After prolonged delay, the US Department of the Treasury and the Internal Revenue Service (IRS) on February 3, 2026 released proposed regulations for the 45Z tax credit, incorporating statutory changes presented under the One Big Beautiful Bill (OBBB) in mid-2025. The proposed rules will be subject to a 60-day public comment period following publication in the Federal Register, with a public hearing scheduled for 28 May. To claim the credit, producers must be registered with the IRS at the time of production using Form 637.
Scope of the 45Z credit and core eligibility requirements
The 45Z Clean Fuel Production Tax Credit applies to eligible transportation fuels produced in the US from January 1, 2025, and sold by the end of 2029. Note, 45Z credit cannot be claimed in conjunction with the Section 45Q carbon capture, utilization, and storage credit. To qualify, fuels must meet sustainability standards, lifecycle emissions thresholds, coprocessing limits, and anti-double-counting rules. Production must occur at an eligible US facility, including US territories, with sales to an unrelat ed party in a qualifying
transaction. Starting in 2026, there is a "domestic" feedstock requirement, whereby eligible fuels must use feedstocks sourced from the US, Canada, or Mexico, increasing requirements for feedstock traceability and documentation.
Further, eligible fuels must be suitable for use in road vehicles or aircraft and achieve lifecycle emissions of 50 kg CO₂e per mmBtu or less. Fuels produced through biomass coprocessing with non-biomass inputs are not eligible, nor are fuels made from another fuel that has already claimed the 45Z credit, reinforcing safeguards against double counting. The IRS explicitly states that fuels made primarily from other qualifying transportation fuels are generally ineligible, such as SAF from ethanol or hydrogen from RNG. However, using transportation fuels as minor process inputs does not automatically disqualify eligibility.
Credit values, labor requirements, and the end of the SAF premium
Credit values depend on fuel type, production year, and labor compliance. For fuel produced through December 31, 2025, the base credit is USD 0.20 per gallon for non-aviation fuels and USD 0.35 per gallon for SAF, with enhanced values of up to USD 1.00 and USD 1.75 per gallon, respectively, for facilities meeting prevailing wage and apprenticeship requirements. Starting January 1, 2026, the SAF premium is eliminated under the OBBB. Credit rates are indexed to inflation; 2025 rates are published, while the 2026 adjustment
factor has not yet been released.
Lifecycle emissions modeling, feedstock treatment, and market implications
In line with the OBBB, the proposal excludes indirect land use change from lifecycle emissions calculations for fuels produced after 2025. This will result in lower CI scores for critical feedstocks such as soybean oil and has implications for the clean fuel standards programs in the US and Canada. An active consultation is underway for the Canada CFR to better align the CFR incentives with the US 45Z. It also indicates that fuels made from animal manure may receive negative lifecycle emissions scores starting in 2026, potentially improving the economics of waste-based pathways.
Emission rates could be calculated using annual emissions tables published by Treasury and the IRS or by provisional emissions rate determination. The proposal does not allow emissions rates to be fixed at construction start, instead requiring annual updat es. This keeps credit values aligned with evolving data. The proposal also distinguishes between SAF and non-SAF fuels for modeling purposes, directing non-SAF
fuels to rely on the latest version of the US Department of Energy’s GREET model while SAF emissions must align with the most recent ICAO CORSIA methodologies or similar approaches.
For renewable natural gas, the IRS clarifies that the credit is claimed by the entity that produces the RNG, not by downstream parties that compress or distribute it. Similarly, for liquid fuels, the credit belongs to the producer rather than the blender. Electricity is explicitly excluded from eligibility under 45Z.
Market implications, investment signals, and remaining uncertainties
The rules meaningfully reduce structural uncertainty but leave project economics highly sensitive to near-term regulatory follow-through. Final emissions modeling, feedstock traceability requirements, and the shift to annually updated CI scores will largel y determine which pathways clear the eligibility threshold and how durable credit values prove over time. At the same time, the post-2025 removal of the SAF premium and unresolved interactions with other federal incentives compress upside and raise the bar for capital discipline. Until final rules and modeling tools are released, investment decisions are likely to remain cautious.
Contact us if you would like to know more about our clean fuels market intelligence services.
You may also be interested in our February Learning Series: Clean Fuels Markets in Practice: Turning Carbon Complexity into Revenue.
