On April 30, 2024, Treasury and IRS (“IRS”) released key guidance on how sustainable aviation fuel (“SAF”) producers must calculate their SAF’s lifecycle greenhouse gas (“GHG”) emissions for certain tax credits under the Inflation Reduction Act (“IRA”). See 26 U.S.C. §§ 40B (“Section 40B”); 6426(k). The guidance, Notice 2024-37, creates safe harbors for SAF producers who opt to use a new GHG emissions model, SAF40B-GREET, released by Department of Energy (“DOE”) in conjunction with the IRS guidance.

The IRA created substantial tax credits for SAF. Under Section 40B, SAF producers who meet certain requirements can claim a credit of at least $1.25 per gallon of SAF. Among other things, eligible SAF must achieve lifecycle GHG emissions reductions of at least 50 percent relative to emissions associated with conventional, fossil-based jet fuel. For each percentage point over 50 percent, producers may receive an additional $0.01 per gallon of SAF, with a maximum increase of $0.50 per gallon and a maximum total credit of $1.75 per gallon. The SAF credit expires at the end of 2024. It is then replaced by the Clean Fuel Production Credit, 26 U.S.C. § 45Z, which credits SAF and other low-carbon transportation fuels and is effective until the end of 2027.

The IRA set out two ways for SAF producers to calculate lifecycle GHG emissions reductions:

1. The most recent Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) that has been adopted by the International Civil Aviation Organization (“ICAO”) with agreement of the United States; or
2. Any “similar methodology” that satisfies the criteria under a provision of the Clean Air Act, 42 U.S.C. § 7545(o)(1)(H). That specific provision of the Clean Air Act governs in the Renewable Fuel Standard, administered by EPA.

The IRS guidance is directed toward the second option. It explains how SAF producers can use DOE’s SAF40B-GREET model to calculate lifecycle GHG emissions as a “similar methodology” and alternative to CORSIA. The guidance also addresses, for certain SAF, when producers may rely on certifications from California Air Resources Board (“CARB”) Low Carbon Fuel Standard (“LCFS”) Verifiers for certification purposes. Finally, the guidance explains how SAF producers can further reduce their emissions rate calculations by sourcing certain corn and soybean feedstock crops from farmers that employ “Climate Smart Agriculture” (“CSA”) practices under a Department of Agriculture pilot program. 

SAF40B-GREET
The IRS guidance creates a safe harbor for SAF if producers use DOE’s newly released 40BSAF-GREET model to calculate lifecycle emissions reductions and certify those calculations per Section 40B.

SAF40B-GREET incorporates seven pathways for producing SAF. It includes two overarching pathways, (1) hydroprocessed esters and fatty acids (“HEFA”); and (2) alcohol-to-jet (“ATJ-Ethanol”). Within those pathways, the model allows for seven different feedstocks, as follows.

HEFA Pathways

• U.S. soybean HEFA
• U.S. and Canadian canola/rapeseed HEFA
• Tallow HEFA
• Used cooking oil (UCO) HEFA
• U.S. distillers corn oil HEFA

ATJ-Ethanol Pathways

• U.S. corn ATJ-Ethanol
• Brazilian sugarcane ATJ-Ethanol

Other feedstocks and production processes are excluded from the model. SAF producers using alternative feedstocks and methods of producing SAF cannot use SAF40B-GREET.

DOE released a separate set of guidelines for using 40BSAF-GREET. Those guidelines set out additional requirements and limitations that could affect SAF producers’ emissions calculations.

• Dry Mill Ethanol. The U.S. corn ATJ-Ethanol pathway allows for ethanol sourced from U.S. corn dry mill plants with corn oil extraction. Ethanol produced by wet milling is excluded from the model.
• Accounting for Electricity. The guidelines give producers three options to account for emissions associated with electricity use:
  • Option 1 – Grid Electricity. The model will assign the average annual grid mix in the eGRID subregion where the SAF production facility is located. An image of the eGRID subregion is shown in the guidelines as Figure 2.
  • Option 2 – Sourcing Electricity from Zero-Carbon Intensity Generators through Renewable Energy Credits (“RECs”).
    • Zero-carbon generators are defined by reference to the California LCFS and Renewable Portfolio Standard (“RPS”). However, the model excludes generators relying on biomass, biomethane, geothermal, and municipal solid waste. It also excludes nuclear power and fossil fuel generators with carbon capture.
    • Option 2 imposes an additionality requirement similar to the one proposed for the IRA’s Hydrogen Production Tax Credit (Section 45V). The generator from which RECs are obtained must have a commercial operations date no earlier than 36 months before the placed-in-service date of the SAF or ethanol facility purchasing the RECs.
    • Option 2 also imposes a regionality requirement. The generators from which RECs are obtained must be located within the local balancing authority for the SAF facility.
  • Option 3 – On-site Behind-the-meter Electricity. This option also refers to the California LCFS and includes an additionality requirement similar to the one discussed above for on-site solar and wind electricity generation. In addition, SAF producers cannot report negative emissions values based on net-metering.
• Renewable Natural Gas. SAF and ethanol producers can claim credit under 40BSAF-GREET for RNG use, if the RNG (1) originates from landfill gas; (2) is the first productive use of the methane portion of the landfill gas; and (3) is supplied directly to the ethanol or SAF facility. Producers cannot rely on RNG sourced from commercial gas pipelines via book-and-claim accounting.
• Hydrogen. Hydrogen users may rely on 45VH2-GREET, the model developed for the Section 45V Hydrogen Production Tax Credit, to calculate the carbon intensity of hydrogen imported for use at SAF production facilities. Hydrogen generated at the facility is to be included in the overall mass and energy balance inputs in 40BSAF-GREET.
• Carbon Capture and Geologic Sequestration is incorporated into 40BSAF-GREET only for ethanol production facilities that supply ethanol as an intermediate to SAF production. Captured carbon that is used in other applications is not included as an option for reducing carbon intensity of SAF in the model.
• Background Data. The 40BSAF-GREET model incorporates certain “background” data that cannot be altered by the user.
  • An upstream methane leakage assumption of approximately 0.9 percent of methane consumed. This same assumption is included in DOE’s separate emissions model for the Section 45V Hydrogen Production Tax Credit, 45VH2-GREET. 
  • Unalterable background emissions assumptions associated with indirect land use impacts for Soy Oil HEFA, Canola Oil HEFA, Corn ATJ-Ethanol, and Brazilian Sugarcane ATJ-Ethanol.
• Co-product Allocation Methods. The model incorporates several specific co-products depending on the SAF production process. Those co-products include distillers grains, distillers corn oil, oil and meals for Soy/Canola Oil HEFA, naphtha, liquified petroleum gas, propane, and diesel.

LCFS Verifiers
The guidance also creates a safe harbor in certain circumstances for SAF producers relying on LCFS Verifiers. LCFS Verifiers are third parties who are accredited by the California Air Resources Board to provide verification services for fuel producers in California’s LCFS program. The safe harbor for the IRA SAF tax credits allows SAF producers to use LCFS Verifiers to meet the IRA’s certification requirements for SAF mixtures that meet the requirements of ASTM D7566 (standard specification for aviation turbine fuel containing synthesized hydrocarbons) and for which 40BSAF-GREET is used to calculate lifecycle emissions reductions for the SAF component of the mixture.

Climate Smart Agriculture (“CSA”)
Another significant development in the guidance is the so-called “CSA reduction,” which SAF producers can use to reduce the carbon intensity score for their SAF significantly if they rely on certain corn or soybean feedstocks that meet CSA requirements.

The guidance refers to USDA’s CSA Pilot Program that incorporates CSA practices for certain crops that can be used as SAF feedstocks. For CSA corn, farmers must engage in no-till farming, plant cover crops, and use certain enhanced efficiency nitrogen fertilizer. For CSA soybeans, farmers must engage in no-till farming and plant cover crops. Appendix A to the guidance sets out the farming requirements in more detail. The guidance also explains the certification requirements for farms participating in the CSA Pilot Program.

This “CSA reduction” is particularly important for corn ethanol, which the guidance uses as an example. The guidance suggests that using 100 percent CSA corn-based ethanol will allow ATJ-Ethanol SAF producers to meet the IRA’s emissions reduction requirements. According to the guidance, the ATJ-Ethanol pathway for corn ethanol has a carbon intensity of 51.8 gCO₂e/MJ. Using 100 percent CSA corn allows a further reduction of 10 gCO₂e/MJ to 41.8 gCO₂e/MJ. When compared to the baseline for petroleum jet fuel, set at 89 gCO₂e/MJ, the result is an approximately 53 percent reduction in lifecycle GHG emissions, or 3 percentage points beyond the 50 percent GHG emissions reduction threshold set by the IRA.
 

Conventional Jet Fuel Baseline
The conventional jet fuel baseline of 89 is critical for calculating lifecycle GHG emissions for purposes of the SAF tax credits. This denominator value of 89 differs from other renewable fuel programs, such as the Renewable Fuel Standard, which compares renewable jet fuel to a diesel baseline of 97 gCO₂e/MJ. The higher baseline in the RFS could make it easier for SAF producers to satisfy emissions reduction thresholds under that program. However, the RFS employs different methods than the IRA for calculating lifecycle emissions, making it difficult to directly compare the two programs.

Conclusion
The IRS guidance provides critical information regarding how lifecycle emissions will be determined for IRA’s SAF tax credits. It also suggests that ATJ-Ethanol SAF producers can meet the IRA requirements using U.S. corn ethanol to produce SAF, provided the corn was grown in compliance with CSA requirements.

As the guidance notes, the IRA’s SAF tax credits expire at the end of 2025, so their time is limited. Beginning in 2025, the IRA’s Clean Fuel Production Credit will become effective and replace the SAF tax credits. The Clean Fuel Production Credit will allow the same credit amounts for SAF, as well as lower credit amounts for non-aviation low-carbon transportation fuels. See 26 U.S.C. § 45Z. However, unlike in Section 40B, prevailing wage and apprenticeship requirements must be met to receive the full credit amount under the Clean Fuel Production Credit. The Clean Fuel Production Credit expires at the end of 2027. DOE may release another emissions model for the Clean Fuel Production Credit, though, for SAF, that model could rely on much of the same methodologies as 40BSAF-GREET.