Section 45Z Update: Clean Fuel Production Credit Regulations Proposed

Long-awaited proposed regulations under Section 45Z of the Internal Revenue Code were released, establishing the first comprehensive regulatory framework for the Clean Fuel Production Credit. The credit was enacted under the Inflation Reduction Act and later modified by the One Big Beautiful Bill Act (OBBBA).The proposed rules provide clarity on how the credit may work.

The regulations address a wide range of issues, including:

• Facility qualification
• Lifecycle emissions methodologies
• Registration requirements
• Credit calculation mechanics
• Extensive substantiation obligations

Together, these rules significantly influence how clean fuel producers evaluate investments, structure operations, and manage compliance for fuel produced beginning January 1, 2025.

Overview of the Section 45Z credit

Section 45Z provides a per gallon tax credit for transportation fuel produced at a qualified facility in the United States and sold to an unrelated party for qualifying uses. The amount of the credit is calculated by multiplying:

• The number of gallons of qualifying fuel sold, times
• The applicable base credit rate (or an increased rate if prevailing wage and apprenticeship requirements are met), times
• The fuel’s lifecycle greenhouse gas emissions factor.

Congress directed lifecycle emissions must be determined using a framework aligned with the Department of Energy’s GREET model, subject to Treasury issued guidance. OBBBA reinforced the credit must be closely tied to measurable, verifiable emissions performance. The proposed regulations translate that mandate into operational rules.

Facility qualification and eligibility

The proposed regulations reaffirm a “qualified facility” must produce transportation fuel within the United States and satisfy all registration and reporting requirements under Section 4101. Treasury clarifies fuel must be produced at the facility.

Activities such as blending, distribution, or upgrading generally don’t qualify unless they result in a chemically distinct product independently meeting the statutory definition of transportation fuel.

Where a facility produces multiple fuels with different emissions intensities, producers must maintain separate production accounting. Alternatively, they may rely on a newly established pro-rata allocation method, provided specific requirements are met.

Clean fuel production credit registration requirements

No Section 45Z credit may be claimed unless the producer is properly registered at the time the fuel is produced. The IRS confirms the existing Form 637 registration process remains controlling.

The proposed regulations clarify submitting a timely but incomplete registration application doesn’t preserve credit eligibility. Registration becomes effective only as of the date the IRS issues a registration letter. Treasury also introduces a re-registration safe harbor in the event of an employer identification number or ownership change.

The rules further establish a formal revocation regime. If a producer’s registration is revoked due to noncompliance, credits attributable to fuel produced after the revocation notice are automatically disallowed. Although producers may reapply, any period of revoked status creates a definitive break in credit eligibility.

Determining lifecycle emissions rates

Lifecycle emissions are the core determinant of the Section 45Z credit. The proposed regulations offer several pathways for establishing an emissions factor:

Annual default emissions rates table

Treasury will publish annually updated emissions rates for common transportation fuels.

Provisional emissions rate (PER) petition

Producers may petition for a customized emissions rate when the default table doesn’t accurately reflect the fuel’s lifecycle profile.

Third-party verification

Sustainable aviation fuel is subject to mandatory third-party emissions certification.

The regulations adopt a multistage lifecycle analysis consistent with the statute, including emissions from feedstock production, fuel production, transportation, and end use combustion.

Treasury acknowledges the complexity of modeling upstream emissions, particularly for producers relying on diverse feedstocks or complex supply chains, and requests public comment on how to address variability in agricultural inputs and electricity sourcing.

A key clarification is emissions factors are determined on an annual basis, not by batch. For producers using the PER petition process, the emissions factor certified for a calendar year applies uniformly to all qualifying fuel produced during that year.

Section 45Z credit computation and antiabuse measures

While the proposed regulations largely follow the statutory credit calculation framework, they add important guardrails to protect the integrity of emissions reductions. The IRS won’t permit aggregation of production across facilities to generate a single emissions factor and purely accounting based or nonoperational allocation methods are prohibited. Each facility must calculate its credit independently, unless multiple facilities operate as a single, integrated production system meeting strict criteria.

The IRS also addresses concerns about overstated emissions reductions achieved through contractual instruments such as renewable energy certificates (RECs). The regulations permit limited use of RECs in electricity related emissions calculations only if they meet stringent time, geographic, and exclusivity requirements. Treasury’s approach draws on methodologies used in other clean energy credit regimes, including Sections 45(d), 45Q, and 48.

With respect to credit rates, the proposed regulations confirm the increased rate — effectively a five times multiplier — applies only when prevailing wage and apprenticeship requirements are satisfied. For facilities placed in service before January 1, 2025, a special rule exempts initial construction from those requirements, while still applying the prevailing wage requirements to post-2024 alterations and repairs.

Sales to unrelated parties and buyer certifications

Section 45Z requires qualifying fuel to be sold to an unrelated party for qualifying uses. The proposed regulations clarify “unrelatedness” is determined under the controlled group rules of Section 52(b), as authorized by the statute.

In addition, buyers must provide certifications confirming the identity of the fuel, its intended end use, and other facts sufficient to establish the sale qualifies for the credit.

Clean fuel production credit recordkeeping and substantiation

The proposed regulations impose extensive recordkeeping and substantiation obligations. Producers must maintain documentation supporting:

• Facility qualification
• Emissions rate determinations
• Feedstock sourcing
• Qualified sales
• Any required third-party or buyer certifications

Treasury emphasizes failures in substantiation may result in full disallowance of the credit, rather than partial adjustments — underscoring the importance of robust compliance systems.

Effective dates and reliance

The proposed regulations generally apply to fuel produced after December 31, 2024. Taxpayers may rely on the proposed rules for taxable years beginning before final regulations are issued, provided they apply the rules consistently and in their entirety.

How CLA can help with Section 45Z clean fuel production credits

The proposed Section 45Z regulations introduce new technical, operational, and compliance demands for clean fuel producers. We can help you determine if you qualify for the credit and at what level. We can also help with filing for the credit and documenting the required information.

CLA supports clients across the full credit lifecycle, helping connect emissions modeling, tax planning, and documentation into a workable approach. Our team of professionals can help:

• Assess eligibility and credit potential early
• Support lifecycle emissions modeling and documentation
• Guide registration and re‑registration planning
• Integrate prevailing wage and apprenticeship requirements
• Strengthen compliance, substantiation, and audit readiness
• Coordinate credit claims and broader tax planning

Contact us

Get the help you need to cash in on Section 45Z credits. Complete the form below to connect with CLA.