The Emerging §45Z Clean Fuel Production Credit

The Emerging §45Z Clean Fuel Production Credit: A Buyer's Guide to Opportunity, Diligence, and Risk Management

July 2026

Executive Summary

The federal clean fuel production credit under Internal Revenue Code §45Z is rapidly emerging as one of the most significant transferable tax credit opportunities in the market. While much of the transferable tax credit market has historically focused on solar investment tax credits (ITCs) and renewable electricity production tax credits (PTCs), §45Z introduces a fundamentally different asset class: transferable credits generated by the production and sale of low-carbon transportation fuels.

For buyers, §45Z presents a unique opportunity. Unlike solar or storage transactions, where diligence often centers on construction, basis, and tax qualification, §45Z transactions require buyers to evaluate feedstock sourcing, lifecycle greenhouse gas emissions calculations, production data, fuel sales, and regulatory compliance. As a result, successful participation in the 45Z market will likely require a different diligence framework than many buyers currently employ.

The market's growth potential is substantial. The credit will support ethanol, renewable diesel, renewable natural gas (RNG), and sustainable aviation fuel (SAF) producers through 2029, while market participants are already reporting growing volumes of anticipated 45Z credits entering the transfer market.

What Is the §45Z Credit?

Section 45Z was enacted as part of the Inflation Reduction Act and subsequently modified by the One Big Beautiful Bill Act (OBBBA). The credit provides an incentive for taxpayers that produce qualifying clean transportation fuel after December 31, 2024, in the United States and sell that fuel before December 31, 2029.

The Section 45Z credit replaces several previous fuel incentives like the income tax credit, excise tax credit, and excise tax payment that existed for different types of biofuels and other alternative fuels like biodiesel, renewable diesel, compressed natural gas, second generation biofuel, and sustainable aviation fuel, also known as SAF.

Unlike prior fuel incentives that separately rewarded specific fuel types such as biodiesel or sustainable aviation fuel, §45Z adopts a technology-neutral framework based on lifecycle greenhouse gas emissions. The lower the fuel's carbon intensity, the larger the available federal tax credit.

This framework creates a significant incentive for innovation in feedstocks, production methods, carbon capture integration, and operational efficiency. It also means that tax credit eligibility is no longer simply a matter of producing a qualifying fuel, it depends heavily on supporting emissions calculations and regulatory compliance.

Why Buyers Should Pay Attention

Several market factors make §45Z particularly attractive for tax credit purchasers.

First, the credit is transferable under Section 6418, allowing producers to monetize credits through direct sales to corporate taxpayers. As a result, many fuel producers who historically had limited access to tax equity financing can now participate in the transferable credit market.

Second, unlike investment tax credits under Sections 48 and 48E, 45Z is a production credit and generally avoids the five-year Section 50 recapture regime that often concerns buyers in ITC transactions. This has led some market participants to view production-based credits as having a cleaner post-closing risk profile.

Third, the underlying industries capable of generating 45Z credits, particularly ethanol and renewable diesel, already operate at significant scale. Existing production infrastructure means that 45Z may produce substantial annual credit volumes without requiring years of project development and construction.

The Largest Expected Sources of 45Z Credits

Although the market remains in its early stages, several fuel sectors are expected to dominate credit generation.

Ethanol

We expect ethanol producers to become the largest source of transferable 45Z credits. The US ethanol industry already produces approximately 15-16 billion gallons annually, which makes it the largest domestic biofuel market. This existing production capacity, combined with better lifecycle emissions profiles due to operational improvements and use of lower CI corn feedstock, positions the ethanol industry to generate significant annual credit volume. Another factor is OBBBA removal of Indirect Land Use Change impacts from 45Z scoring which was a major improvement for crop-based fuels, particularly corn ethanol. Before that change, corn ethanol frequently carried significant ILUC penalties in lifecycle models.

Renewable Diesel

Renewable diesel facilities continue to benefit from favorable carbon intensity characteristics and are expected to remain major participants in the 45Z market. This is due to the existing infrastructure and chemical resemblance (interchangeability) with traditional diesel which positions it as one of the likely top performers within the 45Z credits. Renewable diesel tends to generate higher-value credits per gallon and is produced by large, sophisticated operators with established monetization infrastructure. OBBBA removal of ILUC penalties also significantly benefited biomass diesel which was a major development for the sector. Another major improvement was DOE’s June 2026 release of the updated 45ZCF-GREET model implementing OBBBA changes which allows credit calculations to accurately reflect ILUC removal, updated CI scoring, and eligible feedstock. Without an updated GREET model, many credit transactions were previously hard to price and execute.

Sustainable Aviation Fuel (SAF)

Although OBBBA eliminated the previous standalone SAF incentive structure, SAF producers remain eligible under the broader 45Z framework and are expected to generate meaningful credits. We observe a growing demand from SAF end-users, both for the actual fuel and the certificates that accompany it. Airlines continue to sign long-term SAF offtake agreements despite SAF’s elevated costs. Projections place SAF demand exceeding supply by 2030, driven by airline’s net-zero goals, increasing regulatory mandates, and voluntary decarbonization targets. We observe increasing participation by corporations through SAF certificates and book-and-claim markets, notably, the 2026 agreement between American Airlines and Google for 35M gallons of SAF supplied by Valero over 3 years, which is the largest publicly announced SAF transaction between an airline and a single corporation.

Renewable Natural Gas (RNG)

Renewable natural gas producers may represent a significant future source of transferable credits, particularly where projects can demonstrate favorable emissions profiles and satisfy applicable documentation requirements. This is due to the fact that renewable natural gas can generate some of the highest credit values per unit of fuel produced thanks to the 45Z credit that directly rewards lower lifecycle emissions.

Understanding the Key Risks

The primary risk in a 45Z purchase frequently revolves around data integrity.

The central questions aren't about whether a project will be built and perform, but whether the fuel qualifies in the first place: Is it eligible? Are the emissions calculations accurate? Was it produced and sold as claimed? And can the producer back up every assumption that went into the credit calculation? Answering these questions accurately requires diligence and technical expertise that looks quite different from what buyers are used to in other credit types.

Diligence Area #1: Carbon Intensity and Emissions Calculations

The most important diligence component in any 45Z transaction is validating the emissions calculations used to determine the credit amount.

Treasury's proposed regulations devote substantial attention to emissions-rate calculations, annual emissions-rate tables, certification procedures, and related reporting obligations. Because credit value depends directly on lifecycle greenhouse gas emissions, any error in these calculations can materially affect the amount of the allowable credit.

Buyers should plan on an independent engineering review, validation of the lifecycle assessment, and a close look at the carbon intensity model itself, along with the feedstock emissions assumptions, how co-products are treated, and the underlying workpapers and calculations. This requires technical, project-finance-level diligence, and it's not something that can be shortcut.

Diligence Area #2: Feedstock Eligibility

One of the most consequential changes made by OBBBA was the limitation of eligible feedstocks generally to those produced or grown within the United States, Canada, or Mexico.

That makes feedstock origin a major diligence focus. Diligence must look at origin documentation, supplier contracts, chain-of-custody records, inventory tracking controls, and the producer's internal compliance procedures. Given the volume of agricultural and commodity inputs often used in fuel production, this area should be a significant audit focus.

Diligence Area #3: Production and Sales Verification

45Z requires actual production and completed sale of qualifying fuel. Buyers should accordingly verify that the fuel was produced and sold in the quantities reported by the credit calculation. That means reviewing production reports, operational records, metering data, sales invoices, revenue records, customer contracts, and inventory reconciliation reports to make sure the numbers hold up.

Diligence Area #4: Registration Requirements

The proposed regulations require taxpayers claiming 45Z credits to be properly registered with the IRS using Form 637 for certain excise-tax activities. Failure to maintain required registrations may jeopardize eligibility. Buyers should confirm registration status and timing, check entity ownership consistency, and verify compliance with applicable filing obligations. This verification should occur before signing and before funding.

Diligence Area #5: Foreign Entity and Supply Chain Risk

OBBBA introduced prohibited foreign entity (PFE) restrictions that may affect 45Z eligibility. While future guidance is still evolving, buyers should evaluate ownership structures, supply chains, and key counterparties for potential compliance concerns. Contractual representations should cover PFE status, foreign ownership, control rights, material supply relationships, and ongoing compliance obligations. Because the rules in this area are still taking shape, it deserves heightened attention.

Structuring the Transaction

Given the unique risks associated with 45Z credits, transaction documents should be tailored specifically to fuel-related credits.

Recommended provisions include:

Enhanced Tax Representations

The seller should represent the accuracy of the emissions calculations, the eligibility of the feedstocks used, proper production and sale of the fuel, compliance with registration requirements, and the absence of any prohibited-foreign-entity issues.

Indemnification

The indemnity package should specifically address credit disallowance and credit reduction, along with interest, penalties, professional defense costs, and the possibility of recalculated emissions rates.

Information Rights

Throughout the applicable IRS statute of limitations period, buyers should retain access to production records, audit responses, emissions calculations, third-party and pathway reports, and supporting documentation generally.

Insurance

For larger transactions, tax credit insurance may provide an additional layer of protection against certain qualification risks. However, insurers are likely to focus heavily on emissions methodology and substantiation controls.

Market Pricing Considerations

Early market data suggests growing buyer interest in production-based credits such as 45X and 45Z. Buyers often perceive production credits as having fewer recapture-related concerns than investment tax credits.

However, premium pricing should not be assumed.

Credits with weak documentation, weak evidence for carbon intensity assumptions, uncertain feedstock sourcing, insufficient operational records, or limited indemnity support may trade at a discount relative to credits with solid evidentiary backing. Ultimately, pricing will likely reflect both tax value and documentation quality.

Conclusion

Section 45Z has the potential to become one of the largest segments of the transferable tax credit market through 2029. Existing fuel infrastructure, transferability under Section 6418, and increasing corporate buyer participation create a compelling market opportunity.

For buyers, however, success will depend on disciplined diligence. Unlike solar and storage transactions, where risks often center on construction and qualification, 45Z requires buyers to understand emissions accounting, feedstock sourcing, production verification, and regulatory compliance. The most valuable credits may not necessarily be those with the largest nominal value, but rather those supported by the strongest documentation and risk management framework.

In short, 45Z should be viewed not simply as another transferable credit, but as a credit whose value is fundamentally tied to the quality of the underlying documentation. Buyers that adapt their diligence processes and employ help from technical renewables experts accordingly will likely be best positioned to capitalize on this emerging market.