Overview
The 45Z credit, clean fuel production credit, is a federal tax incentive created to encourage the production of clean transportation fuels within the US. The credit is based on the quantity of clean fuel produced and sold by a domestic producer, who must chemically process feedstocks into finished fuel (excluding blending activities), between January 1, 2025, and December 31, 2027.
For renewable natural gas, the producer is the entity responsible for upgrading biogas to meet pipeline quality standards. Unlike the former Blender’s Tax Credit (BTC), which was available to fuel blenders regardless of the fuel's origin, foreign producers processing fuel in the US were once eligible. This is now limited to domestic producers only.
Unlocking Potential: 45Z Credit Rates, Eligibility, Emission Factors, and Key Models
The 45Z base credit starts at USD 0.20 per gallon for transportation fuels, potentially rising to USD 1.00 with prevailing wage and apprenticeship requirements. For Sustainable Aviation Fuels (SAF), the base credit is USD 0.35 per gallon, up to USD 1.75 under the same conditions. Credits will be adjusted based on the fuel's emissions factor and will be indexed for inflation annually starting in 2025. To qualify, the fuel must have a lifecycle GHG emissions rate of no more than 50 kilograms of CO2 equivalent (CO2e) per million British thermal units (mmBTU). The fuel must be produced at a facility dedicated to transportation fuels and does not qualify for tax credits available to clean hydrogen or carbon capture. Note, the treasury excludes electricity from 45Z eligibility, citing other clean electricity tax credits.
Earlier, on January 10, 2025, notices 2025-10 and 2025-11 were released, outlining upcoming rulemaking by the Treasury and IRS for Section 45Z of the Inflation Reduction Act. These notices provide guidance on calculating emissions rates and to find the rate for a specific fuel, the guidelines refer to the Section 45Z Emissions Rate Table (Appendix - Notice 2025-11).
The emissions factor used to determine the credit amount is calculated by finding the difference between 50 kgCO2e/mmBTU and the fuel's emissions rate, then dividing the result by 50 kgCO2e/mmBTU. The 45Z guidelines assess a fuel's emissions factor through a "cradle to grave" analysis, considering its entire carbon life cycle. A higher emissions rate reduces the credit, while a lower rate increases it. The guidelines do not specifically address how the credit applies to carbon-negative fuels. The emissions rate plays a key role in determining the emissions factor.
The 45ZCF-GREET Model, by Argonne National Laboratory, is used to calculate emissions rates for most fuels eligible for the 45Z. It combines fixed data from the Treasury and the Department of Energy (DOE) with user input. This model ensures consistent and fair calculations across different fuel types. The model is required for most fuels like ethanol, renewable diesel, biodiesel, but not all fuels or pathways need it.
To determine the SAF emissions rate one of the three models based on the feedstocks and pathways must be used - 45ZCF-GREET Model, CORSIA Default or CORSIA Actual. Hydrogen requires a combination of both the 45VH2-GREET and the 45ZCF-GREET models, as the 45VH2-GREET model only partially provides the emissions.
Producers can request a Provisional Emissions Rate (PER) for unlisted or unique fuels, with rates applying retroactively from January 1, 2025.
Feedstocks: Inclusions, Exclusions and Key Insights on Imports
The Emissions Rate Table lists different fuel types, pathways, and feedstocks, along with the models to use for calculation. The following table outlines the permitted imported feedstocks under the 45Z, their designated uses, and the associated restrictions. All other feedstocks are excluded.
What Producers Can Earn from the 45Z Tax Credit
The graph below presents estimated USD per gallon values for 45Z for Ethanol (EtOH), Renewable Diesel (RD), Biodiesel (BD), and SAF based on the 45ZGREET model. It illustrates the premiums associated with different feedstocks and their relationship to the respective emission factors.
Recordkeeping, Verification, and Navigating Credit Stacking: What Producers Need to Know
The draft regulations for the Clean Fuel Production Credit (Section 45Z) require fuel producers to maintain detailed records on feedstocks, emissions rates, and fuel testing. Verification for the 45ZCF-GREET model must be performed by organizations approved by the American National Standards Institute or under the California Low Carbon Fuel Standard program. SAF producers can use third-party certifications from recognized bodies like ISCC and RSB if specific emissions rate methodologies are applied Lastly, clarification is provided regarding stackability; 45Z cannot be combined with other tax credits. Specifically, 45Z cannot be claimed for a facility that also receives credits for clean hydrogen production or carbon capture in the same year, even if different entities own parts of the facility. Additionally, a facility claiming an investment tax credit for hydrogen production is ineligible for 45Z.
The Road Ahead…
While this guidance is a significant step toward the implementation of 45Z, it remains a preliminary draft that requires more clarity. Given President Trump's opposition to climate-related policies that support clean energy and fuels, delays in the implementation of 45Z are likely. Recall, the BTC expired on December 31, 2024. There is ongoing uncertainty regarding its potential renewal and possibly altering the crediting period for 45Z, given that stacking of these two credits is likely not permitted. Until a decision is made, the situation remains unclear. Clearblue will continue to monitor developments and provide updates to clients accordingly.
The draft regulations are so far directionally bullish for the LCFS markets as they affect the lowest CI feedstocks, which would put upward pressure on pricing. In the months ahead, additional details will surface as the Treasury and IRS spell out the added rules and tools necessary for complete implementation. The draft regulations in Notice 2025-10 will not be effective until finalized but may apply retroactively once published. The Treasury and IRS are accepting public input through April 10.