On Friday, the Treasury Department announced long-awaited guidelines for new clean fuel tax credits. Per terms of the Inflation Reduction Act, fuel producers may be eligible for significant tax breaks through a provision known as Section 45Z.  Those credits can be earned by producing transportation fuels with lifecycle greenhouse gas emission below a certain level.

Greenhouse gas emission levels will be calculated by a new methodology known as 45CF-GREET. That methodology will determine a fuel’s impact based on multiple factors through its lifecycle. The new GREET model is expected to be released before President Biden leaves office.

While farmers won’t earn credits directly, they are expected to benefit by producing feedstocks utilizing climate-smart practices. Fuel producers would then presumably pay higher prices for that product.

Previous rules required farmers to implement multiple climate-smart practices in order to qualify for clean fuel feedstock. For example, under Section 40B rules, corn producers were required to utilize cover crops, no-till or reduced-till farming and improved nitrogen efficiency.

Per the new Section 45Z guidelines, producers may not have to adhere to all of those practices to qualify for tax breaks. This “unbundling” of climate-smart practices is an issue commodity and biofuel groups have pushed hard for. USDA officials, including Agriculture Secretary Tom Vilsack, have also acknowledged the need to expand eligibility to more farmers.

“We appreciate the critical role that America’s farmers play in building a clean energy economy, including by providing feedstocks for advanced biofuels grown with climate-smart practices that help farmers earn more for what they grow,” John Podesta, White House senior advisor for international climate policy, says. “Today’s announcement reinforces the important role climate-smart agriculture plays in clean transportation as well as the importance of providing pathways for unbundled accounting of climate-smart practices that producers can count on.”

Big questions remain

The new 45Z guidelines prohibit the use of cooking oil as feedstock for now. There had been growing concerns regarding other nations, particularly China, flooding the market with used cooking oils. The Treasury Department and Internal Revenue Service have also noted that higher-polluting products, like virgin palm oil, could be mislabeled as used cooking oil.

Notably, the Treasury Department did not provide guidance on additional practices farmers may use to produce crops for clean fuel feedstock. Ag groups had hoped to have those details ironed out by the beginning of the year. Treasury department officials say the agency intends to propose rules for how domestic corn, soybeans and sorghum may be used as feedstock for transportation fuels. According to insiders, those rules will likely be left up to the incoming Trump administration.

While pleased that the Treasury Department released its long-awaited guidelines, Renewable Fuels Association President and CEO Geoff Cooper notes the announcement still leaves many biofuel producers in limbo. He says much more needs to be done before clean fuel producers, farmers and consumers can fully benefit from the 45Z program.

 “For the 45Z program to truly drive innovation and value creation in the marketplace, the credit must allow for the inclusion of efficient farming practices, recognition of additional feedstocks and ethanol production technologies, flexible supply chain management tools, and the ability for individual producers to secure their own unique carbon intensity values,” Cooper says. “But most importantly, producers will not act on this or any subsequent guidance unless they have the assurance that the credit will be durable, stable and reliably available in the future.”

American Coalition for Ethanol CEO Brian Jennings applauded the new guidelines, but cautioned there is much work left to be done. He says ACE is eager to collaborate with the Trump treasury team to ensure 45Z is implemented effectively, with consideration of USDA’s technical guidelines on climate-smart agriculture practices that are under development. Since ag-based feedstocks represent about half of ethanol’s carbon footprint, Jennings says it is critical to allow farmers and ethanol producers to realize the full value of sustainable farm practices through this tax credit.

“We once again applaud USDA Secretary Vilsack for his leadership on this topic,” Jennings added. “ACE will continue advocating for flexibility that recognizes the unique contributions of facility-specific process technologies and climate-smart farming practices to achieve meaningful carbon reductions.”

The Treasury Department will accept public comments on the new 45Z guidelines through April 10. At this point, it remains unclear if or how the Trump administration may modify the clean fuel tax credit program. While some Republicans have called for eliminating Inflation Reduction Act programs, insiders say that seems unlikely, but there are no guarantees.