US Treasury and IRS Release Proposed 45Z Regulation Update

On February 3, 2026, the US Department of the Treasury and Internal Revenue Service (IRS) released proposed regulations to implement changes to the Section 45Z Clean Fuel Production Tax Credit. The update offers much-anticipated clarity on how domestic producers of clean transportation fuels can qualify for and calculate the incentive.

These regulations were first developed under the updated tax framework created by the One Big Beautiful Bill Act (OBBBA). They modernize and clarify key aspects of the credit that was originally enacted under the Inflation Reduction Act (IRA).

Details: What the Proposed Regulation Looks Like

The 45Z tax credit provides a per-gallon production tax credit for domestically produced low-emission transportation fuels:

• Biodiesel

• Renewable Diesel

• Sustainable Aviation Fuel (SAF)

Originally part of the IRA, the credit was substantially revised and extended by the OBBBA, pushing the sunset date out to December 31, 2029 and modifying eligibility conditions and credit mechanics.

What Are the Key Elements of the Treasury and IRS’s Proposed 45Z Regulations?

• Eligibility and Registration: Producers must be registered with the IRS and sell the fuel to unrelated parties to qualify.
• Credit Calculation: The credit amount is tied to a fuel’s lifecycle greenhouse gas (GHG) emissions rate. More credits are given for lower carbon fuels. Proposed guidance points to use of the 45ZCF-GREET model developed by DOE for emissions rate determinations.
• Foreign Entities and Feedstocks: The rule limits eligibility to entities and feedstocks predominantly tied to the US, Canada, or Mexico and prohibits other foreign entities from claiming the credit after certain dates.
• Anti-Abuse and Attribution Rules: The draft regulations include anti-abuse provisions to prevent double crediting and to clarify attribution for fuel sold through intermediaries.
• No Negative Emissions Rates: Except for fuels derived from animal manure, negative emissions rates (which would boost credit value) are prohibited.
• Public Comment Period: These proposed rules are open for public comment for 60 days, beginning with the Federal Register publication of the Notice of Proposed Rulemaking (NPRM).

These proposals build on initial guidance published in early 2025 that laid out draft regulations and the first emissions rate table under Notice 2025-10 and Notice 2025-11.

What Does 45Z Update Mean for Biofuels?

This update represents a major step toward regulatory certainty in the 45Z space, which is critical for long-term investment decisions in advanced biofuels and other clean fuels.

Why does this matter for the biofuels industry? Multiple factors are tied into this proposal:

1. Clarity on Emissions Measurement and Modeling

• Consistency: The inclusion of the DOE’s 45ZCF-GREET model for lifecycle emissions brings a consistent and widely used framework for calculating carbon intensity, a core determinant of credit value.
• Confidence: Producers can better forecast credit amounts and make more informed financing decisions with a standardized methodology.

2. Feedstock and Foreign Restrictions

• Potential Market Shifts: Limiting feedstocks to US, Canadian, or Mexican sources could reshape supply chains and benefit domestic agriculture. It could also discourage reliance on previously qualified imported oils.
• North America Focus: Foreign entity restrictions also aim to keep the incentive squarely focused on North American producers in the US, Canada, and Mexico.

3. Standardization of Credit Mechanics

• Improved Accounting: Anti-abuse provisions and formalized sale attribution rules reduce ambiguity around how credits are claimed and accounted. This significantly decreases disputes and audit risk.

4. Pros and Cons for Industry

• Pros: Greater certainty and uniform emissions pathways may encourage capacity expansions and investment in lower-carbon biofuel production.
• Cons: Stricter feedstock requirements and emissions rules could increase compliance costs or limit eligibility for some producers, especially those relying on sources outside of North America.

5. Short-Term Impacts

• Producer Input: Producers now have a clear comment window to shape the rule before it’s finalized. This period will be critical for industry input and evolving regulatory language.
• Hastened Project Plans: Some producers that were previously uncertain about claiming the credit may accelerate project planning.

6. Long-Term Outlook:

• Tax Incentives: Once finalized, these regulations could provide a stable tax incentive outlook through 2029. It will help to anchor the economics of advanced biofuel projects while aligning them with decarbonization goals.
• Potentially Stronger Market: Combined with the transferability of credits in many cases, this could create a much stronger market for biofuel tax credits.

Key Takeaways of Proposal

• • The Treasury and IRS have formally proposed regulations to implement the updated Section 45Z Clean Fuel Production Tax Credit.
  • Proposed rules clarify eligibility, emissions rate determination, and anti-abuse measures. This updates the much more ambiguous and uncertain framework under the One Big Beautiful Bill Act.
  • A clearer regulatory picture is essential for producer planning and investment in biofuel production.
  • New provisions on feedstocks, foreign entities, and emissions could reshape supply chain dynamics and market strategy.
  • A 60-day public comment period begins with the rule’s publication, offering stakeholders a chance to influence 45Z’s final language.

FAQ on 45Z Update Proposal

Taking a Big Step for Biofuels

The release of proposed 45Z regulations by the Treasury and IRS marks a pivotal moment for biofuels. By laying out a more structured and transparent framework for claiming the Clean Fuel Production Tax Credit, the guidance offers producers and investors much-needed clarity on compliance expectations and credit mechanics.

Certain provisions, such as feedstock limitations and foreign entity restrictions, introduce new considerations for biofuel producers. However, the overall direction supports investment and growth in low-carbon transportation fuels.

As the public comment period unfolds, industry stakeholders have a valuable opportunity to shape the final contours of this influential regulation.

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