The 45Z clean fuel production tax credit is being used for unjustified giveaways to the conventional biofuels industry. The Senate should stop it.
The House reconciliation bill guts the Inflation Reduction Act’s clean energy credits, with the notable exception of the 45Z clean fuel production tax credit, which was extended and ballooned in cost. This purported attempt to incentivize “clean fuels” is little more than a giveaway to the conventional biofuels industry. The changes made by the House will only serve to subsidize mature industries for doing the same things they’re already doing (actually, for doing even less, as explained below). The Senate should modify 45Z to ensure that it incentivizes only truly innovative clean fuels, such as synthetic or biogenic sustainable aviation fuel (SAF), which would simultaneously save money while promoting U.S. competitiveness.
The House-passed version of 45Z is costly and fiscally irresponsible
Extending the lifetime of 45Z will compound extraneous spending on mature industries that use conventional technologies over four additional years. Further, the House reconciliation bill broadens 45Z eligibility of conventional biofuels beyond the access these fuels already have to the credit, which would be fiscally irresponsible. The Joint Committee on Taxation (JCT) estimates that the tax credits will cost an additional $45.4 billion through 2034 on top of the $8.4 billion JCT estimates under the current policy, bringing the total projected 45Z spending to $53.8 billion. Under the House bill, almost all of these funds will be claimed by producers of conventional biofuels (e.g. on-road fuels like ethanol, biodiesel, and renewable diesel). If 45Z were scaled back to focus more on aviation fuels and/or innovative clean fuels, it would drastically reduce costs and make room in the budget for other important tax credits, like 45V and 45Q, that are critical to the development of innovative low-carbon, energy-dense fuels that the transportation sector needs going forward. For example, the score of the House-passed 45Z ($45.4 billion) is five times larger than the score of the 45V clean hydrogen production tax credit ($9.2 billion), which the House essentially eliminated.
45Z as drafted will lead to wasted investment in established technologies
The House version also weakens the criteria for determining whether a fuel qualifies for 45Z by removing a requirement that producers must account for the impact of land use change on net emissions. The House’s change would help conventional biofuels earn the credit, even though they are already mass produced and deliver modest environmental benefits, if any. Ignoring how the increased demand for conventional biofuels can affect detrimental land use changes and any associated loss of soil carbon around the world is a dishonest way of making conventional biofuels appear more environmentally beneficial than they are.
Instead of lowering the bar on credit eligibility, the House Ways & Means committee could have incentivized biofuel producers to use non-conventional biomass resources that offer environmental benefits (like agricultural wastes and residues, winter crops, and herbaceous and woody perennials on marginal land), install non-conventional bioconversion technologies and carbon capture systems, recycle soil amendments from bioconversion facilities, or take other real steps to improve their fuels’ performance. Conventional biofuels also already benefit from regulatory support from other programs, like the Renewable Fuel Standard and California Low Carbon Fuel Standard. After decades of state and federal assistance, these fuels do not need lavish tax credits. It’s a multi-billion-dollar giveaway to an existing, mature industry, plain and simple.
Without modifications, 45Z will be bad for innovation and for the environment
The House reconciliation version of 45Z is not designed to incentivize production of clean fuels. Lavishing this subsidy on conventional on-road biofuels like corn ethanol and biodiesel would frustrate the development of bio-based SAF. Under the proposed version of 45Z, early-stage SAF producers would have to compete with overly subsidized conventional biofuel producers for a limited supply of environmentally sustainable bio-feedstocks. Additionally, the restrictions on transferability would further undermine the value of 45Z for these early-stage companies, as they do not typically have the necessary tax liability to take advantage of tax credits. This will hinder any producers that are trying to bring innovative fuels to the market and stifle investment in technologies like carbon capture and storage that are often used in clean SAF production. If the government is going to pay producers to keep making the same basic fuel they have been making for decades, there is no incentive to invest in newer, better, cleaner fuels. These kinds of tax credits should reward innovation and bolster the competitiveness of U.S. industries; they should not double down on the status quo, but that’s exactly what 45Z does under the House reconciliation bill.
It doesn’t have to be this way. The Senate can save money, support innovation, and bolster American competitiveness in an emerging global market by revising the 45Z tax credit so that it’s available only to companies that produce advanced aviation fuels. If that’s too bold, the Senate could at least increase the value of the credit that can be earned by advanced aviation fuel producers while significantly decreasing the value of the credit that incumbent fuel producers can earn. Either approach would both shrink the ballooning cost of 45Z and target public investment toward technologies that need it the most.
