SAF IRS Guidance Released - Is it Worthless?
The IRS and DOE released guidance on using corn ethanol for SAF. However, in our opinion the IRS guidance has little value for corn farmers in 2024.
Sustainable Aviation Fuel (SAF) credits allow the jet fuel producer a credit from the IRS to help offset the extra cost of producing this fuel. This credit for 2023 and 2024 is a base of $1.25 per gallon plus up to an extra 50 cents per gallon credit for a maximum total of $1.75 per gallon. Remember that a bushel of corn can produce close to 3 gallons, therefore, the equivalent credit per bushel is at least $5 in some situations and a minimum of $3.75 (approximately).
This extra credit is based upon the reduction in “carbon” that the producer can achieve. The IRS and Department of Energy released guidance yesterday for determining whether corn ethanol will qualify for these credits.
The Section 40B credit is only available through 2024 and then the Section 45Z credit will kick in through 2027 (based on current rules). Most of us thought there would be guidance on the new Section 45Z credit, however, this guidance was strictly for the current Section 40B tax credit that expires at the end of 2024.
Without getting into all of the technical details on how the GREET (Greenhouse gases, Regulated Emissions, and Energy use in Transportation) model works, the IRS guidance provides a safe-harbor for corn and soybeans to be used for SAF if it meets certain requirements.
If the SAF producer uses corn or soybeans that meets the safe-harbor it will likely have a 53% reduction in greenhouse emissions. This will result in a $1.28 credit per gallon to the SAF producer.
Corn farmers participating in the CSA Pilot Program are required to adopt specific agricultural practices such as:
No-till farming,
Cover cropping, and
The use of enhanced efficiency nitrogen fertilizers (EENF).
Soybean farmers are not required to use EENF since they typically do not input nitrogen in growing soybeans since the plant produces nitrogen naturally but will have to use no-till and cover crops.
The Safe-Harbor requires these practices to be applied to either a full field or perhaps all of the farm operation. The guidance is not totally clear on this requirement. Plus, third-party verification is required to determine the farmer met the CSA Pilot rules. The farmer is required to maintain very detailed records on all of these practices so the third-party can accurately verify the corn or soybeans meet the CSA Pilot rules.
It appears that the farmer must sell and contract their crop directly with the SAF producer. If they deliver their crops to an elevator or other third-party storage system, then that elevator must track that corn and verify it is delivered to the SAF plant.
Now why do we believe this safe-harbor is essentially worthless:
Corn or soybeans being converted this year is from crops harvested in 2023. CSA Pilot rules likely apply to so little corn or soybeans that can be delivered to a SAF plant to be of little use.
This safe-harbor might have had the needed impact if it was released in September, 2022 for the 2023 crop. This would have allowed the farmer to plant cover crops, utilize no-till when planting their crop and EENF.
Corn or soybeans harvested in 2024 that could be processed before year-end must meet the CSA Pilot rules including having a contract with the SAF producer directly not with the local ethanol plant. Agin, this guidance should have been in place before September, 2023 to allow the farmer to meet the rules. Providing guidance now is way too late for any farmer who is not already enrolled in some type of CSA Pilot program to ever provide any corn or beans to the SAF producer.
If the SAF producer is hundreds of miles away, the freight cost would outweigh any potential extra premium the SAF producer would pay to the farmer.
It is pretty easy to see why SAF plants are importing sugar ethanol from Brazil and will not waste their time with this safe-harbor. Our understanding is sugar ethanol reduces emissions by about 61%. This results in a potential credit of $1.36 per gallon to the SAF producer versus perhaps a $1.28 credit for corn ethanol. Why would a SAF producer want to go through the hassle of finding some CSA Pilot corn when they can simply import cheap Brazil sugar ethanol and get a higher credit with a lot less work.
I think the IRS and DOE will need to make this easier for farmers to get value from the Section 45Z credit starting in 2025 than this guidance will ever provide. We are ready to be wrong, but based on what we say from the guidance we are not hopeful.