
Mel Schwarz, senior manager on national tax for Eide Bailly, says the most important initial impact of the IRA will be from the retroactive extension of the second-generation biofuels credit. He also expects a major impact from the expansion of the 45Q tax credit for carbon capture and sequestration.
“Ethanol comes out as the lowest cost of anybody for carbon capture and well below the $85 a ton in the new legislation,” Schwarz says.
He cites a study that’s now a couple years old that indicated the cost for capturing, transporting and storing carbon from the ethanol process at about $46 per ton. That profit potential is likely to stimulate a lot of interest in CCS from ethanol production.
Another IRA provision that Schwarz finds interesting is 48C-Qualified Advanced Energy Project credit, which he adds will have to be certified by the IRS, creating more hoops to jump through for interested parties. The 48C credit is for an investment to re-equip, expand or establish a facility for the production or recycling of a long list of products, which he points out includes renewable fuels. “What place could ethanol have?” he asks. “It seems to meet the definition.” Other possibilities include retooling for sustainable aviation fuel (SAF) or cellulosic ethanol production.
The alternative fuel refueling property tax credit could present new opportunities, Schwarz suggests. While primarily aimed at electric vehicle charging stations, the 30 percent alternative fuel credit applies to any fuel of which 85 percent consists of a list of fuels — including ethanol. That effectively reduces the cost of installing an E85 refueling station, which combined with another IRA feature could attract investments by tax exempts, Schwarz says. “The city, the county, the school district, the college — they don’t pay taxes, so what good was a tax credit? Probably the biggest change in the IRA is they made many of those credits direct pay.” A county installing E85 refueling equipment, for example, could get a check from the Internal Revenue Service (IRS) equal to what it would have claimed if it were a taxable entity. “On top of that, the people who are taxed but can’t use the credit because they are a startup and don’t have profit yet, or haven’t earned enough money, they can sell the credit to somebody else for cash.”
Monetizing tax credits, carbon reductions
Dana Jackson, a partner and national leader on federal credits at RSM US, suggests that ability to monetize tax credits is going to be important to many ethanol plants.
“Many ethanol plants are organized as limited liability companies (LLCs) that have several hundred or over 1,000 members and when you have that structure, the tax credits pass through to your members,” Jackson says. Because individual members’ tax situations can be so different, it’s difficult to know if all members can utilize the credit, she explains, but under IRA provisions, those tax credits are transferable and can be sold for cash. “We’re still waiting for guidance on how exactly this transferability provision will work,” she says, but looking at how a limited number of other transferable federal tax credits, certain state tax credits and wind and solar projects have been handled in the past, it’s likely these credits will be sold at a discount through brokerages. “We’ve been hearing 85 to 95 cents on the dollar might be what these are selling for, but we won’t know until the market actually starts.”
Jackson has been digging into the provisions of the IRA’s 45Z-Clean Fuel Production Credit, scheduled to begin in 2025 offering tax credits for three years. The technology neutral credit applies to transportation and sustainable aviation fuels meeting the threshold of lifecycle GHG emissions of 50 kgCO2e/MMBtu (roughly 48 gCO2e/MJ). The base credit is 20 cents per gallon, with bonus credits up to $1 per gallon determined by the emissions rate for GHG reductions, with the additional provision that prevailing wage and apprenticeship requirements are met. While a provision to meet prevailing wage and apprenticeship requirements will be new for many in the ethanol industry, she adds, the provision has been around for decades and is very familiar to taxpayers working on public works projects.
Just how the emissions factors for GHG reductions are to be calculated is a concern for many. The IRA specifies the use of Argonne National Laboratory’s GREET model, which is considered a big plus. The American Coalition for Ethanol submitted feedback to the IRS in early December supporting the use of GREET but suggesting that some important emissions factors are not yet fully incorporated in the model that should be considered — climate-smart agricultural practices being one of several. ACE cited recent studies, including a South Dakota-based project, that are increasing confidence in quantifying the GHG reduction impacts of tillage intensity, nutrient management, crop yield and soil carbon sequestration.
Jackson adds the new law allows taxpayers to file petitions with the secretary for determination of an emissions rate not yet established for a specific situation. “There’s questions from some that if we get this table and they don’t feel the rate given for corn-based ethanol reflects what a specific plant is doing to reduce CI [carbon intensity], are they going to be able to petition for a provisional emissions rate?” She will be looking for IRS guidance on that and other uncertain details in the act.
Another question being raised, she continues, applies to some ethanol plants partnering in CCS projects. The new law says you can’t get credits for both 45Q and 45Z, Jackson explains, but some asking whether a plant would be eligible for 45Z credits, if the CCS equipment was owned by a third party claiming 45Q credits—another point needing IRS guidance.
Weighing the Opportunities
With the prospect of earning valuable tax credits in the new legislation, ethanol producers are following the discussions on the IRA details and taking a fresh look at their options and long-range plans.
“In the past, these CI score reductions were not as important because our location did not necessarily mean we could take advantage of the LCFS markets, like California’s,” says Chad Kuhlers, CEO of Golden Grain Energy, Mason City, Iowa.
“With the recently passed IRA, projects that may have been marginal are now getting second looks.” Golden Grain has replaced its HRSG (heat recovery steam generator) and added Whitefox membrane solutions in recent years, he adds. “We continue to look for other solutions to reduce our CI, which includes additional heat integration, expansion of the membrane solutions and replacement of other equipment to reduce our energy consumption.”
At Sutherland, Nebraska, Midwest Renewable Energy is weighing whether to utilize 45Z or 45Q, says General Manager Tom Wilson. “One provides a credit for three years and the other for 12 years,” he points out, adding that the IRA doesn’t allow doing both. “We’re trying to review what technologies will work at our plant and make sense.” MRE currently ships ethanol to California, so they know their CI score under the California version of GREET, but ANL’s GREET is a little different. “We’re very close,” he says, to meeting the 45Z threshold. Thus, they’ll be weighing whether the potential 45Z bonus credits will be greater than the 45Q credits.
The carbon intensity of corn feedstock production is a big part of corn ethanol’s CI score, points out Wayne Garrett, general manager of Chief Ethanol Fuels, in Hastings, and Lexington, Nebraska. Thus, climate-smart farming practices is on the list of many things being considered by the two plants he manages. Garrett cites an anecdotal report where climate-smart farming practices dropped corn’s CI from 29 to -11. “I don’t know if that’s been validated, but you add that to carbon capture, and we’d be looking good for reaching net zero.” Garrett adds that smart farming and carbon capture are just two things on the company’s list of carbon-reducing technologies under consideration. Renewable natural gas, anaerobic digesters, combined heat and power and other plant efficiencies are being evaluated.
“We’re taking an all-of-the-above approach — a multifaceted solution figuring where we’re going to get the best payback.”
“The IRA has the potential to be the most transformative piece of legislation since the RFS,” says Jeff Oestmann, CEO of Granite Falls Energy and Heron Lake BioEnergy in Minnesota. “Decarbonization is really where we’re going, and the Inflation Reduction Act is a rallying cry for us to make significant changes.”
With a combination of CCS and other technologies under consideration, Oestmann fully expects his plants to reach zero carbon intensity well before the 2050 target set by many in the industry. Incentives help, but even without, he sees a need to make continued improvements and diversify beyond just producing ethanol. “Margins are getting compressed as the lows get lower and the highs get lower,” Oestmann says, listing a number of potential new uses for ethanol in alcohol-to-jet fuel (sustainable aviation fuel), fuel cells, bio-based chemicals and polymers — all of which are looking for low-carbon feedstocks. He sees the growing interest in low carbon fuel standards moving out of California and the West Coast, into Canada, New York and even his home state of Minnesota where clean fuel standards are in consideration. “Even before the IRA, we were moving toward low carbon,” he says. “We can’t stick our heads in the sand. Our industry is changing before our eyes. We’ve got to do something.”
IRA Biofuel Provisions at a Glance
45Z Clean Fuel Production Credit
Establishes technology-neutral credit for fuel with a carbon intensity of 50 kg CO2e/MMBtu (48 grams CO2/MJ) or less. Authorized for three years—Jan. 1, 2025 to Dec. 31, 2027.
Set the base credit at 20 cents per gallon, bonus credits based on GHG reductions with a maximum of $1.
Requires treasury secretary to publish annual GHG emission rate for fuels, with lifecycle GHG emissions determined by most recent GREET model, “or a successor model as determined by the secretary.”
45Q Tax Credit Extension
Extends “commence construction” qualification window to before Jan. 1, 2033.
Authorizes direct pay for first five years after equipment placed in service; no direct pay for final seven years of credit.
Increases credit value for equipment in service after Dec. 31, 2022, to $85 per ton for CO2 storage in saline geologic formations, $60 for utilizing captured CO2 in low-carbon fuels, $60 for EOR.
SAF Tax Credit
Establishes base tax credit of $1.25 per gallon for sustainable aviation fuel (SAF) with at least 50% GHG reduction. In effect January 2023 through December 2024. SAF then is eligible for 45Z at the $1.25 base rate.
Increases credit by 1 cent per gallon for every additional percentage point of reduced GHG emissions up to a maximum of $1.75 per gallon.
HBIIP
Authorizes $500 million for USDA grants for the Higher Blends Infrastructure Incentive Program through Sept. 30, 2031, citing E15 and E85 specifically, also applicable to biodiesel.
Sets cost share at 75% to install, retrofit or upgrade equipment, storage systems and other infrastructure for ag-based fuels.
Limits a single entity to no more than 10% of appropriated funds, unless insufficient eligible applications.
Alternative Fuel Refueling Property Tax Credit
Extends current credit and increases value of property covered to $100,000.
Includes renewable fuels blended at 85%.
Advanced Biofuel Grants
Authorizes $10 million for advanced biofuel grants from EPA through Sept. 30, 2031.
Climate-Smart Agriculture
Authorizes $18 billion total for USDA programs:
$8.45 billion for EQIP addressing reduced methane from livestock, soil management practices to reduce nitrogen losses and GHG emissions.
$4.95 billion for RCPP projects that improve soil carbon, reduce N losses and GHG emission.
$300 million for NRCS to collect and quantify field-based data on carbon sequestration and GHG emissions.
Fuel Study
Authorizes $5 million for EPA to test and collect data on the environmental, health and lifecycle GHG effects of all transportation fuels and fuel additives.
