Recent legislative proposals in the US Congress, part of a broad tax and budget reconciliation bill dubbed the "big, beautiful bill,” are poised to significantly alter the landscape for clean transportation fuels, particularly impacting the types of feedstocks used in their production.
As detailed recently by The Globe and Mail, these potential changes center around the 45Z Clean Fuels Production Tax Credit. We invite you to read the article, Canada’s canola farmers stand to gain from U.S. tax breaks for clean fuel which features input from ClearBlue Markets’ Mehr Imran.
The reconciliation bill passed the US House of Representatives with a 215-214 vote on 22 May and is headed to the Senate, where Republicans have control with a 53-47 majority. A simple majority is required to pass. The bill is still subject to revision, and the Senate is expected to hold a vote next month.
Replacing the Blender’s Tax Credit in 2025, recall the 45Z credit is a US tax incentive from the Inflation Reduction Act signed into law in 2022 for domestically produced clean fuels, based on lifecycle GHG emissions. The rules restrict credit eligibility to domestic producers, excluding foreign producers even if processing occurred in the US. To qualify, fuels must emit no more than 50 kgCO₂e/mmBTU, with feedstock type being the key factor for the emissions rate.
Under the original 45Z rules, prior to the proposed modifications from the 2025 reconciliation bill, feedstock eligibility and emissions thresholds included indirect land use change (ILUC) emissions, which raised the carbon intensity (CI) of crop-based fuels. This particularly impacted Canadian canola as a feedstock for biodiesel, renewable diesel and sustainable aviation fuel (SAF) - pushing it above the emissions limit and making it ineligible for credits despite its clean fuel potential. Other crop-based feedstocks were similarly affected, but there was still a credit potential for biodiesel, renewable diesel and SAF from corn oil and soybean oil. For Canadian canola farmers and processors, the Biden administration's version of the tax credit represented a loss rather than a gain. As a result, Canadian canola faced a setback, with crude canola oil exports to the US dropping by 66% between December 2024, the month prior to the 45Z transition, and March 2025, according to US Census Bureau trade data.
While support for renewables has generally diminished under the Trump administration, biofuels are seeing sustained favorable treatment. The proposed Republican tax and budget reconciliation bill introduces key changes to biofuel feedstock rules. There were discussions over limits to non-domestic feedstocks along with the domestic production requirements, and this is incorporated into the bill to an extent. The bill would limit the 45Z tax credit to fuels made from feedstocks grown in the US, Canada, or Mexico, excluding some imported feedstocks like used cooking oil from Asia and tallow from Brazil and Australia.
The bill also removes indirect land use change (ILUC) penalties from carbon calculations, improving the competitiveness of crop-based feedstocks like canola and soybean oil. The chart below highlights the 45Z credit values for various fuels and feedstocks, based on ClearBlue’s interpretation of 45Z guidance from January 2025, and also compares the impacts of removing the ILUC component for canola and soybean oil. According to ClearBlue’s analysis of the proposed updates, using the 45ZCF GREET model, canola-based renewable diesel could now earn about USD 0.11/gallon in credits (previously ineligible due to ILUC), and canola-based biodiesel could receive around USD 0.23/gallon.
Additionally, the bill explicitly includes animal manure-based fuels as eligible, assigning them specific emissions rates for credit qualification. Finally, 45Z is proposed to be extended from 2027 to 2031, providing additional certainty.
Figure 1, 45Z Credit Value With vs. Without Indirect Land Use Change (ILUC) Consideration
These proposed changes are expected to significantly alter the landscape for clean fuels and reshape the feedstock mix. While overall renewable diesel volumes entering LCFS markets like California might increase (driven partly by the revised 45Z policy and RFS mandates), the composition of feedstocks used is likely to shift. Higher-carbon-intensity crop-based feedstocks that are now eligible under the new bill, such as canola, are expected to increase their market share. Conversely, lower-carbon-intensity waste-derived feedstocks that are now excluded due to their origin, such as used cooking oil from Asia and tallow from Brazil and Australia, would decline.
This potential shift towards a greater proportion of higher-carbon-intensity feedstocks is expected to raise the average carbon intensity of renewable diesel entering these markets, potentially leading to fewer credits generated per gallon in respective LCFS programs and tightening the LCFS credit market, potentially pushing prices higher. While the pool of eligible feedstocks now include Canada and Mexico, the availability of low-carbon-intensity fuels shrinks, as most foreign waste oils and animal fats are excluded, likely increasing the average carbon intensity of fuel in California. An estimated 6.2 billion pounds (equivalent to nearly 3 billion litres of renewable diesel) of foreign feedstock (excluding Canadian and Mexican sourced) were used in US biofuel production in 2024. Under the proposed changes to the 45Z credit, a similar volume would no longer be eligible, highlighting the significant market gap that North American feedstocks like Canadian canola could help fill.
Also, numerous plants in Canada are looking to source feedstock, adding to the overall demand. This strong market signal highlights the need to expand Canada’s feedstock processing capacity to take full advantage of emerging opportunities.
Canada currently has 14 canola crushing and refining plants, with the capacity to process around 13 million tonnes of canola seed annually. Although nearly five new facilities were planned, only one is operational so far due to political uncertainty before the election, US-Canada trade tensions, and limited regulatory support. In addition to these, Canada has about 11 bio-based diesel refineries (Total biodiesel capacity of 700 million litres and 2.3 billion litres of renewable diesel capacity considering Braya, Imperial and Tidewater) either operational or under construction.
Should this bill become law, Canada’s bio-based diesel refineries are likely to see margin pressures due to rising canola prices driven by increased demand. Still, the US is expected to remain a more attractive market for farmers, largely because of its more competitive subsidy programs compared to Canada. In some cases, such as Imperial Oil, Alberta-specific subsidies may help offset these impacts. However, the growing gap in support between the two countries suggests that Canada may need to reassess the competitiveness of its domestic refining sector in response to stronger US incentives.
The development is seen as a positive step for Canadian canola farmers, offering stronger market opportunities driven by increased demand and support from the 45Z tax credit. With the premium available under the proposed 45Z credit, the price of canola could rise by approximately 0.03 USD per pound. Combined with the exclusion of competing feedstocks and the impact of an ambitious Renewable Volume Obligation (RVO), prices could see a further increase of 0.02 to 0.03 USD per pound. However, the rising demand, leading to higher feedstock prices, could divert canola oil away from the food and other industrial and oleochemical markets, where rising prices may begin to result in demand destruction, in turn moderating price rises. There are also ongoing concerns about the enforcement of traceability rules to prevent Canada and Mexico from being used as transshipment hubs for restricted foreign feedstocks. Nonetheless, the bill represents a clear win for farmers, who stand to benefit from improved market access and stronger long-term pricing signals.