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Jul 18, 2024
By Scott Gerlt, PhD, ASA Chief Economist • Krista Swanson, NCGA Lead Economist • Katelyn Klawinsky, ASA Economics Intern
The Inflation Reduction Act (IRA), passed in August 2022, created a sustainable aviation fuel tax credit. This tax credit, called 40B due to its section in the IRA, is in effect for 2023 and 2024. The 40B credit amount is based on the carbon intensity from a lifecycle analysis for the specific sustainable aviation fuel (SAF) obtaining the tax credit. As such, lower carbon intensity (CI) biofuels receive a larger tax credit than those with higher CI scores [i].
While SAF can be produced from many different feedstocks, both soybeans and corn are options that can be used at scale. One option to lower the CI of the SAF is for corn and soybean farmers to implement specific conservation practices. Unfortunately, the requirements in 40B for conservation bundling severely limit the ability of producers to provide additional carbon intensity benefits to the 40B program. Removing the bundling requirement could result in more than a four-fold increase in eligible corn or soybean acres.
SAF producers have the option of three models to choose from when scoring their renewable jet fuel. The 40BSAF-GREET model returns the largest CI reductions for both soybeans and corn and allows the use of farm conservation practices for further CI reductions. Using standard inputs in the 40BSAF-GREET model, SAF made from soybean oil has a 55% CI reduction while SAF made from corn ethanol has a CI reduction of 18% compared to fossil jet fuel. To qualify for credits, the biofuel must have at least a 50% reduction.
For corn ethanol to qualify for the 40B credit, the fuel producer must utilize further emission reduction strategies, such as carbon capture and storage, landfill renewable natural gas (RNG), wind electricity or climate smart agriculture (CSA) practices. Soybean oil-based SAF can utilize 45V modeled hydrogen, landfill RNG, wind electricity and climate smart agriculture practices to further reduce its score.
The requirements for the SAF producer to achieve a greater CI reduction by utilizing soybeans or corn grown with CSA practices are intensive. Farmers must utilize both cover crops and no-till on soybean fields for those soybeans to qualify as CSA feedstock. For corn to qualify as CSA feedstock, farmers must utilize both of those practices plus enhanced efficiency nitrogen fertilizer. Using only one of the practices will render the crop grown on those acres ineligible for classification as CSA to contribute to a greater CI reduction for the 40B credit.
Corn and soybean farmers face several other requirements to qualify. This bundle of practices mentioned above must be used on the entire field on which the crop is grown. Producers are also required to provide records of crop seed purchases, seeding rates and dates, yields, cover crop mix (including species, variety, seed size, seed depth), and cover crop seeding rates among other items. They must also sign a letter of intent to continue these bundled practices on the same acreage, with the exception that they can use tillage no more than once every five to 10 years. This extensive list of requirements adds costs for farmers beyond those generated by simply implementing the conservation practices.
If these criteria are met, the farmer may contract with a SAF producer for the CSA commodities. The farmer does not have to deliver the crops directly to the SAF facility, but the balance of CSA crops must be maintained through the chain of custody to ensure credits used at the SAF facility match the number generated at the farm level. The contract requirement between the farmer and SAF producer is intended to ensure the farmer receives at least some portion of the tax credit value.
The SAF producer must maintain all required records from each farmer. A CSA certifier must audit these and also the supply chain records. SAF producers who go through the steps and use the 40BSAF-GREET model authorized under the 40B may then claim further emission reductions for their SAF.
For CSA soybeans, this is an additional five percentage points, and for CSA corn, it is an additional 10 percentage points reduction in CI score as compared to fossil jet fuel. Given the 40B credit formula that increases by $0.01 for each percentage point reduction in emissions beyond 50% reduction, this simply translates to CSA practices adding $.05 per gallon to credit value for soy-based SAF and $.10 per gallon to credit value for corn-based SAF, assuming they met the 50% GHG reduction threshold.
If the full credit value were passed back to farmers, it would equal $3.46 for a typical soybean acre and $21.29 for a typical corn acre. These amounts are generally less than the costs incurred for establishing the required practices [ii]. Combined with the likelihood that the credit will be distributed throughout the supply chain, this presents a lack of incentive for a farmer to initiate a CSA practice they are not already doing. Further, given the details on utilizing CSA practices were released in April and the 40B expires at the end of the year, the 40B CSA provisions will likely have extremely limited utilization. While the tax credit is retroactive through 2023, farmers cannot farm retroactively to produce CSA commodities.
The importance of CSA inclusion in the 40B provisions is that it provides a starting point for the upcoming 45Z tax credit that runs from 2025 through 2027. The 45Z credit will likely include additional CSA options for producers.
While evaluating the evolution of the tax credits for the next iteration of SAF and on-road biofuels, it is important to consider the impact bundling requirements have on eligible acres. Put simply, how many acres are rendered ineligible for CSA credits due to the requirement to conduct multiple conservation practices on the same acres?
To answer this question, we utilized 2022 Census of Agriculture data at the county level. This dataset provides information on cover crop and no-till acres. It does not include enhanced efficiency nitrogen fertilizer application data. Figure 1 shows the results.
The 2022 Census of Agriculture had about 85 million harvested acres of soybeans and 81 million acres of corn harvested for grain. There were 105 million no-tilled acres of all crops in that year. The counties with the highest rates of no-till were in northern Montana, which tends to be spring wheat and barley area. Only about 18 million acres were planted to cover crops that year; this was due to environmental and growing season limitations that affect cover crops and the relatively high cost of implementation.
Figure 1: Census of Ag Land Uses
Source: USDA 2022 Census of Agriculture
Note: Corn and soybean acreages will not match NASS survey results
To convert the Census of Agriculture data to potential CSA acres for 40B, we took the lowest value of harvested acres, no-till acres and cover crop acres for each county. Although the census data does not include enhanced efficiency fertilizer statistics, multiple surveys of corn farmers indicate the requirement is likely met on more than half of corn acres [iii]. These fertilizer requirements are not viewed as the limiting factor among the three practices required for corn.
We made this calculation for both corn and soybeans. This method overestimates the potential CSA for several reasons:
Due to these constraints, the results should be viewed as a theoretical maximum of potential CSA acres for each crop. Nevertheless, given the data limitations of on-farm production and practices, these estimates provide a starting point.
Figure 2 and Figure 3 show the results by county for maximum potential soybean and corn CSA acres under the 40B program. Using generous assumptions about eligibility, approximately 13.0 million acres (or roughly half the area of Kentucky) of soybeans could be eligible for the credits. Iowa has the most potential eligible acres with 1.3 million, followed by Indiana (1.0 million) and Missouri (0.9 million).
Corn has a few more potential eligible acres with 13.8 million acres (about twice the area of Vermont). Once again, Iowa has the most potential eligible acres (1.3 million), followed by Indiana (1.0 million), then Nebraska (0.9 million). As previously mentioned, the corn and soybean totals cannot be added together, as each number assumes all potential cover crop and no-till acres accrue to each crop.
Figure 2
Source: USDA 2022 Census of Agriculture and ASA and NCGA Calculations
Figure 3
Table 1 shows the maximum potential eligible acres for each crop with the current bundling requirement and for both practices individually. The requirement to bundle these practices is a limitation, so there is a larger number of potential eligible acres for each CSA practice if practices are considered individually.
For cover crops only, both corn and soybeans would each receive 400,000 or more potential eligible acres. However, for no-till, both crops will gain significantly more potential CSA-eligible acres. Corn would have over 56 million potential eligible acres, while soybeans would be over 57 million.
Acknowledging the benefit of individual CSA practices in 45Z guidance would significantly increase the maximum potential acres of corn and soybean production that could qualify as CSA feedstock for SAF and other biofuels. Nearly 70% of the acres for both corn and soybeans could potentially be eligible compared to less than 20% of the acres of either commodity that are potentially eligible for 40B CSA credits. Again, these numbers reflect the maximum potential acres and would be reduced if data allowed us to address the reasons for overestimation noted earlier.
Table 1: Maximum Potential CSA Eligible Acres
Note: Corn and soybean totals cannot be combined due to assumptions about all CSA practices accruing to each crop.
The 40B SAF tax credit is unlikely to take advantage of potential CSA practices due to the short period of eligibility, bundling requirement, and burdensome recordkeeping.
The inclusion of CSA practices in 40B does, however, help set the stage for the next iteration of the tax credit, 45Z. Lessons from 40B can be applied to help refine 45Z into a tax credit that will allow a greater number of corn and soybean acres to be eligible and thus contribute to lower-emissions biofuels.
This outcome could be achieved by considering a broader range of individual climate smart practices and eliminating bundling requirements so that more acres could potentially qualify. Our analysis finds that up to 40 million additional acres of either corn or soybeans potentially could be eligible for CSA under 40B if the bundling requirement were not included.
The simple change of allowing enrollment of individual climate smart ag practices in 45Z could result in a fourfold increase in maximum potential eligible acres compared to 40B. This adjustment could substantially increase the profitability of not only farmers, but also biofuels and SAF producers as we work together to decarbonize the transportation sector—from farm, to fuel, to flight.
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[i] For more information about the 40B calculations and resulting values for soybeans, see previous Economist’s Angle.
[ii] https://www.sare.org/wp-content/uploads/Cover-Crop-Economics.pdf
[iii] Based on NCGA internal survey results of over 100 corn growers across the nation and Fiocca, D., et al. “Voice of the US farmer 2023-24: Farmers seek path to scale sustainably.” McKinsey & Company Insights. 9 April 2024.
