Preliminary 45Z guidance offers promise as new era begins in DC
By Susanne Retka Schill
As the new year rolls in, uncertainty is the keyword for ethanol proponents. In mid-January, the outgoing administration finally released long-awaited guidance on the 45Z Clean Fuel Production Tax Credit and carbon intensity accounting for Climate-Smart Agriculture (CSA) practices. But the guidance was preliminary, and the rules clearly labeled “draft,” which leaves the incoming administration in charge of finalizing them. Then, there’s the uncertainty surrounding the incoming administration and its cabinet nominees, plus the shifting landscape in Congress.
USDA CSA Draft Rules
The U.S. Department of Agriculture’s interim rule lays out guidelines for quantifying, reporting and verifying greenhouse gas (GHG) emissions of biofuel feedstocks produced using CSA practices. The rules cover field corn, soybeans and sorghum, the draft says, because they comprise the vast majority of feedstocks in use, plus there is limited data on other oilseed feedstocks. The draft outlines requirements for record keeping and verification standards targeted at each step in the supply chain, including farms, first points of aggregation, intermediaries and refiners. The draft rules allow a third-party verifier for the first point of aggregation to randomly select a subset of farm suppliers for audits and also allow farm producers to voluntarily arrange audits of their farm records.
The CSA practices defined in the USDA rule include no-till, reduced till, cover crops, nitrification inhibitors, split in-season nitrogen application and no fall nitrogen application. CSA crops and conventional crops can be physically commingled on the farm or in the supply chain, with carbon intensity (CI) calculated using a weighted average.
American Coalition for Ethanol (ACE) CEO Brian Jennings noted the USDA rule aligns with ACE’s feedback and specifically mentions ACE’s Regional Conservation Partnership Program (RCPP) projects. “The RCPP projects will serve as a valuable resource to inform updated GHG credit values for CSA, improve the accuracy of GREET and address perceived information gaps currently preventing farmers and ethanol producers from monetizing CSA practices in regulated markets.” He thanked USDA for its leadership “in taking critical steps to support farmers and biofuel producers in achieving verifiable carbon reductions through climate-smart practices. We’re pleased to see greater flexibility for farmers, including the stacking of practices and a departure from the all-or-none bundled approach previously required under 40B (the short-term tax credit given SAF).”
The USDA is seeking comments about several items that may be included in the final rule, if sufficient research and data emerges in the comment stage. That includes the potential inclusion of canola feedstocks, conservation crop rotation and other enhanced efficiency fertilizer products. The agency also requests comments on the creation of a book and claim system that would allow decoupling the CI credit from the actual grain, giving farmers greater market flexibility.
In addition, the USDA is seeking feedback on a draft Feedstock Carbon Intensity Calculator (FD-CIC) for three crops — field corn, soybeans and sorghum — that can be used to calculate per-bushel carbon intensity using one or more CSA practices. The inputs include county location and field-level CSA practices. This is separate from the Department of Energy’s own FD-CIC and 45ZCF-GREET model, which was released the same day in mid-January that will be used to calculate CI scores under 45Z.
ACE Board Director Ron Alverson has calculated various scenarios with the new FDCIC and says it is an outstanding tool. “When no-till corn is chosen, it not only estimates a soil organic carbon (SOC) sequestration credit but reduces energy use and indirect nitrous oxide emissions as well,” Alverson said.
Comments on USDA’s “Technical Guidelines for Climate-Smart Agriculture Crops used as Biofuel Feedstocks” and feedback on the FDCIC are due March 18, pending potential timeline changes from the Trump administration.
In its statement following the release, National Corn Growers Association (NCGA) President Kenneth Hartman Jr. thanked outgoing USDA Secretary Vilsack “for ushering the process along and increasing the numbers of corn bushels that would qualify for the tax credit. It is still unclear whether that is enough to enable farmer participation.” A book and claim system and the expansion of qualifying practices would encourage greater participation, he added.
Given the newness and complexity of the program, it will take time to fully understand the potential opportunity and even longer to implement them. “Those agronomic decisions don’t happen overnight,” says Matt Ziegler, NCGA public policy director for renewable fuels. “There’s a whole suite of practices that are utilized all over the country that can make significant steps towards [CI reduction].”
45ZCF-GREET
As mentioned, on the same day the USDA CSA guidelines came out, the DOE released its specially designed 45ZCF-GREET model to be used to calculate carbon intensity for the Treasury Department’s 45Z Clean Fuel Production Tax Credit, established in the Inflation Reduction Act. The goal was to meet three parameters: “user friendliness and consistency, technical robustness of the pathways represented, and consistency with other 45Z requirements.”
In its 45Z preliminary guidance, the Treasury Department explains that the GREET research and development version is not suited to regulatory compliance. “While the R&D GREET model is a valuable tool for characterizing the benefits and impacts of energy technologies in a directional manner and testing new and updated data and parameters, it is not appropriate for use in analyses where a high degree of precision and certainty is required.” The R&D GREET model, for example, offers users many choices that can result in calculating different emission rates for the same fuel.
45Z Draft Guidance
Days before the USDA CSA and DOE 45ZCF-GREET announcements, the Treasury Department released its draft guidance, disappointing just about everyone looking for the details in the subsequent USDA and GREET announcements.
The 50-some page preliminary guidance, however, provides draft language on numerous important rules for sustainable aviation fuels (SAF) and non-SAF fuels. It includes definitions, registration requirements, outlines qualifying sales and gives examples applying anti-stacking rules for 45Z with similar tax credits for carbon capture (45Q) or hydrogen (45V). Individuals or organizations accredited by ANSI or as a verifier under the California Low Carbon Fuel Standard will qualify as third-party certifiers for the program. The guidance also covers how producers can petition for a provisional emissions rate for novel fuels or pathways. The proposed rule does not qualify imported used cooking oil but allows imports of tallow, certain Canadian oilseeds, and Brazilian sugarcane ethanol.
The preliminary rule also says Treasury will propose rules at a future date on how climate-smart agriculture practices can be applied to reduce GHG emission rates for 45Z tax credits. Comments on the proposed rule are due April 10, pending potential timeline changes from the Trump administration.
Jennings indicates a near-term goal is to convince the Trump Treasury to incorporate USDA’s CSA guidelines into the final rule for 45Z. “Former Secretary Vilsack and the staff at USDA’s Office of Chief Economist did an incredible job developing the CSA guidelines and we strongly urge the Trump Treasury to copy and paste their work into the final rule for 45Z.”
The 45Z tax credits are a substantial incentive for reducing carbon intensity, with a base credit of 20 cents per gallon for all fuels meeting the 50 kg/MMBtu threshold for carbon intensity and 35 cents per gallon for SAF. Facilities satisfying prevailing wage and apprenticeship requirements get a higher credit of $1 per gallon for non-SAF and $1.75 per gallon for SAF. The incentives grow with additional CI reductions.
Congressional Opportunities, Challenges
While corn and ethanol producers were relieved to finally see the preliminary 45Z and CSA guidelines, the path forward is still uncertain because the guidance will be finalized and implemented by the incoming Trump Administration. Plus, the fate of the entire IRA could be in jeopardy as well.
Ziegler, NCGA’s policy director for renewable fuels, says there’s reason for hope that parts of the program will prevail. “There’s a lot of Republicans on the Hill that would like to see the entire IRA repealed. That's a very real concern,” he says. “But we’ve got a lot of good friends on the House Ways and Means and Senate Finance committees from the Midwest from the Corn Belt that see biofuels the way we do.” He points to the request for information on the renewable credits in the IRA that was issued by six members on the Ways and Means committee in November. In NCGA’s comments, Ziegler says, “we asked for material changes to the credit implementation itself, and we asked for a 10-year extension.” One possibility, he says, is that individual pieces of the IRA will be rolled into a large tax package at some point this year.
Jennings points out that Congress enacted the IRA, “and so Trump couldn’t sign an executive order to do away with it. Speaker Johnson has indicated the House would use a surgical approach, as opposed to a sledgehammer, when it comes to the IRA. We do expect them to take up legislation to get rid of parts of it, and the parts Trump has complained most loudly about have to do with electric vehicles and wind and solar power. We have Republican supporters for 45Z in both the House and the Senate, and we will rely on them to help make the case that 45Z needs to remain; not only remain but be extended beyond the 2027 sunset date.”
Legislative To-Dos
Alongside a 45Z extension, both NCGA and ACE put nationwide, year-round E15 access at the top of their list for legislative priorities in the new Congress. The E15 legislation made it into the second-to-last bill draft, but not the final continuing resolution passed just before Christmas, which pushes budget negotiations into the new Congress and administration. “This is about as close as we’ve ever been to it getting done,” Ziegler says. “We’re pleased with the effort from a lot of our champions on the Hill and the collective effort from stakeholders, from the American petroleum industry to different refining entities across the country that were instrumental in getting us that far.” With eight Midwestern states receiving a waiver that will allow year-round E15 starting in April, there’s an incentive for refiners to get a legislative fix, he says. “Creating a boutique fuel market in those eight states creates supply chain challenges.”
For NCGA, the Farm Bill is high on the list as well. “We got a one-year extension in the continuing resolution,” Ziegler says. “But there’s a lot of things this Congress would like to achieve pretty quickly, and I don’t see a full five-year authorization of a new Farm Bill at the top of the list.” The NCGA has worked with the staff of returning Republican leaders on the Senate and House Agriculture Committees, while also adapting to new Democratic leadership in both chambers. “We’ll have to see how the new dynamics play out.”
For ACE, the new dynamic giving hope to biofuel and agriculture priorities in Congress is in the Senate leadership. “We’re looking forward to working with the new Congress, especially because South Dakota Sen. John Thune is going to be the Senate majority leader,” Jennings says. “It's been decades since we had a Democratic or Republican leader in Congress who had as much experience with agriculture and biofuels and, as such, is a champion for agriculture and biofuels. I think we have an opportunity to work with Sen. Thune to try and position ethanol for some success next year in Congress.”
Key Cabinet Positions
The new players picked for USDA and Environmental Protection Agency promise new dynamics in the administration as well. Trump’s pick for EPA administrator raised eyebrows among ethanol supporters. “Lee Zeldin is a former member of Congress from Long Island, New York, who cosponsored bills to repeal and reduce the Renewable Fuel Standard (RFS),” Jennings explains. “He also cosponsored bills that would prevent E15 from having access to the marketplace.”
Following his confirmation hearing, Jennings thanked several Republican senators for raising biofuel priorities during their discussions with Zeldin, like E15 and the RFS. “We appreciate Zeldin affirming he’d follow the law as it relates to timely and appropriate RVO rulemakings and ‘do his part’ to ensure year-round E15 nationwide, building on the momentum of E15 legislation initially included in the year-end funding package.”
Brooke Rollins, the nominee for Secretary of Agriculture, is a relative unknown, Jennings continues. “She does not have a deep record in agriculture policy, although she has worked on policy for some conservative think tanks over the years. She also worked for Gov. Rick Perry of Texas who was one of the leading opponents of the RFS.”
“Hopefully she'll recognize that Rural America’s success is really tied to the growth and the success of the biofuel sector — they are really one in the same right now,” Jennings says. “We're hoping there's a recognition on her part that we're not talking about just Texas anymore. We're talking about the entire country and biofuels are critically important.”