Besides extending the CFPC through 2031 (it currently expires at the end of 2027), the bill would ban most foreign feedstocks and would remove indirect land use change (ILUC) penalties from US feedstocks.
Impact on the US feedstock mix
The new ILUC rule could bring about dramatic changes in the US feedstock mix for biofuels. It appears to give soybean oil an equivalent carbon intensity (CI) score to waste-based feedstocks such as used cooking oil and tallow.
Restrictions on foreign feedstocks
The House budget bill adds a clause to Section 45Z in the Special Rules section that appears to try to ban most biofuel feedstocks of foreign origin. All amendments to Section 45Z are set to apply to fuel sold after December 31, 2025, according to the bill.
The new language says that the CFPC will only apply if “such fuel is exclusively derived from a feedstock that was produced or grown in the United States, Mexico, or Canada.”
This amendment would seem to close the foreign feedstocks loophole created by the most recent guidance for 45Z, SAF Notice 2021-11 published by the Internal Revenue Service on January 10.
While all other biofuel feedstocks and production pathways specified the use of US feedstocks (with the exception of tallow), sustainable aviation fuel (SAF) alone was also allowed any pathway or feedstock established in the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), created by International Civil Aviation Administration, that was not otherwise listed.
Most biofuel producers understood this addition to mean that they could continue to use feedstocks such as imported used cooking oil, but only for SAF production and not for other biofuels.
The proposed amendment would not only block imported used cooking oil — a large portion of which comes from China — it would also block feedstocks from Brazil such as sugar cane ethanol. The banning of these feedstocks could be mitigated by the next provision of the bill, concerning land use change.
Removing ILUC and its implications
A second proposed change to 45Z would require lifecycle greenhouse gas emissions to be adjusted to exclude any emissions attributed to indirect land use change (ILUC).
ILUC refers to additional carbon emissions that are released due to changes in how land is used — usually from the loss of forests or native grasslands, which store carbon in soil and plants when undisturbed.
The removal of ILUC penalties will significantly help some US feedstocks that come from row crops, according to Fastmarkets biofuels analyst Melissa Cousin.
Every production facility has its own CI score based on a number of inputs, but comparison can be made by using the example parameters given by the GREET model.
For biodiesel production, the CI score of soybean oil would fall from 33 to 20, making it equivalent to tallow and domestic used cooking oil, Cousin said on May 22.
Initial 45Z guidance suggested that biofuels produced from feedstocks with lower emissions rates, such as tallow, will be eligible for a higher credit incentive than soybean oil.
Canola oil could see an even more dramatic improvement. This is from an original CI score of 53, which is above the maximum of 50 allowed under CFPC and therefore would receive no tax credit, to 34.
The lower CI scores will increase the value of the tax credits for the use of canola oil and soybean oil in the production of renewable diesel.
One trading source told to Fastmarkets this week that some biofuel producers have “started to kick tires” and see if starting back up will be financially possible under the ILUC change. A number of biodiesel producers in particular have shut in production over the past several months due to low margins.
The impact of ILUC penalties removal
The removal of ILUC penalties “is amazing!” according to Mitchel Hora of Ag Continuum, an agriculture consulting company that helps farmers improve their soil health and CI scores, adding “massive wins for 45Z for sure.”
“The problem is lack of transferability. That’s an issue,” Hora said. Transferability refers to the ability of producers to transfer tax credits to buyers.
Hora said that transferability may most important for small producers whose biofuel output generates more tax credits than they can claim. With transferability, a small producer could essentially “sell” the unusable portion of the tax credit to then be claimed by the biofuel buyer, allowing full monetization of the credits.
GREET model updates and legislative actions
ILUC has been a hotly contested topic over the past few years as the Argonne National Laboratory and US Department of Energy have worked to update the greenhouse gases, regulated emissions, and energy use in technologies (GREET) model for scoring the carbon intensity of various biofuels feedstocks.
Many in the biofuels industry felt that GREET penalized US row crops like corn (for producing ethanol) too severely and encouraged the import of feedstocks such as Brazilian sugarcane ethanol, or even Brazilian corn ethanol — while not attributing any penalty to those feedstocks for global shipping emissions.
The bill specifies that the methodology for ILUC emissions changes would be determined by the US Treasury Department, USDA and Environmental Protection Agency working in conjunction.
The addition of USDA to ILUC methodology is notable because several bills such as this year’s Farm to Fly Act have been submitted that would allow USDA to have more input on rulemaking for SAF in particular.
The One Big Beautiful Bill Act has moved to the US Senate where it will be marked up and then will head back to the House for approval.
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