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Section 40B Guidance: A Flexible Sustainable Aviation Fuel Tax Credit or an Exclusionary Standard?

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The Internal Revenue Service (“IRS”) issued guidance on December 15th, 2023, regarding sustainable aviation fuel (“SAF”) tax credits under Section 40B of the Internal Revenue Code, enacted by the Inflation Reduction Act of 2022. The guidance pertains to the emissions model used to calculate the allowable tax credit under Section 40B. In short, the guidance states that the existing Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies Model developed by the Argonne National Laboratory (“Argonne GREET”) does not satisfy the requirements and cannot be used to calculate emissions under Section 40B. However, the Sustainable Aviation Fuels Lifecycle Analysis Interagency Working Group (“IWG”) is developing a version of GREET that will satisfy the 40B requirements, and the IRS anticipates the new GREET model will be available by March 1, 2024. Additionally, the guidance creates a “safe harbor” for SAF that generates Renewable Identification Numbers (“RINs”) under the federal Renewable Fuel Standard (“RFS”) and will deem this SAF to have 50% or 60% emissions reductions.

While the safe harbor provisions are significant in and of themselves, a brief statement issued simultaneously by the IWG provides perhaps the most interesting preview of what is to come regarding the required lifecycle assessment for clean fuels. That statement suggests that the modified GREET model will allow crediting for carbon capture and storage, renewable electricity used to power biorefining facilities, and certain “climate smart” agriculture practices. However, the IWG stated it will also be revisiting carbon intensity values associated with indirect land use change, an area in which the Argonne GREET model treats United States crops relatively favorably.

The importance of these modeling developments is magnified by the fact that the Section 45Z Clean Fuel Production Credit (“45Z credit”) contains nearly identical language to that in Section 40B with respect to the emissions model choice for SAF carbon intensity, and explicitly calls for reliance on Argonne GREET or a “successor model” for other fuels. It appears very likely that the IRS will rely on this same modified GREET model for Section 45Z purposes, or at least that the 40B model will serve a precursor to the Section 45Z model. As a result, the modified GREET model will likely have significant impacts on the nature of decarbonization investments in the clean fuels space for years to come. More details regarding the GREET model, the safe harbor, and the Section 45Z credit follow below.



Under Section 40B of the Internal Revenue Code, SAF greenhouse gas lifecycle emissions must be calculated either using the Carbon Offsetting and Reduction Scheme for International Aviation adopted by the International Civil Aviation Organization with the agreement of the United States (“CORSIA”) or a “similar methodology” that satisfies criteria under § 211(o)(1)(H) of the Clean Air Act. The guidance issued on December 15 sets forth the IRS’s current position on the “similar methodology” option, including its views on the Argonne GREET model in this context.


Argonne GREET Model

The guidance states that the existing Argonne GREET model does not satisfy the Clean Air Act § 211(o)(1)(H) criteria and cannot be used to calculate lifecycle emissions for purposes of the Section 40B sustainable aviation fuel tax credit. This conclusion is in large part based on a letter from Environmental Protection Agency Acting Assistant Administrator Joe Goffman to the Treasury Department finding that Argonne GREET by itself is insufficient to calculate lifecycle greenhouse gas emissions. Goffman’s letter provides little explanation to back up this conclusion, but it is accepted by the Treasury Department to support its position nonetheless.

The IWG is developing a modified version of GREET that it states will satisfy the requirements of Section 40B. The IRS anticipates this modified GREET model will be released in early 2024 and that taxpayers will be able to use it to calculate emissions for SAF sold or used after December 31, 2022, through January 1, 2025.

The Department of Energy (“DOE”) issued an announcement on December 15, 2023, stating that this modified GREET model will integrate other categories of indirect emissions, such as crop production and livestock activity, as well as land use change emissions informed by models such as GTAP-BIO and GCAM. DOE notes the modified GREET model will include inputs for carbon capture and storage, renewable natural gas, renewable electricity, and climate smart agricultural practices.


RFS Safe Harbor

Although Argonne GREET is deemed insufficient for Section 40B purposes, the guidance provides that lifecycle analyses performed under the federal RFS can qualify as a “similar methodology” under certain circumstances. The guidance creates a “safe harbor” for SAF that generates RINs under the RFS, assigning these SAF gallons emissions reductions as assigned under the RFS.

Specifically, a SAF blending component that has generated a D4 or D5 RIN under the RFS and has been validated under a quality assurance plan (“QAP”) will be assigned a 50% emissions reduction percentage. A SAF blending component that has generated a D3 or D7 RIN under the RFS and has been validated under a QAP will be assigned a 60% emissions reduction percentage. The IRS will only accept 50% or 60% emissions reductions as part of the “safe harbor” and will not accept other specific lifecycle estimates or ranges of estimates. 

Under Section 40B(f)(2), SAF producers using lifecycle emissions calculation methodologies other than CORSIA and consistent with the Clean Air Act must provide a third-party certification demonstrating compliance with requirements “similar to” “any general requirements, supply chain traceability requirements, and information transmission requirements” under CORSIA. There has been concern that the IRS would use this provision to import a broad range of sustainability requirements that would impede SAF industry growth. However, in this guidance at least the IRS appears to be taking a narrow view of the types of requirements that would satisfy this provision. According to the guidance, the IRS will consider a producer to have met these requirements if the RINs are verified under the QAP program under the RFS. Under this program, independent third-parties audit and verify that RINs have been properly generated and are valid for compliance purposes. If so, these RINs are designated as Q-RINs. Significantly, the QAP program does not layer additional sustainability requirements on fuel producers; it only assures rigorous compliance with the existing RFS framework.


Section 45Z – Clean Fuel Production Tax Credit

The Section 40B tax credit expires at the end of 2024, at which time the Section 45Z clean fuel production tax credit will take its place for 2025 through 2027. Much of the relevance of this guidance, then, is as a precursor to the Section 45Z tax credit guidance. The interpretive decisions that the IWG makes when promulgating the modified GREET model will likely carry over to the IRS’s administration of the Section 45Z tax credit.

Under the Section 45Z tax credit, the assessment of SAF carbon intensity closely mirrors the Section 40B tax credit. However, the carbon intensity of other fuels must be based on Argonne GREET “or a successor model (as determined by the Secretary [of the Treasury]).” It appears highly likely that the modified GREET model being developed by the IWG will serve as a precursor to the “successor” model called for under Section 45Z.

Of course, other fundamental interpretive issues are presented by Section 45Z context, particularly how the Treasury Department will implement the requirement to publish “a table which sets forth the emissions rate for similar types and categories of transportation fuels.” The granularity of the table, or the IRS’s interpretation to allow plant-specific carbon intensity scores under this provision, will largely determine how flexible Section 45Z will be in incentivizing low carbon behaviors in fuel production.


Baker Botts continues to monitor IRA guidance and will provide further updates as guidance is released.  We would be pleased to assist you in your analysis of the IRA, clean energy tax incentives and guidance issued thereunder, as well as in preparation of any comments you might wish to submit in response to issued guidance.


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