What is §45Z?
Section 45Z establishes the Clean Fuel Production Credit. It is a newly modified federal income tax credit for clean fuel production. It applies to clean transportation fuel produced domestically and sold between January 1, 2025 and December 31, 2029. The Clean Fuel Production Credit is divided into two categories:
- sustainable aviation fuel (SAF) and
- non-SAF transportation fuel.
To qualify for the credit, any clean transportation fuel produced after December 31, 2025, must come from feedstocks either produced or grown in the United States, Mexico, or Canada.
The value of the credit will depend on the fuel type and its lifecycle greenhouse-gas emissions rate relative to a statutory baseline. In simplified terms, the cleaner the fuel pathway, the larger the credit. (I.R.C. §45Z(a), (b), (c), (e).)
For a high-level rule of thumb:
- Non-SAF transportation fuel starts with a lower statutory amount.
- Sustainable aviation fuel (SAF) starts with a higher statutory amount.
- If prevailing wage and apprenticeship rules are satisfied, the credit can be higher.
- The final number will still depend on the emissions rate formula. (I.R.C. § 45Z(a), (b), (f).)
Before later legislative changes, §45Z was originally set to cover fuel produced after 2024 and before 2028. 2025 OBBBA changes preserved and extended 45Z rather than repealing it, which is why §45Z remains so relevant to ethanol, renewable diesel, and SAF markets. (I.R.C. § 45Z(g) as originally enacted; mid-2025 legislative summaries of the reconciliation package.)
What “transferability” means for §45Z
Transferability for §45Z means the producer can elect under §6418 to transfer all or part of the credit to an unrelated taxpayer in exchange for cash. The buyer then claims the credit on its own tax return. The cash paid for the transfer is generally not taxable income to the seller and not deductible by the buyer. (I.R.C. § 6418(b), (c), (g); Treas. Reg. § 1.6418-2.)
What OBBBA Changed
First, OBBBA treated 45Z more favorably than many market participants expected when broader clean energy credits were being reworked. In market terms, that signals that clean fuels retain meaningful political support even in a more skeptical tax policy environment. That is important for buyers because they care not only about whether a given 2026 credit is valid, but also whether the market will still exist in later years. The OBBBA changes matter because they improved the market’s confidence that §45Z has bipartisan support which makes it likely that market for these credits is durable compared to other credits.
Second, OBBBA provides an incentivize for operational efficiency and carbon intensity improvement for producers because the lower the carbon-intensity score, the larger the credit can be generated under the statutory formula. Producers have a reason to spend money on plant optimization, cleaner processes, carbon capture, lower emissions energy sources, feedstock improvements, and other measures that result in lower carbon intensity scores. That means OBBBA did more than preserve the tax benefit; it sharpened producer incentives to make incremental improvements that can increase transferable credit amount. In market terms, supply base may expand not only because more producers participate, but because participating producers will try to earn larger credits.
Third, OBBBA backing of §45Z credits indicates bipartisan support. Although they were enhanced by a Republican backed bill, §45Z credits existed previously. OBBBA pushed 45Z further toward a domestic fuels and agriculture policy, rather than a purely climate-oriented program. That matters because it broadened the coalition behind the credit. A credit associated with rural economies, refining, agriculture, and transportation fuels draws support from constituencies that do not always align with the broader clean-energy market.
§45Z market maturity and pricing
For buyers, one of the most attractive aspects of §45Z is the maturity of this fuel market compared to other credits. As compared to §45X, §45Z projects have been producing fuel for a long time. The players in this market are very liquid, profitable companies that have existed for some time. Now they can sell §45Z credits to third parties through transferability introduced in January 2025 and reinforced through OBBBA.
The above, added to the fact that producers now have a reason to spend money towards increasing efficiency to drive larger credits, should result in highly competitive supply with improved pricing and credit size for buyers.
§45Z Diligence Aspects to Consider
§45Z is a production tax credit based on qualifying production, calculated annually, and transferred under the same Section 6418 framework that governs other eligible production tax credits. As such, it has the same lower risk than other production credits compared to investment tax credits (ITCs), and there's no five-year recapture period. But the diligence is different because the asset is different. The due diligence looks different because §45Z producers are not making widgets, solar panel components, or electricity. They produce clean fuels.
A §45Z buyer’s due diligence includes analyzing fuel qualification, emissions methodology, and production data. Generally speaking, due diligence for §45Z should answer the following questions:
- What fuel was produced, at what facility, and in what volume?
- Was it sold in a qualifying manner for a qualifying use?
- What lifecycle greenhouse gas emissions rate applies to that pathway?
- What methodology and supporting data were used to determine the carbon-intensity score?
- What feedstocks were used, and can the seller prove sourcing and chain of custody?
- If the producer is claiming the higher wage and apprenticeship adjusted credit rate, do they have proper documented support?
The most important aspect to be mindful of during due diligence for a §45Z transfer is usually overstatement of the credit. If the underlying credit amount is overstated because the emissions rate was wrong, the fuel did not qualify, the sale requirement was not met, or the documentation is deficient, the IRS can pursue the transferee for the excessive amount. That is why proper technical diligence, with special focus on carbon intensity scoring matters so much.
Bottom line for buyers
The buyer case for §45Z after OBBBA is straightforward.
This is a transferable credit tied to an established operating industry. The underlying sellers are often mature companies. The credits are liquid because they are transferable under Section 6418. Pricing and credit size will likely continue to improve because producers now have a direct incentive to improve carbon intensity and grow credit value. The diligence is specialized, which is why engaging experienced specialized advisors is crucial. Due diligence should consider: carbon intensity scoring, feedstock validation, fuel qualification, and production support. §45Z should appeal to many tax credit buyers because it’s a production credit with no classic ITC recapture period.
