Section 45Z: Proposed Regulations Provide Clarity and Certainty
After a year of anticipation, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) published long-awaited proposed regulations for the Section 45Z Clean Fuel Production Tax Credit on Feb. 4, 2026.
Section 45Z was first enacted in the Inflation Reduction Act of 2022 and subsequently amended by the One Big Beautiful Bill Act in 2025. The credit aims to incentivize U.S. production of low-carbon transportation fuels including ethanol, renewable diesel, biodiesel, sustainable aviation fuel (SAF), and renewable natural gas (RNG).
The new regulations provide clarity on the rules governing how domestic fuel producers can qualify for and claim the §45Z credit. The credit may be applied to low carbon fuel produced and sold between Jan. 1, 2025, and Dec. 31, 2029.
What’s in the Proposed Regulations?
The proposed rules clarify eligibility criteria, emissions rate calculations, registration and certification procedures, and requirements for reporting and claiming credits. Key items included in the §45Z regulations include:
Definitions and eligibility: Updated clear definitions for key terms such as “transportation fuel,” “qualified facility,” and “producer” help solidify eligibility to claim the tax credit.
EAC allowance: The regulations clarify previously ambiguous language regarding the purchase of Energy Attribute Certificates (EACs). The regulations clarify that any EACs purchased to reduce the carbon intensity (CI) score of a fuel must be purchased from a project that was placed in service within 36 months of the fuel facility being considered a qualified facility.
Sales rules: The rules allow for fuel sales to intermediaries or related parties to qualify, provided the fuel is ultimately sold to an unrelated buyer. Previous language in notice 2025-10 was ambiguous on the ability of fuel sold to a third-party marketer or related party to qualify for the §45Z credit. This much-anticipated clarification better aligns with the real-world market for renewable fuels.
Regenerative agriculture: The regs confirm that regenerative agriculture practices will be an input into the model for determining the carbon intensity of eligible fuel. The USDA must still release the updated USDA FD-CIC, which will provide additional information on the farming practices incorporated into the model and the impact on the fuel’s carbon intensity.
Responses From the Market
Industry reactions have been positive overall. Major agriculture and biofuel advocacy and trade groups have applauded the release, saying the new guidance finally provides the clarity and certainty that producers and tax credit buyers have been waiting for. Biofuel producers and tax credit buyers alike see the proposed rules as essential for investment decisions. There are still a few holes to be filled, such as the FD-CIC model for regenerative agriculture practices — as well as an updated GREET model — that will remove the current “indirect land use change” (ILUC) penalty.
Next Steps
The proposed regulations will be open for public comment through April 6, 2026, with a Treasury-hosted public hearing scheduled for May 28, 2026.
The Feb. 4 release of the Section 45Z regulations represents both a policy milestone and a crucial step toward fully realizing the economic benefit from §45Z for low carbon fuel producers.
For more information, reach out to our renewables experts:
Faith Larson, at faith@mickco.com or 605-977-4873 ext. 4.
Molly Stevens, at molly@mickco.com or 605-977-4873 ext. 7.
The Company should seek independent legal, tax, and accounting advice as part of this process. Mickelson & Company is not providing legal or accounting services.