Monetizing Biogas and Separated Food Waste for Transportation Fuel in the U.S.
Brought to you by King & Spalding
Authors
Ilana Saltzbart
Partner
King & Spalding
Amina Dammann
Partner
King & Spalding
Arlene Hennessey
Senior Associate
King & Spalding
Jeanna Murphy
Associate
King & Spalding
Sue
Moon
Associate
King & Spalding
I. Introduction
Participating in EPA’s Renewable Fuel Standard (“RFS”) program, California’s Low Carbon Fuel Standard (“LCFS”) program and/or using federal tax credits comes with specific legal requirements, including related to the feedstock that is used for sustainable aviation fuel (“SAF”) production. This article highlights new requirements and challenges related to biogas, separated food waste recordkeeping, and related carbon accounting models.
II. Select Regulatory Topics
a. Monetizing Biogas/RNG Under EPA’s RFS Program
Biogas from sources such as landfills, municipal wastewater treatment facility digesters, agricultural digesters, and separated municipal solid waste (“MSW”) digesters can be used to produce renewable natural gas (“RNG”). When used as a transportation fuel in the United States, RNG can generate renewable identification numbers (“RINs”), the “currency” of the RFS program. Biogas can also be used as a feedstock to produce renewable compressed natural gas and liquified natural gas. To upgrade biogas to RNG, the methane content is increased by removing water vapor, carbon dioxide, hydrogen sulfide and other impurities. It can then be injected and transported via natural gas pipelines and used as a substitute for natural gas.
Under the RFS program, RNG is currently characterized under two different RIN categories: cellulosic (D3 RINs) or advanced biofuel (D5 RINS), depending upon the feedstock or source. Further, if a party simultaneously converts a predominately cellulosic feedstock and a non-predominantly cellulosic feedstock in a waste digester, it must apportion the resulting RINs under the appropriate D3 and D5 pathways. EPA requires records necessary to verify the apportionment calculation.
Of particular note, EPA made sweeping regulatory changes affecting biogas and RNG producers in a final rule published on July 12, 2023; these changes are collectively referred to as the Biogas Regulatory Reform Rule (“BRRR”). Generally, the new provisions establish a multitude of new requirements for various entities participating in the biogas and RNG production process, including biogas producers, RNG producers, and RNG RIN separators. Importantly, a newly defined category of market participants generates RNG RINs and there are restrictions regarding which entities can now separate RNG RINs from the RNG.
The BRRR is codified in a new subpart (40 C.F.R. Part 80 subpart E). Certain of the BRRR changes will become effective on July 1, 2024, and others on January 1, 2025. Currently registered parties must submit updated registration information no later than October 1, 2024.
b. Separated Food Waste for SAF Production: Compliance with EPA RFS Recordkeeping Requirements
When participating in EPA’s RFS program, detailed recordkeeping requirements apply that can differ by feedstock type. For example, renewable fuel producers must keep records associated with feedstock purchases and transfers that identify where feedstocks were produced and are sufficient to verify that the feedstocks are renewable biomass. 40 CFR 80.1454(d)(1). For separated food waste feedstock, EPA added in 2020 the requirement to keep records demonstrating the “location of any establishment(s)” from which the waste is collected. 40 CFR 80.1454(j)(1)(ii). According to EPA, “location” means the physical address that the aggregator obtained the wastes from, not the aggregator’s address. 85 Fed. Reg. 7,016, 7,062 (Feb. 6, 2020). This was a dramatic departure from prior requirements, which involved providing a plan that listed by metropolitan region where feedstock will originate and addresses of aggregators. See 40 CFR 80.1450; 85 Fed. Reg. 7016, 7080 (Feb. 6, 2020); EPA, “RFS Registration for Renewable Fuel Producers” (July 2015). EPA has since made clear that “[i]f records are not available for these [waste] feedstocks, then it cannot be shown to be renewable biomass, should not be used under the program, any RINs generated for such fuels may be invalid, and the party should not be receiving any revenue from the RIN.” Response to Comments (June 2023) at 374.
Yet, compliance with these recordkeeping requirements is not without challenge for the industry. Practical challenges include a decentralized supply chain, where smaller or less sophisticated parties may not have operationalized recordkeeping processes. Moreover, feedstock suppliers may have very real concerns about sharing feedstock records that identify their proprietary supply source.
In its July 12, 2023 rulemaking, EPA finalized an alternative recordkeeping approach (40 CFR 80.1479) that allows for an independent auditor to verify records held by a feedstock aggregator. However, the feedstock aggregator must register with EPA and is subject to on-site audits under a quality assurance plan (“QAP”). Additionally, as EPA noted, if the records do not demonstrate the feedstock is renewable biomass, then the renewable fuel producer has not met the recordkeeping requirements regardless of who is holding the records. See 88 Fed. Reg. 44468, 44548 (Jul. 12, 2023).
EPA confirmed that renewable fuel producers may use other third parties, who may not be QAP providers, to hold records on their behalf. Id. at 44549; Response to Comments (June 2023) at 368. However, using third parties does not relieve producers from ultimate liability for shortcomings in the records nor from EPA’s verification expectation.
c. Carbon Intensity Models for SAF
i. Federal Carbon Intensity Models for Inflation Reduction Act’s SAF Credit
The Inflation Reduction Act of 2022 introduced tax incentives to support the SAF industry. See IRC §§ 40B, 45Z. To qualify for the SAF credits, the SAF must, among a number of requirements, have a lifecycle greenhouse gas (“GHG”) emissions reduction percentage of at least 50% relative to petroleum-based jet fuel. Different models for calculating lifecycle GHG emission reductions are recognized, including most recently the “40BSAF-GREET 2024 model.” See King & Spalding Client Alert (May 9, 2024); IRS Notice 2024-37. The 40BSAF-GREET 2024 model calculates lifecycle GHG emissions associated with SAF from two production processes: hydroprocessed esters and fatty acids (HEFA) and alcohol-to-get using an ethanol feedstock (ATJ-Ethanol). The emissions associated with feedstock production, SAF fuel production, and SAF fuel distribution and end use are all considered in determining the credit amount.
ii. California’s Approach to Evaluating Carbon Intensity
California’s LCFS sets annual carbon intensity (“CI”) benchmarks based on a complete lifecycle GHG analysis for gasoline fuel, diesel fuel and their substitutes. In a given year, qualifying fuels with a CI below the benchmark generate credits while fuels with a CI above the benchmark generate deficits. Providers of California transportation fuels must offset any generated deficits with credits, either earned or acquired.
Fossil jet fuel is currently exempt from generating deficits under the LCFS, but providers of alternative jet fuels can opt-in to generate credits. Alternative jet fuels primarily generate credits through fuel pathway-based crediting, either by applying for a new pathway or by using an already approved fuel pathway and CI published in a “Lookup Table.” California’s current CI modeling method for alternative fossil jet fuel pathways is “CA – GREET3.0.”
In January 2024, the California Air Resources Board published updated proposed LCFS amendments that would remove the fossil jet fuel exemption. If adopted, the LCFS amendments will require providers of fossil jet fuels used in intrastate flights to offset deficits starting in 2028 and be subject to annual verification and reporting requirements. Removal of the fossil jet fuel exemption for California intrastate flights is expected to significantly increase the opportunity for alternative jet fuel-based carbon credit generation. The proposed LCFS amendments also propose to adopt an updated modeling version, CA – GREET4.0, to calculate CI for alternative jet fuels and create a new Lookup Table for fossil jet fuels. A public hearing on the proposed LCFS amendments is currently scheduled for November 8, 2024.
III. Conclusion
The SAF community should be vigilant in monitoring new U.S. regulatory requirements. New BRRR requirements will become effective as soon as July 1, 2024. Communication about feedstock-related recordkeeping obligations should occur early and often within the feedstock supply chain. Recognized CI models relevant to SAF federal tax credits changed again recently, and California is considering further changes to its LCFS credit and deficit benchmarking.
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