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Treasury Proposes Sweeping Rules for Section 45Z Clean Fuel Production Credit

Treasury Proposes Sweeping Rules for Section 45Z Clean Fuel Production Credit

IRS proposal clarifies who qualifies for the clean fuel production credit, tightens rules around feedstocks, emissions modeling, and credit stacking, and reshapes incentives across biofuels, SAF, and renewable natural gas.

What the proposed rule does


The Treasury Department and IRS have released a 170-page notice of proposed rulemaking laying out detailed regulations for the Section 45Z Clean Fuel Production Credit, the post-2024 replacement for a patchwork of prior biofuel and alternative fuel tax incentives.

The proposal implements statutory changes from the Inflation Reduction Act and the One, Big, Beautiful Bill Act, and would govern clean transportation fuel produced domestically and sold through 2029.

Still to come are a final carbon intensity calculator by USDA.

Treasury wants comments on determining origin on feedstocks from Canada, Mexico.

The proposed rule focuses on transportation fuel “suitable for use as a fuel in a highway vehicle or aircraft.” However, the proposed rule does not consider electricity in the definition of a transportation fuel. IRS noted that the IRA also created a 45Y credit which addresses electricity, and if the definition of “transportation fuel” under Section 45Z included electricity, then there “would be significant overlap” between electricity eligible for a 45Z credit and for a 45Y credit.

The proposed rule from IRS divides transportation fuel into two categories relative to emissions rates: non-Sustainable Aviation Fuel (SAF) transportation fuel and SAF transportation fuel.

Changes made via OBBBA
 

IRS noted that the OBBBA made several changes to the Section 45Z credit to:

• Extend the credit to Dec. 31, 2029;
• Limit feedstocks to those grown or produced in the US, Mexico, or Canada;
• Add prohibited foreign entity restrictions;
• Broaden sale attribution for fuel sold through related intermediaries;
• Eliminate the special rate for sustainable aviation fuel;
• Add an anti-abuse provision to prevent double crediting;
• Prohibit negative emissions rates except for fuels derived from animal manure;
• Require feedstock-specific emissions rates for fuels derived from animal manure; and
• Exclude indirect land use changes from emissions rates.

The feedstock changes will mean that transportation fuel produced after Dec. 31, 2025, must be exclusively derived from a feedstock that was produced or grown in the U.S., Mexico, or Canada.

More details still pending from USDA. USDA released a beta version of its Feedstock Carbon Intensity Calculator (USDA FD-CIC) in January 2025. According to the Internal Revenue Service, the tool is still undergoing testing, peer review, and public comment ahead of a final release.

Once finalized, the Treasury Department and the IRS expect a section 45Z-specific version of the calculator to be incorporated into the Department of Energy’s 45ZCF-GREET model. That module would be used to calculate carbon-intensity adjustments under section 45Z for feedstocks produced using certain agricultural practices, including no-till or reduced tillage, cover crops, and nutrient management.

The IRS added that adopting the final USDA FD-CIC would bring additional requirements tied to agricultural practice implementation, recordkeeping, and verification — potentially mirroring USDA technical guidelines for crops used as biofuel feedstocks.

Both the IRS and the Treasury Department said they expect to issue further guidance on these requirements alongside publication of the final 45ZCF FD-CIC.

Imported feedstocks: Treasury said fuel pathways using imported feedstocks — including used cooking oil (UCO) — will not be available in the 45ZGREET model until Treasury and the IRS issue further guidance. Under the proposal, a feedstock is considered “foreign” if it is sourced or purchased from outside the U.S., Canada, or Mexico.
 

The agencies said they are also weighing substantiation and recordkeeping requirements for feedstocks imported from Canada and Mexico, including UCO, and are seeking public comment on how to verify that such imports meet the statute’s sourcing requirements.
 

Treasury and the IRS further requested information on existing industry practices for tracking feedstock origin, including whether current business records can reliably demonstrate that feedstocks produced in Canada or Mexico do not include inputs or additives originating outside those countries.
 

In addition, the agencies are asking whether there are reliable methods to identify where oilseeds originated or crops were grown before being processed into cooking oil — information that could be used to determine whether the statutory foreign feedstock limitation applies.

Qualified certifiers for SAF transportation fuel. Under the IRS’s proposed rule, sales of sustainable aviation fuel (SAF) transportation fuel must be supported by certification from a qualified certifier. This requirement does not apply in the same way to non-SAF transportation fuel.
 

A “qualified certifier” is defined as an individual or organization that is independent of the taxpayer and not an employee, and that holds an active accreditation from either: (i) the American National Standards Institute National Accreditation Board (ANAB) to conduct validation and verification in accordance with ISO 14065; or (ii) the California Air Resources Board Low Carbon Fuel Standard (CARB LCFS) program, as a verifier, lead verifier, or verification body. ANAB- and CARB LCFS-accredited verifiers are experienced in evaluating information comparable to that used in the 45ZCF-GREET model.
 

For non-SAF transportation fuel, the proposed rule instead provides a “safe harbor” for substantiating whether a sale qualifies. In this case, the taxpayer must obtain a certificate from the purchaser that is “in substantially the same form and manner” as the certificate required for SAF transportation fuel. To rely on the safe harbor, the taxpayer must have no reason to believe that any information in the certificate regarding fuel use is false and must retain the certificate in its books and records.

Fuel from animal waste. The proposed 45Z rule makes clear that transportation fuels produced from animal waste receive preferential treatment. It directs the IRS to assign “a distinct emissions rate with respect to any transportation fuel derived from animal manure,” with that rate tied to the specific feedstock — including dairy, swine, poultry, or other manure sources the Secretary deems appropriate.
 

Notably, the proposal specifies that only transportation fuels made from animal manure are eligible for an emissions rate below zero.

At a high level, the rule:

  • Defines what counts as “production” — focusing on chemical transformation, not blending or minimal processing.
  • Establishes emissions accounting rules, relying on the new 45ZCF-GREET lifecycle model for non-SAF fuels and CORSIA-based methodologies for sustainable aviation fuel.
  • Bars electricity from eligibility, keeping 45Z focused on liquid and gaseous fuels.
  • Tightens anti-stacking rules, preventing facilities from claiming 45Z if they also claim clean hydrogen (45V), carbon capture (45Q), or certain energy credits.
  • Clarifies registration and ownership, including who is considered the “producer” and how credits flow through related parties.
  • Imposes foreign-entity and feedstock restrictions, including limits tied to specified foreign entities and, after 2025, feedstocks sourced outside the U.S., Canada, or Mexico.
     

The credit value depends on lifecycle greenhouse-gas reductions relative to a statutory baseline and whether the facility meets prevailing wage and apprenticeship requirements.

Key policy signals in the proposal

  • Production, not blending, is the policy priority. Congress’s shift away from blender credits is reinforced explicitly.
  • Lifecycle emissions modeling becomes decisive. Project economics will hinge on GREET and CORSIA assumptions.
  • Credit stacking is aggressively curtailed. Treasury is signaling that producers must choose between overlapping incentives.
  • Administrative rigor increases. Registration, substantiation, and the ability to revoke registrations are all strengthened.

Potential winners

  • Renewable natural gas producers using animal manure
    • Manure-based fuels can receive distinct emissions rates — potentially below zero, preserving a strong incentive for dairy, swine, and poultry RNG pathways.
  • Sustainable aviation fuel producers with CORSIA-compliant supply chains
    • SAF remains eligible for higher credit values (at least through 2025) and benefits from clear certification pathways.
  • Producers with low-carbon feedstocks and efficient processes
    • Facilities that score well under GREET or CORSIA gain a durable, technology-neutral credit through 2029.
  • Integrated producers selling through intermediaries
    • New look-through rules allow sales via related wholesalers or dealers to still qualify as sales to unrelated persons.
  • Projects meeting prevailing wage and apprenticeship rules
    • These facilities preserve access to the higher credit tiers, reinforcing labor-compliant investment.

Potential losers

  • Fuel blenders
    • Explicitly excluded from being treated as producers; blending alone no longer generates credits.
  • Facilities stacking multiple climate credits
    • Projects combining clean hydrogen, carbon capture, or energy credits with fuel production may be forced to forgo 45Z entirely.
  • Electricity-based transportation pathways
    • Treasury firmly excludes electricity, leaving EV-related incentives to other sections of the tax code.
  • Producers relying on foreign feedstocks
    • Post-2025 sourcing restrictions narrow eligibility for fuels made from non-U.S./Canada/Mexico inputs.
  • Projects with borderline emissions profiles
    • Fuels close to the 50 kg CO₂e/mmBTU threshold face greater modeling and compliance risk.
 Corn Where corn wins
 Corn used for ethanol — especially low-CI pathwaysCorn ethanol clearly remains eligible as a non-SAF transportation fuel.The key determinant is lifecycle carbon intensity under 45ZCF-GREET, not volume or blending.Ethanol plants that:Use renewable power,Capture and sequester CO₂,Improve process efficiency, orSource corn with documented lower emissions
are best positioned to generate meaningful 45Z value.Sales flexibility preservedTreasury’s final approach to “sold for use in a trade or business” means ethanol sold to wholesalers, blenders, or other intermediaries can still qualify.This avoids a major disruption to the existing ethanol marketing chain.Farm-state upsideBecause corn is overwhelmingly U.S.-grown, it easily clears the domestic feedstock rule that applies after 2025.That gives corn ethanol a structural advantage over fuels dependent on imported oils or intermediates. Where corn loses or faces risk Blending is no longer rewardedEthanol blending into gasoline does not count as production.The policy shift is unmistakable: incentives are for plants, not downstream blending activity.Stacking constraintsEthanol facilities using 45Q carbon capture credits may be forced to choose:Claim 45Q, orClaim 45Z — but not both.This matters for Midwestern plants pursuing CCS hubs.CI documentation pressureOver time, producers may need more granular corn sourcing data (fertilizer intensity, yields, transport).That raises compliance costs and could favor larger or vertically integrated operations.
Soybeans
 Where soybeans win
 Soybean oil–based renewable diesel and SAF remain eligibleSoy oil continues to qualify as a biomass feedstock for non-SAF fuels and SAF.Facilities producing renewable diesel or SAF from soy oil can still earn 45Z — if CI pencils out.North American sourcing advantageU.S. soybeans and soy oil satisfy the post-2025 U.S./Canada/Mexico feedstock requirement, unlike some imported oils.Labor-compliant plants benefitLarge renewable diesel and SAF plants that meet prevailing wage and apprenticeship rules retain access to the full $1.00 per gallon equivalent (inflation-adjusted). Where soybeans lose or face risk Indirect land use change (ILUC) no longer adjustableThe statute — and the proposed rule — requires ILUC to be excluded from emissions rates after 2025.That sounds positive, but it also means Treasury locks in GREET assumptions, limiting future flexibility.If GREET assigns soy oil a higher baseline CI than alternatives, there’s little room to maneuver.Double-crediting prohibitionIf a fuel made from soy oil qualifies for 45Z, that fuel cannot then be used as a feedstock to generate another 45Z credit.This limits multi-step fuel pathways and some SAF configurations.Competition from waste oils and animal fatsUsed cooking oil, tallow, and manure-derived pathways often score much lower CI values.Those fuels may crowd soy oil out of marginal projects if credit values compress.Foreign-entity restrictionsProjects with ownership or financing ties to restricted foreign entities face growing scrutiny after 2025–2027, which could affect large biofuel platforms.
Bottom line for farm country Corn outlook: Generally constructive — especially for ethanol plants investing in carbon reduction. Corn’s domestic supply and established infrastructure fit Treasury’s intent, but the days of “easy credits” via blending are over.
 Soybean outlook: More competitive and nuanced. Soy oil remains viable, but it must fight harder on carbon intensity against waste-based and manure-derived fuels, and some SAF pathways may be squeezed by the anti-stacking and double-credit rules. 

What happens next: Public comments are due 60 days after Federal Register publication, and Treasury has scheduled a public hearing for May 28, 2026. Given the rule’s complexity and its stakes for biofuels, SAF, and farm-linked energy markets, significant industry feedback — and potential revisions — are likely before finalization.

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