Will Section 45Z Create "Payments" to Farmers?

The Inflation Reduction Act (IRA) created new Section 45Z "Clean Fuel Production Credit" starting in 2025. Will this credit lead to extra payments to farmers?

The Inflation Reduction Act (IRA) extended several energy tax credits and also enacted some new energy credits including Section 45Z - Clean Fuel Production Credit.

Most of this provision provides a credit to producers of energy that has a lower carbon footprint including ethanol producers. This credit starts in 2025 and extends to the end of 2027 (at least based on current law).

It is our understanding that farmers who can prove that their Carbon Intensity (CI) is lower than the standard for corn or soybeans may qualify for a premium from their ethanol or biofuel purchaser.

The current standard for corn is a CI of 29.1 GHG/MJ of ethanol energy. If the ethanol plant can prove that their purchase of corn has a CI of less than 29.1, then they may qualify for a credit of up to 5.4 cents per CI less than 29.1. Our current understanding is that the ethanol plant may need to pay prevailing wages and have a qualified apprenticeship program in place to qualify for the higher rate. If they do not meet that standard and if it applies, then the credit may be as low as 1.08 cents per CI. These rates will be indexed to inflation.

Since the ethanol plant may qualify for a credit, there is a good chance that they would pass part of that credit through to the farmer in the form of premiums. How much could this premium be? It depends on how much of the credit the plant will actually receive since these credits may exceed their tax liability. The IRA allows the plant to “sell” the credit to others who have enough tax liability to use the credit, but this means the plant will not receive face value. We would estimate they might get 75-80% of face value for the credits sold. There is also a direct pay option from the IRS, but this may not apply for these credits.

Let’s look at an example:

Assume a farmer delivers corn with a CI of 15 and the plant qualifies for the full credit of 5.4 cents per CI reduction. This equals a credit of 76.14 cents per bushel. If we assume that plant will pay a premium based on 40% of the credit, this equals a premium of about 30 cents per bushel. If the farmer grows 220 bushels per acre, this is an extra $66 per acre of revenue.

The IRS has until January 1, 2025, to issue regulations on this credit and we would expect it take close to that amount of time since it is not a current priority. Many farmers would assume they can wait until then, however, if they plan on selling corn to an ethanol plant in 2025, the practices that need to be in place will start later this year. Also, the determination of the CI score is based on a Department of Energy calculation and the IRS is in charge of the credit. Many changes may happen to the current calculations.

In order to maximize the reduction in CI scores the farmer will need to do cover crops which would need to be planted this fall and shown to be in place next spring before the 2024 crop is planted. Other ways of reducing your score are using no-till, higher yields, reducing use of fertilizer and lower fuel usage. You get credit for doing these practices already unlike some of the carbon sequestering options.

There is no real guidance on this yet and who knows what the actual rules will be. However, you may at least want to find out what your CI score is for your farm. These scores appear to be based on counties, etc. so it is important to know your base score and determine what is needed to reduce the score. It may be worth the investment. We will keep you posted.