At a May 28, 2026 public hearing, fuel producers, agricultural stakeholders, and environmental credit companies testified before the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), calling for targeted fixes to proposed regulations affecting clean fuel production tax credit under Section 45Z of the Internal Revenue Code of 1986 (Section 45Z Credit).
Established by the Inflation Reduction Act of 2022 (IRA) and subsequently extended through 2029 by the One Big Beautiful Bill Act (OBBBA), the Section 45Z Credit was designed to incentivize cleaner fuel production across the United States by providing a tax credit worth 20 cents per gallon for non-sustainable aviation fuel and 35 cents per gallon for sustainable aviation fuel, which amount increases to $1 per gallon for non-sustainable aviation fuel produced at facilities that satisfy prevailing wage and apprenticeship requirements. Additionally, the OBBBA relaxed eligibility requirements associated with fuel carbon intensity and reduced the maximum per-gallon credit for sustainable aviation fuel from $1.75 to $1 per gallon. However, as the IRS and Treasury work through the regulatory process, a growing chorus of industry voices is warning that key provisions in proposed rules affecting the Section 45Z Credit are creating more uncertainty than clarity. The hearing made clear that while the framework is in place, significant gaps remain.
The Safe Harbor Problem
The proposed rules include safe harbor provisions that allow producers to satisfy the credit’s qualified sale and emissions rate substantiation requirements by relying on purchaser certificates and third-party certifications, rather than independently verifying each transaction or independently recreating lifecycle emissions calculations. On paper, this sounds like a reasonable compliance pathway. In practice, witnesses said, the safe harbor raises more questions than it answers.
Nick Panko of CFO Services, a tax credit consulting firm, identified two issues with the current safe harbor provisions that he argued undermine producers’ ability to rely on a clear compliance standard. First, Panko urged that the proposed rule explicitly confirm that a properly executed purchaser certificate, obtained in good faith and absent actual knowledge of its falsity, fully satisfies the qualified sale safe harbor. Without that confirmation, he warned, IRS examiners could challenge credits even where certificates were obtained legitimately. Second, Panko flagged a structural gap: while one section of the proposed rule references a plus-or-minus-five-percent threshold, the rule is otherwise silent on what level of discrepancy triggers disqualification, leaving producers without a reliable benchmark for compliance. His recommendation was straightforward: the final regulations should clarify that compliance with an applicable safe harbor will be treated as fully sufficient for substantiation purposes, subject only to fraud or material misrepresentation. That approach, he said, would reduce ambiguity during examination, facilitate credit transfers and financing, and promote consistent compliance while preserving the IRS’s ability to address abusive or fraudulent conduct.
Others went further. Joe Jobe of the Sustainable Advanced Biofuel Refiners Coalition argued that the current certification requirement is unworkable for many taxpayers, and he recommended that Treasury allow producers to rely on documentation already required under the Renewable Fuel Standard (RFS), such as invoices and product transfer documents, as an alternative when purchaser certificates cannot be obtained through no fault of the producer.
Daniel Tevis of California Bioenergy, a methane gas system developer, proposed an entirely different approach: a new qualified sale safe harbor tied to the generation of low-carbon fuel standard credits under state low-carbon fuel programs or renewable identification numbers under the RFS. His reasoning was that if a sale already generates those regulatory records under penalty of perjury, requiring a separate purchaser certificate is duplicative.
Mass Balance vs. Book-and-Claim: A Fork in the Road
Beyond safe harbor issues, the hearing surfaced a fundamental disagreement about how low-carbon grain attributes should be tracked through the supply chain. The proposed regulations are silent on this question, leaving unresolved a core issue that will determine whether millions of farmers can participate in the credit. Two competing approaches emerged from the testimony: mass balance and book-and-claim.
Under a mass balance system, physical grain must be traced directly from the farm to the biofuel facility, maintaining an auditable link between the crop and the resulting fuel. Book-and-claim, by contrast, decouples the carbon attribute from the physical commodity, allowing a farmer to sell grain to any buyer while separately transferring the verified low-carbon attribute to a biofuel producer through a registry, similar to how renewable energy certificates function in electricity markets.
Mitchell Hora of Continuum Ag argued that mandatory mass balance accounting would force farmers to restructure their grain logistics just to participate in a program meant to reduce emissions, which he said would be counterproductive to the credit’s purpose. Matt Frostic of the National Corn Growers Association agreed, warning that physical segregation requirements would create enormous logistical complications and could unintentionally shut small and medium-sized farms out of the program.
Ryan Pearcy of Arva Intelligence pushed back, arguing that mass balance is the only approach that prevents the fraud risks inherent in book-and-claim accounting, asserting that linking physical bushels to gallons of biofuel produced is the only path to absolute auditable fidelity.
Dani Charles of Veriflux raised a different concern entirely: regardless of which system Treasury selects, the reliability of that system will only be as strong as the platforms used to track it, and the proposed regulations currently set no minimum standards for those platforms. He also warned about foreign-operated record keepers holding compliance data hostage and demanding payment for its release, which he characterized as extortion dressed up as a service that has no place near a federal tax credit program.
The Process Fuel Dispute: Did the Treasury Overstep?
A third issue drew pointed testimony: whether the proposed regulations go beyond what Congress authorized in the statute. Section 45Z allows producers to claim a credit based on the emissions rate of the transportation fuel they produce. Some producers use process fuels with very low or negative carbon emissions. OBBBA prohibits negative emissions rates for transportation fuels, but the proposed regulations extend that prohibition to process fuel inputs used in production as well.
Brent Bobsein of CNX Resources argued that the statutory prohibition specifically and unambiguously applies only to transportation fuels, not to process fuel inputs, and that the extension in the proposed rule lacks congressional authorization.
Martina Simpkins of Anew Climate agreed, arguing that the statute’s prohibition targets the emissions rate of the transportation fuel itself, not the emissions rate of every input used to produce it. Allowing a process fuel with a negative emissions rate to lower the overall emissions score of the produced fuel, she contended, is precisely the incentive Congress intended to create to reward cleaner production methods.
Katherine Panczak of DT Midstream offered a middle-ground proposal: allow producers to voluntarily waive their own credit on a process fuel so that the carbon benefit flows through to the produced fuel instead.
Unresolved Questions
The unresolved questions surfaced at the May 28 hearing carry direct financial and operational consequences for fuel producers, agricultural stakeholders, and investors across the supply chain. While these regulations are not in the final form, depending on how Treasury and the IRS resolve the safe harbor provisions, supply chain tracking methodology, and process fuel prohibition scope in the final regulations, producers may need to restructure existing transactions, revisit capital investment decisions, and overhaul compliance programs on compressed timelines. Entities that engage proactively now—by evaluating their current credit positions, identifying exposure to regulatory outcomes, and developing contingency strategies—will be best positioned to capture the full value of the Section 45Z Credit while mitigating downside risk. Wary producers and stakeholders should consult with qualified tax counsel to assess how these regulatory developments may affect their operations and how to prepare for final guidance.
Contact us
If you have any questions regarding this proposal’s implications for tax credits, please contact Doug Jones, Alex Okafor, Joseph Munoz, or your Husch Blackwell attorney.
Source: Browne, M. K. (2026, May 29). Safe harbor ambiguity seen as clouding clean fuel credit. Tax Notes. Doc 2026-15336.