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45Z Update: Imported UCO Now Excluded from Tax Benefit

45Z Update: Imported UCO Now Excluded from Tax Benefit

The US Treasury’s latest update on Section 45Z tax credits is shifting momentum across the biofuel market. The announcement confirmed earlier projections that imported used cooking oil (UCO) to the US is now excluded from qualifying for credit generation.

Highlighting concerns like supply chain fraud and inaccurate emissions reporting, this adjustment will reshape global feedstock dynamics, likely strengthening US bean oil markets in the process.

Imported UCO Eliminated from Credit Eligibility

For years, imported UCO has been a growing staple in US feedstock supplies. This helped it become a key feedstock in meeting renewable fuel demand.

However, the Treasury Department is now implementing strict eligibility requirements for 45Z credits, citing significant risks tied to imported materials. A primary concern is that substances falsely labeled as UCO—such as virgin palm oil—pose environmental risks due to their higher emissions.

Additionally, incentivizing demand for UCO with the tax credits in 45Z could lead to its replacement by virgin oils. This would all but undo any of the sustainability benefits biofuels produce.

Transparency issues in foreign UCO markets compounded these concerns. The ambiguity led the Treasury to declare that imported UCO will not factor into the emissions calculation model (45ZCF-GREET) until further rules are established.

For now, only domestically sourced UCO remains eligible. This change also aligns with prior policy efforts to focus on US-sourced materials, reinforcing a domestic-first approach to sustainability in the US.

The Treasury outlined plans to improve recordkeeping enforcement for imported greases. The update emphasized that future guidance will also focus heavily on mitigating fraud risks. For now, any UCO originating from or purchased through non-US entities is ineligible for the credit.

Focus on Domestic Supply Chains

Alongside changes around imported UCO, the Treasury’s guidelines also outlined several initiatives for domestically-produced feedstocks.

The department will explore climate-smart agricultural (CSA) practices to further integrate domestic feedstocks into sustainable fuel production. These CSA practices align with the government’s push for traceability and sustainability in domestic agricultural supply chains. They could help create credit pathways for US-grown corn, soybeans, and sorghum in biofuel manufacturing,

Immediate Effects on US Bean Oil Markets

The publication of these new rules has directly affected US bean oil markets. Prices jumped around 12% after the update, indicating a heightened demand for US-sourced bean oil.

This surge stems from increased reliance on domestic feedstocks to fulfill biomass-based diesel mandates under the Renewable Fuel Standard (RFS). With imports of UCO now disqualified for 45Z credit eligibility, domestic biofuel producers will need to pivot to replace this lost volume. Higher production of biodiesel and renewable diesel domestically will be critical to meeting mandates.

Strains on Renewable Fuel Markets

As the market adjusts to these imminent changes, the challenges these adjustments will pose to biofuel producers are substantial.

The current RFS2 biomass-based diesel mandate has already jumped by 310 million gallons year-over-year. Proposed reallocation efforts could require an additional 123 million gallons of renewable volume to address a surplus in D4 Renewable Identification Numbers (RINs) from 2023.

Furthermore, the exclusion of imported UCO could tack on further pressure. Shifting UCO sources could bring new demand up to 1.254 billion gallons if domestic production remains constant.

To manage this demand surge, renewable diesel plants would need to achieve around 94% capacity utilization. Even under prior operating conditions, this utilization target would be difficult to achieve.

However, the industry may find some breathing room in the legacy overproduction carried into 2024. The assumed 19% carryover in D4 RINs from 2023 could at least provide a short-term buffer as producers adjust to the policy shift.

Outlook for Prices and Policy Development

The developments in the US are likely to ripple through biodiesel markets, RIN pricing, and federal tax-related incentives. Particularly, RIN prices are expected to rise as they adjust to the reduced availability of imported feedstocks and the phase-out of the existing Blenders Tax Credit (BTC) framework.

The market may see added volatility as stakeholders adapt to the new regulatory framework. It may also impact both domestic and international strategy as companies continue to use biofuels to decarbonize their operations.

While it’s clear that these measures introduce new challenges, they also represent an opportunity to create more traceable, reliable, and sustainable biofuel systems in US operations. The coming months will test the resilience and adaptability of US biofuel producers navigating this shifting terrain.

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