Fuel Tax Credits Section 45Z


cover crops

The Biden Administration passed the 2022 Inflation Reduction Act and farmers may benefit from this legislation. Under section 45Z, the legislation provides a tax credit for the domestic production of clean transportation fuels, The 45Z tax credit applies to fuels produced after Dec. 31, 2024 and sold before Dec. 31, 2027. It includes $369 billion in spending and tax credits for climate and energy programs over 10 years.

Instead of paying farmers to sequester soil carbon, this legislation pays farmers to reduce their carbon foot print by using sustainable fuel or producing sustainable fuel. The legislation extends the biodiesel and alternative fuel credits through December 31, 2024. It extends the $1.00/gallon Section 40A biodiesel and renewable diesel credit and the $1.00/gallon biodiesel mixture credit, which was due to expire after 2022. Several other alcohol, biodiesel, and alternative fuel credits were renewed including a $.50 alternative fuel credit. In most cases, the tax credits are collected by processors but some of the benefits can be passed on to farmers to increase “sustainable” production usage of sustainable fuels and fertilizers.

Here are a couple of examples. Suppose a beef farmer grazes beef on pasture and uses a minimal amount of fuel and fertilizer to grow those animals. Beef sold from this type off grazing operation is sold to a meat packer who qualifies for the tax credit. This meat packer should pay the farmer a premium for producing this type of beef. So far, the Internal Revenue Service (IRS) has not yet written the final rules for how to make this program work.

Another example, a farmer uses no-till and cover crops to produce corn sold to an ethanol plant. Since the famer is using less fuel to till the soil and losing less carbon to the atmosphere, this is considered a sustainable practice. The farmer might also be using ethanol from the corn he produces which is considered a sustainable practice. Also, the no-till is preserving the soil carbon and the cover crop is putting carbon back into the soil, considered sustainable practices. If the farmer plants a legume or clover cover crop and reduces commercial fertilizer usage, this is also considered sustainable. Commercial nitrogen fertilizer is produced from natural gas while legumes and clovers take nitrogen from the atmosphere. These are all considered sustainable practices which are beneficial for reducing greenhouse gasses for “climate change” according to this legislation. Trying to add up an calculate all the sustainable farming practices is going to be daunting!

Payments from ethanol plants will be based on how much farmers lower their “carbon intensity” (CI) score. Standard corn has a CI score of 29.1 which is produced with commercial fertilizer and regular fuel. The Inflation Reduction Act wants a weighted average below a CI score of 25. For example, a CI score of 0 is worth about $1.57 per bushel on 200-bushel corn or $314 per acre. The ethanol plant will not pay 100% but may pay 25% to 30% which is still $78-$94/acre of corn produced with this CI score.

Tax credits for sustainable aviation fuel are even higher at $1.25/gallon in a qualified mixture plus a supplement amount equal to 1 cent for each percentage point the fuel reduces the life cycle of greenhouse gas emission by more than 50% compared to petroleum-based jet fuel. The maximum saving could be an additional $.50 per gallon for a total possible aviation tax credit of $1.75/gallon.

To get this sustainable aviation tax credit, the fuel must meet ASTM International Standards which means it must be derived from biomass, waste streams, renewable energy sources, or gaseous carbon oxides, and must reduce life cycle emissions by 50%. What type of farming operation might qualify? Biomass includes straw, switchgrass, wood chips etc. that might be made into sustainable aviation fuels. Waste streams might include manure from livestock facilities, methane, even biosolids if they used to produce aviation fuel. Even if it is not used for aviation fuel, the credits should apply as “alternative” fuel credits. More details will be coming so farmers can take advantage of this program.