45Z – Emerging From the Mists

With the calendar flipping over from 2024 to 2025, the Biomass-Based Diesel Blenders Tax Credits (BTC – both the $1.00/gallon 40A credit for renewable diesel (RD) and biodiesel (BD) and the $1.25-$1.75/gallon 40B credit for sustainable aviation fuel) have expired and the new Clean Fuel Production Credit (better known by its section of the tax code, 45Z) takes effect. Unfortunately for market participants, key details on how the tax credit is to be implemented, which requires the Treasury Department to complete a rule-making process, have yet to be finalized. These regulations are needed for market participants to know exactly which fuel production pathways are eligible, the exact value of the credit available to a given batch of fuel, who can claim that credit, and the process by which the credit may be claimed. Without this information, producers are struggling to price their product and know what they can afford to pay for each of the different feedstocks which they may be able to process.

What has been released?
On January 10, 2025 the U.S. Treasury Department published Notice 2025-10 Intent to Propose Regulations and Notice 2025-11 Annual Emissions Rate Table. Notice 2025-10 provides Treasury’s interpretation of the statute and preliminary regulatory language for implementing that interpretation. Notice 2025-11 outlines how emission rates are to be determined using either the GREET Model (all eligible fuels) or the CORSIA model (SAF only) and a list of covered combinations of fuels, production processes, and feedstocks. For both notices there is a request for public comments to be submitted to Docket IRS-2025-0002 at http://www.regulations.gov no later than April 10, 2025.

On January 15, 2025, the U.S. Department of Energy (DOE) released the 45ZCF-GREET model; this is the version of the GREET model which Treasury has specified for use in the determination of emission rates for the 45Z tax credit. This model and related information are available at https://www.energy.gov/eere/greet.

Also on January 15, 2025, the U.S. Department of Agriculture (USDA) released an interim rule on Technical Guidelines for Climate-Smart Agriculture (CSA) Crops Used as Biofuel Feedstocks and a beta version USDA Feedstock Carbon Intensity Calculator. USDA will be accepting public comments on these documents through March 18, 2025 at Docket USDA-2024-0003 at http://www.regulations.gov.

What has been said?
Some of the key interpretations and proposals made by Treasury include:

1. Definition of Producer – this is key as the producer is the only party permitted to claim the 45Z tax credit. Treasury defines the producer as the party that operates a chemical process to convert feedstocks into products suitable for use as ground transportation or aviation fuel. Accordingly, a party importing untreated BD and blending with an additive in the U.S. or importing hydrous ethanol and dehydrating it to fuel grade ethanol specifications in the U.S. is not a producer. For renewable natural gas, the party upgrading biogas to pipeline quality is defined as the producer.
2. Fuel eligibility – Treasury requires that the fuel be suitable for use as fuel for ground transportation or aviation. Importantly, this differs from the U.S. Renewable Fuel Standard (RFS), the now expired BTC, and state low carbon fuel (LCF) programs in that the fuel is not actually required to be used for those purposes. As 45Z is a producer tax credit, therefore, the producer is not obliged to track the end use of their product.
3. Exclusion of Electricity – Treasury excludes any form of electricity from eligibility, citing the establishment of other IRA tax credits applicable to clean electricity.
4. Permissible Feedstocks – Imported feedstocks are currently limited to Brazilian sugarcane ethanol (only for use as a feedstock for Alcohol-to-Jet, ATJ), tallow (for use as a feedstock for BD, RD, or SAF) and Canadian canola (for use as a feedstock for BD, RD, or SAF). All other feedstocks listed in Notice 2025-11 are restricted to those sourced domestically. However, used cooking oil (UCO) is the only imported feedstock specifically discussed in the text of 2025-10 where Treasury explains that it was excluded due to concerns over potential adulteration with palm oil (which is prohibited by statute) and risks of impacts on food-grade vegetable oil supplies. Accordingly, it is reasonable to expect that additional types of imported feedstocks could be added in the future based on industry input (potentially including UCO if adulteration concerns can be successfully mitigated.)
5. Producer-Specific Considerations – Unlike state LCF programs where every producer and feedstock combination can have a custom pathway, the proposed approach for 45Z involves many more of the potential variables being standardized as a way to minimize the amount of Treasury resources required to manage the program. While this may be an inevitable compromise for administering a federal program, covered producers are advised to review the assumptions made in the 45Z model specific to their pathways and comment with supporting data where warranted.

The USDA guidelines on climate smart agriculture (CSA) goes beyond the previous guidelines which were released for use with the, now expired, 40B SAF blender’s tax credit. Whereas the 40B guidelines included three CSA practices for corn and soybeans, all of which had to be used together, the 45Z guidelines adds grain sorghum (milo) to the list of covered crops, adds additional practices to the list, and allows growers to pick and choose those individual practices on the list which are suitable for their crops and location. Importantly, CSA practices have not yet been included for cover crops (e.g., camelina, carinata, and pennycress) despite their inclusion in the 45Z-GREET model.

What comes next?
As has been done with all recent changes in presidential administration, the new Trump administration has temporarily frozen all regulatory development, including the 45Z, pending a 60-day review in order to get their new appointees in place and up to speed on their agency’s activities. Treasury will ultimately need to formally issue a proposed rule to implement 45Z, accept and consider public comment, and issue a final rule. This process could easily take a year. Until that happens, industry will continue in an uncomfortable state of being unable to confidently quantify the tax credit associated with their current fuel production. This uncertainty may force some producers, primarily smaller producers with weaker balance sheets, to shut down or restrict operations.

Responding to this uncertainty, some members of Congress representing farm states are moving to retroactively extend the currently expired, 40A and 40B tax credits as a way to provide greater certainty to the market while 45Z guidance is delayed. It remains uncertain if, or when, Congress might enact such an extension.

Are you looking for help in finding your way out of this regulatory fog? Reach out to us!