Carbon intensity of vegetable-based oils must full account for cross-market substitution effects
Carbon intensity calculations for vegetable oil-based fuels must fully account for the effects of cross-market substitutions, in line with Congress’ restrictions on palm fatty acid distillates
Diverting certain vegetable oils toward the energy sector can create supply gaps that may be filled by carbon intensive palm oil
Congress sought to prevent the expansion of global palm oil use by enacting section 45Z. Palm oil itself will not qualify for the 45Z credit, as its total lifecycle assessment (LCA) is far too high. For example, CORSIA puts the carbon intensity of palm oil between 76.5 and 99.1 g CO2e/MJ, and EPA has determined that the carbon intensity of palm oil-based biodiesel is 80.7 g CO2e/MJ and 86.7 g CO2e/MJ1 for palm oil-based renewable diesel. But because palm oil is the cheapest available vegetable oil globally, it is often used to backfill gaps in other vegetable oil markets when those oils are shifted to the energy sector.
One such example is in the case of palm fatty acid distillates (PFADs). PFADs are a byproduct of palm oil that are removed during the refining process, comprising about 4% of crude palm oil by mass. PFADs are often referred to as waste or residue, but there is non-energy demand for PFADs from producers of oleochemicals, soaps, and animal feed. Use of PFADs as an energy feedstock creates supply gaps that are typically backfilled by vegetable oils—especially palm oil. And if this gap “results in more palm oil being used for oleochemicals, soaps and animal feed, then the net outcome may be similar to simply using the palm oil directly for biofuel production in the first place.” Given the high LCA of palm oil, such a result would be counter to the clear requirements of section 45Z.
Models used to determine the carbon intensity of vegetable oil-based fuels must fully account for cross-market substitutions
To address this potential loophole, section 45Z prohibits the use of PFADs to make SAF. By banning PFADs, Congress demonstrated clear concern over indirect substitution impacts of diverting PFADs to transportation fuels, which causes greater demand for primary oils like palm oil to fill the gap. Similarly, Treasury must ensure that its 45Z guidance does not indirectly drive demand for palm oil as a backfill for other vegetable oils. For example, when soy oil is shifted from non-energy sectors to energy sectors (such as for making transportation fuel), palm oil is the marginal product on global market that fills that gap. In the U.S., there is evidence that the production of “soy biodiesel is driving increased consumption of palm oil,” as the figure below illustrates. To prevent an increase in palm oil production, Treasury must ensure that the models used to determine the carbon intensity of vegetable oil-based fuels identify and fully account for the emissions that result from cross-market substitutions.
Figure 1. U.S. soy oil used in biodiesel and palm oil imports.
See CATF’s full comments on 45Z for more information.
Footnotes
1. The conversion factor between g CO2e/MJ and kg CO2e/mmBTU is 1.055, per the conversion below:
Therefore, values in g CO2e/MJ are comparable to values in kg CO2e/mmBTU.
