45Z Brings Ag Data Questions
/The Inflation Reduction Act (“IRA”) created many market incentives to combat climate change. One of these incentives is the issuance of tax credits to renewable fuel producers, called “45Z credits” due to their location in Section 45 of the Internal Revenue Code. In theory, these 45Z credits should increase the price paid to farmers who supply raw materials (e.g. corn, soybeans) to renewal fuel producers. Whether that turns out to be true is not yet know, but this post explores how these credits impact data collection on the farm.
What is 45Z? Congress previously created a Section 40B credit that applied to producers of sustainable aviation fuel (SAF). Under 40B, producers of SAF that reduced the greenhouse gas emissions of the fuel by at least 50 percent are eligible for the tax credit for every gallon produced. 45Z expanded the 40B credit to include not just sustainable aviation fuel but also to non-aviation sustainable transport fuel. The formula for determining whether a fuel is “clean” enough to warrant a tax credit is based upon the reduction in emissions generated during production.
How do 45Z credits trickle down to farmers? The tax credits are only available to producers of sustainable fuels, such as ethanol and biodiesel plants. The credits are worth up to $1.25 per gallon if all the requirements are met. These are tax credits too---not tax deductions—so it is real money. In theory, these credits received by producers should trickle down to the prices paid to farmers who deliver grain to these producers.
What data is required from farmers? To pay a premium to grain farmers, producers will need to verify that their fuel meets the sustainability requirements. To do that, these producers will require farmers to submit data on how corn, soybeans, or other crops are grown. Some farmers have already been asked to sign general agreements promising to provide their ag data to producers of sustainable fuels to verify production practices (such as no-till, cover cropping, fertilizer usage). There are no specific regulations for exactly what data must be collected, how it should be used, and what happens to such data after verification. Contrast this to data submitted to USDA which comes with certain statutory protections about with whom and how USDA can share ag data.
As we approach 2025, the Treasury Department is expected to issue rules to clarify certain aspects of the 45Z tax credit. Agri-Pulse notes: “Rules for a temporary tax credit, known as 40B, for sustainable aviation fuel that expires Dec. 31 require corn farmers to follow three separate practices, no-till, cover crops and use of energy-efficient fertilizer. The Treasury Department is currently considering rules for the 45Z tax credit, which will replace 40B on Jan. 1 and apply to renewable diesel and other biofuels in addition to SAF.”
45Z brings a lot of promises to midwestern corn farmers, but it also brings a lot of unanswered questions about what ag data is necessary to verify compliance and how such data will be used. If you receive a contract to supply ag data to a sustainable fuel producer, please send it my way or ask another lawyer to review.
