Washington moved a step closer to reshaping the economics of clean fuels this month, and if you’re in the biodiesel or sustainable aviation fuel (SAF) business, this one matters.
On 3 February, the US Department of the Treasury and the Internal Revenue Service (IRS) rolled out proposed regulations for the 45Z Clean Fuel Production Tax Credit—updated under the so-called One Big Beautiful Bill (OBBB) passed in mid-2025. The clock is now ticking on a 60-day public comment window, with a public hearing set for 28 May.
Behind the bureaucratic language sits a high-stakes question: who qualifies for the credit, how much is it worth, and how tightly will Washington police the supply chain?
What Is the 45Z Clean Fuel Production Credit?
Section 45Z of the Internal Revenue Code provides an income tax credit for clean transportation fuel produced domestically after 31 December 2024 and sold by 31 December 2029. The IRS describes the credit framework on its official guidance pages at irs.gov, noting that the incentive is designed to reward fuels with lower lifecycle greenhouse gas emissions.
Unlike older, technology-specific credits, 45Z is emissions-based. That’s a big shift. Instead of saying “biodiesel gets X, ethanol gets Y,” the credit is tied to how clean your fuel is compared to a baseline. Cleaner fuel, higher credit. Simple in theory. Messy in practice.
Under the proposed rules, the IRS provides detailed guidance on emissions rates, sustainability requirements, certification standards, and registration obligations. Treasury’s broader climate and energy tax guidance is available at home.treasury.gov, where policymakers frame 45Z as part of a long-term push toward domestic energy security and lower-carbon fuels.
Here’s how the base credit currently stands for fuel produced on or before 31 December 2025:
| Fuel Type | Base Credit (per gallon) |
|---|---|
| Non-aviation clean fuel | $0.20 |
| Sustainable aviation fuel | $0.35 |
From 2026 onward, eligibility tightens—particularly around feedstock sourcing.
The New Eligibility Rules: More Strings Attached
The proposed regulations spell out several conditions taxpayers must meet to qualify:
- Produce a transportation fuel that meets sustainability, emissions rate, and co-processing rules.
- Avoid “double crediting” (no stacking multiple federal incentives for the same gallon).
- Produce the fuel at a qualifying facility in the United States, including US territories.
- Be registered as a clean fuel producer under Section 4101 at the time of production.
- Sell the fuel to an unrelated party in a qualified sale during the taxable year.
That’s not exactly light reading. But the real headline is the feedstock requirement.
For fuel produced after 31 December 2025, the feedstock must be exclusively derived from material produced or grown in the United States, Mexico, or Canada.
In other words, North American sourcing becomes mandatory.
If you’re importing used cooking oil from overseas or sourcing feedstocks from outside North America, the message is clear: your supply chain may need a rethink.
Feedstock Tracking: The Big Unanswered Question
The IRS is actively seeking stakeholder input on how to track feedstocks to ensure only US, Canadian, or Mexican sources qualify. That’s where things get technical—and politically sensitive.
How do you verify where a soybean was grown? How do you track waste fats or agricultural residues across borders? What documentation is sufficient? Treasury’s rulemaking process, which will be published and updated via regulations.gov and the Federal Register at federalregister.gov, is likely to see intense lobbying over this very issue.
Producers want clarity and flexibility. Lawmakers want guardrails. Environmental groups want strict enforcement.
Some industry insiders worry about compliance costs. Smaller producers may struggle with documentation burdens, especially if supply chains are complex. Larger refiners? They’ll likely absorb the compliance overhead more easily.
Why This Matters for Biodiesel and SAF Producers
Let’s be blunt: margins in fuel production can be razor-thin. A $0.20 to $0.35 per gallon credit isn’t pocket change—it can be the difference between red ink and profitability.
Consider a hypothetical biodiesel plant producing 50 million gallons annually:
| Annual Production | Credit per Gallon | Potential Annual Credit |
|---|---|---|
| 50 million gal | $0.20 | $10 million |
For SAF producers, the math is even more compelling at $0.35 per gallon.
And this is before emissions-based adjustments, which could increase or decrease the credit depending on lifecycle carbon intensity. That lifecycle modeling will rely on methodologies approved by Treasury and IRS, potentially referencing tools similar to those used by the Department of Energy and EPA.
In short, compliance isn’t just regulatory housekeeping—it’s strategic finance.
The North American Supply Chain Angle
The OBBB’s update tightening feedstock rules to the US, Mexico, and Canada adds a geopolitical dimension. It dovetails neatly with broader “friendshoring” trends and North American trade frameworks like the USMCA.
For farmers in Iowa or Manitoba, this could mean increased demand. For overseas suppliers—particularly in Asia or South America—it could mean losing access to US tax-advantaged markets.
Investors should pay attention here. Feedstock availability and pricing could shift as domestic demand rises. If everyone suddenly needs North American-grown inputs to qualify for 45Z, basic supply-and-demand economics kick in.
Translation: feedstock prices could rise, squeezing margins unless credit values offset those increases.
Registration and Compliance: Don’t Miss the Fine Print
Another critical requirement: producers must be registered under Section 4101 at the time of fuel production. Miss that step, and the credit may be out of reach.
The IRS has historically taken registration requirements seriously in fuel credit programs. Documentation, audit trails, and substantiation will likely be central. Businesses claiming the credit should expect scrutiny, especially given the scale of potential payouts.
The credit runs through 31 December 2029 for qualifying sales, which gives producers a multi-year planning horizon. But remember, these are proposed regulations. Changes may come after the public comment period and May hearing.
If you’re in the industry, sitting out the comment period would be a mistake.
A Policy With Teeth—and Trade-Offs
At its core, 45Z is Washington trying to thread a needle: incentivize cleaner fuels, strengthen domestic supply chains, and avoid abuse or double-dipping.
But every policy has trade-offs.
Tight sourcing rules may boost domestic agriculture but constrain global supply flexibility. Emissions-based calculations reward innovation but introduce complexity. Compliance safeguards reduce fraud risk but raise administrative costs.
For investors and producers alike, the opportunity is real—but so is the paperwork.
The coming months will determine how stringent the final rules are. And once they’re locked in, capital allocation decisions will follow quickly. Plants may expand. New SAF projects could break ground. Or, if the rules prove too rigid, some projects might stall.
One thing is certain: 45Z isn’t just a tax footnote. It’s shaping the next chapter of America’s clean fuel economy.
FAQs
1. What is the 45Z Clean Fuel Production Tax Credit?
It is a federal income tax credit for domestically produced clean transportation fuel sold between 2025 and 2029, based on lifecycle greenhouse gas emissions.
2. How much is the 45Z credit worth?
For fuel produced on or before 31 December 2025, the base credit is $0.20 per gallon for non-aviation fuels and $0.35 per gallon for sustainable aviation fuel, with adjustments based on emissions rates.
3. What are the feedstock requirements after 2025?
For fuel produced after 31 December 2025, feedstocks must be exclusively produced or grown in the US, Mexico, or Canada.
4. Who must register to claim the credit?
Producers must be registered under Section 4101 as clean fuel producers at the time the fuel is produced.
5. When does the public comment period end?
The IRS opened a 60-day public comment period following the 3 February release, with a public hearing scheduled for 28 May.
