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Felicity Bradstock

Felicity Bradstock

Felicity Bradstock is a freelance writer specialising in Energy and Finance. She has a Master’s in International Development from the University of Birmingham, UK.

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Inflation Reduction Act Is Both Good And Bad News For U.S Biofuels

  • Inflation Reduction Act may further stimulate biofuel production.
  • Experts now worry that the provisions in the IRA may lead to cases of fraud.
  • The Environmental Protection Agency has already brought forward 16 biofuels fraud cases in the last decade, with civil fines as high as $27 million.

There is great optimism over the expansion of America’s renewable energy sector, beyond just wind and solar power, particularly following the approval of the Inflation Reduction Act (IRA) this summer. In addition to more well-known energy sources, such as hydropower, experts are now seeing great potential for lesser-known green energy sources like biofuels in America’s future. But as the U.S. government introduces new policies in support of biofuels production some worry about the potential for fraud.  Biofuels are liquid fuels produced from biomass materials, also known as feedstocks. They are mainly used as transportation fuels but can also be used for heating, as well as electricity generation. The three main biofuels used in the U.S. are ethanol, biodiesel, and renewable diesel. Feedstocks often include food crops (sugar, starch, oil), such as palm, rapeseed, soy, beets, and cereals.

In 2021, the U.S. produced an estimated 17.5 billion gallons of biofuels, of which 16.8 billion were consumed, making the U.S. a net exporter of biofuel. Ethanol was the most popular both for domestic consumption and export. Biofuel has been used predominantly by mixing it with refined petroleum products such as gasoline, diesel fuel, heating oil, and kerosene-type jet fuel.  Related: Norway, Germany, Brace For Insecurity After Nordstream Explosions

There are now high hopes for a new policy that will support the development of the biofuels industry. President Biden is expected to introduce annual biofuel blending mandates for the refining industry for a period of three years, rather than the traditional yearly mandate. Shifting to a multi-year target would enhance security for both the refining and biofuels industries. 

Under the U.S. Renewable Fuel Standard (RFS), oil refiners are obligated to blend billions of gallons of biofuels into the country’s fuel, which supports farmers, encourages a reduction in energy imports, and reduces greenhouse gas emissions. One source stated of the change, "They're trying to put together a proposal for 2023, 2024 and 2025 where once they put the proposals together, then they don't have to go back in, and they don't have to change and modify the volumes.” 

And the introduction of the recent Inflation Reduction Act (IRA) is expected to further support the development of the biofuels industry. The law introduces several initiatives aimed at combatting climate change, including incentives for the biofuels industry. This law will work in partnership with the RFS, rather than replacing it. 

Biofuel producers will be able to access tax credits and other funding schemes for carbon capture, utilization and storage provisions, clean fuel production credits, and incentives for ethanol-based sustainable aviation fuel. The $1.01/gal second-generation biofuels credit will also help cellulosic ethanol producers to boost their output. And two expired biofuels credits have also been revived retroactively: the alternative fuel mixture credit and the 2G biofuels credit.

 

The IRA extends tax credits for carbon capture and storage (CCS) technologies for projects under development from 2023 to 2032. The number of tax credits will depend on the quantity of CO2 captured. The new law increased the credit to $85/mt for sequestration and $60/mt if the carbon oxide is utilised. This is good news for many biofuels producers as several ethanol companies have plans to incorporate CCS technologies into their operations to reduce their carbon emissions. Companies such as Summit Carbon Solutions, Navigator CO2, and Wolf Carbon Solutions already have plans for pipelines that will transport captured CO2 to be stored underground.

But while there is optimism around the growth of the biofuels market, experts now worry that the provisions in the IRA may lead to cases of fraud. While the IRA provides several incentives for the development of the industry, critics say there are no new provisions to prevent fraud. Peter Whitfield, a partner at law firm Sidley Austin in Washington, D.C. explained: “In a program where, comparatively, you have little oversight, and there’s a way to generate a massive amount of money fraudulently with almost little effort, it seems like those possibilities [for fraud] will still exist.”

The Environmental Protection Agency has already brought forward 16 biofuels fraud cases in the last decade, with civil fines as high as $27 million. Many people have attempted to claim renewable fuel credits by establishing shell companies, saying they produce biofuels. The IRS is supporting investigations into biofuels fraud, using EPA reporting data to measure reported production against output. 

The worry now is that the IRA will encourage greater levels of fraudulent behaviour as it further incentivises the production of renewable fuels. There is currently a shortage of traditional feedstocks, meaning some producers may attempt to cheat to be eligible for more credits. Whitfield suggested, “Somebody may decide to build a facility that’s the equivalent of a bridge to nowhere, right? You build a facility that can produce biofuel, but you never have any intention of operating it.” He added, “So, you’re just spending money to take advantage of the Inflation Reduction Act.”

While improved incentive schemes may help develop the U.S. biofuels industry, at a time when it is racing to establish greater energy security, the government must also consider the induction of better protections against fraud in the sector. 

By Felicity Bradstock for Oilprice.com

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