The latest Senate draft of a major US budget bill would extend a biofuels tax break for an additional two years, down from four years in the prior draft, and set far more sweeping limits on foreign feedstocks.
The "45Z" clean fuel production credit would last until 2029 and be available for only domestically produced fuels produced from North American feedstocks starting next year, according to a draft released over the weekend by Senate leaders that could be voted on as soon as Monday.
An earlier Senate draft proposed extending the incentive through 2031 and cutting credit values for foreign feedstocks by just 20pc. The incentive, part of the Inflation Reduction Act, kicked off this year and currently offers a sliding scale of subsidy to US-made alternative fuels through 2027 based on their greenhouse gas emissions.
The updated language is a win for farm groups, which have worried that imports of used cooking oil, tallow, and sugarcane ethanol are hurting demand for home-grown crops that can also be turned into biofuels. Refiners that had previously looked abroad for renewable diesel inputs, expanding US production to record levels last year, would have to pay up for scarcer domestic options.
A shorter credit extension could frustrate corners of the industry that had emphasized the need for policy certainty — including companies with plans to start producing novel fuels later this decade — although biofuel incentives have a long history of extensions.
For instance, the Senate bill would revive an expired tax credit for small biodiesel producers in a major change from earlier drafts. Facilities with capacities of no more than 60mn USG/yr could claim a 20¢/USG subsidy for up to 15mn USG of annual production this year and next year, supplementing tax breaks they can already claim under 45Z. That could keep more biodiesel plants, which have struggled to adapt to policy changes and competition from larger renewable diesel producers, running after a difficult start to the year.
Smaller producers also would benefit from the latest Senate draft preserving the ability of companies without enough tax liability to sell tax credits to others.
The bill is otherwise similar to earlier versions. It would still bar regulators next year from considering indirect emissions from land use changes, a shift from current law that in effect ups subsidies for fuels made from crops, another top priority for farm groups. If passed, the typical gallon of US dry mill corn ethanol and canola biodiesel would likely qualify for some 45Z subsidy — unlike under current rules — and soybean-based road fuels would earn larger credits next year.
Aviation fuels conversely would see slimmer subsidies starting next year, since the bill would eliminate extra credit under current law for jet fuels over road fuels. That would be a major disruption to airlines and to those refiners that have invested in upgrading more of their renewable diesel output to instead produce sustainable aviation fuel (SAF). Trucking groups had argued that the imbalance was diverting feedstocks away from road markets to costlier SAF production — and that treating fuel types equally was one way conservative lawmakers could reduce the credit's price-tag.
More changes possible
The bill could be changed further Monday as the Senate proceeds with a process in which lawmakers can propose amendments. If the bill passes, it would go back to the House for approval. President Donald Trump has pushed lawmakers to finalize the sprawling package this week, an ambitious timeline given lawmakers still disagree on key issues.
Any revised 45Z credit would also need final rules from the US Department of Treasury, which still has questions to answer about eligibility this year. The ultimate profitability of biofuels will depend on interactions between the tax credit and other policies that are also in flux. That includes a federal biofuel blend mandate, which the Trump administration wants to revamp to discourage foreign feedstocks, and newly tougher carbon intensity targets in California's influential low-carbon fuel standard market.
