Fix the reconciliation biofuels tax credits to align with climate goals

Earlier this month, the Biden administration announced a target of 3 billion gallons of sustainable aviation fuels (SAFs) by 2030. SAFs are “drop-in” biofuels that work in existing jet engines. The most tangible path to decarbonizing air transport runs through second-generation SAFs that are very low carbon and are scalable with limited land use spillovers. A critical climate policy task thus is supporting this nascent industry to see which, if any, of the many potential second-generation feedstocks and technologies become economically viable at scale.

Unfortunately, the biofuel tax credits being considered by lawmakers in Congress under budget reconciliation do exactly the opposite: They promote the expansion of first-generation biofuels, primarily biodiesel and renewable diesel made from soybean oil, at the expense of second-generation fuels.

In 2018, 30 percent of U.S. soybean oil went into making biomass-based diesel. Planned renewable diesel facilities — mainly renovations of petroleum refineries facing declining demand — will more than double biomass-based diesel capacity by 2024. This growth, plus increased Chinese demand, drove this year’s doubling of soybean oil prices and will heighten demand for soybeans over the next few years. Soybeans are globally traded, so increasing demand places pressure on deforestation for planting soy in Brazil and — because vegetable oil markets are linked — for palm oil plantations in Indonesia. Moreover, there simply isn’t enough vegetable oil capacity to come close to meeting demand for aviation fuels.

Instead, the path to truly sustainable aviation fuels runs through second-generation feedstocks with very low carbon footprints. Such feedstocks include corn stover (left-over cobs, leaves and stalks), energy grasses and woody biomass. The resulting fuels face considerable technological and supply chain uncertainty. Commercializing these fuels requires the durable policy support that long-term, well-designed tax credits can provide.

The biofuel tax credits in the House bill will likely have three main effects. First, the extension of the biodiesel blender’s tax credit will slightly reduce pump prices for blended diesel. Importantly, the tax credit does not affect the demand for or price of soybeans. Instead, research confirms that this tax credit reduces the price of biodiesel RINs under the Renewable Fuels Standard, shifting some of the subsidy for biodiesel from diesel consumers to taxpayers.

Second, the second-generation biofuels production tax credit extension in the House bill, which applies to road use only, is too small to have much effect on second-generation production. The Joint Committee on Taxation (JCT) scoring estimates that only 30 million gallons of second-generation fuels will receive this credit in 2030. 

Third, the new SAF tax credit will shift some oil-based renewable diesel to SAF but is unlikely to yield substantial volumes: The SAF tax credit isn’t much bigger than the on-road biodiesel blenders tax credit, yet it requires additional carbon reductions plus upgrading the fuel to aviation quality. Accordingly, the JCT scoring of the SAF tax credit plausibly foresees roughly 100 million gallons of eligible SAF in 2030, far short of the Biden administration’s goal.

The biofuel provisions being considered by Senate tax committees would also boost soy biodiesel without providing meaningful support to second-generation fuels.

A straightforward fix to the House tax credits would shift support from first to second generation fuels. The biodiesel blenders tax credit accounts for $32 billion of the $33 billion cost of the three biofuels tax credits. Eliminating or sharply scaling back this tax credit would fund an increase in the second-generation biofuels tax credit from $1 to $3. Also, the SAF tax credit could have a rider that provides second-generation SAFs an additional $2/gallon, with an aggressive additional reward for reducing its carbon footprint of 4 cents/gallon for every percentage point improvement beyond a 50 percent reduction, relative to petroleum.

U.S. biofuel policy has supported farm economies and has reduced the carbon footprint of the U.S. fuel supply. But the tragedy of U.S. biofuel policy is its failure to provide the reliable long-term support to second-generation fuels that companies need to justify scaling up a risky new technology. We know how to provide that support: Witness how the investment and production tax credits helped drive wind and solar installation, thereby driving down wind and solar costs. We now have the opportunity to do the same for SAFs. But doing so requires a pivot from tax credits that benefit petroleum refiners and diesel consumers to ones that open a path for scalable, deeply decarbonized SAFs.

James H. Stock was a member of the Council of Economic Advisers in 2013-2014 and is professor of economics and vice provost for climate and sustainability at Harvard University.