You’ve heard of 45Z. Where is it now?
Created in 2022 under the Inflation Reduction Act, the 45Z Clean Fuel Protection Credit is one of the few Biden legacy programs that so far is still on the books. Kind of.
The issue is that as of mid-August, the Trump administration had not yet issued final guidance regarding 45Z.
“Things are moving very quickly, but the message at this point to farmers is to be aware of 45Z, be aware that by collaborating with your ethanol plant, there may be money to go after together. But there’s no money flowing today,” says Mitchell Hora, a seventh-generation Iowa farmer and founder of Continuum Ag.
45Z provides an incentive that is calculated for each gallon of “qualified clean transportation fuel” that is produced and is based on the carbon intensity of the fuel production process.
Indirect payment
Here’s the tricky part: Farmers themselves cannot directly claim these tax credits. Even so, they could potentially gather premiums for their crops when selling to renewable fuel producers, Hora says.
“Our agricultural commodities contribute about half of the carbon footprint for those biofuels,” he notes. “So if the final rules allow, when biofuel producers are looking to reduce their carbon intensity and maximize these tax credits, the farmers are a big part of the equation.”
Hora’s advice to farmers: “You should be having a conversation with your ethanol plant and letting them know that you’re aware of 45Z and getting your data organized. But you also understand that we don’t have the final rules yet.”
In this conversation, Hora says a farmer doesn’t want to come in “guns blazing.” With so many unknowns, this conversation should be a bit nuanced. That said, it’s worth having your proverbial ducks in a row since this tax credit is set to take effect later this year.
“My concern is these rules will come out likely later this year, and we’ll have a very narrow window of time to get a lot of stuff done, and there’s billions of dollars on the line,” he says. “There’s free or minimal cost to get in line for tremendous upside potential.”
Prudent next steps could include:
- connecting with a local renewable fuel producer
- consulting with Extension and other experts about implementing climate-smart practices
- monitoring ongoing administration updates on final guidance
- participating in ag industry groups that inform and advocate on 45Z
Set yourself up for success
What can farmers do to best position themselves to indirectly benefit from 45Z?
It starts with implementing climate-smart ag practices and documenting what you have done. That could include anything from practicing no-till or reduced tillage, planting cover crops, or improving your nutrient management program.
Examples of the latter would include split-use nitrogen applications, using nitrification inhibitors or deploying variable-rate applications.
Next, calculate your farm-level carbon intensity score using the Department of Energy’s GREET Feedstock Carbon Intensity Calculator, which Hora says can be done in a matter of minutes.
“Farmers should know what their score is,” Hora says. “The word on the street is that there will be an updated version later this year — our own scoring system is based on the most current version available.”
Documentation will be critical, Hora adds. You will need to be able to prove that you did the farming practices that lowered your carbon intensity.
Specific documentation you may need to assemble includes:
- field-level records with GPS boundaries of fields
- records on input applications, such as products, rates, timing, etc.
- yield data
Having a “bundling” mindset — combining multiple carbon reduction practices — will help you stack up the best odds for success. Due to the way 45Z is structured, lower carbon intensity scores will receive more robust tax credits for fuel producers.