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Viewpoint: US tax fight next year crucial for 45Z

  • : Agriculture, Biofuels, Chemicals, Emissions, Natural gas, Oil products
  • 24/12/23

A Republican-controlled Congress will decide the fate next year of a federal incentive for low-carbon fuels, setting the stage for a lobbying battle that could make or break existing investment plans.

The 45Z tax credit, which offers greater subsidies to fuels that produce fewer emissions, is poised to kick off in January.

Biofuel output has boomed during President Joe Biden's term, driven in large part by west coast refiners retrofitting facilities to process lower-carbon fats and oils into renewable diesel. The 45Z tax credit, created by the 2022 Inflation Reduction Act (IRA), was designed to extend that growth.

But Republicans will soon control Washington. President-elect Donald Trump has dismissed the IRA as the "Green New Scam", and Republicans on Capitol Hill, who had no role in passing Biden's signature climate legislation, are keen to cut climate spending to offset the steep cost of extending tax cuts from Trump's first term.

Biofuels support is a less likely target for repeal than other climate policies, energy lobbyists say. But Republicans have already requested input on 45Z, signaling openness to changes.

Republicans plan to use the reconciliation process, which enables them to avoid a Democratic filibuster in the Senate, to extend tax breaks that are scheduled to expire in 2025.

"I want to place our industry in a place to make sure that the biofuels tax credit is part of reconciliation," said Kailee Tkacz Buller, president of the National Oilseed Processors Association. But lawmakers "could punt the biofuels discussion if stakeholders aren't aligned."

A decade ago, biofuel policy was a simple tug-of-war between the oil and agriculture industries. Now many refiners formerly critical of the Renewable Fuel Standard produce ethanol and advanced biofuels themselves.

And the increasingly diverse biofuels industry could complicate efforts to present a united front to Congress.

Farm groups worry about carbon intensity scoring hurting crop demand and have lobbied to curtail record-high feedstock imports, to the chagrin of some biorefineries. Those producers are no monolith either: Biodiesel plants often rely more on local vegetable oils, while ethanol producers insist on keeping incentives that do not discriminate by fuel type and some oil majors would back subsidizing fuels co-processed with petroleum.

Add airlines into the picture, which want greater incentives for aviation fuels, and marketers frustrated by 45Z shifting subsidies away from blenders — and the threat of fractious negotiations next year becomes clear.

There are options for potential compromise, according to an Argus analysis of comments submitted privately to Republicans in the House of Representatives, as well as interviews with energy lobbyists and tax experts. The industry, frustrated by the Biden administration's delays in clarifying 45Z's rules, might welcome legislative changes that limit regulatory discretion regardless of what agency guidance eventually says. And lobbyists have floated various ways to appease agriculture groups without kneecapping biorefineries reliant on imports, including adding domestic content bonuses, imposing stricter requirements for Chinese-origin used cooking oil, and giving preference to close trading partners.

Granted, unanimity among lobbyists is hardly a priority for Republican tax-writers. Reaching any consensus in the restive caucus, with just a handful of votes to spare in the House, will be difficult enough.

"These types of bills always come to down to what's the most you can do before you start losing enough votes to pass it," said Jeff Navin, cofounder of the clean energy advocacy firm Boundary Stone Partners and a former House and Senate staffer. "Because they can only lose a couple of votes, there's not much more beyond that."

And the caucus's goal of cutting spending makes an industry-wide goal — extending the 45Z credit into the 2030s — even more challenging. "It is a hard sell to get the extension right away," said Paul Winters, director of public affairs at Clean Fuels Alliance America.

Climate costs

Cost concerns also make less likely a simple return to the long-running blenders credit, which offered $1/USG across the board to biomass-based diesel. The US Joint Committee on Taxation in 2022 scored the two-year blenders extension at $5.5bn, while pegging three years of 45Z at less than $3bn. An inconvenient reality for Republicans skeptical of climate change is that 45Z's throttling of subsidies based on carbon intensity makes it more budget-friendly.

Lawmakers have other reasons to not ignore emissions. Policies elsewhere, including California's low-carbon fuel standard and Europe's alternative jet fuel mandates, increasingly prioritize sustainability. The US deviating from that focus federally could leave producers with contradictory incentives, making it harder to turn a profit. And companies that have already sunk funds into reducing emissions — such as ethanol producers with heavy investments in carbon capture — want their reward.

Incentives with bipartisan buy-in are likely more durable over the long run too. Next time Democrats control Washington, liberals may be more willing to scrap a credit they see as padding the profits of agribusiness — but less so if they see it as helping the US decarbonize.

Tax credit changes
40A Blenders Tax Credit45Z Producers Tax Credit
$1/USGUp to $1/USG for road fuels and up to $1.75/USG for aviation fuels depending on carbon intensity
For domestic fuel blendersFor domestic fuel producers
Imported fuel eligibleImported fuel not eligible
Exclusively for biomass-based dieselFuels that produce no more than 50kg CO2e/mmBTU are eligible
Feedstock-agnosticCarbon intensity scoring incentivizes waste over crop feedstocks
Co-processed fuels ineligibleCo-processed fuels ineligible
Administratively simpleRequires federal guidance on how to calculate carbon intensities for different feedstocks and fuel pathways
Expiring after 2024Lasts from 2025 through 2027

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24/12/23

Viewpoint: Low-carbon fuel battles tumble into 2025

Viewpoint: Low-carbon fuel battles tumble into 2025

Houston, 23 December (Argus) — Fights over North America's largest low-carbon fuel mandates will tumble into 2025, long after a contentious year spent updating the program. California's minority Republican lawmakers have seized upon fears that new, tougher targets approved in November to the state's Low Carbon Fuel Standard (LCFS) could hike today's pump prices by 15pc. Environmental opponents have sued the California Air Resource's Board (CARB) alleging regulators ignored shortcomings to push through those amendments. And fuel suppliers, meanwhile, continue to grapple with new demands on feedstock selection, certification and other decisions that will begin to tighten by the end of this decade. LCFS programs require yearly reductions in transportation fuel carbon intensity. Higher-carbon fuels including petroleum diesel and gasoline incur deficits for exceeding annual targets. Suppliers must offset these deficits with credits generated from distributing approved, lower-carbon alternatives to the state. California operates the oldest and largest among five operating programs on the continent. The program helped drive a surge in US renewable diesel production capacity that earlier this year cut petroleum's share to less than a quarter of the liquid diesel used in the state. Credit trade representing each metric tonne (t) of carbon reduction drives the incentives for renewable diesel, captured dairy methane or electric vehicle charging capacity used in California transportation. Credits peaked at $219/t in February 2020, equivalent to roughly $267.10/t in today's dollars. But spot credits have languished below $100/t since late 2022. Prices buckled under the growing weight of more than 30mn t of extra credits available for future compliance — enough to satisfy all the deficits generated in 2023 a second time, with another 30pc leftover. CARB staff estimated that the targets board members approved in November would reduce that reserve by more than 8mn t, or less than a third. Fuel producers warned that carbon reduction could stagnate under the smothering imbalance of new credits. Staff dismissed outside estimates of 65¢/USG increases to gasoline prices attributed to the tough new program targets, but declined to offer a competing cost estimate. Spot credit prices would need to more than triple to $250/t next year to hit gasoline prices that hard at the pump, based on Argus analysis. Pump prices make good politics Governor Gavin Newsom (D) has for two years sought and received state tools to scrutinize oil company profits on California fuel sales. Now a California state senate Republican bill would repeal the new targets and other newly adopted changes intended to restore incentives under the program. A state assembly bill would require any CARB new rulemaking or standard to undergo a cost analysis by the state's Legislative Analyst Office, a nonpartisan office that performs such reviews of legislative proposals. These Republican measures face a likely impossible climb through Democratic supermajorities in both chambers. But lawmakers noted the potency of fuel price complaints. A legislative session — framed in defiance of a new federal administration hostile to their climate efforts — opened with leaders acknowledging the need to balance costs. "California has always led the way on climate change and we will continue to lead on climate," speaker Robert Rivas (D) said on 2 December. "But not on the backs of poor and working people. Not with taxes or fees for programs that don't work." Similar battles have already spilled out of the state. British Columbia voters in October narrowly denied conservatives a majority on a platform that included ending the province's aggressive LCFS. National conservatives targeted Canada's carbon taxes in a campaign against Premier Justin Trudeau's wobbling government ahead of elections next year. As regulators update programs to drive ambitious transportation changes, voters will become more aware of where the changes are heading. By Elliott Blackburn Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Viewpoint: European HVO demand to rise in 2025


24/12/23
24/12/23

Viewpoint: European HVO demand to rise in 2025

London, 23 December (Argus) — European demand for hydrotreated vegetable oil (HVO), or renewable diesel, will be supported in 2025 by a combination of higher mandates for the use of renewables in transport, and by changes to EU member state regulations on the carryover of renewable fuels tickets, like in Germany and the Netherlands . European HVO production could grow by more than 400,000t in 2025, if announced projects are completed in time. Most new plants have the flexibility to switch to sustainable aviation fuel (SAF) production, in the form of hydrotreated esters and fatty acids synthesised paraffinic kerosene (HEFA-SPK). But those seeking to import HVO into the EU will face barriers. Definitive EU anti-dumping duties (ADDs) on Chinese biodiesel and HVO will be imposed by mid-February , and anti-dumping and anti-subsidy duties are already in place for HVO and biodiesel of US and Canadian origin . Flows of US-origin HVO to the UK are unimpeded as transposed EU duties were removed in 2022 . A clean slate... Against a headwind of gradually shrinking diesel demand, national transport renewables mandates are increasing. These ambitions rise again under the next iteration of the EU's Renewable Energy Directive (RED III), for which member states face a May 2025 transposition deadline. Optimism in the biofuels markets will be tempered by experiences in 2024. The low value of renewable fuel tickets — tradeable credits generated primarily by the sale of biofuel-blended fuels — in major European demand centres has weighed on supplier appetite for physical biofuels. This includes the relatively expensive HVO that can be blended in much greater volumes than cheaper fatty acid methyl esters (Fame). A portion of these tradeable tickets can usually be carried over from one obligation year to the next — as was done from 2023-24 — extending pressure on physical biofuel demand. But Germany has approved a law removing the option for companies to carry over excess 2024 greenhouse gas (GHG) certificates through both 2025 and 2026, aimed at resetting the outlook for physical renewables demand. Obligated parties will need start from scratch to meet their annual GHG savings targets — at 10.6pc for 2025 and 12.1pc for 2026 — resulting in greater demand for physical biofuels including HVO. In the Netherlands, the tickets carryover will be reduced from 25pc to 10pc for companies with an annual blending obligation. ...follows volatility Prompt HVO assessments firmed significantly late in 2024 — albeit from long-term lows — driven by short-term demand in the Netherlands at a time of tight regional supply. HVO (Class II) fob ARA range, a European benchmark based on HVO produced from used cooking oil (UCO), peaked at $1,500/m³ as a premium to escalated gasoil by 14 November — or a 122pc increase from the start of October — equating to $2,652.91/t on an outright basis. Assessments then fell back to a $860/m³ premium a week later, when the market rebalanced as suppliers looked to reroute prompt volumes. Before the rise, prices had hovered around historically soft levels for a sustained period. Sweden's decision to slash its GHG emissions mandate for the 2024-26 period due to fuel price concerns, and the low ticket prices have kept a lid on values. The HVO (Class II) outright price averaged around $1,625/t over 1 January-31 October 2024, down by around $580/t compared with the same period of 2023. While fundamentals now point to growth in European HVO use, the futures curve is backwardated. Those in the market may yet take a position that aligns with this viewpoint, but recent volatility has stunted forward trade. By Toby Shay Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Viewpoint: Brazil may face road bottleneck in 1Q


24/12/23
24/12/23

Viewpoint: Brazil may face road bottleneck in 1Q

Sao Paulo, 23 December (Argus) — The Brazilian soybean harvest and fertilizer deliveries for the country's 2024-25 second corn crop will likely drive first-quarter grain and fertilizer road freight rates higher. Grain freight rates have been unusually low in 2024 because lower international soybean prices discouraged producers from doing business in most months. But market participants expect greater demand for transportation services in export corridors in 2025, as an expected record 2024-25 harvest combines with a US dollar that has strengthening against the Brazilian real, driving export demand. Brazil will produce 166.2mn metric tonnes (t) of soybeans in the 2024-25 cycle, an increase of almost 13pc from the previous season, according to national supply company Conab's third official estimate for the cycle. The 2024-25 soybean harvest in Mato Grosso state — Brazil's largest producer — will total 44mn t, also 13pc above 2023-24 production, according to the state's institute of agricultural economics Imea. Mato Grosso's soybean planting pace for 2024-25 has fluctuated significantly over the growing season, initially advancing slowly because of dry weather, and then speeding up once rains returned. Planting was complete on only 25pc of the almost 12.7mn hectares (ha) expected for the cycle by 18 October, less than the 60pc reached at the same time in 2023 for the 2023-24 cycle. But planting increased by 68.6 percentage points in the following three weeks, totaling 93.7pc by 8 November. As a result, more than half of the soybean planted area in Mato Grosso was carried out in the same three week period. That raises concerns among market participants about high competition for export transportation and available vehicles when all those crops become ready for harvest at the same time, resulting in a logistical bottleneck. Market participants expect lower freight rates for exports during the 2024-25 second corn harvest, set to take place in the second half of 2025. Demand from the Brazilian domestic market will remain at a consistently high level, especially from ethanol units, whose demand for corn was high in 2024, as prices carried a premium to the export market, and also contributed to lower export volumes. This should lead to lower grain freight rates during the second half of 2025, with a significant portion of grain destined to meet the Brazilian industry's needs. Corn ethanol production in Brazil is expected to total 7.2bn liters (124,865 b/d) in the 2024-25 cycle, a 22pc increase from 5.9bn l in the previous cycle, according to Conab. The company projects that 1t of corn can produce around 400l of ethanol, which means that approximately 18mn t of corn will be consumed by the ethanol industry. Brazil is expected to produce around 86.2mn t of animal feed in 2024, 2.3pc more than it did in 2023, according to the sector's national union Sindiracoes. This should stimulate demand for about 55mn t of corn for all animal feed production expected this year. Animal feed production is expected to grow further in 2025 to 87.8mn t. Ferts freight rates may also increase Fertilizer transportation may face logistical bottlenecks to move inputs from ports to crops in early 2025 because of the slow pace of fertilizer purchases, especially nitrogen, for the 2024-25 second corn harvest. With the purchase window coming to a close by the end of December, market participants estimate that these nutrients have to arrive at Brazilian ports by early January, so that they can be transported in time for application during the grain harvest. That may also increase competition for vehicles in the first quarter of 2025, especially in January, when the supply of trucks is reduced following end-of-year festivities. Under these circumstances, higher fertilizer freight rates and higher costs for road logistics are expected. By João Petrini Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

German heating oil demand dips, diesel stocks reduced


24/12/23
24/12/23

German heating oil demand dips, diesel stocks reduced

Hamburg, 23 December (Argus) — Heating oil consumers in Germany are refraining from purchasing because of high inventories, while importers are lowering their diesel stocks to maintain low bio-blended reserves. Reported volumes of heating oil traded to Argus fell by nearly 35pc last week. Consumers see little need to increase their stocks that, although they have steadily declined, remain higher than the same period in 2023 at 59.6pc, Argus MDX data show. Heating oil traded at about €1.50/100l higher than the previous week, further deterring consumers from last-minute purchases ahead of the Christmas holiday. Importers are striving to keep their diesel stocks minimal until the year's end. Obligated parties will be unable to use any surplus greenhouse gas (GHG) certificates from previous years in 2025 and 2026, so importers that have already met their obligations this year are eager to avoid generating more certificates until January. As a result, demand is low for diesel imports into Germany's northern ports and to storage facilities along the Rhine river. Northern Germany experienced a significant drop in imports in December to the lowest since September, Vortexa data show. But importers and barge operators are preparing for increased import activity in early 2025 to replenish their biodiesel inventories as quickly as possible. Suppliers at the Bayernoil consortium's 215,000 b/d Vohburg-Neustadt refinery in Bavaria are experiencing low stocks, primarily as a result of heightened demand in early December when buyers were active before an increased CO2 levy and the GHG quota take effect on 1 January. By Natalie Müller Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Japan’s Chugoku restarts Shimane nuclear reactor early


24/12/23
24/12/23

Japan’s Chugoku restarts Shimane nuclear reactor early

Osaka, 23 December (Argus) — Japanese utility Chugoku Electric Power restarted the 820MW Shimane No.2 nuclear reactor for test operations on 23 December, two days earlier than originally planned. The No.2 reactor at Shimane in west Japan's Shimane prefecture was reconnected to the country's power grids for the first time in nearly 13 years, after the reactor shut down in January 2012 for stricter safety inspections following the 2011 Fukushima nuclear meltdown disaster. Chugoku reactivated the Shimane No.2 reactor on 7 December, aiming to resume power generation on 25 December. But the target date for commercial operations remained unchanged on 10 January, despite the earlier than expected restart. The Shimane No.2 reactor will be a vital power source as the sole nuclear fleet in the Chugoku area, to help enhance the resilience of the power supply structure, stabilise retail electricity prices and reduce CO2 emissions, said Japan Atomic Industrial Forum's president Hideki Masui on 23 December. The Shimane No.2 reactor is the second boiling water reactor (BWR) to be restarted after the Fukushima disaster, following the 825MW Onagawa No.2 BWR unit that resumed test generation on 15 November, with normal operations scheduled to restart on 26 December. The BWR is the same type as that involved in the meltdown at the Fukushima Daiichi plant. The restart of the two BWRs would pave the way for Japan's nuclear restoration, as 15 BWRs — including advanced BWRs — are still closed in the wake of the Fukushima disaster. Japan has restored 14 reactors as of 23 December, including the Shimane and Onagaw reactors, of which 12 are installed with a pressurised water reactor (PWR) design. Nuclear power's share The Japanese government last week set a target of 20pc for nuclear power's share in the country's draft power mix for the April 2040-March 2041 fiscal year, under the triennial review for the country's Strategic Energy Plan (SEP). Tokyo is seeking to restart all existing reactors to achieve the 20pc goal, adding that replacement reactors would also be possible. The draft SEP allows nuclear power operators that had decommissioned reactors to build next-generation reactors at their nuclear sites, not limited to the same site. The previous SEP did not mention building new reactors or replacements. Japan's Federation of Electric Power Companies (FEPC) has applauded this progress, but FEPC chairman Kingo Hayashi noted that it was disappointing the SEP did not mention a nuclear capacity target which the FEPC had requested. It also did not include building new reactors or the expansion of existing nuclear plants, Hayashi added. By Motoko Hasegawa Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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