Renewable natural gas compressed for use as a transportation fuel and neat sustainable aviation fuel (SAF) that is blended into a fuel mixture would qualify for tax credits under guidance released Jan. 10 by the U.S. Treasury Department and Internal Revenue Service.

Some industry groups, however, said the guidance was incomplete and lacked specifics producers need. 

The guidance on the Inflation Reduction Act’s (IRA) Clean Fuels Production Credit, known as 45Z, was released 10 days before President Joe Biden’s administration is set to leave office.

The guidance includes a notice of intent to propose regulations on the credit and a notice providing the annual emissions rate table. Final rulemaking authority will land with the administration of President-elect Donald Trump.

“This guidance will help put America on the cutting-edge of future innovation in aviation and renewable fuel while also lowering transportation costs for consumers,” said Deputy Secretary of the Treasury Wally Adeyemo. “Decarbonizing transportation and lowering costs is a win-win for America.”

The credit consolidates and replaces pre-IRA credits for biodiesel, renewable diesel and alternative fuels and an IRA credit for SAF.

The guidance released Jan. 10 clarifies who can claim the per-gallon tax credit and which fuels are eligible. The Treasury Department said a fuel must be suitable for use as a transportation fuel to qualify. It intends to propose that fuels must have practical or commercial fitness for use as a highway vehicle or aircraft fuel.

“The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible. Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable,” the Treasury Department said in a news release. “Additionally, natural gas alternatives such as renewable natural gas (RNG) would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.

While industry players were pleased to see some news about the credits, they were unsatisfied that the guidance was not complete. The Department of Energy plans to release the model that will determine emissions rates to qualify for the 45Z in the coming days.

“Today’s package falls short of expectations and remains incomplete,” said Geoff Cooper, president and CEO of the Renewable Fuels Association. “The guidance is a potential step in the right direction, but much work remains to be done before clean fuel producers, farmers and consumers can fully benefit from the 45Z program.”

Among the concerns was the continued wait for the emissions rate table crucial for determining producers’ eligibility for the credit and the lack of so-called climate-smart agriculture (CSA) practices capable of lowering the carbon intensity of renewable fuels.

Acknowledging the emissions-lowering benefit of CSA practices, the Treasury Department said it intends to propose rules for incorporating the emissions benefits from such practices for cultivating domestic corn, soybeans and sorghum as feedstocks for SAF and non-SAF transportation fuels.

However, “these options would be available to taxpayers after Treasury and the IRS propose regulations for the section 45Z credit, including rules for CSA, and the 45ZCF-GREET [Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation] model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.”

In the proposed regulations notice, the Treasury Department and IRS also raised what they described as “significant concerns” regarding the ability to distinguish between imported used cooking oil (UCO) feedstocks and palm oil.

Misidentifying a substance as UCO when it is not—such as mislabeling palm oil as UCO— could have a greater impact on emissions, they said.
The Treasury Department and the IRS are considering appropriate substantiation and recordkeeping requirements for imported UCO.

The regulation was being closely watch by the biofuels industry, including companies looking to move forward with projects aimed at reducing global greenhouse gas emissions in the transportation sector. Renewable fuels, such as SAF, can be blended with conventional aviation fuel without modification to existing planes or engines, resulting in fewer emissions. Companies such as BP, Chevron, Eni and Shell are pursuing biofuel production projects, mainly SAF and hydrotreated vegetable oil.

SAF, however, remains in short supply and is costlier than fossil-based jet fuel for airlines.

“Unfortunately, today’s guidance does not provide the certainty or flexibility that ethanol producers were looking for, and many questions remain unanswered,” Cooper said. “We do not believe this guidance alone will spur the investment, innovation, and job creation in the clean fuels sector that Congress and the administration intended. It simply isn’t bankable, investible, or otherwise actionable for the vast majority of biofuel producers.”

Similar sentiments were shared by other biofuel trade associations, including Growth Energy.

Growth Energy CEO Emily Skor called the “long-overdue” guidance “far from complete.”

“We look forward to working with the next administration to fill in the gaps left by today’s announcement and to ensure this economic opportunity for the struggling farm economy is not left on the table,” Skor said. “Demand for low carbon energy will continue to grow with or without us, and we need strong policy support in order to unleash the kind of investments that will position the U.S. for leadership in this market. Today’s guidance does not satisfy that need.”

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