What the Inflation Reduction Act Means for Biofuels

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

The IRA could be a huge boon for the bioenergy market, from production to consumption, and across all sectors, including residential, commercial, and industrial. Indeed, as Advanced Biofuels Association president Michael McAdams puts it, the IRA is “the single largest law Congress has ever enacted to combat climate change.” The law offers “a suite of meaningful policy directives that will enable the advanced biofuels industry to better reach its fullest potential, including long-term tax policy, new financing and grant resources … and increased federal resources … to administer the Renewable Fuel Standard,” McAdams said.

Tax Breaks for Cleaner Transportation Fuel

The IRA establishes tax credits for sustainable aviation fuel (SAF), clean transportation fuels, and clean hydrogen, and extends several existing tax credits that benefit transportation biofuels, such as renewable diesel and biodiesel. The EU is considering similar mandates, and both the EU and US laws should stimulate growth and investment in the use of low-carbon renewable fuels like ethanol, bringing meaningful benefits to both farmers and ethanol producers. The IRA tax credit starts at $1.25 per gallon but could reach $1.75 per gallon depending on the greenhouse gas reduction achieved. 

The law also creates a new technology-neutral Clean Fuel Production Tax Credit, which aims to support the production of low-emissions transportation fuel that is sold in 2025, 2026, and 2027. The legislation also extends several existing bioenergy and biofuel tax credits. The $1 per gallon blends tax credit for biodiesel and renewable diesel is extended through the end of 2024. In addition, the existing 50-cent-per-gallon alternative fuels tax credit (which was set to expire after 2024) was extended through 2025; the second-generation biofuel income tax credit (which expired at the end of 2021) was extended through 2024; and the alternative fuel vehicle refueling property credit (which expired at the end of 2021), was extended through 2032. 

For an industry that is accustomed to one- to two-year extensions of tax credits, the longer-term tax credits should help biofuels and biogas providers attract investment for projects that can take years to build. “For the first time, this bill gives developers and financiers certainty and a competitive edge that will fuel growth of the biogas and clean energy industries for years to come,” the American Biogas Council said in a statement.

Grants Target Infrastructure Investment 

In addition to the various tax credits, the legislation aims to establish a competitive grant program to support alternative aviation fuels and low-emissions aviation technologies, which could lead to greater production capacity and increased biofuel blending with existing conventional fuels. In part, the program would provide grants to eligible entities to carry out projects located in the US that produce, transport, blend, or store SAF. Nearly $250 million in funding would be available to support SAF projects, many of which are constrained by a lack of infrastructure. SAF currently accounts for approximately 0.01% of aviation fuel use, with most of the deliveries occurring via truck.

The IRA also should lead to increased blending and faster uptake for other alternative transportation fuels. The legislation appropriates $500 million to support the much-needed development of biofuel infrastructure, including infrastructure improvements for blending, storing, supplying, and distributing biofuels. The IRA also supports installing, retrofitting, or upgrading fuel dispensers to supply higher blends of biofuels. 

To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.