Biofuel producers in the US could see a major boost under a sweeping tax and budget reconciliation bill unveiled by House Republicans this week. Among the most consequential provisions is a proposed extension of the 45Z Clean Fuels Production Tax Credit, a key incentive for low-carbon transportation fuels that is set to replace the former Blenders Tax
Credit beginning in 2025. Initially created under the Inflation Reduction Act and scheduled to expire in 2027, the 45Z credit would be extended through the end of 2031 under the House Ways and Means Committee’s newly released 389-page tax package.
45Z Clean Fuels Production Tax Credit Extension
The draft legislation—dubbed the “big, beautiful bill” by President Donald Trump—is part of a broader Republican effort to extend Trump-era tax cuts while scaling back significant climate and energy provisions championed by Democrats in 2022. The proposal introduces several key changes to the 45Z credit. It limits eligibility to fuels made from feedstocks grown or produced in the US, Canada, or Mexico, reclassifying Canadian and Mexican feedstocks as “domestic.” This reclassification broadens eligibility while excluding certain imported feedstocks, such as used cooking oil from Asia. The bill also removes indirect land use change (ILUC) emissions from lifecycle greenhouse gas calculations. In addition, fuels derived from animal manure—such as dairy, swine, and poultry waste—would receive specific emissions rates, making them eligible for the credit.
Impact on California's LCFS Market
These changes are expected to have a bullish impact on California’s LCFS market. While total renewable diesel volumes entering California are projected to rise, mostly driven by Renewable Fuel Standard (RFS) mandates and partly the revised 45Z policy, the composition of those fuels is likely to shift. Higher-carbon-intensity crop-based fuels like Canola and soybean oil are expected to increase in market share, while lower-carbon-intensity waste-derived feedstocks—such as used cooking oil from Asia and tallow from Brazil and Australia—would decline. This change could raise the average carbon intensity of renewable diesel entering California, decreasing the number of LCFS credits generated per gallon and tightening the credit market, potentially pushing prices higher.
Benefits for Canola-Based Renewable Diesel
Canola-based renewable diesel stands to benefit significantly. Its limited adoption in the US market has been driven more by high carbon intensity under existing 45Z rules—which penalize ILUC—than by its foreign origin. The removal of ILUC penalties would lower Canola’s carbon intensity, improving its competitiveness. The reclassification of Canadian feedstocks as domestic would further allow Canola from Canada to qualify fully for the credit, potentially expanding its role in the renewable diesel supply chain. We note that while the pool of eligible feedstocks expands, the availability of low-carbon-intensity fuels shrinks, as most foreign waste oils and animal fats are excluded. This is likely to increase the average carbon intensity of fuel in California, tightening LCFS balances.
Some factors could moderate this effect. Higher demand for soybean and Canola oil may drive up feedstock prices, possibly slowing use for biofuels. There are also concerns about Canada and Mexico becoming transshipment points for restricted feedstocks, depending on how rigorously traceability rules are enforced. Ultimately, while the 45Z credit shapes the carbon profile of fuel supplies, the 2026 RFS volume targets will remain a more critical force driving total renewable diesel imports into California.
Changes to Other Clean Energy Tax Credits
Beyond Renewable diesel, the removal of ILUC penalties would also enhance subsidies for low-carbon-intensity ethanol, potentially increasing its supply to California. However, the expansion of lower-carbon ethanol faces challenges, particularly the ongoing legal and regulatory barriers to building CO₂ pipelines in the Midwest—critical infrastructure for ethanol producers aiming to reduce their carbon scores.
Further, the Ways and Means Committee has recommended several alterations to clean energy tax credits. These include the early expiration of clean vehicle tax credits under Section 30D for both new and used EVs, set to end on December 31, 2026, instead of December 31, 2032. Commercial clean vehicle credits under Section 45W will be terminated, except for binding contracts signed before May 12, 2025, for vehicles placed in service prior to January 1, 2033. Tax credits for alternative fuel refueling property under Section 30C will end by December 31, 2025, instead of December 31, 2032. Energy-efficient home improvement credits under Section 25C and residential clean energy tax credits under Section 25D would also expire on December 31, 2025, earlier than previously planned.
Additionally, clean electricity production tax credits under Section 45Y and investment tax credits under Section 48E, as well as those for energy properties under Section 48, will begin phasing out starting January 1, 2029. Tax credits for zero-emission nuclear power under Section 45U and hydrogen production under Section 45V are set to phase out, with clean hydrogen production tax credits under Section 45V ending on January 1, 2026, for facilities beginning construction after December 31, 2025. Foreign ownership restrictions are applied to many of these credits.
Lastly, CO2 sequestration tax credits under Section 45Q will be restricted for foreign entities starting from the date the bill is enacted. Meanwhile, the House Energy and Commerce Committee’s draft bill includes a proposal to rescind Section 60108 of the Inflation Reduction Act. That section had allocated USD 15 million to the EPA for testing fuels and fuel additives, analyzing lifecycle greenhouse gas data, and evaluating environmental and community impacts. These funds were not directed toward administering the RFS but were intended to support science and analysis around transportation fuels.
On the agriculture front, the House Agriculture Committee is expected to propose increased support for farmers by expanding crop insurance options and enhancing the farm bill’s commodity safety net. These boosts are expected to be partially offset by reductions to the Supplemental Nutrition Assistance Program (SNAP), with some program costs shifted to state governments.
Proposed Revisions by House Committees
All three committees—Ways and Means, Energy and Commerce, and Agriculture—are scheduled to hold markup sessions this week to debate and revise the proposed bill. The marked-up committee proposals will be compiled into a reconciliation bill and head to the House for a floor vote.
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