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When the Inflation Reduction Act was signed into law in 2022, it established a new tax credit to support the production of low carbon biofuels. While the growing season for the first year of eligibility starts soon, the industry is awaiting final guidance to inform how programs should be designed.
This guidance will come in the form of an update to the United States Department of Energy’s Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model.* For the agricultural industry, this update will clarify how farmers and agribusinesses can quantify greenhouse gas emissions in order to qualify for this tax credit, which is known alternatively as the Clean Fuel Production Credit (CFPC), or, more colloquially, the 45z tax credit.
If you are interested in organizing a biofuels program to take advantage of the 45z tax credit, read on to learn more about what this tax credit is, why it’s a unique financial moment for the entire agricultural value chain, and how companies can prepare to fully take advantage of the opportunity.
*Regrow has been tracking updates on the forthcoming GREET model release closely, and plans to update this blog post with additional information as it becomes available.
What is the 45z tax credit?
The 45z tax credit is an incentive for producers of biofuels who can verify that they have reduced the carbon intensity (CI) score of the crops that are blended to create these fuels. A CI score is a measure of the emissions released throughout the duration of the lifecycle of cultivating a crop, including, among other sources, the energy used to synthesize fertilizer, the emissions generated through different on-field cultivation practices, and the diesel burned transporting the crop.
Importantly, the release of 45z marks the first time that a federal tax credit intentionally creates a market premium for farmers who adopt resilient agriculture practices that produce biofuel feedstocks. The updated GREET model – specifically a sub-component of the model called the Feedstock Carbon Intensity Calculator (FD-CIC) – will dictate how farmers growing these feedstocks must quantify the emissions associated with the lifecycle of the cultivation process.
How long does the 45z tax credit last?
The tax credit is funded for three years, applying to fuels sold from 2025 through 2027. Since farmers are currently planning crop rotations that will be harvested in 2024 and blended into biofuel in 2025, companies looking to capitalize on the opportunity need to act quickly to recruit growers and set up scalable processes for collecting the right data to comply with GREET model requirements.
What is the financial upside for farmers, agribusinesses, and biofuel producers?
The 45z tax credit incentivizes action across the value chain, as biofuel blenders, grain traders, and growers all stand to share in on the revenue generated. The tax credit works on a sliding scale, with biofuels producers being eligible for larger payouts as the net emissions of the feedstocks that they blend approach zero. In turn, biofuel producers and agribusinesses may offer premiums to farmers that adopt (or have adopted) the practices that reduce carbon intensity (e.g. cover cropping, reduced till).
Specifically, biofuel producers are offered a credit of two cents per gallon, per point of carbon intensity reduced below a government threshold score (the threshold differs by feedstock). The maximum credit is $1 per gallon for non-aviation fuel, and $1.75 per gallon of aviation fuel.
How can agribusiness and biofuel producers prepare to take advantage of 45z?
Given that there is a limited amount of time to capitalize on this tax credit, it is important that companies act quickly. Here is a simplified playbook for how companies can set up a successful, scalable 45z program:
Step 1: Identify the right grower profiles
Key question: How can I find regions, or specific growers, with low CI scores to maximize the revenue opportunity in year one?
The 2024 growing season will produce the first crops that will be eligible as part of the 45z tax credit. So companies looking to maximize their financial upside in year one should start recruiting growers this year.
This means finding farmers who are already adopting practices that are correlated with lower CI scores, such as those practicing reduced or no till, incorporating cover crops, and managing fertilizer use efficiently. It also means identifying growers that could be eligible in year one if they adopt new sustainable practices.
This identification process can be a challenge. Without a data-driven plan, you run the risk of losing time and weakening your ROI. One solution to this challenge is to leverage remote sensing information, which can help locate regions in which growers are already adopting these practices at above average rates. This type of data can help enable companies to efficiently deploy recruitment resources.
Step 2: Recruit growers
Key question: How can I demonstrate to farmers that they should join the program? What options can I offer to a grower that does not already have a low CI score?
Each farmer will have unique considerations for enrolling in a biofuels program, but companies recruiting farmers to join their programs can offer key pieces of information that will help guide them.
Most importantly, companies should be portraying a clear range of returns-on-investment that a farmer can expect through their participation in a biofuels program. You can provide this information to farmers by evaluating how their CI scores from FD-CIC will change in the future depending on which practices they adopt. While this can be a lot of data to analyze – numbers can vary for farmers in different regions and with different practice histories – a good MRV partner can help you through this planning process.
Additionally, companies can offer other opportunities to generate value for farmers who do not meet the low-CI threshold for 45z. For example, companies can help farmers access the carbon credit market, which does not does not require CI scoring. And if farmers can successfully reduce their CI by participating in a carbon crediting program in year one, they could join a biofuels program in later years of tax credit eligibility.
Step 3: Enroll farmers and gather the required data to run FD-CIC
Key question: How do I reduce the data-entry burden on farmers so I can spend less time enrolling each grower and focus on scaling my program?
Running the GREET model to quantify feedstock carbon intensity scores requires gathering data for every field that a farmer plans on enrolling in a biofuels program. FD-CIC requires a number of data points for each field, including the previous year’s data on that field’s yield, crop rotation, tillage practices, manure application, and additional fertilizer use (among other automated inputs such as weather and soil data).
For a company recruiting farmers who each may be enrolling tens, if not hundreds of fields, managing and organizing this data can quickly turn into a headache. Therefore, it is crucial to build simplified and scalable processes to both handle the farmer data entry component, and automate running the FD-CIC calculations – tasks that a digital MRV platform can help streamline.
Ready to get started with a 45z program?
For companies seeking to take advantage of this tax credit, now is the time to plan before official guidance is released. A smooth, profitable 45z program necessitates an intentional and precise planning process.
Regrow is leveraging our experience and technology that supports the largest agricultural companies in the world to enable our partners to start planning for 45z today. If you would like to learn more about how Regrow can help you plan, and scale a biofuels program, click here to get in touch with one of our biofuels experts.
