The Inflation Reduction Act: Clean Fuels Tax Credits

The Inflation Reduction Act of 2022, signed into law by President Joe Biden on August 16, 2022, includes $369 billion in spending and tax credits for climate and energy programs over 10 years. A significant portion of these credits and incentives are reserved for the production of clean fuels. Specifically, the Act extends the biodiesel and alternative fuel credits, provides a new credit for sustainable aviation fuel, a new technology-neutral credit for the production of clean fuel, and a new credit for the production of clean hydrogen.

Incentives for Biodiesel, Renewable Diesel, and Alternative fuels

The Act extends and revives income and excise tax credits for biodiesel, biodiesel mixtures, and alternative fuels through December 31, 2024. It extends the $1.00-per-gallon Section 40A biodiesel and renewable diesel credit and the $1.00-per-gallon biodiesel mixture credit under Section 6426(c)(6) beyond their scheduled expiration at the end of 2022. It also revives several credits that expired at the end of 2021. This includes the alcohol, biodiesel, or alternative fuel credits under Section 6427(e); the 50-cents-per-gallon alternative fuel credit under Section 6426(d)(5); the alternative fuel mixtures credits under Section 6426(e)(3); and the second-generation biofuel income tax credit under Section 40(b)(6).

New Sustainable Aviation Fuel Credit

The Act also establishes a new credit under Section 40B for sustainable aviation fuel mixtures sold or used after December 31, 2022 through December 31, 2024. The credit is $1.25-per-gallon of sustainable aviation fuel in a qualified mixture, plus the applicable supplementary amount with respect to such sustainable aviation fuel. The applicable supplementary amount is the amount equal to 1 cent for each percentage point that the fuel reduces the lifecycle greenhouse gas emissions by more than 50 percent compared to petroleum-based jet fuel. The maximum supplementary amount is 50 cents. This puts the total possible credit at $1.75 per gallon.

Sustainable aviation fuel must meet ASTM International Standards; be derived from biomass, waste streams, renewable energy sources, or gaseous carbon oxides; not be derived from palm oil, and reduce lifecycle emissions by 50 percent. A qualified mixture under the credit is a mixture of sustainable aviation fuel and kerosene produced by the taxpayer in the United States. It must be used by the taxpayer in an aircraft or sold for use in an aircraft in the ordinary course of business. The fueling must also occur in the United States.

New Clean-Fuel Production Credit

The Act also creates a technology-neutral clean fuel production tax credit under Section 45Z. The credit applies to transportation fuel produced and sold by the taxpayer from December 31, 2024 through December 31, 2027 and that meets a particular emissions reduction factor. The Act provides a base credit of 20 cents per gallon or $1.00 per gallon if prevailing wage and apprentices requirements are met. For sustainable aviation fuel, the Act provides a base credit of 35 cents per gallon or $1.75 per gallon if prevailing wage and apprentices requirements are met. The actual credit amount is determined using a formula that takes into account the base credit amount and the GHG emissions factor. A qualified facility cannot be a facility eligible for the clean hydrogen credit under Section 45V, the Section 48 for a clean hydrogen production facility, or the carbon oxide sequestration credit under section 45Q.

Clean Hydrogen Production Credit

The Act creates a Clean Hydrogen Production Tax Credit (CHPTC) under Section 45V. The CHPTC applies to clean hydrogen production after December 31, 2022 at a facility that began construction before January 1, 2033. The base credit is 60 cents per kilogram multiplied by a percentage determined by the applicable lifecycle greenhouse gas emissions rate. There is a bonus credit of five time the base credit if prevailing wage and apprentices requirements are met, and there are additional credits for meeting domestic content requirements and investments in an “energy community.” The credit is also reduced for projects that use tax-exempt bonds for financing. Facilities that include carbon capture equipment that is eligible for a Section 45Q credit are not allowed to claim the Section 45V credit.

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