On February 3, 2026, the Treasury and the IRS issued proposed regulations (REG-121244-23) for the Section 45Z clean fuel production credit. From January 1, 2025, through December 31, 2029, eligible producers may claim a credit for producing transportation fuels, such as ethanol, biodiesel, and renewable natural gas, and selling them to unrelated buyers. The credit amount, generally up to $1.00-per-gallon, depends on the fuel's lifecycle greenhouse gas emissions rate.
The proposed regulations were issued over a year after the release of preliminary guidance on Section 45Z.
Highlights of the proposed regulations include:
- Sales to Intermediaries. Departing from earlier guidance, the proposed regulations would allow sales both to end-users and wholesalers of clean fuels or other intermediaries to qualify for credits (although credits remain available only for registered producers of fuels which do not use credit-eligible feedstocks, preventing double-counting).
- Sales to Related Parties. In another departure from earlier guidance, the proposed regulations would allow credits for sales to a related party, so long as the related party sells the fuel to an unrelated party.
- Emissions Rate Calculations. Section 45Z requires taxpayers to use a specific GREET model to calculate a fuel's emissions rate. Treasury and the IRS indicated they will update the model to credit carbon savings from specific climate-smart agricultural practices. Furthermore, consistent with the OBBBA, the new model will disregard "indirect land use changes"—that is, the unintended emissions caused when fuel crop production displaces food crops to previously uncultivated land. These revisions to GREET will likely reduce the emissions rate for biofuels.
- No Grandfathering of GREET Models. Under the proposed regulations, taxpayers would be required to use the most recent 45ZCF-GREET model for each taxable year, with no option to grandfather a previously released model (such as the model in place when construction of a facility began or the facility was placed in service).
- The proposed regulations incorporate changes from the OBBBA, including requirements that the fuel must be derived exclusively from feedstock grown or produced in North America and certain restrictions applicable to foreign entities of concern.
The regulations generally will be effective to sales occurring in 2025 if finalized in 2026. Taxpayers may rely on the proposed regulations until they are finalized, provided that taxpayers follow them in their entirety and in a consistent manner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
