Industry study: Generous tax credits are a double-edged sword for Iowa ethanol

By Jared Strong, Iowa Capital Dispatch

Federal incentives for low-carbon fuels would be a boon to Iowa ethanol producers — potentially more than tripling their profit margins — but they also put those producers at risk if they are unable to take advantage of the tax credits, ethanol proponents say.

If Iowa producers are able to capture the carbon dioxide they would otherwise emit into the atmosphere, an ethanol plant that produces 100 million gallons per year might benefit to the tune of more than $40 million annually, according to a recent study commissioned by the Iowa Renewable Fuels Association. That calculation is dependent on whether pipelines are built to carry the greenhouse gas away.

On the other hand, if the pipelines aren’t constructed — and if the plants don’t find a different destination for their carbon dioxide — ethanol production might shift to other nearby states, the study concluded.

“Iowa ethanol is at a crossroads,” said Al Giese, president of the association, which lobbies for policies that benefit the industry and commissioned the study.

The study by Decision Innovation Solutions of Urbandale predicted that a lack of carbon capture and sequestration for the state’s ethanol plants could shift three-quarters of their current production out of state, resulting in lost revenues that might exceed $10 billion annually.

That relies on the premise that production will increase in nearby states that have better access to sequestration, especially where the geology is more amenable to retaining the gas deep underground.

Little is known about Iowa’s potential for underground sequestration, largely due to a comparative lack of oil exploration. Geologists have noted that about half of the state’s ethanol plants are located in areas that have potential for sequestration but that it might take years to fully evaluate that potential.

“We’re not going to be around to find out,” said Monte Shaw, executive director of the association, insinuating that the state’s ethanol plants would be imperiled by the delays.

The study did not take into consideration the potential for localized or regional sequestration in Iowa.

Environmental groups that oppose carbon dioxide pipelines have derided the doomsday predictions as scare tactics that are meant to block new legislation that could halt the projects.

“It’s fearmongering,” said Jess Mazour, of the Sierra Club’s Iowa chapter.

The group has argued that carbon sequestration will unnecessarily extend the use of ethanol fuel as the nation shifts to electric vehicles. It further has concerns about safety hazards from pipeline leaks and environmental damage from their construction.

The potential for revenue increases from sequestration is muddied somewhat by the agreements that have been forged between the pipeline companies and the ethanol producers, which have not been publicly revealed.

David Miller, an economist for the company that conducted the study, said standard rates that ethanol producers pay other companies to transport carbon dioxide were used to calculate revenue projections.

“We have not been privy to the individual negotiations of any of the ethanol plants with the pipelines,” he said.

Shaw also said he is unaware of the agreements: “When you run a trade association, the last thing you try to do is ever get into the business side of the business.”

Shrinking carbon footprints

Fuels are scored with a carbon index that compares how much carbon dioxide is produced to create a certain amount of energy. The indexes for gasoline and diesel fuels are in the mid 80s.

The ethanol produced by Iowa plants average among the lowest carbon scores of any state, according to the U.S. Department of Agriculture. The lower the score, the better in terms of emissions. The USDA estimated in late 2020 that the average for Iowa ethanol was just under 60.

Ethanol plants can reduce those scores by increasing their energy efficiency and using low-carbon sources of fuel and electricity.

The plants could further reduce their carbon indexes by buying corn from farmers who use techniques to reduce their own greenhouse gas emissions.

“But the magnitude is not nearly as great as what can be done relative to sequestration,” Miller said. “It is likely that we might be able to take 10 points, maybe even 12 points, out of the carbon score from the agronomic side.”

That compares with an estimated 30-point reduction that would accompany carbon capture and sequestration.

The incentives to reduce the scores gained new importance with a tax credit in the Inflation Reduction Act of 2022, which will reward ethanol producers per gallon based on how far below the 50-point, low-carbon threshold they go.

Miller estimates that Iowa ethanol plants that are able to sequester their carbon emissions could get 48 cents per gallon.

Another tax credit would reward producers based on how much carbon dioxide they capture and sequester: $85 per ton, which the Inflation Reduction Act increased from $50. Those who sell the gas for other commercial purposes — such as dry ice — get lesser amounts.

Ethanol producers would have to choose one of the credits to claim — either for their total captured carbon or for their low-carbon fuel score. By Miller’s estimates, the low-carbon score might be more lucrative.

Producers also would have the advantage of selling into low-carbon fuel markets, such as California.

Pipeline company agreements differ

It’s unclear how much the three companies that have proposed carbon dioxide pipelines in Iowa would benefit. They have declined to reveal the specifics of their agreements but gave Iowa Capital Dispatch a general overview.

Navigator CO2 Ventures and Wolf Carbon Solutions would be paid based on the amount of carbon dioxide they transport away from the ethanol plants.

Navigator’s 810 miles of pipe would connect to 14 sites in Iowa, with the potential to add seven more as part of a second phase of its project.

Wolf’s pipeline would span about 90 miles in eastern Iowa and connect to two ethanol plants.

Summit Carbon Solutions is taking a different approach: profit sharing. Its roughly 680 miles of pipe would connect to 12 sites in Iowa, and the company would get an unspecified percentage of the additional revenues the plants generate.

— Iowa Capital Dispatch is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Iowa Capital Dispatch maintains editorial independence. Contact Editor Kathie Obradovich for questions: info@iowacapitaldispatch.com. Follow Iowa Capital Dispatch on Facebook and Twitter.