The 45Z tax credit system for US biofuel feedstocks could struggle to return value to US farmers — with complex systems and long value-chains leaving a wide gap between producers and end-users — an outcome that could hinder bringing the program to scale.
Originally intended to promote the usage of low-carbon feedstocks for biofuel production, the re-worked 45Z tax credit has widely been viewed by US agricultural groups as a tool to "create opportunities for farmers" said David Kubik, Biofuels and Trade Policy Manager with the Illinois Soybean Board.
But complexities within the system — including the verification processes or how the US Department of Agriculture rates climate-smart agricultural practices — have introduced hurdles that US farmers have yet to work out.
Setting expectations
The potential for the 45Z tax credit to bid value back to crop producers has limitations shaped by feedstock type, supply chains, and geography.
Understanding the "incremental value" generated by carbon-intensity (CI) reducing agricultural practices is key, according to Matt Herman, chief officer of Demand and Advocacy with the Iowa Soybean Association. "That's what the farmer and the value chain are going to be negotiating over."
The tax credit — which increases incrementally with the CI reduction of the feedstock — caps out at $1/USG of biofuel production. For producers of renewable diesel and biodiesel, $0.60/USG is guaranteed if soybean oil is the feedstock. That leaves a potential of up to $0.40/USG of tax credit to be bid into incentivizing agricultural practices for US soybean producers. A credit that will also pass through the hands of soybean crushers — with soybean oil accounting for less than 20pc of a crushed soybean — before it can be factored into a farmer's profitability.
For corn producers the advantage seems to be greater as the entire $1/USG credit for ethanol is aligned with the CI reduction of the feedstock.
Regardless of the cap, the value returned to farmers will be further shaped by the accounting and compliance costs borne by the biofuel producers — the recipients of the credit — as well as any other part of the supply chain involved in moving the crop from the field to the end user.
For farmers located away from biofuel end users, each additional supply chain link adds another layer of cost "taking away some of that potential farmer value", according to Adam Kiel, executive vice president with the Iowa Soybean Association.
Rewarding the risk
Time also creates a barrier between the potential value of 45Z for biofuel producers and the farmers who produce the crops.
It could take "years from the time a farmer makes that decision to the time the credit value is returned back to the fuel producer even, let alone the farmer", said Keil. And farmers who adopt CI reducing agricultural practices incur those costs up front "probably a year before they harvest that crop," said Kiel.
"Somebody's got to carry that cost", according to Herman. "There's a lot of opportunity here, but I think that there's a lot of area to improve".
"I look at it as a subsidy for farmers who are already doing it" said Kubik. Those who have already adopted practices consistent with the CI reduction incentive will be the early beneficiaries.
To balance or to book
A possible solution to the barriers in returning value back to farmers would be to modify the method used to account for the CI reduction.
Under the current regulation the CI reduction is accounted for and reported by the biofuel producer using a "Mass Balance" approach. Under mass balance accounting, documentation of the feedstock's production method follows it up the supply chain to the biofuel producer who uses it to prove the CI reduction of the feedstock and collect the tax credit.
The alternative "Book and Claim" approach has the potential to simplify this. The proof of CI reduction would become decoupled from the feedstock as it enters the supply chain, and become a distinct product that biofuel producers can purchase to claim the tax credit.
"Book and Claim is the preferred approach as it would allow more farmers to participate", said Sean Arians, Vice President with the National Corn Grows Association.
But to adopt it would require multiple US agencies to agree that book and claim is an eligible accounting method, according to Arians. And additional safeguards and monitoring would have to be developed to ensure that the same bushel of feedstock is not sold multiple times to generate additional credits.
And the book and claim approach could open the door to more farmers claiming the credit without modifying farming practices, particularly from producers who live in areas where CI reduction eligible practices, such as no-till, are a necessary part of agriculture production.
But with time farm groups remain adamant that the 45Z system will benefit US producers.
"The key for corn growers is to see a portion of 45Z make its way back to the farm, said Arians.
"The ultimate goal of 45Z is to is to create opportunities for farmers", Kubik said. "And I do believe that farmers will be able to capitalize on those opportunities at the right time. It's just, kind of, working through the quirks."
