SAF blenders tax credit approaches legislative runway

A number of bills have been introduced in the United States Congress recently to incentivize blending of sustainable aviation fuel beyond the current $1 per gallon tax credit that is often simply referred to as the “biodiesel tax credit (BTC),” various measures for which have also been put forth, or soon will be, to extend the existing tax credit post-2022 when it is currently set to expire.

On May 20, Rep. Brad Schneider, D-Illinois, introduced the Sustainable Skies Act to create a blenders tax credit starting at $1.50 a gallon for SAF demonstrating a minimum of 50 percent greenhouse gas (GHG) reductions compared to conventional jet fuel. Eligible fuels would need to follow the sustainability criteria established by the International Civil Aviation Organization, or methodology EPA determines equally stringent. To incentivize greater GHG reductions, the legislation provides an additional credit of 1 cent per gallon for each percentage over 50 that the SAF reduces GHG emissions.

Although the SAF blenders tax credit would begin at $1.50 a gallon when the BTC is in effect, this would be lowered to $1.15 a gallon if the BTC were to expire, which has happened numerous times since its enactment in 2005. As the bill is currently worded, the SAF tax credit would expire at the end of 2031.

Also this month, Sen. Sheldon Whitehouse, D-Rhode Island, introduced into the Senate the Sustainable Aviation Fuel Act, for which companion legislation was reintroduced in the House by Rep. Julia Brownley, D-California, in February. Like Schneider’s bill, SAFA would also establish a blenders credit for SAF of between $1.50 and $1.75 a gallon. To prevent double dipping, SAF would no longer be eligible for the existing BTC.

Moreover, SAFA would also require EPA to establish an aviation-only low carbon aviation fuel standard (LCAFS) that regulates jet fuel producers and importers. The measure would create a grant program authorized at $1 billion over five years to expand the number of facilities producing SAF and build out infrastructure. In addition, the bill would require the defense department to use 10 percent SAF in 2024, provided the fuel is “cost-competitive with fossil jet fuel and readily available.” SAFA also directs DOE and USDA to research cover crops for SAF feedstock. The legislation also seeks to expand the existing energy investment tax credit to include SAF production facilities and related infrastructure.

In related legislation, Reps. Jim Costa, D-California, and David Valadao, D-California, introduced a bill mid-May to extend and phase out the BTC. In 2023, the bill would reduce the credit from $1 per gallon to 75 cents, and in 2024 to 50 cents through 2025, when it would cease to exist.

Sources on Capitol Hill familiar with the matter told Biobased Diesel Daily that Sens. Chuck Grassley, R-Iowa, and Maria Cantwell, D-Washington, will introduce legislation May 25 that seeks to extend the full $1 per gallon blenders tax credit through 2025. Similar legislation will also be introduced in the House.

Broader concerns exist in biodiesel-specific circles about what such an SAF blenders credit would do to feedstock availability for methyl ester producers, particularly the smaller ones. In addition, like the BTC, the SAF blenders credit would apply to qualified imported fuel. Some would prefer to see the SAF blenders tax proposal changed to a domestic SAF production credit.

Feedstock prices have soared in recent months to new highs, but some of those who have been in this market for decades say while the market is tight now, it’s a short-term blip similar to what happened in 2006-’08, and that the global agricultural markets will adjust accordingly. Furthermore, used cooking oil, a highly valued feedstock due to its low carbon intensity, is in short supply from the pandemic and restaurant closures, but this is on track to pick back up imminently.

“As this space evolves, we will get more creative as to what feedstocks qualify,” one expert said. “None of this is magical. It moves bit by bit, piece by piece.”

Another source familiar with the matter told Biobased Diesel Daily that in this age of politicians being hyper-focused on electrification for ground transportation, there is growing concern that liquid fuels will be relegated to aviation and marine markets.

“There will still be need for billions of gallons of low carbon fuels in multiple distillate markets,” the source said.

Others justify the higher value of the SAF credit proposal because they say SAF costs more to produce, distribute and implement in the marketplace than biodiesel or renewable diesel.

“Today, they all get a dollar,” the source said, adding that renewable diesel and biodiesel get larger returns because of SAF’s higher costs.

SAF is being widely embraced by airlines as a primary way to reduce carbon emissions, and projects to produce SAF or to expand existing SAF manufacturing capacity are plentiful. So why is there a need to enact an SAF-specific blenders credit and LCAFS?

“Although there is a lot of interest in SAF, actual use in 2020 in the U.S. was only 4.6 million gallons,” one source said. “So, in an 11 to 18 billion-gallon U.S. aviation fuel market, that’s not a big number. As these companies actually look to embrace SAF and not just make headlines, I believe they need help moving product into the marketplace, and also from a cost perspective, since it’s more expensive.”

Sources on Capitol Hill say the most likely avenue for the SAF-specific blenders credit to be implemented is through modification of the existing BTC, U.S. Code 26 section 40A.