45Z is set to take effect on Jan. 1, 2025. While the 45Z credit has the potential to significantly boost sustainable aviation fuel (SAF) production, the current lack of detailed guidance is causing some uncertainty in the industry.
Producers and investors are eagerly awaiting further clarification from the Treasury Department to make informed decisions about SAF production and investments.
There are a few key reasons why guidance on the 45Z clean fuel production tax credit program is taking a long time to be issued:
• Complexity of the program: The 45Z credit is a new, technology-neutral credit based on carbon intensity scores, which is more complex than previous biofuel tax credits. Developing the emissions rate tables and carbon intensity scoring methodology is technically challenging.
• Interagency coordination: The Treasury Department and IRS need to coordinate with other agencies like the Department of Energy to develop the emissions rate tables and carbon intensity methodologies.
• Stakeholder input: The government is likely taking time to gather and incorporate input from various industry stakeholders on how to structure and implement the credit.
Technical details: Determining specifics like eligible fuels, feedstocks, and how to calculate and verify carbon intensity scores requires careful consideration.
• Transition from existing credits: The 45Z credit will replace several existing biofuel credits in 2025, so the transition needs to be carefully managed.
• Limited resources: The Treasury and IRS have been working on implementing many new tax provisions from recent legislation, potentially straining their resources.
• Desire for accuracy: Given the credit’s importance for clean fuel investment, the government likely wants to ensure the guidance is comprehensive and accurate before releasing it.
Impact of delay. The lack of full guidance is causing uncertainty for fuel producers trying to plan investments and production for when the credit takes effect in 2025. However, the government has issued some initial guidance on registration requirements to help producers prepare.
The 45Z Clean Fuel Production Credit differs from previous fuel production credits in several ways:
• Technology-neutral approach: Unlike previous credits that targeted specific types of fuels, the 45Z credit is technology-neutral and applies to any transportation fuel that meets the emissions reduction criteria.
• Carbon intensity-based: The credit amount is calculated based on the fuel’s carbon intensity score, rather than a flat rate per gallon. Fuels with lower emissions receive a larger credit.
• Producer credit vs blender credit: The 45Z credit goes to the fuel producer, whereas some previous credits like the $1/gallon biodiesel tax credit went to fuel blenders.
• Emissions rate requirement: To qualify, fuels must have an emissions rate no greater than 50 kg of CO2e per mmBTU.
• Registration requirement: Producers must be registered with the IRS before claiming the credit, which is a new requirement.
• Limited duration: The 45Z credit is currently set to apply only to fuels produced from 2025-2027, whereas some previous credits were repeatedly extended.
• Replaces multiple credits: The 45Z credit will replace several existing fuel credits that are set to expire, including those for biodiesel, renewable diesel, and alternative fuels.
• Potentially larger credit amounts: For fuels meeting certain labor requirements, the credit could be up to $1.75 per gallon for sustainable aviation fuel or $1.00 per gallon for other fuels, which is potentially higher than some previous credits.
The 45Z Clean Fuel Production Credit has several important implications for sustainable aviation fuel (SAF) production:
• Incentivizes SAF production: The 45Z credit provides a significant financial incentive for producers to manufacture SAF, with a maximum credit of $1.75 per gallon for aviation fuels that meet certain requirements.
• Technology-neutral approach: Unlike previous credits that targeted specific fuel types, the 45Z credit is technology-neutral. This means any SAF that meets the emissions reduction criteria can qualify, potentially spurring innovation in SAF production methods.
• Carbon intensity-based: The credit amount is calculated based on the fuel’s carbon intensity score. SAF with lower emissions receives a larger credit, encouraging producers to minimize the carbon footprint of their production processes.
• Replaces previous credits: The 45Z credit will replace several existing fuel credits set to expire, including the current sustainable aviation fuel credit (Section 40B).
• Registration requirement: SAF producers must register with the IRS before claiming the credit, which is a new requirement compared to previous fuel credits.
• Emissions reduction threshold: To qualify for the credit, SAF must have an emissions rate no greater than 50 kg of CO2e per mmBTU.
• Potential for higher credit amounts: For SAF meeting certain labor requirements, the credit could be up to $1.75 per gallon, which is potentially higher than some previous credits.
• Uncertainty due to delayed guidance: The lack of final guidance on how to calculate carbon intensity scores is causing uncertainty for SAF producers and potentially delaying investments in new production facilities.
• Impact on feedstock choices: The credit may influence which feedstocks are used for SAF production, depending on how carbon intensity is calculated for different agricultural inputs.
• Transition period: The shift from the current SAF credit (Section 40B) to the new 45Z credit in 2025 is creating some challenges for producers in planning future production and sales.
What is 45Z?
The new credit will be based on emissions rates, providing $1.75 minus $.035 per kg of CO2e per mm BTU for SAF with emissions below 50%. This shift may reduce incentives for agricultural feedstocks, favoring waste-based materials. The 45Z program also establishes a tax credit for biodiesel and renewable diesel, which will receive $1.00 minus $.02 per kg of CO2e per mm BTU, indexed to inflation. The GREET model will be used for CI scoring.
The potential 45Z credits for soy-based biofuels are lower than the current biomass-based diesel tax credit, with most renewable diesel receiving additional Low Carbon Fuel Standard credits in California. The 45Z program may further increase demand for waste-based feedstocks over agricultural ones.
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