Little to no ethanol will qualify for US aviation fuel credit

By Leah Douglas and Jarrett Renshaw

(Reuters) - Little to no ethanol will qualify for U.S. sustainable aviation fuel (SAF) subsidies under a new pilot program by President Joe Biden's administration, which toughened climate requirements at the last minute, according to a Reuters review of government data and people familiar with the matter.

The issue could hurt the biofuel industry, which sees SAF as ethanol’s best chance at growth since electric cars have cut into its market as a gasoline additive. It could also hinder Biden's goal of producing 3 billion gallons of SAF by 2030. He once promised 95% of SAF - a biofuel that can be made from oils, waste, or grains - would come from farmers.

Details about how little ethanol will qualify for the subsidies under the pilot program, and how the requirements were raised at the final hour, have not previously been reported.

At issue is a $1.25/gallon production tax credit embedded in the 2022 Inflation Reduction Act reserved for SAF that demonstrates a 50% reduction in lifecycle greenhouse gas emissions compared to regular jet fuel.

Under the pilot program finalized on April 30, ethanol producers seeking to claim that credit must verify their corn comes from farms using three climate-friendly farming practices in tandem: not tilling the soil, planting cover crops, and using higher efficiency fertilizers.

U.S. Agriculture Secretary Tom Vilsack touted the program as "a great beginning as we develop new markets for sustainable aviation fuel that use home grown agricultural crops."

But a Reuters review of data from the U.S. Department of Agriculture (USDA) suggests almost no U.S. corn farmers use all three practices at the same time. Officials at five farm and biofuel trade groups told Reuters few, if any, ethanol-makers will be able to meet the standard.

"I have not had a single ethanol producer member contact me and say, we're going to meet the climate-smart agriculture requirements," said Brian Jennings, CEO of the lobby group American Coalition for Ethanol.

A USDA spokesperson said the rule was still a milestone because it recognizes farmers' potential to fight climate change, and would encourage adoption of climate-smart farm practices. The agency did not provide an estimate of how much ethanol would qualify.

The pilot program covers ethanol produced in 2023 and 2024, and will be replaced by a new program in 2025 that biofuel groups hope will be less restrictive.

"I see this (pilot) as a marker, a signal and think it was a good first step," said Patrick Gruber, CEO of biofuel producer Gevo.

LAST-MINUTE CHANGE

The White House had been set to ditch the requirement that all three farming methods be used at the same time, but reversed course after Treasury Department officials said bundling the practices would boost compliance and increase environmental benefits, according to two sources familiar with the discussions.

Bundling the practices also helped balance rural and farm interests with environmental concerns, the sources said.

Environmental groups have long worried that biofuels can cause climate and environmental damage if more land is cleared to produce them.

The USDA does not collect data on how many farmers use all three required climate-friendly practices together, but data suggests the overlap is slim.

Nationally, continuous no-till is used on about 33% of cropland acres, efficient fertilizer application on about 26%, and cover crops on about 6%, according to a 2022 USDA report.

There is no breakdown by crop or for corn destined for ethanol production facilities.

"It’s a very small number of operations that would qualify," said Matt Ziegler, policy director with the National Corn Growers Association.

The climate-smart requirements also present hurdles for farmers who grow soybeans, another potential SAF feedstock.

Josh Gackle, a North Dakota farmer and head of the U.S. Soybean Association, said the cover crop requirement is particularly problematic in his region, where long winters and short growing seasons make it harder for him to grow the off-season crop than his peers in Iowa or Nebraska.

"We just want to make sure that the rules across the growing regions are right so all places can participate," Gackle said. (This story has been corrected to change the SAF goal figure to 3 billion from 30 billion, in paragraph 2)

(Reporting by Leah Douglas and Jarrett Renshaw; Editing by Richard Valdmanis and David Gregorio)