Treasury and IRS release guidance on 45Z

In Washington, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) released guidance on the Clean Fuels Production Credit (section 45Z) last Friday. Section 45Z provides a tax credit for the production of transportation fuels with lifecycle greenhouse gas (GHG) emissions below certain levels. The credit is in effect in 2025 and is for sustainable aviation fuel (SAF) and non-SAF transportation fuels.

The guidance was informed by extensive input from stakeholders and the public as well as collaboration between Treasury, IRS, and expert agencies. The guidance includes both a notice of intent to propose regulations on the section 45Z credit and a notice providing the annual emissions rate table for section 45Z, which refers taxpayers to the appropriate methodologies for determining the lifecycle GHG emissions of their fuel. In conjunction with the guidance, the Department of Energy will release the 45ZCF-GREET model for use in determining emissions rates for 45Z in the coming days.

Section 45Z provides a per-gallon (or gallon-equivalent) tax credit for producers of clean transportation fuels based on the carbon intensity of production. It consolidates and replaces pre-Inflation Reduction Act (IRA) credits for biodiesel, renewable diesel, and alternative fuels, and an IRA credit for sustainable aviation fuel.  Like several other IRA credits, 45Z requires Treasury to establish rules for measuring carbon intensity of production, based on the Clean Air Act’s definition of “lifecycle greenhouse gas emissions.”

Treasury and the IRS intend to provide that the producer of the eligible clean fuel is eligible to claim the 45Z credit. Consistent with the statute, compressors and blenders of fuel would not be eligible.

Under section 45Z, a fuel must be “suitable for use” as a transportation fuel. Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible.

Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable. Additionally, natural gas alternatives such as renewable natural gas (RNG) would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.