On December 15, 2023, IRS published Notice 2024-06, a brief but important guidance on Section 40B, the Inflation Reduction Act (“IRA”) tax credit for sustainable aviation fuel (“SAF”). The guidance establishes a safe harbor for SAF that generates RINs under the federal Renewable Fuel Standard program (“RFS”). It also announces that the Department of Energy (“DOE”) will release an updated GREET model in early 2024 that meets Section 40B’s requirements for determining SAF’s lifecycle greenhouse gas (“GHG”) emissions reductions.

Section 40B establishes a tax credit equal to $1.25 per gallon of SAF that meets certain criteria, including that it is certified as reducing lifecycle GHG emissions by at least 50 percent relative to petroleum-based jet fuel. Section 40B also provides for an additional $0.01 per gallon for each percentage point above the 50 percent threshold for a maximum of $1.75 per gallon.

Producers generally have two options under Section 40B for demonstrating lifecycle GHG emissions reductions. They may rely on an international standard—the “most recent Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) that has been adopted by the International Civil Aviation Organization (ICAO) with the agreement of the United States.” Or, they may use “any similar methodology that satisfies the criteria under § 211(o)(1)(H) of the Clean Air Act.”

The IRS guidance addresses the second option. That option refers to a Clean Air Act provision governing the RFS, which allows qualifying transportation biofuels to generate Renewable Identification Numbers (“RINs”), which function as tradeable credits that certain “obligated” fossil fuel entities must purchase to meet annual program requirements. The RFS credits certain biomass-derived jet fuels that either (1) fall within one of six generally applicable production pathways established by program regulations; or (2) receive company-specific approval from EPA. The safe harbor the IRS guidance establishes applies to those RFS fuels as follows: 

• SAF that generates “advanced” RINs (i.e., SAF that has been shown under the RFS program to reduce lifecycle GHG emissions by 50 percent relative to a fossil baseline – D-code 4 or D-code 5 RINs) will be eligible for the $1.25 per gallon base credit.
• SAF that generates “cellulosic” RINS (i.e., SAF that has been shown under the RFS program to reduce lifecycle GHG emissions by 60 percent relative to a fossil baseline – D-code 3 or D-code 7) will be eligible for a $1.35 per gallon credit—that is, the $1.25 per gallon base credit plus $0.10 per gallon for the 10 additional percentage points above the IRA’s 50 percent threshold).

Importantly, the guidance requires that SAF generate Q-RINs, which are RINs that have been verified by a third-party auditor under the RFS regulations. Equally important, the safe harbor caps the SAF tax credit at either the 50 percent “advanced” or 60 percent “cellulosic” thresholds in the RFS. This means that, under the safe harbor, SAF is credited based only on the 50 or 60 percent RFS thresholds, even if producers can show that their SAF actually achieves much higher lifecycle GHG emission reductions. 

Finally, the guidance announces that DOE will release a revised Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (“GREET”) model for the SAF tax credit. The GREET model was developed by Argonne National Laboratory years ago and is updated annually. It is a standard tool for calculating lifecycle GHG emissions reductions but has been criticized for not fully accounting for certain GHG emissions.

SAF producers should pay close attention to any forthcoming revisions because they could affect whether their SAF qualifies for the tax credit. The revisions could also have more sweeping effects. The SAF tax credit expires at the end of 2024 and is replaced by the Clean Fuel Production Credit (Section 45Z), which similarly credits SAF that is shown to reduce lifecycle GHG emissions by 50 percent. The revised GREET model could apply to Section 45Z as well. The revised model could also affect the IRA production tax credit for hydrogen (Section 45V), a potential SAF feedstock, which refers to the GREET model “or a successor model (as determined by the Secretary)” for determining whether “qualified clean hydrogen” meets certain lifecycle GHG emissions thresholds. See 26 U.S.C. § 45V(c)(1)(B) (emphasis added). SAF producers should consider commenting on any revisions to the GREET model, if requested, as well as any other forthcoming guidance regarding calculating lifecycle GHG emissions, which could affect how these critical IRA clean energy tax credits will be applied.