US Senate Democrats agree new climate budget bill; includes SAF credits

The latest Inflation Reduction Act supports more biofuel blending

Democrats in the US Senate have agreed to back the Inflation Reduction Act, which contains several major provisions to support biofuels and cleaner transportation that have been retained from a previous climate package blocked in the upper house since 2021.

The bill includes a new dedicated tax credit for sustainable aviation fuel (SAF) and an extension of the existing credit for road-based biodiesels through 2024. Still, it then transitions to a ‘Clean Fuel Production Credit’ for the years 2025-2027, with the new credit applying to domestic production credit only, unlike the current BTC.

The package of measures in a repurposed climate-focused bill (which took many in Washington by surprise) was drawn up by senior democrats in consultation with Joe Manchin, the West Virginia senator who had effectively blocked President Biden’s much-bigger ‘Build Back Better’ bill.

The package, which accounts for around $370 billion in direct spending but could almost double that in potential benefits to the US economy, according to the White House, is much smaller in scope than the stalled ‘Build Back Better’ bill.

Yet it still contains a slew of climate budget legislation including tax credits for various types of biofuels, alternative fuels such as hydrogen, and electric vehicles (EVs).

“With this legislation, we’re facing up to some of our biggest problems and we’re taking a giant step forward as a nation … This bill is far from perfect, it’s a compromise, but that’s often how progress is made: by compromises,” President Joe Biden said in a statement on the bill, which has been named with a nod to surging inflation in the US that has been largely driven by higher oil prices.

The revised package of measures was broadly welcomed by the biofuels sector but also prompted some disquiet because fiscal incentives will taper off later in the decade.

The transition [to CFPCs] is much sooner than previously negotiated by Congress – the Build Back Better Act would have extended credits through 2026 and then transitioned to the CFPC for 2027-2031, with credit values for on-road fuels significantly lowered after that
pointed out one US biofuels industry source.

That extension of the BTC through 2024 prolongs a major fiscal incentive for US companies that compete fiercely with European producers on a global basis for waste-based feedstocks such as used cooking oil (UCO) and animal fats, and comes against the backdrop of a boom in conversions of existing oil refineries to renewable diesel (RD) plants and the construction of new facilities.

A SAF tax credit of $1.25 per gallon, which could rise to $1.75 per gallon depending on the greenhouse gas reduction level of the fuel, is also included in the bill and would also be effective through 2024, but from 2025 biojet will also revert to the CFPC payments.

The CFPC establishes a base credit of $0.20 per gallon (or $0.35 per gallon for SAF) multiplied by an applicable emissions factor if the fuel emissions factor is less than a particular threshold.

Meanwhile, the increased credit rate for the CFPC is five times the base rate if prevailing wage and apprenticeship requirements are met.

Expiry date

“We are very pleased that the bill recognizes that SAF requires an additional incentive to attempt to level the playing field with ground transport fuels and their many policy supports. However, we are disappointed that the SAF credits are limited to five years, expiring in 2027 along with other fuels. This new industry needs a longer-term incentive to deploy at scale,” one US SAF producer said in response to the bill.

US producers of biojet have said for years that tax credits are essential for many projects to attract necessary financing.

Language in the bill specifically calls for the use of biomass in generating renewable fuels and prohibits the use of palm derivatives but this would mean first-generation feedstocks such as soyoil and cornoil will be eligible for biojet - unlike in Europe, which has proposed to exclude food crops in its evolving SAF mandate.

Cleaner grid for EVs?

The bill also has provisions to support clean hydrogen, zero-emission nuclear power, an energy source that would be key to decarbonizing grids to power EVs and tax credits of $4,000 to households to purchase used EVs and a $7,500 tax credit to buy a new battery-operated vehicle.

The proposed act also proposes $30 billion of incentives for products and processes that decarbonize energy grids, such as wind turbines and solar panels, and boost demand for domestic sources of raw materials for EVs.

The bill also includes a $10 billion investment tax credit to build EV production plants, wind turbines and solar panels.

Democrat lawmakers have also proposed $1 billion for clean heavy-duty vehicles (HGVs), such as school and transit buses and garbage trucks, and would create a 30% tax credit for commercial EVs.

Lobbies

Biofuels groups such as the Advanced Biofuels Association and Growth Energy said that the extension of existing tax credits for road biofuels and the introduction of new ones for aviation would protect existing jobs and help create additional employment in the sector.

The Renewable Fuels Association said the bill would open up new markets for corn-based ethanol and that provisions to promote carbon capture, utilization, and storage would help incentivize using this biofuel to meet carbon reduction targets.

The lobbies said they would push strongly for the bill to pass through the House of Representatives, in which Biden’s party has a majority but includes some left-wing democrats who may take the view that the Inflation Reduction Act is far too insufficient to combat climate change.

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