After more than a year of negotiations, President Biden finally signed a slimmed-down version of his tax, health, and climate bill into law on August 16. Tackling climate change has been a priority for Biden since before taking office and his administration has set a target for the United States to achieve a 50-52 percent reduction in greenhouse gas emissions from 2005 levels by 2030.
To that point, the Inflation Reduction Act (IRA) includes a $369 billion investment in climate and energy policies. While much of the attention goes toward other provisions in the bill, the IRA represents one of the largest boosts to U.S. biofuels production in history. These provisions will greatly benefit the nation’s ethanol industry.
Inflation Reduction Act Casts Wide Biofuel Net
The IRA’s biofuel reach is broad in its scope, touching numerous aspects of the industry. The legislation includes new tax credits, extends existing tax credits, provides funding for biofuel infrastructure, and expands tax credits for carbon capture and storage. Included in the Inflation Reduction Act are several key priorities for the biofuels industry:
- the IRA allocates $500 million for biofuels infrastructure through the end of 2031.
Clean Fuel Production Credit
- the IRA creates a new Clean Fuel Production Credit. This provision establishes a base credit of $.20/gallon for ethanol produced at a qualified facility ($.35/gallon for aviation fuel). Alternatively, ethanol can qualify for a $1/gallon credit ($1.75/gallon for aviation fuel) if the fuel is sufficiently low carbon based on a lifecycle assessment of the fuel production. This credit starts in 2025 and expires for transportation fuels sold after December 31, 2027.
Sustainable Aviation Fuel Credit
- the IRA creates a new $1.25/gallon sustainable aviation fuel credit for biodiesel produced in the United States and that is used to fuel aircraft in the United States. This credit can be increased by up to an additional $.50/gallon based on the lifecycle greenhouse gas emissions reduction achieved by the fuel. While this provision uses standards adopted by the International Civil Aviation Organization which are not as favorable to biofuels when calculating lifecycle greenhouse gas emissions, this credit will still provide a significant impetus for the production and sale of biodiesel aviation fuels. This credit extends through December 31, 2024.
Extension of the Biodiesel and Renewable Diesel Credit
- the IRA extends the biodiesel and renewable diesel tax credit from December 31, 2022, to December 31, 2024.
Extension of Second Generation Biofuel Incentives
- the IRA extends the second-generation biofuel incentives from 2022 to 2025 and retroactively applies the provision to qualified second-generation biofuel production after December 31, 2021.
- the IRA substantially increases the availability of 45Q credits for carbon capture, utilization, and sequestration projects and makes it easier for those projects to qualify for 45Q credits. The IRA provides tax credits through 2032 with rates of $85/ton for sequestration and $60/ton for utilization.
Funding for Alternative Fuel and Low-Emission Aviation Technology Program
- the IRA appropriates $244,530,000 for “projects relating to the production, transportation, blending, or storage of sustainable aviation fuel” and another $46,530,000 for “projects relating to low-emission aviation technologies.”
To put the significance of this legislation for the ethanol industry into perspective, Presidents Obama and Trump both implemented $100 million in ethanol infrastructure programs during their terms in office. This combined $200 million in funding resulted in the installation of roughly 2,800 E15 pumps nationwide.
The $500 million in funding provided by the IRA is expected to result in the installation of an additional 10,000 E15 pumps which will significantly increase the availability and sale of E15 biofuels. Add to this the extension and expansion of existing credits and the creation of significant new credits and you have a package that will do more to boost the U.S. biofuels industry than perhaps any action since the passage of the renewable fuels standard.
Inflation Reduction Act and Electric Vehicles
As part of his push to combat climate change, President Biden has made increasing electric vehicles a major priority. He has set an ambitious target of 50% of electric vehicle (EV) sale shares in the U.S. by 2030. To meet this goal, the Inflation Reduction Act provides significant incentives for electric vehicles. The IRA includes a tax credit extension worth up to $7,500 for buyers of new all-electric cars and hybrid plug-ins. The bill also creates a separate tax credit worth a maximum of $4,000 for used versions of these vehicles.
Along with the Biden administration, the nation’s leading auto manufacturers have aggressively pursued electric vehicles. Ford has committed to having 40% of its vehicles electrified by 2030. General Motors is aiming to produce only EVs by 2035. Both companies are spending large amounts of money to manufacture more EVs. Ford’s commitment is further reinforced by the high-profile rollout of its F-150 Lightning this year that included President Biden taking a spin in the new model. Making an electric version of the nation’s best-selling vehicle clearly demonstrates the company’s long-term commitment to reaching its goals and moving the needle in the electric direction.
Inflation Reduction Act Drives Ethanol and Sustainable Aviation Fuel Production
With the auto industry and Biden administration’s emphasis on electric vehicles, what is the future for ethanol? Despite all the media attention paid to EVs, some perspective is in order. There are approximately 250 million cars, SUVs, vans, and pickup trucks on America’s roads today. Fewer than one percent of all vehicles are electric. Even if automakers are able to increase EV sales to constitute one-quarter of new sales by 2035, this would constitute only 13 percent of vehicles on the road. Even in 2050, when electric vehicles are projected to make up 60 percent of new sales, most vehicles on the road will still be running on liquid fuel. The reason for this is that the life of today’s cars and trucks is quite long- remaining on the road for up to two decades.
In contrast, ethanol use is already widespread, with more than 98% of gasoline in the U.S. containing some ethanol. In fact, total production capacity increased from 13.6 billion gallons per year in 2011 to 17.5 billion gallons per year in 2021 and, today, ethanol makes up more than 10% of the nation’s vehicle fuel supply.
This expansion in the use of ethanol has greatly benefited America’s corn producers. Strong demand for ethanol production has resulted in higher corn prices and has provided incentives for farmers to increase corn acreage. Ethanol production accounts for nearly 40 percent of total corn use in the United States. This makes for a formidable political constituency. Currently, the most common blend of ethanol is E10. With the deployment of 10,000 E15 pumps, the Inflation Reduction Act will further expand the percentage of ethanol in the nation’s fuel mix.
In addition, and long before putting his signature on the Inflation Reduction Act, President Biden had indicated the administration’s desire to power the nation’s jets and other airplanes with sustainable aviation fuel. The administration has set a goal of having 3 billion gallons of sustainable aviation fuel produced annually by 2030. While some sources in the industry have told us that they are not currently prepared for this, it is further indication that ethanol’s future is now being bolstered for decades to come.
Given the significance of the provisions in the Inflation Reduction Act, we should expect that demand for corn will continue to be driven by ethanol markets for the foreseeable future and that there will continue to be a strong supply of ethanol by-products – dried distillers grains and carbon dioxide. We should also expect continued growth in the biodiesel industry. Finally, we should expect construction of additional ethanol and biodiesel plants and related infrastructure such as carbon dioxide pipelines.
For more information contact a member of the Pinion biofuels team.