Andy: Hello, and welcome to another episode in the "Biofuels Report" podcast series, where we discuss major developments in the world of biofuels. This series is brought to you by Argus Media, a leading independent provider of energy and commodity price information, news, and analytics. With the world increasingly looking to lower carbon sources of energy, we wanted to have a dedicated space to cover the renewable fuels market. Everything from finished fuels like ethanol and renewable diesel to feedstocks to environmental credit markets and climate policies. My name is Andy Schwarz, and I'm the editor of Argus Media's Americas Biofuels publication, coming to you from our office in Houston. And today I'll be speaking with our senior reporter, Cole Martin, who has been closely tracking some major changes in U.S. biofuels policy.
Cole: Thanks for having me. Excited to get into the weeds.
Andy: Perfect. Well, we wanted to have you on to get your reaction on what the U.S. election results might mean for biofuels markets, particularly for biomass-based diesel and their feedstocks. But first, can you give us a brief rundown of what policy looks like now and how it's shaped those markets?
Cole: Of course. So a big shift during the Biden's term was renewable diesel production expanding pretty significantly. This was largely sparked by California's Low Carbon Fuel Standard and similar policies along the U.S. West Coast that have helped drive down the cost of biofuels. So we saw major refiners like Phillips 66 and Marathon convert existing oil refineries into facilities capable of processing vegetable oils, fats, greases, other wastes into renewable fuels. More recently, the industry has been a victim of its own success in a way, since there's been so much supply of renewable diesel. And it last met nearly 70% of diesel demand in California during the second quarter this year. Because of that, the prices of credits tied to LCFS programs and the Federal Renewable Fuel Standard have fallen pretty significantly from wherever they were just two or three years ago. And that has really hurt production margins and threatened plans to build more capacity. On top of all of that, the industry is preparing for the Inflation Production Act's Clean Fuel Production Credit, often known as 45Z, which takes effect in January.
Andy: And how will 45Z work exactly? How is it different from the other credits that the industry has relied on in the past?
Cole: Good question. So there's a suite of federal biofuel tax credits that are currently in effect. This includes a long-running credit that offers a dollar per gallon for blenders of biodiesel and renewable diesel. That's called the BTC. Next year that all changes. So the Inflation Reduction Act set a schedule for all those credits to expire at the end of this year and be replaced by the technology-neutral 45Z credit in January 2025. That credit offers up to a dollar per gallon for domestic producers of low-carbon road fuels and up to a dollar seventy-five per gallon for low-carbon aviation fuels. And I should note most fuels will earn less than that maximum credit value since those maximum values are just for carbon-neutral fuels. So generally producers should expect a drop off in credit value next year. And also unlike the blenders credit, 45Z will offer higher credit values to fuels that produce fewer emissions. It functions like a sliding scale. So the less carbon you produce, the more subsidy you get.
Obviously, there are winners and losers from that policy. Blenders and those currently importing biofuels don't like the credit shifting to domestic refiners. Plants that might not have as much access to lower-carbon waste feedstocks like used cooking oil also don't like it. They'll earn much less subsidy next year than they do this year. I would say the bigger challenge for the industry right now with the transition to 45Z has been that the Biden administration has not yet released guidance clarifying how it will calculate emissions from different fuels and feedstocks, which is a really complex endeavor since available life cycle models today vary pretty significantly in their emissions estimates, particularly for crop-based fuels. So the government's accounting here for carbon can make or break the economics for certain plants. So, for instance, does corn ethanol or soy biodiesel qualify from the get-go without climate-smart farm practices or carbon capture? We don't know for sure. So, because of that, we've heard from market participants that talks around first-quarter fuel and feedstock contracts have really slowed because people just aren't sure how to price anything without knowing the credit value next year. In my own reporting, I've heard from some biodiesel plants that say they will likely idle early next year absent policy clarity. That includes the largest biodiesel plant in the U.S. and that's just because it's so hard to prepare for the tax credit change.
Andy: Wow. So even before the election, there was all of this uncertainty. Nobody could say for sure how policy might work next year and now the market has to prepare for a change in administration on top of everything. So my mind wanders to what does that look like when a new president takes over the reins of enforcing a climate law that he's publicly opposed in the past? How at risk is 45Z?
Cole: The short answer is that the industry is not totally sure which compounds all of the recent problems with uncertainty. So I would say it's a matter of debate right now. Does Biden issue guidance before leaving office, try to cement his legacy? Does that guidance end up mattering if Trump announces a shift in course? Maybe he signals more favorable carbon accounting for farmers, or alternatively, if Trump begins his presidency without 45Z guidance in effect, how long will it take before producers have any clarity? Does he issue guidance at all if he's intent on limiting the reach of the Inflation Reduction Act?
I'd also say an underappreciated dynamic here is that 45Z is set to expire after 2027. So Trump and Republicans will have pretty significant leverage over the terms of any extension or modification. A lot of those details could be hashed out next year with Congress set to debate about what to do about some tax cuts from Trump's first term that are expiring at the end of 2025. Republicans might look to roll back other programs like Inflation Reduction Act credits to pay for prolonging those tax cuts. I would say biofuel subsidies are generally seen as less vulnerable in that tax policy debate than some other clean energy credits. There's powerful farm-state lawmakers from both parties that would really resist any major changes. And in general, too, the Inflation Reduction Act has primarily spurred projects in Republican districts. So the politics are complex. In a tightly controlled Congress, you can imagine representatives of those districts maybe resisting a full of repeal. And regardless, you know, federal incentives could still end up looking very different in the future than they do now. So some farm groups, for instance, are advocating for 45Z to only be available to domestic producers using domestic feedstocks. Imports of biofuel feedstocks have really surged during Biden's term. You know, used cooking oil from China has gotten the most attention. But there's also been a huge increase in tallow from Brazil, canola oil from Canada, and that influx has weighed on U.S. soybean oil prices. And it's frustrated some of the farmers and also the oil seed processors that had invested in recent years in expanding their crush capacity. So I think that could be less of a headache for farm groups next year if Trump finalizes tariffs that discourage foreign imports, particularly from China. But, you know, I still expect that to be a thorny issue in biofuel policy debates over his second term.
Andy: So besides guidance around 45Z, is there anything else that policymakers could do before Trump takes office that might assuage some of the concerns that the industry has right now?
Cole: Yeah, so kind of in the background of policy discussions all year, there's been lobbying to extend that expiring one dollar per gallon blenders credit for biomass-based diesel through 2025. You know, and that effort initially was being pushed by fuel marketer and biodiesel groups, but after the election, the coalition of groups supporting just a one-year extension of that credit, you know, framed as a way to prolong the status quo before lawmakers debate the longer-term tax changes next year, that coalition's really grown. So it includes groups like Clean Fuels Alliance America and some soybean associations that had been more reluctant to embrace a credit extension earlier this year and had focused on 45Z instead. There are also groups that have come out in favor of extending not just that blenders credit, but other various expiring biofuel incentives too, including the 40B credit for sustainable aviation fuel. So I expect that to be a major push from lobbyists for Congress to do something before the end of the year. Whether anything happens is another question.
So I should mention the politics are more complex this year than they were for prior extensions of the BTC, since biofuel groups really disagree on whether it makes more sense to continue with 45Z over the long term or revert to the prior regime. You know, the idea of continuing to subsidize foreign fuel imports is controversial. Bio refineries that had invested in decarbonization want to earn more of a subsidy than those that have not. And you know, airlines, another group that's important here, they like that 45Z encourages more feedstocks to go toward SAF over road fuels. So there's just a lot of competing interest. And on top of all that, Congress has many other priorities before the end of the year, including the debt ceiling, disaster aid, Democrats wanting to confirm judges. So you can imagine how biofuel incentives could maybe be seen as less essential and could slip out of any end-of-year package.
Andy: Fascinating stuff, Cole. Are there any other biofuels policy issues that you're tracking right now? Any areas where you think Trump's victory could really reshuffle how incentives work?
Cole: Yeah, so the renewable fuel standard is always something that the industry looks to. You could look at Trump's first term as a guide. He pursued generally higher annual blend volumes, at the same time, more small refinery exemptions. But EPA now theoretically has more discretion under the program's set authority to potentially not keep increasing blend mandates every year like in the past. Trump's pick for the EPA, Lee Zeldin, actually co-sponsored a bill to repeal the RFS during his time in Congress. So I think there's some risk for producers there as they await new RFS volumes, which are expected next year. I'll also be tracking how Democratic-led states respond to Trump's victory. So governors in these states could feel more of an obligation to prioritize climate change now that the federal government will soon put much less of a focus on it. And you saw that dynamic in Trump's first term, states trying to lead the way on climate. And that could take the form, for instance, of low-carbon fuel standards. California, just days after the election, approved updates to its state LCFS with stricter carbon intensity targets and some limits on vegetable oils. New Mexico developing its own LCFS. And I'm based in New York, so I always try to keep tabs on policy here. New York regulators have said that they are at least studying how an LCFS could work in the state and how it might interact within economy-wide carbon market they're developing. So that's something to watch. And there's a range of other policy tools too. So there's state tax credits for SAF in Illinois and Washington. There are biofuel blend mandates for heating oil and proposed clean heat standards in the Northeast. And some of these policies could make or break whether more renewable diesel or SAF production comes online, whether biodiesel plants stay open, whether ethanol producers follow through on plans to capture their carbon emissions. So I'm curious to see how states rethink climate policy after the election and if they do, the extent to which alternative fuels are a part of their strategies.
Andy: Thanks, Cole. It'll certainly be interesting to track this over the next four years. And thanks to our listeners for tuning into this episode. If you enjoyed this podcast, please be sure to tune in for other episodes in our series, the "Biofuels Report." And for more information on Argus biofuels coverage, please visit www.argusmedia.com/biofuels. See you next time.
