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Biofuel Provisions in the Manchin/Schumer Inflation Bill

The “Inflation Reduction Act of 2022” includes tax incentives to support biofuel production and infrastructure, as well as carbon capture and storage (CCS). It would establish a new tax credit for sustainable aviation fuel (SAF) of between $1.25 and $1.75 per gallon, depending on the greenhouse gas reduction of the fuel. The legislation would also extend several existing biofuel tax credits, including those for biodiesel, renewable diesel and second-generation biofuels. In addition, the bill would allocate $500 million to support biofuel infrastructure and agriculture project market expansion.

These subsidies will do nothing toward keeping existing U.S. refineries operational in processing oil into gasoline, diesel, jet fuel and heating oil that Americans need for transportation and home heating. In fact, they are designed to turn agriculture products into biofuels to displace oil production in the United States. Already about 1 million barrels per day of U.S. refining capacity has shuttered since 2019 and many refineries are switching to producing biofuels as the tax incentives enhance their profits. Federal and state incentives, for example, resulted in renewable diesel obtaining a $3.70 a gallon premium over regular diesel in California in early 2022, benefiting from the $1 a gallon federal tax credit and regulatory credits under California’s low-carbon fuel standard. Over 1 million barrels per day of refining capacity have now been converted to bio-fuel processing, handicapping the U.S. refining industry’s ability to produce petroleum products needed and in demand by Americans.

No new major oil refinery has been built in the United States since the Carter administration and Biden’s climate policies and regulations will ensure that none are built in the future. While the United States is shuttering refining capacity, China and the Middle East are adding refining capacity. According to the Energy Information Administration, at least nine refinery projects (2.9 million barrels per day) are beginning operations or are scheduled to come online before the end of 2023 in China and the Middle East. In 2022, China is expected to have 18.81 million barrels per day of refining capacity while the United States had 17.8 million barrels per day of operating refinery capacity at the beginning of this year and about 0.2 million barrels per day of idled capacity. While additional refinery closures are expected in the United States, China’s primary refining capacity is expected to reach 20 million barrels per day by 2025.  Refined products are essentially value-added manufacturing products which China will use to both run their country and for exports to power their economy.

Biofuel Provisions in the Manchin/Schumer Bill

The proposed bill would provide for a two-year as-is extension of the $1 per gallon biodiesel and renewable diesel blenders tax credit as well as the 50-cent alternative fuels tax credit. The credits are currently set to expire at the end of this year, but the proposed bill would extend them through 2024. After that, in 2025-2027, the incentives would transition to a tax-credit system based on greenhouse gas reduction, the value of which would vary from producer to producer and plant to plant, depending on their specific reductions. The system is expected to be similar to how California’s Low Carbon Fuel Standard is set up, with carbon intensity determining the value producers receive from carbon credits. These complicated programs expand the reach and discretion as well as the power of unelected officials in government. This bill makes government more complicated, expensive and powerful.

As mentioned above, the proposed bill would include a tax credit for sustainable aviation fuels (SAF) for 2023-2024, ranging from $1.25 to $1.75 per gallon. Similar to the sliding scale for biodiesel and renewable diesel based on greenhouse-gas reductions and carbon intensity, from 2025-2027, SAF would be eligible for a credit up to $1.75 per gallon for those that reduced their emissions by 100 percent. Similarly, SAF that reduces greenhouse gas emissions by 57 percent would be eligible for a tax credit of 35 cents per gallon while a biodiesel or renewable diesel fuel with the same reduction profile would receive 20 cents per gallon.

In addition, the threshold for fuels to qualify for the clean fuel production credit in 2025-2027 would be lowered, making it less challenging to meet. The bill would lower the threshold to 50 kilograms of carbon dioxide equivalent per million BTUs compared to the previous threshold where a fuel was required to meet a minimum standard of 35 kilograms of carbon dioxide equivalent per million BTUs.

The proposed legislation also extends the Section 45Q tax credit to any carbon capture, direct air capture or carbon utilization project that begins construction before January 1, 2033 and increases the value of the credit for industrial facilities and power plants that capture their carbon emissions to $85 per metric ton of carbon dioxide stored in secure geologic formations, $60 per ton for the beneficial utilization of captured carbon emissions, and $60 per ton for carbon dioxide stored in oil and gas fields. For direct air capture technologies, the credit is increased to $180 per metric ton for projects that store captured carbon dioxide in secure geologic formations, $130 per ton for carbon utilization, and $130 per ton for carbon dioxide stored in oil and gas fields. This tax credit would help biofuel projects meet carbon emissions reductions to secure tax credits post 2024 through adoption of carbon capture technology.  These figures could also be arguably used to justify “social costs of carbon” the administration is conjuring up to tilt cost/benefit analysis of proposed projects in the United States.

Under the Obama administration, a similar expansion of biofuel programs was pursued, including a program in which the Department of Defense paid $59 per gallon for advanced jet fuel.

Conclusion

Biofuel tax credits are extended by the proposed Manchin/Schumer bill and a new tax credit for sustainable aviation fuel is added. If passed, these tax credits will encourage existing petroleum refining capacity to convert to renewable fuels, making it harder for Americans to get the petroleum fuel products they need for transportation and home heating. These incentives will make the United States import more petroleum products from countries with additional capacity such as China and the Middle East. President Trump made the United States energy independent in 2019, but the Democrats in Congress and President Biden wants Americans to be dependent on OPEC counties in the Middle East and China for energy.

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