OPIS Insights

The proposed regulations for the 45Z credit, issued by the Internal Revenue Service (IRS) and the Department of the Treasury on Feb. 3, mark a significant change in tax policy for biofuels. These provisions replace previous credits for biodiesel and sustainable aviation fuel (SAF). However, most of the provisions in the proposed rules are broadly aligned with market expectations. As such, the 45Z credit offers a production tax subsidy for qualifying clean transportation fuel. 

Credit Eligibility

The 45Z credit applies to qualifying low-carbon transportation fuels produced domestically after Dec. 31, 2024, and sold by Dec. 31, 2029. Eligibility for the credit rests on four pillars:

1. Production of a qualified “transportation fuel”;
2. Production at a qualified facility within the U.S. or its territories;
3. Registration of the producer with the IRS; and
4. An arm’s-length sale of the fuel to an unrelated party.

The most complex requirement is qualifying as a “transportation fuel.” A fuel must meet all of the following:

• End-Use: Suitable for use in a highway vehicle or aircraft.
• Carbon Intensity (CI): Lifecycle GHG emissions must not exceed 50 kg of CO₂e per million BTU (mmBTU). This is the benchmark; fuels with a lower CI receive a higher credit.
• No co-processing: Cannot be produced by co-processing a bio-based feedstock with petroleum, natural gas and coal in a traditional refinery (preventing “greenwashing” of a barrel of oil).
• No double-dipping: Cannot be made from a fuel that has already received the 45Z credit (prevents “credit stacking” on the same molecule).

A critical exclusion is that electricity is not considered a “fuel” for 45Z purposes. This means renewable electricity used in electric vehicles is not eligible. The credit is reserved for liquid and gaseous transportation fuels consumed to produce heat or power, which also makes marine fuel producers eligible. The credit inadvertently incentivizes low-carbon fuels for the shipping industry.      

A major supply chain constraint is the domestic sourcing requirement. Effective Jan. 1,  all feedstocks must be grown or produced in the U.S., Canada or Mexico. This shifts and protects the North American supply chain, favoring domestic and North American feedstocks like soybean, canola and corn, while excluding fuels reliant on imported feedstocks like palm oil. This will most likely create a premium for North American feedstocks and strain supplies of materials like used cooking oil. Foreign-controlled or influenced entities are prohibited from claiming the credit, with restrictions phasing in starting July 5, 2025. 

Eligibility also requires a “substantial transformation” of a feedstock into a new, finished fuel. Simple blending or repackaging is insufficient. This means a producer blending ethanol and gasoline would not be creating an eligible fuel. 

Credit Value

The credit amount is not fixed, but determined by a formula that compares a fuel’s CI to a baseline. The credit is calculated per gallon or gallon-equivalent and has a two-tier structure, eliminating a previous premium for SAF, starting Jan. 1: 

• Base Credit: USD 0.20 per gallon for most fuels.
• Prevailing Wage and Apprenticeship (PWA) Credit (5x Base): USD 1.00/gallon for fuels produced in compliance with PWA requirements.

Prior to Jan. 1, SAF is eligible for a higher, uncapped credit of USD 1.75/gallon (if PWA compliant). This credit is under a different, expiring incentive. 

CI: The Heart of the Credit

The credit’s value is directly tied to a fuel’s lifecycle GHG emissions (CI score), measured in gCO₂e/MJ. The model used to calculate CI is critical for non-SAF transportation fuels:

• Fuel produced before Jan. 1: The GREET model, including emissions from Indirect Land Use Change (ILUC), is used.
• Fuel produced on or after Jan. 1: The GREET model excluding ILUC emissions is used, significantly lowering the CI score for many biofuels and making the 50 kg/mmBTU threshold easier to meet.

Special Cases:

• Renewable Natural Gas (RNG): Capturing methane from animal manure can yield a negative CI, making it eligible for the maximum credit. 
• SAF: Its CI must be calculated using the CORSIA model (or an approved equivalent), rather than the Greenhouse Gases, Regulated Emissions, and Energy use in Technologies (GREET) model.
• Ethanol, Biodiesel and Renewable Diesel: Credit value is directly tied to their CI scores, with corn ethanol using carbon capture or advanced pathways scoring better. 

The credit value hinges on the documented CI and a “qualified sale.” Sales to intermediaries, resellers, or even related parties (under specific conditions) can qualify.  

The Anti-Stacking Clause

A “qualified facility” can only claim one major energy credit. A facility cannot claim the 45Z credit if it also claims:

• 45V (Clean Hydrogen PTC); 
• 45Q (Carbon Sequestration Credit); or
• 48 (Investment Tax Credit, via election for hydrogen).

This forces strategic decisions at facilities producing multiple low-carbon outputs (e.g., a facility producing both hydrogen and biofuels).

Key Takeaways 

The proposed regulations could reshape the biofuels industry by shifting its economic and operational foundations toward deep carbon reduction. However, the tax policy’s long-term impact is constrained by a critical factor: the 2029 expiration of the credit. This three-year window to achieve production and sales before the credit expires heavily favors projects that can be deployed rapidly. The dynamic will likely steer capital and innovation toward retrofitting existing infrastructure or expanding proven technologies like RNG, while potentially sidelining more complex, advanced projects that cannot be built and commissioned before the deadline. Consequently, while the incentive reorients the market toward a CI model, its short window may paradoxically consolidate investment around a narrower, less innovative set of technologies that can be deployed at speed, rather than fostering long-term systemic transition.  

Next Steps

The IRS and Treasury have initiated a 60-day public comment period (due April 6), with a public hearing scheduled on May 28. Following the comment review, the draft rules will undergo an internal review by the IRS Office of Chief Counsel, a process that may take up to 90 days. Final regulations will be published in the Federal Register, with a standard 30-day period before taking effect.