Pivoting ethanol industry to stay relevant

GIBSON CITY, Ill. — Ethanol has been the bread and butter of the corn industry since the Renewable Fuel Standard was created in 2005, but the winds of change are on the horizon.

Illinois Corn recently hosted a series of meetings and a webinar that addressed “the crossroads of carbon and corn.”

The theme focused on the importance of reducing the carbon footprint that would create new market opportunities for ethanol.

Federal policies are encouraging carbon reductions — not just in ethanol production, but also across multiple sectors of industries.

“The RFS was created in 2005 and then updated in 2007. This created a boom in the ethanol market. There were 66 ethanol plants in 2002 with a production capacity of 3.19 billion gallons annually,” said Lauren Lurkins, founder of Lurkins Strategies.

With the passage of an updated RFS in 2007, the United States had 136 ethanol plants and a production capacity of 7.888 billion.

There were 211 ethanol plants by 2012 with a production capacity of 14.838 billion gallons. The United States had 199 ethanol plants last year and a production capacity of 17.946 billion gallons.

In Illinois, there are 13 ethanol plants, producing 1.8 billion gallons from 657 million bushels of corn. Nearly one-third of the corn grown in Illinois is used for ethanol production.

“Not only do we have more ethanol plants, they have more production capacity and they’re also more efficient at what they’re doing. The industry has grown, not just in Illinois, but nationwide since the RFS,” Lurkins said.

“When the RFS started in 2005, corn prices were around $2 per bushel. When the updated RFS was put in place in 2007, corn was $4.20 per bushel. Corn was $6.70 per bushel last year.”

Market Threats

“We’ve seen several cumulative threats in the ethanol market today,” Lurkins noted. “Obviously, the U.S. EPA has the regulatory control over the RFS, but they also have other areas that touch the farm gate, including the recent proposals on electric vehicles.”

U.S. Environmental Protection Agency’s proposed Multi-pollutant Rule states by 2032 the federal government will require 67% of all new light duty vehicles and trucks be electric.

“There’s another proposal from the Department of Transportation from the National Highway Traffic Safety Administration that would go hand in glove with the EPA requirements,” Lurkins said.

“This is all about the efficiency of the fleet that lessens the reliance of foreign oil, but this also from a DOT perspective requires a 58% improvement in efficiency by 2032. This also has very serious components of EV mandates tied into it to meet efficiency numbers by that same year of the EV proposal.

“Another proposal is the California electric vehicle mandate. Sixteen other states have adopted that policy. California is the biggest market for the auto industry in the U.S., and so it cannot be ignored when you have that state being joined by several others. It does have a huge impact on what is available in the auto industry as far as consumer choice.”

The third threat to the ethanol market is states establishing low carbon fuel standards.

“California sort of set the stage with their low carbon fuel standard, but we’re seeing more of those happen particularly along the West Coast in Oregon, Washington. When those states are setting their low carbon fuel standard, they are not necessarily thinking about Midwestern agriculture and corn markets,” Lurkins said.

“All of these threats to ethanol are important and powerful as they stand alone, but when you see them all together, and they’re all coming at the industry really at the same time, they do have significant impact.

“Just with the EV mandate alone, we would see about a 1 million bushel demand destruction by 2033. Those EV mandates are targeted for 2032 and so this is something that is nine, 10 years away and if we let everything stand.”

Silver Lining

Reducing carbon footprints, along with carbon capture and sequestration can create opportunities for the ethanol industry moving forward.

Federal and state carbon reduction tax incentives are now in place, several of which are focused on sustainable aviation fuel.

The federal Inflation Reduction Act incentives extended existing renewable energy tax credits and adopted several new ones.

Section 40B in the act provides a tax credit for the sale and use of sustainable aviation fuel that achieves a life cycle greenhouse gas emission reduction of at least 50% as compared to petroleum-based jet fuel.

The 40B tax credit is available from the beginning of 2023 though the end of 2024. It’s a base credit of $1.25 per gallon.

The tax incentive 45Z in the act will effectively replace 40B after it expires. It provides a very similar tax credit for the domestic production of clean transportation fuel, including SAF, and it will apply to fuels that are produced after 2024 and sold before the end of 2027.

Section 45Q in the Inflation Reduction Act is with regard to carbon dioxide sequestration. This was modified and expanded under the act. It first became law in 2008 and has been amended a couple times since then.

It gives tax incentives to those who own carbon capture equipment and can capture carbon dioxide from an industrial facility like an ethanol plant, and they sequester or use it for certain purposes.

“The state of Illinois also has a tax credit for SAF. That became effective June 1, 2023, and is in place until Jan. 1, 2033. There are some conditions in the Illinois tax credit with regard to needing domestic biomass,” Lurkins said.

“So, we’re talking about the corn and soybeans that are grown in Illinois. The only way to qualify for these incentives is through carbon reduction.”

In 2021, the Biden administration announced the goal of producing at least 3 billion gallons of SAF per year by 2030, and also issued the “SAF Grand Challenge” to meet 100% of aviation fuel demand by 2050, close to 35 billion gallons per year.

As a reference point, the RFS accounts for 14.5 billion gallons of ethanol demand per year.

“It’s quite a jump, but a very different future for what things like corn-based ethanol can look like in the future,” Lurkins said.

Carbon Reduction

Ethanol must meet a 50% carbon reduction to qualify for the SAF tax credit incentives. The carbon footprint of ethanol can be reduced below 50% by combining carbon capture and sequestration technology.

The footprint would be reduced even greater using practices such as cover crops, the 4Rs of nutrient management and no-till, combined with carbon capture and sequestration.

“Going under 50%, it really unlocks new markets with the use of carbon capture and sequestration technology,” Lurkins said.

Potential new markets include:

• Brazil’s low carbon fuel standard and tariffs are keeping U.S. ethanol out of Brazil. With these changes, that entire market can be open.

• The international SAF markets and fuel markets, specifically in Japan.

• Higher blends of ethanol in fuel tanks with legislation such as the Next Generation Fuels Act.

• Future low carbon fuel standard markets including Canada and U.S. states with those standards.

“California and 16 other states have their own low carbon fuel standard. If you have the other technology and corn ethanol playing a bigger role, those low carbon fuel standards can reflect that in other states,” Lurkins said.

“When we look at all of the effort, it’s moving very rapidly and the conversations are complex. The policy is complex.

“But when we look at everything today, we see that ethanol brought demand to corn farmers in the 2000s, and we’re still able to grow that industry and the footprint of that industry in Illinois. Although there are numerous threats that could potentially jeopardize the future of that industry.

“So, we truly have opportunities now to pivot the ethanol industry and to be incredibly relevant for years and decades and generations to come if we are able to look at and utilize carbon capture technology to reduce the carbon intensity score for the grain that we grow here in Illinois and across the country.”