Season’s GREETings from the U.S. Treasury: IRS Issues Sustainable Aviation Fuel Tax Credit Guidance

Biofuels will have a key role to play in the meeting U.S. demand for sustainable aviation fuel (SAF). In guidance released in mid-December on the federal SAF tax credit (40B), the U.S. Treasury critically clarified which emissions calculation methodologies may be used to determine eligibility for the tax credit.

Decarbonizing the carbon-intensive aviation sector is critical to meeting the global challenge of climate change. While aviation accounts for a relatively small share of global emissions, it is one of the most challenging sectors to decarbonize.

Along with the SAF Grand Challenge, President Biden set a goal of 100% domestic commercial jet fuel use by 2050 and has a target of increasing U.S. annual SAF production from the current 15.8 million gallons to 3 billion gallons of SAF by 2030. Under the new IRS guidance, it is now expected, although not guaranteed, that corn-based ethanol will qualify for the credit. Depending on the methodologies permitted, ethanol could have been excluded.

SAF producers and environmentalists have been in a heated debate over which calculation model should be accepted.

Biofuels producers have advocated for use of the Greenhouse gases, Regulation Emissions, and Energy use in Transportation (GREET) model, which was developed by the U.S. Department of Energy. Environmental groups have argued for the methodology developed by the International Civil Aviation Organization for the United Nations, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) model.

The GREET and CORSIA models differ in their respective treatment of emissions from indirect land-use changes (ILUC) and soil organic carbon credits from land-management practices.

Environmental groups have raised concerns that agricultural-based fuels, specifically ethanol, pose risks to food security and ecological diversity. CORSIA does not give credit for carbon management activities and discourages turning wildlands or wetlands into agricultural land for production purposes. Under the CORSIA model, it is unlikely that ethanol-based SAF would qualify for the tax credit.

While the IRS guidance recognized that the current version of GREET is inadequate, it allowed for an updated version of that model to be used for the purposes of the SAF tax credit calculations. The administration has committed to finishing the GREET model updates by March 1, 2024.

Biofuels producers and the airline industry celebrated the announcement as a win. However, the revisions are still underway, and it remains to be seen if GREET can be successfully revised soon. It is unclear how the revised GREET will account for estimated ILUC emissions and credit soil carbon management activities. Depending on how GREET is configured, ethanol may be less likely to qualify.

The anticipated global demand for SAF well outstrips current production levels. In addition to the U.S., countries like Brazil and Mexico have begun to scale up SAF production for both domestic use  and for export. Already, renewable diesel demand in California driven by that state’s Low Carbon Fuel Standard has increased biofuels imports into the U.S. The IRS SAF guidance potentially will make U.S.-produced SAF more cost competitive and the U.S. a less attractive market for imported SAF markets, with other markets such as the Middle East, being more attractive for non-U.S. produced SAF.

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