AtJ SAF’s future hangs in balance as US decides IRA tax credits for ethanol

opinion

by Fayaz Hussain

December 15, 2023

After 18 months of dilly-dallying, the Biden Administration is expected to finally announce its guidance on whether aviation fuel produced from corn ethanol qualifies for tax credits under the Inflation Reduction Act (IRA) next week. Whatever the decision, it will have a big impact on the global Sustainable Aviation Fuel (SAF) market.

US ethanol producers obviously favour tax credits under the IRA especially given the bleak long-term gasoline production outlook as the number of electric vehicles rises.

Others argue that the US ethanol sector already enjoys more than its fair share of tax credits and SAF producers don’t really stand to gain much even if tax credits are extended for ethanol-to-jet fuel.

“Corn ethanol in the US already benefits from a large incentive from the federal Renewable Fuel Standard, which mandates nearly 15bn gallons of production and is associated with a sizeable incentive associated with compliance,” said Nik Pavlenko, alternate fuels program lead at the International Council on Clean Transportation speaking to SAF Investor.

Pavlenko estimates that this works out at about a $1 for each gallon of ethanol based on public renewable identification number (RIN) credit data. RINs are the compliance mechanism used for the Renewable Fuel Standard.

“Depending on how the SAF tax credit is implemented, corn ethanol-to-jet could get anywhere from $0-1.75 per gallon jet-equivalent,” says Pavlenko. “However, it’s not clear if this is enough to motivate entirely new corn ethanol-to-jet production on its own and go beyond the mandate levels in the RFS. The early projects will likely rely on combining multiple incentives, such as the SAF tax credit, RINs, and state-level incentives in order to break even at least in the near to medium term.”

The final decision on corn ethanol subsidies depends on which methodology the US government adopts in calculating life-cycle emissions. Specifically, land-use changes.

Under the IRA, aviation fuel becomes eligible for tax credit if it can successfully reduce life-cycle emissions by 50% compared with that of the conventional jet fuel. It uses the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) scheme to calculate emissions from feedstocks. The CORSIA model does not give traditional corn ethanol as many benefits because of assumptions of indirect land-use changes and soil organic carbon credits.

CORSIA is not the only way to calculate emissions and the ethanol industry argues that it is outdated. Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET), developed by the US Department of Energy is another model that differs from CORSIA in its emissions calculations for indirect land uses. Under the GREET model, SAF produced from ethanol will be eligible for IRA tax credits.

“Corn ethanol SAF producers, backed by US airlines looking for cheap domestic SAF, are pushing the US administration to change the regulations to allow the use of the GREET model,” says Keith Lawless, managing director at Savia Consulting, which provides decarbonization and sustainability advisory services to the aviation industry.

“First, they would qualify for IRA subsidies which require a minimum greenhouse gas lifecycle reduction,” says Lawless. “Second, ethanol production creates a lot of CO2. To reduce the lifecycle emissions a way must be found to reduce them, for example carbon capture and sequestering. Using the GREET model would enable producers to claim get GHG reductions without needing to do so much capture and sequestration, thus reducing costs.”

He worries that extending tax credits to corn ethanol for SAF will hurt the overall industry in the long run. “Allowing producers to use GREET will backfire. Although it will enable the US to produce large quantities of SAF and help farmers, I think that it will hurt the long-term credibility of SAF as it will be heavily criticized by environmentalists and the EU.”

Ethanol producers disagree. In either case, if the US government goes with CORSIA, it will be difficult for many ethanol alcohol-to-jet producers to achieve the 50% greenhouse gas reduction threshold required under the Inflation Reduction Act.

“Without the change in regulations to use GREET, the business case for alcohol-to-jet ethanol SAF is very weak,” says Lawless. He adds that the public does not want to delve into the details of lifecycle greenhouse gas reduction models.

The Biden administration has pondered on the issue for a long time. If we finally get a decision, next week will be a big one for the industry.