Conversations about decarbonization and the energy transition often turn to the transportation sector, which accounted for about 27% of U.S. greenhouse gas (GHG) emissions in 2020. Electric vehicles typically dominate these talks, but alternative fuels like renewable diesel (RD) and sustainable aviation fuel (SAF) also come up, not only because of their lower emissions but also because they are considered “drop-in” replacements for conventional diesel and jet fuel. Policies at the state and national level have already encouraged some production growth, but a tax credit established as part of the recently enacted Inflation Reduction Act (IRA) provides a major incentive for cleaner fuels. In today’s RBN blog, we look at the new 45Z Clean Fuel Production Credit (CFPC), how it will impact the production of RD and SAF, and why facilities that can produce fuels with the lowest carbon intensity (CI) stand to benefit the most.
The IRA, which we wrote about in Name Game and was signed into law August 16, includes several of President Biden’s biggest clean energy priorities. A promise to reduce fossil-fuel usage and GHG emissions and promote the development of a clean-energy industry was a key part of Biden’s 2020 campaign and he took several actions shortly after taking office, but passage of the IRA is by far the most significant development. To date, the main incentive for RD producers has been the federal Blender’s Tax Credit (BTC). The BTC was established under Section 40A of the Internal Revenue Code and provides a tax credit of $1/gal for biodiesel or RD included in a “qualified biodiesel mixture” that is either used or sold as a fuel. RD, like biodiesel, is a biomass-based fuel that can be burned in diesel engines or used as heating oil for homes. Those federal tax credits, along with policies like California’s Low Carbon Fuel Standard (LCFS), have played key roles in the development of alternative transportation fuels like RD and SAF (see our Come Clean series). The BTC was set to expire at the end of 2022, but the IRA’s passage has extended its life by two years, with RD now eligible for the credit until the end of 2024.
The IRA also creates a new section of the tax code — 40B — to extend the BTC to SAF, which is considered to be one of the most promising options to reduce GHG emissions in the aviation sector, where electrification is challenging due to battery weight. To claim the credit for SAF, a producer will need to certify that the fuel’s lifecycle GHG emissions are reduced by at least 50%. The SAF credit will be equal to $1.25/gal plus an additional $0.01 for each percentage of lifecycle emissions reduction that exceeds 50%. (If the emissions are reduced by 100%, the SAF credit would be $1.75/gal.) That means that producers of low-CI SAF, such as Fidelis New Energy, whose planned GigaSystem project we detailed in Part 1 of this blog, will have a significant advantage over market competitors unable to match those CI scores. But as we said, the BTC only runs through 2024 and the tax credit taking its place will swing the advantage even more in the favor of low-CI fuel producers.
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