By Alejandro Plastina, Iowa State University Extension Economist
The Inflation Reduction Act (IRA) of 2022 and the USDA Partnerships for Climate-Smart Commodities provide multiple pathways for farmers and ranchers to expand markets for America’s Climate-Smart Commodities, leverage the greenhouse gas (GHG) benefits of Climate-Smart commodity production, and provide direct benefits to production agriculture.
Direct pathways include participating in Voluntary Carbon Markets, by contracting with voluntary private carbon initiatives (VPCIs) to implement agricultural conservation practices that sequester carbon in the soil and avoid GHG emissions in exchange for monetary compensation. See AgDM File A1-76, How to Grow and Sell Carbon Credits in US Agriculture for a side-by-side comparison of VPCIs; AgDM File A1-40, Carbon Farming: Stacking Payments from Private Initiatives and Federal Programs to review the interaction of VPCIs and USDA cost-share programs; and AgDM File A1-78, Net Returns to Carbon Farming, to evaluate the financial impact of contracting with VPCIs for your own operation.
Indirect pathways for farmers and ranchers to participate in Climate-Smart programs include efforts to reduce the carbon intensity of feedstocks used in biofuels production. Over the past two decades, substantial reductions in GHG emissions from the electric power generation sector drove down total US GHG emissions. The next policy goal is to reduce emissions from the transportation sector. Tax credits to biofuel plants are among the chosen instruments to target this federal policy goal.
Farm Equipment Manufacturers Association (FEMA) reports:
Federal Tax Credit 45Z (TC45Z), the “Clean Fuel Production Credit”, consolidates and replaces several fuel-related credits scheduled to expire at the end of 2024, including credits for the production of biodiesel, agri-biodiesel, renewable diesel, second-generation biofuel, sustainable aviation fuel, alternative fuels, and alternative fuels mixtures (Congressional Research Service, 2023). A major difference between TC45Z and the expiring provisions is that while the latter subsidize specific types of low-GHG emission fuels, the former is technology-neutral and is intended to subsidize the production of any transportation fuel with zero or low GHG emissions.
TC45Z is expected to be available to biofuel refineries for qualifying transportation fuel produced after 2024 and sold on or before December 31, 2027. TC45Z has the potential to generate significant tax savings for US fuel production facilities able to produce “clean” fuel, defined as fuel produced with no more than 50 kilograms of carbon dioxide equivalent per 1 million British Thermal Units (50 kg CO2e / 1 mmBTU).
The 2022 IRA defined the formula to calculate the credit values per ton of clean fuel sold as $0.20 ร [1 – (kg of CO2e per mmBTU / 50)], where the expression in square brackets is called the Emissions Factor (EF). The base payment rate is higher for sustainable aviation fuel (SAF) than for other fuels: $0.35 instead of $0.20. Finally, if certain wage and apprenticeship requirements are met by the refinery, the base payment rate increases from $0.20 to $1.00 for non-SAF and from $0.35 to $1.75 for SAF.
While federal agencies are still developing the rules and underlying life-cycle analysis (LCA) model for the operationalization of TC45Z, the CI-Score Calculator is based on the R&D version of GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies): a full life-cycle model sponsored by the Argonne National Laboratory, U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy. The R&D version of GREET (Wang et al., 2023) fully evaluates the farm-to-fumes GHG emissions of advanced and new transportation fuels. The GREET model is specified in the IRA as the methodology to calculate the LCA for clean hydrogen production until a successor is approved by the Secretary of the Treasury.
Why the need for a CI-score calculator?
AgDM File A1-80 Decision Tool was designed to help United States farmers achieve four goals with minimal effort:
1. calculate the average carbon intensity score (CI-Score) of their corn production under current farming practices,
2. calculate the expected change in CI-Score under alternative farming practices,
3. project the dollar amount of the Federal Tax Credit 45Z that ethanol plants would obtain from using the corn supplied by the farmer as feedstock under (1) and (2), and
4. project the extra-revenue that a farmer could receive from the ethanol plant, depending on the share of Tax Credit passed-through.
Caveats
The federal government is finalizing the rules and models that will be used in the implementation of the TC45Z, and the final model could differ substantially from the one used in this CI-Score Calculator. The value of this tool is purely educational and does not imply any warranties on the potential payments from the TC45Z program. See Information File A1-80, Carbon Intensity Score Calculator for additional information on how to use the Decision Tool, interpret the results, and additional sources of information.
