IRS Issues Proposed Regulations Regarding § 45Z Clean Fuel Production Tax Credit

On February 4, 2026, the Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") published proposed regulations addressing the clean fuel production tax credit ("45Z Credit") under section 45Z of the Internal Revenue Code ("Code"). The 45Z Credit is an income tax credit available to domestic producers of clean transportation fuel sold from January 1, 2025, through December 31, 2029. The credit is important to producers and sellers of biofuels, such as ethanol, renewable natural gas ("RNG"), renewable diesel, biodiesel, and sustainable aviation fuel ("SAF") and indirectly benefits farmers producing the feedstock for such fuels.

Key aspects of the proposed regulations include:

• In a win for the biofuels industry, the proposed regulations revise prior draft guidance to allow a qualified sale to include a sale of fuel to distributors or wholesalers that subsequently resell the fuel in their trade or business. In addition, the proposed regulations would allow sales to related persons to be qualified sales when they are followed by sales to unrelated persons.
• Responding to industry requests, the proposed regulations would make clear that minimal processing, like blending a fuel mixture or engaging in activities that do not result in a chemical transformation, generally does not constitute "production" for purposes of eligibility for the 45Z Credit. Similarly, compression of RNG is not considered to be part of production and those who compress the fuel after removal from the pipeline will not be considered to be producers. Importing fuel that is only minimally processed in the United States also does not qualify as "production."
• The proposed regulations rejected industry requests to rely on the emissions rate for a production process as determined by the version of the model applicable at the time the qualified facility begins construction and instead would require that the emissions rate be dictated by the version of the model in effect at the time of production. The emissions rate, which determines the amount of the credit for a production process, is determined by the Department of Energy's 45ZCF-GREET model, which was released and subsequently updated last year.
• The proposed regulations also incorporate the amendment to section 45Z enacted by the One, Big, Beautiful Bill Act ("OBBBA") that excludes from the emissions rate calculation indirect land use changes ("ILUC"), such as redirecting land to agricultural crops for biofuels, for fuel produced after December 31, 2025. The reduction in emission rates resulting from this exclusion will only be clear when an updated 45ZCF-GREET model is released, however.
• Reflecting an amendment to section 45Z enacted by the OBBBA, the proposed regulations confirm that RNG from dairy farms can receive an enhanced credit because the emissions rate of a transportation fuel produced from a primary feedstock that is animal manure (including dairy, swine or poultry) may be negative, meaning that such fuel can receive an emissions factor greater than one, generating a credit of greater than $1.00 per gallon.
• The proposed regulations confirm that undenatured fuel ethanol meeting the specifications of ASTM D8651, in addition to denatured ethanol, is qualifying transportation fuel.
• The proposed regulations specify that, for purposes of counting the purchase of RECs toward a reduction in a transportation fuel's emissions rate (which is restricted to RECs from electricity generating facilities that achieved commercial operation no more than 36 months before the qualified facility was placed in service), a qualified facility will be considered to have been placed in service in the first year in which it produces a transportation fuel, even if such year pre-dates section 45Z. The proposed regulations are silent, however, as to how to determine that transportation fuel satisfying the section 45Z emissions rate was produced in a year that precede the effective date of section 45Z and the release of the 45ZCF-GREET model.

Effective Date and Reliance

The portion of the proposed regulations concerning the emissions rate tables will be effective for qualifying sales occurring in taxable years ending on or after January 10, 2025. The remainder of the proposed regulations will not be effective until published as final regulations in theFederal Register. Taxpayers may rely on the proposed regulations as long as they rely on them in their entirety and in a consistent manner.

Comments on the proposed regulations are due by April 5, 2026, and a public hearing will be held on May 28, 2026.

45Z Credit Basics

Section 45Z provides a tax credit for the production of transportation fuel at a qualified facility. Transportation fuel includes SAF and non-SAF transportation fuel. The producer must be registered as a clean fuel producer under section 4101 of the Code and must sell the transportation fuel to an unrelated person in a qualified sale.

The credit amount is calculated by multiplying the "applicable amount" per gallon of transportation fuel by the "emissions factor" for the fuel. The "applicable amount" is currently a base amount of 20 cents per gallon (the OBBBA reduced the higher applicable amount previously allowed for SAF of 35 cents per gallon). If the qualified facility satisfies certain prevailing wage and apprenticeship ("PWA") requirements, discussed by us here, then the "applicable amount" is multiplied by a factor of 5, resulting in a credit of $1.00 per gallon or gallon equivalent of fuel. The 45Z Credit is adjusted for inflation.

Under section 45Z(b)(1)(A), the "emissions factor" for a given type of transportation fuel is calculated by subtracting the "emissions rate" of the fuel from 50 kilograms of CO2e per MMBtu and then dividing this amount by 50 kilograms of CO2e per MMBtu. Thus, the greater the emissions rate, the smaller the emissions factor and the smaller the tax credit. In most cases, the emissions rate will be positive, thereby generating a credit of less than $1.00 per gallon. However, if the emissions rate were negative, the emissions factor would be greater than one, thereby generating a credit of more than $1.00 per gallon. The OBBBA amended section 45Z to prohibit negative emissions rates except for fuel that is produced from a primary feedstock that is animal manure. The proposed regulations provide that the emissions rate of a transportation fuel produced after December 31, 2025, may be less than zero in such circumstances.

Under section 45Z(b)(1)(B), emissions rates must be published annually by Treasury in a table that sets forth the emissions rates for similar types and categories of transportation fuels based on lifecycle greenhouse gas ("GHG") emissions as described in § 211(o)(1)(H) of the Clean Air Act. Taxpayers may file a petition for a "provisional emissions rate" ("PER") for any transportation fuel for which an emissions rate has not been published.

For non-SAF transportation fuel, lifecycle GHG emissions must be based on the most recent determinations under the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation ("GREET") model developed by Argonne National Laboratory or a successor model designated by the Treasury Secretary. The first version of the 45ZCF-GREET model and an accompanying user manual were released on January 15, 2025. An updated version of the 45ZCF-GREET model and an accompanying user manual were released in May 2025 and can be accessed here. For SAF, lifecycle GHG emissions must be calculated either using the Carbon Offsetting and Reduction Scheme for International Aviation ("CORSIA") adopted by the International Civil Aviation Organization ("ICAO") or a "similar methodology" that satisfies criteria under § 211(o)(1)(H) of the Clean Air Act. SAF producers must provide third-party certification of compliance with various CORSIA requirements.

These proposed regulations come after Treasury and the IRS released Notice 2025-10, on January 10, 2025, which provided "draft" regulations under section 45Z (see our summary of this Notice). Some of the differences between the 2025 "draft" regulations and these 2026 proposed regulations are noteworthy; we describe key distinctions further below.

Treasury and the IRS also previously released Notice 2024-49 on May 31, 2024, which provided guidance on the producer registration requirements for the 45Z Credit. See our summary for more information about this guidance.

Proposed Regulations

The proposed regulations contain provisions addressing each of the key elements of a claim for the 45Z Credit as described below. Especially noteworthy provisions of the proposed regulations are highlighted below.

What is a qualified facility?

• The 45Z Credit is available for transportation fuel produced by the taxpayer at a "qualified facility." A qualified facility is defined by section 45Z(d)(4) as a facility used for the production of transportation fuels and does not include any facility for which certain other tax credits are allowed in the taxable year (see discussion of anti-stacking provisions below). The proposed regulations define "facility" as "a single production line that produces a transportation fuel." The proposed regulations define a "single production line" as including all components that function interdependently to produce a transportation fuel through a process that results in the lifecycle GHG emissions rate used to determine the credit. Components function "interdependently" if the use of each component is dependent upon the use of each of the other components to produce the fuel.
• The proposed regulations provide that a facility includes carbon capture equipment if the carbon capture equipment contributes to the lifecycle GHG emissions rate of the fuel.
• A facility may include components that are located in a different building or geographic area than other components of the facility, so long as the components function interdependently. Blending equipment is excluded from the facility definition.

Who is a producer?

• The proposed regulations define a "producer" as "the person that engages in the production of a transportation fuel."
• The producer does not need to own the production facility.

What is production?

• The proposed regulations define "production" as "all steps and processes used to make a transportation fuel." Production begins with the "processing of primary feedstocks" and ends with ready-to-sell fuel.
• Minimal processing, such as blending a fuel mixture or engaging in activities that do not result in a chemical transformation, does not qualify as "production" for purposes of eligibility for the 45Z Credit. Responding to industry requests, the proposed regulations exclude taxpayers who remove and compress conventional or alternative natural gas from pipelines because compression is not a chemical transformation.
• Importing fuel that is only minimally processed in the United States also does not qualify as "production."
• For alternative natural gas, including RNG, the producer is "the person that processes the untreated sources of alternative natural gas to remove water, carbon dioxide, and other impurities such that it is interchangeable with fossil natural gas." Note that the removal of water, carbon dioxide, and other impurities is also not a "chemical transformation," but merely constitutes physical separation. Nonetheless, the proposed regulations distinguish compression from these other processing steps.

What is a qualified sale? What about sales to distributors?

• Section 45Z(a)(4) provides that a qualified "sale" is a "sale of transportation fuel by the taxpayer to an unrelated person if (A) the fuel is sold for use in the production of a fuel mixture by such person, (B) the fuel is sold for use in a trade or business by such person, or (C) such person sells such fuel at retail to another person and places such fuel in the fuel tank of such other person."
• The proposed regulations reflect an OBBBA amendment to section 45Z that excludes from the definition of "transportation fuel" any fuel produced from a fuel for which a section 45Z credit is allowable. For example, SAF is not "transportation fuel" if the 45Z Credit is allowable to the ethanol used as its primary feedstock. This rule eliminates the potential for a double claim of the 45Z Credit for both the primary feedstock fuel and the fuel produced with the primary feedstock.
• The proposed regulations provide that a taxpayer is eligible to claim the 45Z Credit only for the taxable year in which the qualified sale of the transportation fuel occurs. A qualified sale may not take place before the transportation fuel is produced.
• A taxpayer that is a member of a consolidated group is considered to sell fuel to an unrelated person if another member of the consolidated group sells fuel to an unrelated person. A helpful new rule in the proposed regulations provides that, even apart from consolidated groups, a taxpayer will be considered to sell fuel to an unrelated person if a related person sells fuel to an unrelated person.
• There has been a significant question whether sales to distributors or wholesalers can be qualified sales, and Notice 2025-10 provided that fuel sold for use in a trade or business must be fuel sold for use "as a fuel" in a trade or business within the meaning of section 162 of the Code, signaling Treasury's position that a sale to a buyer that will, in turn, resell or distribute the purchased fuel in bulk will not be a qualified sale. Following industry expressions of concern that such a provision would eliminate the 45Z Credit for a significant portion of clean fuel sales, the proposed regulations have reversed the prior position and provide that the term "sold for use in a trade or business" includes fuel sold to an unrelated person that subsequently resells the fuel in its trade or business.

What is transportation fuel?

• Section 45Z defines "transportation fuel" as fuel that is "suitable for use as a fuel in a highway vehicle or aircraft" and that has an emissions rate which is not greater than 50 kilograms of CO2e per mmBTU.
• The proposed regulations provide that electricity is excluded from the definition of "transportation fuel."
• The proposed regulations interpret the definition of "transportation fuel" as meaning fuel that has "practical and commercial" fitness as a fuel in a highway vehicle or aircraft, or fuel that may be blended into a fuel mixture with such practical and commercial fitness. Actual use as a fuel in a highway vehicle or aircraft is not required. The proposed regulations contain an example illustrating that diesel fuel suitable for use in a highway vehicle or aircraft satisfies the suitable for use standard notwithstanding its use by the purchaser as marine fuel. Low-GHG methanol, which is of importance to marine fuel innovation, is specifically identified as a fuel that qualifies as a transportation fuel in the proposed regulations.
• There has been a significant question as to whether undenatured ethanol would qualify as "transportation fuel" because Notice 2025-10 listed denatured ethanol as a "transportation fuel" without mentioning undenatured ethanol, even though a substantial portion of sales of ethanol for export are of undenatured ethanol. In a significant win for the ethanol industry, the proposed regulations provide that undenatured fuel ethanol meeting the specifications of ASTM D8651 meets the definition of "transportation fuel."

How are emissions rates calculated for non-SAF transportation fuel?

• The proposed regulations require taxpayers to use the 45ZCF-GREET model to calculate emissions rates for non-SAF transportation fuel. The proposed regulations also designate the 45ZCF-GREET model as a successor model to GREET (as determined by the Treasury Secretary).
• The first version of the 45ZCF-GREET model and an accompanying user manual were released on January 15, 2025. An updated version of the 45ZCF-GREET model and an accompanying user manual were released in May 2025 and can be accessed here. The updated version added pathways for alternative natural gas from coal mine methane capture and ethanol from U.S. corn wet mills.
• Like other iterations of GREET established for purposes of the Inflation Reduction Act, 45ZCF-GREET contains both fixed assumptions that the IRS calls "background data" and customizable inputs called "foreground data." The background data cannot be modified even if the producer has evidence that the data is not representative of the user's production process.
• The proposed regulations rejected industry requests to rely on the emissions rate as determined by the version of the model applicable at the time the qualified facility begins construction and instead would require that the emissions rate be dictated by the version of the model in effect at the time of production.

Can Energy Attribute Certificates (EACs), such as RECs, be used to reduce the emissions rate of a production process?

• For purposes of accounting for emissions associated with transportation fuel, rules similar to the rules under section 45V (hydrogen) apply and a key rule there provides that if a taxpayer wants to rely on its purchase of Energy Attribute Certificates (EACs), such as renewable energy certificates (RECs), to reduce the carbon intensity of its hydrogen production process, the electricity generating facility to which the EACs relate must be relatively new, that is, it cannot have begun commercial operations more than 36 months before the placement in service of the hydrogen production facility (referred to as the "incrementality" requirement).
• Since many fuel production facilities were placed in service many years ago, there has been a significant question as to how the rule would apply to older facilities. In this regard, the proposed regulations specify that, for purposes of this rule, a qualified facility will be considered to have been placed in service in the first year in which it produces a transportation fuel. An illustrative example describes a facility that was placed in service and began producing ethanol in 2002 but only finished upgrading its facility to produce fuel with a sufficiently low emissions rate to qualify as transportation fuel on January 1, 2024; therefore, the example concludes that the taxpayer may count RECs it purchases from any electricity generating facility that began commercial operations no earlier than January 1, 2021. The proposed regulations do not, however, describe how a determination is to be made as to when a qualified facility began producing transportation fuel in a year that predates section 45Z or the release of the 45ZCF-GREET model.

How are emissions rates for SAF calculated?

• The proposed regulations require taxpayers to use the most recent version of the CORSIA Default Life Cycle Emissions Values for CORSIA Eligible Fuels ("CORSIA Default"), the CORSIA Methodology for Calculating Actual Life Cycle Emissions Values ("CORSIA Actual"), or the 45ZCF-GREET model, as directed by the emissions rate table, to determine emissions rates for SAF. The proposed regulations explain that the 45ZCF-GREET model is a "similar methodology" to CORSIA because, like CORSIA, it evaluates emissions throughout the full fuel lifecycle.

Did the proposed regulations include an updated emissions rate table?

• The proposed regulations do not include an updated emissions rate table for 2026.
• Notice 2025-11 established the initial table of emissions rate methodologies used to calculate the 45Z Credit. This table is in response to the statutory requirement that the Treasury Secretary annually issue a table "which sets forth the emissions rate for similar types and categories of transportation fuels."
• Rather than assigning emissions rates to these categories, the table specifies that fuel emissions rates are to be calculated using the most recent determinations under 45ZCF-GREET for non-SAF transportation fuel and the most recent version of CORSIA Default, CORSIA Actual, or 45ZCF-GREET for SAF.

How are the emissions rates of fuels, feedstocks, and pathways not addressed by the emissions rate table determined?

• For fuels, feedstocks, and pathways not addressed by the emissions rate table, the taxpayer must petition for a PER. Before filing a PER petition, the taxpayer must first submit a request to the Department of Energy (DOE) for an emissions value for an eligible fuel and must receive a calculated emissions value letter (CEVL) from the DOE.

Can more than one type of credit be claimed for the fuel production (the "anti-stacking" rules)?

• As foreshadowed in Notice 2025-10, the proposed regulations contain guidance regarding "anti-stacking" provisions to prevent taxpayers from claiming more than one type of tax credit with respect to a qualified facility that produces transportation fuel. Section 45Z(d)(4) excludes from the definition of "qualified facility" any facility for which one of the following credits (referred to as the "anti-stacking credits") is allowed in the same taxable year:
  • section 45V (clean hydrogen),
  • section 45Q (carbon capture), or
  • section 48(a)(15) (hydrogen storage).
• Note that the anti-stacking rules are tied to the definition of "qualified facility." A facility is not a "qualified facility" if one of the anti-stacking credits is claimed with respect to the facility in the same year. The definition of "facility" in the proposed regulations provides that a facility includes carbon capture equipment if such carbon capture equipment contributes to the lifecycle GHG emissions rate of the transportation fuel for which the credit is determined. An illustrative example in the proposed regulations describes a facility that would not produce a fuel with an emissions rate that would qualify for the 45Z Credit without the carbon capture equipment and therefore determines that the carbon capture equipment is part of the facility, meaning that the facility would not be a qualified facility for purposes of section 45Z if the section 45Q credit is also claimed.
• The proposed regulations do not, however, explicitly state the opposite, i.e., that if the carbon capture equipment does not contribute to the lifecycle GHG emissions rate of the transportation fuel (or at least the taxpayer does not include it in its calculation of the emissions rate), then the carbon capture equipment would not be considered part of the facility and so a section 45Q credit claim would not disqualify the facility from the 45Z Credit. Rather than forcing taxpayers to rely on the negative inference of the example, an example making this clear would be helpful and might be hoped for in the final regulations.

May the same facility claim 45Z in one taxable year and then a different credit in a different taxable year?

• The proposed regulations confirm that taxpayers may alternate between claiming the 45Z Credit and either the section 45V or the section 45Q credit in different taxable years.
• An entity that claims the section 48(a)(15) clean hydrogen investment tax credit with respect to a facility, however, is forever barred from claiming the 45Z Credit for the same facility.

What recordkeeping and substantiation requirements apply to transportation fuel production and sales?

• Taxpayers are required to maintain records sufficient to establish eligibility for the credit and the amount of the credit claimed. Such records must include records to establish that the fuel is a transportation fuel, information related to the primary feedstock for the fuel, records to substantiate how the emissions rate was determined and records to establish that each sale was a qualified sale, among other required records. The proposed regulations offer two "safe harbors" pursuant to which a taxpayer's records will be considered sufficient: (i) to substantiate the emissions rate for a fuel the taxpayer may obtain certification from a third party certifier in substantially the same form and manner as is required for SAF producers and set forth in the regulations (as described below); and (ii) to substantiate that a sale was a qualified sale, a taxpayer may obtain a certificate from the purchaser, signed under penalty of perjury, at or before the time of sale that is "in substantially the same form" as the form certificate provided in the proposed regulations, which calls for the purchaser's statement that the fuel will be used in production of a fuel mixture, used in the purchaser's trade or business or sold at retail and that the purchaser is unrelated to the seller.

What are the certification requirements for SAF producers?

• Section 45Z(f)(1)(A)(i)(II) requires that SAF producers obtain certification from a third-party confirming the accuracy of the emissions rate determination for a fuel's production process. The proposed regulations would accept certifications from certifiers accredited by the International Sustainability and Carbon Certification ("ISCC"), Roundtable on Sustainable Biomaterials ("RSB"), ClassNK, and other sustainability certification schemes approved by the ICAO if CORSIA Default or CORSIA Actual is the selected emissions rate methodology, and from certifiers accredited by the American National Standards Institute or accredited as verifiers under the California Low Carbon Fuel Standard (LCFS) program if the 45ZCF-GREET model is used.

What are the substantiation and recordkeeping requirements for imported used cooking oil feedstocks?

• Treasury and the IRS are considering additional substantiation and recordkeeping requirements for imported used cooking oil feedstocks because of the concern about improper identification of used cooking oil feedstocks from foreign sources. Until such requirements are promulgated, the 45ZCF-GREET model does not contain a pathway for imported used cooking oil. The IRS requests comments on substantiation requirements for imported feedstocks, including used cooking oil, imported from Canada or Mexico, which do not qualify as from foreign sources.

Baker Botts would be pleased to assist you in your analysis of clean energy tax incentive matters, including any comments you might wish to file with respect to the proposed regulations.

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.