45Z North American Feedstock Rules Collide with RFS Incentives, Raising Timing Questions for Biofuel Markets
Uncertainty over 45Z enforcement and RIN valuation changes could drive near-term shifts in feedstock sourcing and trading behavior
A complex policy intersection between the Section 45Z clean fuel production credit and the Renewable Fuel Standard (RFS) is emerging as a key market driver, with potentially significant implications for feedstock sourcing, cross-border trade, and biofuel pricing dynamics.
Under current law, the 45Z tax credit is explicitly limited to fuels produced from feedstocks sourced within North America — the United States, Canada, and Mexico — creating a clear geographic eligibility requirement.
That constraint stands in contrast to the structure of the RFS, which has historically allowed full Renewable Identification Number (RIN) credit generation regardless of feedstock origin.
However, that dynamic is set to shift. Finalized RFS volumes for 2026 and 2027 will continue to grant full RIN values to foreign fuels or fuels produced from foreign feedstocks. Beginning in 2028, those same fuels will only qualify for 50% of a RIN’s value, effectively penalizing non-North American supply and creating a longer-term incentive to localize feedstock sourcing.
That phased adjustment has already raised concerns among analysts about a potential “front-loading” effect. With full RIN values still available through 2027, producers and traders may accelerate the use of lower-cost foreign feedstocks in the near term before the 50% penalty takes effect. This behavior could distort trade flows, increase imports of used cooking oil and other biofuel inputs, and temporarily suppress demand for domestically sourced crops.
Meanwhile, a critical — and unresolved — question centers on how strictly and how quickly the Treasury Department and Internal Revenue Service will enforce the North American sourcing requirement embedded in 45Z. In proposed rulemaking, both agencies acknowledged significant uncertainty around how to verify feedstock origin, particularly for complex global supply chains involving intermediate products like used cooking oil or processed vegetable oils.
Treasury and IRS have explicitly requested industry input on “reliable methods” to track where crops were grown and how feedstocks move through international markets before being converted into fuel. They also raised questions about how to ensure imported inputs originate exclusively from Canada or Mexico, rather than being transshipped from other countries.
That uncertainty opens the door — at least in theory — to a potential delay in enforcing the foreign feedstock restriction under 45Z. If regulators determine that current tracking systems are insufficient to verify origin with confidence, they could justify a phased or delayed implementation timeline while methodologies are refined. Such a move would not eliminate the statutory requirement, which is written into law and would require congressional action to change, but it could temporarily soften its practical impact.
Even the possibility of that delay is notable for markets. Traders and biofuel producers are highly sensitive to policy timing, and any perception that enforcement could be deferred until closer to 2028 — when the RFS itself begins penalizing foreign feedstocks — could reinforce incentives to maximize imports in the interim. That alignment would effectively extend the window for arbitrage between global and domestic feedstock markets.
The result is a policy landscape defined as much by timing as by substance. On paper, both 45Z and the RFS are moving toward favoring North American feedstocks. In practice, however, the transition path remains uncertain, with regulatory discretion, data limitations, and implementation challenges all playing a role.
For now, the lack of clarity is itself a catalyst. Market participants are likely to position for multiple scenarios, including the possibility of delayed enforcement, continued near-term reliance on foreign inputs, and a sharper pivot to domestic sourcing later in the decade. How Treasury and IRS ultimately resolve the tracking and verification challenge will determine whether that transition unfolds gradually — or triggers a more abrupt realignment in biofuel supply chains.
