Regulators Push to Incentivize Biofuel Production, Carbon Capture and Storage

For years, Midwest refiners have converted corn into ethanol.  More recently, as regulators have pursued climate goals, ethanol has gained nationwide acceptance as an energy source that can reduce carbon emissions in the transportation industry. 

We summarize three regulatory initiatives that may continue driving markets for ethanol and associated technologies, such as carbon capture and storage (“CCS”):

1. Low Carbon Fuel Standards (“LCFS”). LCFS programs encourage the growth of clean transportation fuels, like ethanol, renewable natural gas and renewable diesel.  Fuel producers and importers that incorporate those cleaner fuels earn credits for the difference between their carbon intensity and that of a reference fossil fuel.  Those that do not must purchase credits or otherwise reduce their emissions.

In states that have incorporated LCFS, these programs have helped reduce the carbon intensity of transportation fuels.  LCFS programs have also driven investment in CCS.  CCS further limits ethanol’s carbon intensity and thus increases its per-gallon credit.

Hawaii, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, New York and Vermont all have LCFS statutes under consideration.  If approved, those statutes would join the existing LCFS programs in California, Oregon and Washington and the newly adopted LCFS program in New Mexico.

2. Sustainable Aviation Fuel (“SAF”). SAF producers can qualify for a federal tax credit of $1.25 per gallon.  Qualifying SAF must have no more than half the carbon intensity of a reference fossil fuel.  SAF producers qualify for an additional $0.01 per gallon for each percentage point by which the reduction exceeds 50 percent.  See 26 U.S.C. § 40B. 

Some state programs add further incentives.  For instance, on April 23, 2024, Nebraska Governor Jim Pillen signed L.B. 937 enacting the Sustainable Aviation Fuel Tax Credit Act.  It sets a $0.75-per-gallon state income tax credit for SAF producers in tax years 2027-2034.  Nebraska SAF must have no more than half the carbon intensity of a reference fossil fuel, and Nebraska SAF producers qualify for an additional $0.01 per gallon for each percentage point by which the reduction exceeds 50 percent.  L.B. 937 expressly anticipates the use of “agricultural practices and [CCS]” to increase these credits.

While these statutory tax incentives promise new market opportunities for ethanol and CCS, the industries continue to await guidance.  To measure carbon intensity, both federal and Nebraska law will use a version of the “Greenhouse Gases, Regulated Emissions and Energy Use in Technologies” model (“GREET”).  GREET will likely enable ethanol-based SAF to qualify for significant tax credits, particularly if it incorporates CCS.  However, rules implementing GREET remain outstanding.

3. Year-Round E15. States also have pushed federal regulators to permanently allow year-round sale of E15 (i.e., gasoline blended with a 15 percent concentration of ethanol).  Federal law prohibits E15 sales during summer months to limit the formation of ozone pollution.  See 40 C.F.R. Part 1090.  On April 19, 2024, the U.S. Environmental Protection Agency issued a temporary waiver to allow E15 sales through at least May 20, 2024.

The U.S. House of Representatives currently has a bill under consideration that would make the waiver permanent in some states.  Under H.R. 8052 (2024), Illinois, Iowa, Minnesota, Missouri, Nebraska, Ohio, South Dakota and Wisconsin could all sell E15 during summer months, subject to the same limitations as E10.  The bill would thus enable more use of ethanol in transportation fuel.  However, the bill’s future is uncertain.

Attorneys at Baird Holm specialize in various subject matter areas including land use and environmental matters, tax matters and corporate compliance.  Please do not hesitate to contact us if you have questions about this case or any related matter.