45Z Update: What You Need to Know

The long-awaited clarity around the 45Z Clean Fuel Production Credit has finally arrived. And it's a significant development for the biofuels industry.

After more than a year of uncertainty surrounding eligibility, monetization, and lifecycle emissions modeling, the Treasury and IRS have issued proposed regulations under the One Big Beautiful Bill (OBBB). For producers, traders, and investors, this update reduces ambiguity across several key areas. However, it does not eliminate policy interaction risk entirely.

In this blog, we’ll cover:

• What 45Z is and how it evolved
• What the newly proposed regulations clarify
• What remains unresolved
• How the market has reacted
• What this means for biofuels economics going forward

Jump to Key Takeaways →

What is the 45Z Tax Credit?

The 45Z Clean Fuel Production Credit, created under the Inflation Reduction Act, replaces the Blender’s Credit and shifts US biofuel incentives to a performance-based, Carbon Intensity (CI) model.

Unlike previous flat-per-gallon incentives, 45Z rewards fuels based on lifecycle greenhouse gas reductions. The lower the CI score, the higher the potential credit value.

How Has 45Z Been Updated?

Under the current structure, the provisions are as follows:

• Available for domestic producers
• Applies to fuel sold between December 31, 2024 and December 31, 2029
• Base credit of $0.20/gal (non-aviation) and $0.35/gal (SAF)
• Maximum currently capped at $1.00/gal (including SAF, down from the original $1.75)

Over the past year, however, the absence of finalized rules created a policy vacuum. Producers struggled to value credits. Credit buyers demanded insurance protections against potential invalidation. Investment decisions were delayed, and output slowed.

The newly issued proposal resolves several of those issues. And the industry response has largely been relief.

Clean Fuels Alliance America noted that the Treasury responded to many taxpayer concerns and resolved uncertainties from prior guidance. For a sector that has been navigating uncertainty through 2025, this marks a meaningful shift.

How Do the New Feedstock Rules Reshape Trade Flows?

Beginning January 1, 2026, eligible feedstocks must originate from the US, Mexico, or Canada (USMCA).

The provision helps to support continued imports of Canadian canola oil. This element is particularly significant given Canada’s recent trade disruptions with China, where punitive tariffs sharply reduced seed exports.

However, increased Canadian flows into the US biomass-based diesel (BBD) sector will also depend on forthcoming 2026–27 Renewable Fuel Standard (RFS) rules. If the EPA finalizes a rule reducing RIN generation by 50% for imported fuel or fuel derived from imported feedstock, the trade calculus may shift again.

In short: 45Z clarifies feedstock eligibility, but RFS policy will ultimately determine how flows evolve.

In short: 45Z clarifies feedstock eligibility, but RFS policy will ultimately determine how flows evolve.

What Does ILUC Removal Mean for Crop-Based Biofuels?

One of the most consequential updates of 45Z is the removal of IndirectLand Use Change (ILUC) from lifecycle emissions calculations for fuels produced after December 31, 2025.

Previously, ILUC modeling inflated CI scores for crop-based fuels such as soy-derived biodiesel and corn ethanol. Excluding ILUC lowers CI values and improves credit eligibility.

Market participants estimate that ILUC removal could add roughly 30 cents per pound to soybean oil's value in renewable diesel and biodiesel production.

This is not a minor technical revision. It materially shifts feedstock competitiveness and margin sensitivity under 45Z.

Has Credit Monetization Improved?

The short answer? Yes.

Under previous uncertainty, producers transferring 45Z credits faced reduced value because credit traders required insurance in case credits were later invalidated.

With formal proposed regulations in place, the insurance risk should decline. As Clean Fuels Alliance noted, producers should now be able to retain more value from credit transfers.

Improved monetization clarity strengthens the financial case for production. However, it’s important to note that final rulemaking is still pending.

What About SAF and Long-Term Certainty?

There is already political momentum to extend 45Z beyond its current 2029 expiration.

The Securing America’s Fuels (SAF) Act proposes:

• Extending 45Z through 2033
• Restoring the SAF premium to $1.75/gal

Currently, the OBBB caps SAF credits at $1.00/gal. A restored premium would materially affect SAF project economics.

With this cap in mind, many investors will continue to seek longer-term policy certainty before committing capital at scale. What this will ultimately mean for SAF in the short-term remains to be seen.

Why Did Prices Rally and Why Did Gains Fade?

Following the guidance release, markets reacted immediately:

• Soybean oil futures rallied
• UCO and greases strengthened
• Tallow saw upward movement

The ILUC removal, in particular, fueled optimism about soybean oil demand.

However, gains moderated as uncertainty remains around:

• Pathway updates for GREET (Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies)
• Final RFS 2 rules
• Export eligibility for 45Z

Meanwhile, structural weakness from 2025 continues to weigh on the sector.

According to Prima CarbonZero data, Iowa biodiesel output fell 31% year-over-year to its lowest level in a decade. Several plants paused production, awaiting clarity. Some forecasts called for weaker earnings amid delayed blending quotas and flat crush margins.

Key Takeaways on 45Z Update

• 45Z proposed regulations provide long-awaited clarity for producers.
• Feedstocks must originate from the US, Mexico, or Canada beginning in 2026.
• Indirect Land Use Change (ILUC) removal materially improves crop-based fuel competitiveness.
• Credit transfers should retain more value under clearer rules.
• SAF premium restoration and credit extension remain under debate.
• RFS and GREET updates will heavily influence next-phase economics.
• Markets reacted positively, but structural weakness persists from a 2025 downturn.

Clarity Arrives, Margin Equation Still Moving

The formal 45Z proposal reduces a major layer of uncertainty that has constrained the biofuels sector over the past year. But clarity does not equal stability.

Feedstock spreads, RIN interactions, lifecycle modeling, and blending quotas are still in flux. The removal of ILUC shifts the competitive balance among feedstocks. USMCA sourcing rules reshape trade incentives. And SAF economics remain politically contested.

The bigger question now is not whether 45Z is taking effect. It's how producers, traders, and investors position themselves in a market where policy is once again an active pricing driver.

How quickly can the sector translate regulatory clarity into renewed production, stronger margins, and durable investment? That answer will shape the next phase of the biofuels market evolution.

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