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The Clean Fuels Credit, codified under 26 U.S. Code Section 45Z, has quickly become a central focus for businesses pursuing opportunities in the evolving energy sector. Designed to incentivize the production of cleaner transportation fuels, this credit not only benefits fuel producers but has also started attracting interest from companies seeking to purchase credits under the transferability provisions of 26 U.S. Code Section 6418. Initially introduced as part of the Inflation Reduction Act (IRA), the Clean Fuels Credit stands out as one of the few tax incentives that received an extension through 2029 under the One Big Beautiful Bill Act (OBBBA). As the regulatory landscape continues to shift, it is essential for companies to understand both the strategic advantages and the legal requirements associated with this incentive.

This article examines the critical features of the Clean Fuels Credit, assesses its practical impact for businesses, and highlights key legal considerations necessary for maximizing its value.

Clean Fuels Credit Qualifications

Section 45Z Clean Fuels Credits apply to qualified fuel produced between January 1, 2025, and December 31, 2029. The value of the credit is directly linked to the fuel’s greenhouse gas emissions as compared to conventional petroleum fuels, meaning the fewer the emissions, the larger the credit a producer can earn.

Emissions for the 45Z credit are determined using the U.S. Department of Energy’s 45ZCF-GREET (Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies) Model. This model calculates the total greenhouse gas emissions generated throughout the entire lifecycle of the fuel, beginning with the cultivation of feedstock and ending with the combustion of the fuel itself. It considers variables such as transportation methods, agricultural techniques, and processing practices. The result is a carbon intensity (CI) score for each gallon of fuel produced. The lower the CI score, the higher the tax credit available to the producer. The Internal Revenue Service (IRS) issues an annual table that specifies the CI values for various types of fuels, most recently published in Notice 2025-11. Apart from the expansion of the credit period, another noteworthy update under the OBBBA is the exclusion of emissions resulting from indirect land use changes (ILUC)—such as converting additional land to grow feedstocks for biofuels—from the emissions calculation for crop-based fuels, which can lower reported emissions and thereby increase potential credits for biofuel producers.

To qualify for the credit, a fuel must produce less than 50 kilograms of carbon dioxide per unit of energy, about half the emissions of traditional petroleum-based fuels. Meeting this threshold earns a base credit of 20 cents per gallon. However, fuels that achieve greater emissions reductions can earn even more, providing a strong incentive for innovation and cleaner fuel production. The maximum credit for standard biofuels is $1 per gallon (based on the emissions factor), while sustainable aviation fuel qualifies for an enhanced rate of up to $1.75 per gallon, reflecting its strategic importance for decarbonizing the aviation sector.

Eligibility for the 45Z credit is further determined by sales requirements. The fuel must be produced at a qualified facility and sold to an unrelated third party, either for use in blended fuel mixtures or directly in trade or business activities. Alternatively, if the fuel is sold to an unrelated party who then resells it at retail, the producer may still claim the credit.

Finally, there are strict sourcing requirements: all eligible fuel must be produced from feedstocks grown or produced exclusively in the United States, Mexico, or Canada. This condition supports domestic and regional agriculture, ensures supply chain transparency, and aligns the credit with North American climate and economic goals.

Legal Considerations for Sellers and Purchasers of Clean Fuels Credits

Whether you are producing, selling, or purchasing Section 45Z credits, meticulous attention to legal details is essential. Below are key considerations and best practices for all participants in this growing marketplace:

  • Compliance with Emissions Standards: The value and eligibility of Section 45Z credits hinge on accurate lifecycle greenhouse gas emissions calculations, performed using the 45ZCF-GREET model. All parties should ensure fastidious recordkeeping, including data on feedstock sourcing, production methods, and emissions modeling and verification. Well-documented pathways not only substantiate the credit claim but also provide essential protection in the event of IRS audits or transfer disputes.
  • Ensuring a Qualifying Sale: Eligibility for Section 45Z credits depends on specific statutory requirements, including that the fuel be sold to an unrelated party for prescribed uses. Transactional parties should ensure that contracts and sales documentation clearly establish compliance with these requirements. Careful contract drafting—including representations, warranties, and indemnities—can help manage risk and facilitate smoother credit transfers.
  • Prevailing Wage and Apprenticeship Compliance: For purchasers and sellers aiming to access the full value of Section 45Z credits, compliance with prevailing wage and apprenticeship mandates for construction, alteration, or repair work at qualifying facilities is crucial. Comprehensive protocols and documentation supporting adherence to these labor standards can mitigate the risk of credit disallowance and enhance the marketability of credits.
  • Land Use and Regulatory Changes: Recent updates exclude indirect land use change considerations from federal lifecycle emissions calculations for crop-based fuels. However, state incentives and regulations may continue to treat ILUC differently. Ongoing monitoring of both federal and state policy developments is essential to ensure ongoing compliance and to optimize credit eligibility across jurisdictions.
  • Insurance and Verification: The Section 45Z market is still evolving, with many transactions taking place in a novel regulatory context. Tax insurance has become a popular mechanism for mitigating the risks of IRS challenges, modeling errors, or regulatory reinterpretations. Parties should consider tailored insurance solutions and work with experienced counsel and insurance professionals to structure transactions that protect their interests.
  • Change in Laws: The IRS and Department of Energy (DOE) are expected to issue ongoing updates to carbon intensity tables, technical guidance, and compliance requirements. All market participants should maintain flexibility in transactional documents to accommodate future regulatory changes and should regularly consult with legal advisors to remain aligned with the latest developments.

Conclusion

The Section 45Z Clean Fuels Credit offers considerable opportunities for both fuel producers and credit market participants. However, the program’s complexity and the evolving regulatory landscape require careful planning and diligent compliance. By proactively addressing these legal and operational considerations, participants can maximize credit value, minimize risk, and position themselves at the forefront of the clean energy transition.

For more information on the Clean Fuels Credit, compliance strategies, or transactional support, please contact Husch Blackwell’s legal team.