Biden Administration – Sustainability, Resiliency and Risk Mitigation

Last week, the U.S. Department of the Treasury and Internal Revenue Service (IRS) released guidance on the Sustainable Aviation Fuel (SAF) Credit established by the Inflation Reduction Act (IRA).

Per the press release from Treasury, “…Sustainable aviation fuel is a key part of the Biden-Harris Administration’s efforts to transition the American economy to a clean energy future and rebuild the middle class from the bottom up to the middle out in rural America,” said U.S. Secretary of Agriculture Tom Vilsack. “Today’s announcement is an important stepping stone as it acknowledges the important role farmers can play in lowering greenhouse gas emissions and begins to reward them through that contribution in the production of new fuels. This is a great beginning as we develop new markets for sustainable aviation fuel that use home grown agricultural crops produced using climate smart agricultural practices. USDA will continue to work with our federal agency partners to expand opportunities in the future for climate smart agriculture in producing sustainable aviation fuel.”

“The guidance released today reflects the latest data and science needed to help create new economic opportunities for America’s agricultural sector,” said U.S. Secretary of Energy Jennifer M. Granholm. “This interagency effort will help our climate goals take flight with cheaper, cleaner sustainable aviation fuel — ensuring America maintains an innovative edge on the global clean technology stage.”

The Treasury Department’s guidance provides important clarity around eligibility for the SAF Credit. The credit incentivizes the production of SAF that achieves a lifecycle greenhouse gas emissions reduction of at least 50% as compared with petroleum-based jet fuel. Producers of SAF are eligible for a tax credit of $1.25 to $1.75 per gallon. SAF that achieves a GHG emissions reduction of 50% is eligible for the $1.25 credit per gallon amount, and SAF that achieves a GHG emissions reduction of more than 50% is eligible for an additional $0.01 per gallon for each percentage point the reduction exceeds 50%, up to $0.50 per gallon.

As part of the released guidance, the agencies comprising the SAF Interagency Working Group (IWG) jointly announced the “40B SAF-GREET 2024″ model. This model provides another methodology for SAF producers to determine the lifecycle GHG emissions rates of their production for the purposes of the SAF Credit.

The modified version of GREET incorporates new data, including updated modeling of key feedstocks and processes used in aviation fuel and indirect emissions. The modified GREET model also attempts to integrate key greenhouse gas emission reduction strategies such as carbon capture and storage, renewable natural gas, and renewable electricity.

The Notice incorporates a USDA pilot program to encourage the use of certain Climate Smart Agriculture (CSA) practices for SAF feedstocks. Incorporating CSA practices into the production of SAF will likely lower overall GHG emissions associated with SAF production and increase adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health.

For corn ethanol-to-jet, the pilot provides a greenhouse gas reduction credit if a “bundle” of certain CSA practices (no-till, cover crop, and enhanced efficiency fertilizer) are used. It similarly would allow a greenhouse gas reduction credit for soybean-to-jet if the soybean feedstock is produced using a “bundle” of applicable CSA practices (no-till and cover crop). Per the announcement, this is a pilot program specific to the 40B credit, which is in effect for 2023 and 2024.

To credit CSA practices in the Clean Fuel Production Credit (45Z), which becomes available in 2025, the agencies have committed to do further work on modeling, data, and assumptions, as well as verification. Lastly, a new 45Z-GREET will be developed for use with the 45Z tax credit.

Green Spouts: The focus on SAF and aviation fuel by the Administration and relevant agencies continues. The new rules enable ethanol and soy-based biofuel to be eligible for tax credits under the IRA. Biorefineries can qualify for tax credits if their fuel is sourced from corn and soy farms that use certain “climate-smart” conservation practices. SAF is a large part of the airline industries’ plans to reduce GHG emissions. Per the EPA, only 24.5 Million gallons of SAF were consumed in the US in 2023, leaving close to 3 Billion gallons a year more of additional production and consumption to meet the Administration’s 2030 domestic goal for SAF.

Aviation emissions (mostly from fuel sources) account for approximately 2% of global energy-related carbon dioxide emissions (or about 800 million metric tons of CO2. The aviation industry is responsible for approximately 12% of CO2 emissions from all transportation.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. For more information, please contact Brad A. Molotsky, David Amerikaner, Joseph West, Sharon Caffrey, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo or the attorney in the firm with whom you are regularly in contact.

In January, 2021, the Biden Administration issued Executive Order 13990 (“EO”) which re-established an interagency working group (the “Working Group”) in order to formulate guidance on the “social cost of greenhouse gases“. The EO directed the Working Group to publish dollar estimates quantifying changes in carbon, methane and nitrous oxide emissions for consideration by all federal agencies when policy making.

Since 2021, the working group has published their Interim Estimates which were based largely on findings of their predecessor Working Group which was established during the Obama Administration.

Various State Attorneys General from Louisiana, Alabama, Florida, Georgia, Kentucky, Mississippi, South Dakota, Texas, West Virginia and Wyoming (the “Plaintiff States“) challenged the EO and the Interim Estimates as procedurally invalid, arbitrary and capricious and obtained a preliminary injunction in the Western District Court of Louisiana.

The 5th Circuit concluded that the Plaintiff States did NOT establish standing to bring such a claim, and, as such, dismissed their action for lack of jurisdiction and vacated the lower courts preliminary injunction. The court indicated that the Plaintiff States failed to meet their burden to prove standing as they did not show an injury in fact. With this ruling, the Working Group and the Interim Estimates may now be used by various federal agencies as part of their analysis and policymaking.

For more than a decade, federal agencies have considered the effect of greenhouse gas emissions (along with a host of other variables) in their cost benefit analysis in determining whether to and the cost of implement various regulations. As the Court pointed out, before proposing any significant action, federal agencies are required to assess the costs and benefits of the regulation and submit to the Office of Management and Budget their assessment for review.

In 2009, the Obama Administration established the original working group to develop a transparent and defensible method, designed for the federal rulemaking process, to quantify the social costs of greenhouse gases. In 2017, after years of work and research, this group derived estimates from peer-reviewed models for translating emissions into dollar costs. Their findings were the subject of public notices and comments and were peer reviewed by the National Academies of Science, Engineering and Medicine.

Later in 2017, the Trump Administration disbanded the prior working group and its work product withdrawn from federal agencies, but these federal agencies were not barred from “monetizing the value of changes in greenhouse gas emissions resulting from proposed regulations.” In ohter words, the agencies were not mandated to include the Interim Estimates BUT they were still permitted to include greenhouse gas emissions and their impact in the agencies’ recommendations. The result of the disbanding of the working group was that instead of utilizing a coordinated approach across all agencies, each agency was left to its own devices in determining how and whether to score green house gas emissions in preparing its cost benefit analysis for a given regulation.

In early 2021, under the Biden Administration, the Working Group was reconvened under EO 13990 and re-tasked with developing Interim Estimates that would be “appropriate and consistent with applicable law.” When the applicable federal agency relies on the Interim Estimates to justify a final action, the court noted that the agency “must respond to any significant comment on those estimates and ensure it analysis” is “not arbitrary or capricious”.

Although some could characterize the Court’s ruling as a bit of legal “in the weeds” arguments over standing and injury, the crux of the court’s ruling hinged on the fact that the “EO 13990 does NOT require any action from federal agencies”. Agencies are required to exercise discretion in conducting their cost benefit analysis and deciding whether or not to use the Interim Estimates. If used, “the Interim Estimates are required by the EO to be appropriate and consistent with applicable law.” The Court further noted that “nothing in EO 13990 requires States to implement the Interim Estimates.”

Parting Thoughts – activism by the Plaintiff States Attorneys’ General is on the rise in the ESG arena and is evident in various articles and actions being taken to oppose various ESG and environmentally focused regulations. It is likely that this activism continues and that further ESG focused programs in investments arena and in disclosure of the impacts of climate change (like the proposed SEC Rules on Climate Change Disclosure which are supposed to be announces as final this month) continue to be called into question by these Plaintiff States. We will continue to monitor and report on these developments as they occur and are here if we can be helpful to you in your analysis on how they might affect your operations, your businesses or you.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. We would be happy to discussion your proposed project and how this DOE funding prize might apply to you. For more information or if you have any questions about this post, please contact Brad A. Molotsky, Alice Shanahan, Jeff Hamera, Nanette Heide, Jolie-Anne Ansley, Robert Montejo, Seth Cooley or David Amerikaner or the attorney in the firm with whom you in regular contact or the attorney in the firm with whom you are regularly in contact.