A new US tax credit for low-carbon fuels will likely begin next year without final guidance on how to qualify, leaving refiners, feedstock suppliers, and fuel buyers in a holding pattern.
The US Treasury Department this month pledged to finalize guidance around some Inflation Reduction Act tax credits before President Joe Biden leaves office but conspicuously omitted the climate law's "45Z" incentive for clean fuels from its list of priorities. Kicking off in January and lasting through 2027, the credit requires road and aviation fuels to meet an initial carbon intensity threshold and then ups the subsidy as the fuel's emissions fall.
The transition to 45Z was always expected to reshape biofuel markets, shifting benefits from blenders to producers and encouraging the use of lower-carbon waste feedstocks, like used cooking oil. And the biofuels industry is used to uncertainty, including lapsed tax credits and retroactive blend mandates.
But some in the market say this time is unique, in part because of how different the 45Z credit will be from prior federal incentives. While the credit currently in effect offers $1/USG across the board for biomass-based diesel, for example, it is unclear how much of a credit a gallon of fuel would earn next year since factors like greenhouse gas emissions for various farm practices, feedstocks, and production pathways are now part of the administration's calculations.
This delay in issuing guidance has ground to a halt talks around first quarter contracts, which are often hashed out months in advance. Renewable Biofuels chief executive Mike Reed told Argus that his company's Port Neches, Texas, facility — the largest biodiesel plant in the US with a capacity of 180mn USG/yr — has not signed any fuel offtake contracts past the end of the year or any feedstock contracts past November and will idle early next year absent supportive policy signals. Biodiesel traders elsewhere have reported similar challenges.
Across the supply chain, the lack of clarity has made it hard to invest. While Biden officials have stressed that domestic agriculture has a role to play in addressing climate change, farmers and oilseed processors have little sense of what "climate-smart" farm practices Treasury will reward. Feedstock deals could slow as early as December, market participants say, because of the risk of shipments arriving late.
Slowing alt fuel growth
Recent growth in US alternative fuel production could lose momentum because of the delayed guidance. The Energy Information Administration last forecast that the US would produce 230,000 b/d of renewable diesel in 2025, up from 2024 but still 22pc below the agency's initial outlook in January. The agency also sees US biodiesel production falling next year to 103,000 b/d, its lowest level since 2016.
The lack of guidance is "going to begin raising the price of fuel simply because it is resulting in fewer gallons of biofuel available," said David Fialkoff, executive vice president of government affairs for the National Association of Truck Stop Operators.
And if policy uncertainty is already hurting established fuels like biodiesel and renewable diesel, impacts on more speculative but lower-carbon pathways — such as synthetic SAF produced from clean hydrogen — are potentially substantial. An Argus database of SAF refineries sees 810mn USG/yr of announced US SAF production by 2030 from more advanced pathways like gas-to-liquids and power-to-liquids, though the viability of those plants will hinge on policy.
The delay in getting guidance is "challenging because it's postponing investment decisions, and that ties up money and ultimately results in people perhaps looking elsewhere," said Jonathan Lewis, director of transportation decarbonization at the climate think-tank Clean Air Task Force.
Tough process, ample delays
Regulators have a difficult balancing act, needing to write rules that are simultaneously detailed, legally durable, and broadly acceptable to the diverse interests that back clean fuel incentives — an unsteady coalition of refiners, agribusinesses, fuel buyers like airlines, and some environmental groups. But Biden officials also have reason to act quickly, given the threat next year of Republicans repealing the Inflation Reduction Act or presidential nominee Donald Trump using the power of federal agencies to limit the law's reach.
US agriculture secretary Tom Vilsack expressed confidence last month that his agency will release a regulation quantifying the climate benefits of certain agricultural practices before Biden leaves office, which would then inform Treasury's efforts. Treasury officials also said this month they are still "actively" working on issuing guidance around 45Z.
If Treasury manages to issue guidance, even retroactively, that meets the many different goals, there could be more support for Congress to extend the credit. The fact that 45Z expires after 2027 is otherwise seen as a barrier to meeting US climate goals and scaling up clean fuel production.
But rushing forward with half-formed policy guidance can itself create more problems later.
"Moving quickly toward a policy that sends the wrong signals is going to ultimately be more damaging for the viability of this industry than getting something out the door that needs to be fixed," said the Clean Air Task Force's Lewis.
