Statutory overview of 45Z

Statutory overview of the 45Z tax credit

Section 45Z provides tax credits for clean fuel production based on the fuel’s carbon intensity. Unlike previous fuels credits,¹ section 45Z is set up to incentivize deep reductions in the carbon intensity of transportation fuels by awarding higher credit amounts to cleaner fuels.  

The amount of credit a producer receives is the product of the “applicable amount” per gallon or gallon equivalent of fuel and the “emissions factor” for the fuel. The “applicable amount” is defined in the statute as $1.75 for sustainable aviation fuel (SAF) and $1.00 for all other transportation fuel. The “emissions factor” is equal to 50 kg CO₂e/mmBTU minus the “emissions rate,” divided by 50 kg CO₂e/mmBTU. The statute provides that Treasury “shall annually publish a table which sets forth the emissions rate for similar types and categories of transportation fuels based on the amount of lifecycle greenhouse gas emissions,” expressed as kilograms of CO₂e per mmBTU. So, the equation to calculate tax credits for section 45Z boils down to:  

As an example, if a SAF producer seeks the tax credit for production of a hypothetical “Fuel A,” and Treasury has determined the emissions rate for Fuel A is 30 kg CO₂e/mmBTU, the relevant “emissions factor” is 0.4:  

Thus, if the SAF producer meets prevailing wage and apprenticeship requirements, the producer can earn $0.70/gallon of Fuel A:  

As a comparison, if a SAF producer seeks the tax credit for production of a hypothetical “Fuel B,” and Treasury has determined a much lower emissions rate for Fuel B of 5 kg CO₂e/mmBTU, then the “emissions factor” is 0.9, and the amount of tax credit per gallon is significantly higher: 

As these examples illustrate, 45Z incentivizes deep decarbonization by awarding higher credits to cleaner fuels.² 

CATF recommendations 

As evident from the above formulas, the 45Z tax credit program relies heavily on precise assessments of a fuel’s carbon intensity—i.e., the amount of greenhouse gases emitted across the lifecycle of the fuel per each unit of energy the fuel delivers—but this can be very difficult to pinpoint with certainty. Section 45Z has the potential to contribute to transportation decarbonization, but it could also be counterproductive if implemented in ways that subsidize the production of fuels that do not deliver significant, readily verifiable climate benefits.  

To ensure that Treasury’s 45Z guidance promotes energy carriers that deliver climate benefits with a high degree of certainty so that tax dollars are spent in ways that are clearly justified from a climate and fiscal perspective, CATF recommends the following: 

• Limit palm oil demand: Given Congress’ concern that a diversion of palm fatty acid distillates would result in expanded global palm oil production, Treasury should ensure that its 45Z guidance does not indirectly drive demand for palm oil. 

• Use CORSIA or modify GREET to properly account for indirect land use change: If Treasury opts not to use CORSIA to estimate the lifecycle greenhouse gas emissions of sustainable aviation fuel (SAF), it must modify GREET for 45Z to ensure that GREET is both similar to CORSIA and fully accounts for indirect land use change in accordance with Clean Air Act section 211(o)(1)(H). 

• Differentiate climate smart agriculture practices: To the extent Treasury incorporates climate smart agriculture practices into its implementation of section 45Z, these practices should be differentiated based on the measurability of their impact on the carbon intensity of fuels.  

• Allow credits for synthetic SAF: Synthetic SAF will be essential to decarbonizing the aviation sector and should receive credits under 45Z. 

• Limit methane-derived feedstocks: The lifecycle assessments of emissions associated with methane-derived feedstocks are complex, with great variability between sectors and even individual facilities. Treasury should not include such feedstocks in the emissions rate table until it is fully confident in such assessments associated with a specific use of any particular feedstock, including emissions from the full value chain and indirect emissions.  

• Disallow negative emissions rates and blending: Treasury must not include negative emissions values in the published table of emissions rates, as this would present both significant environmental and fiscal concerns, such as artificial emissions offsets, harmful market distortions, and inappropriate expenditure of taxpayer dollars. Likewise, allowing producers that blend biomethane and fossil natural gas to claim clean transportation fuel credit under section 45Z may lead to similar negative outcomes. 

• Allow “stacking” tax credits along a value chain: Treasury must allow stacking of section 45Z and other tax credits in certain situations. Section 45Z permits several situations where facilities along a transportation fuel value chain can claim both 45Z credits and either 45Q or 45V credits. These situations arise when different facilities produce feedstocks versus fuels along the value chain.  

Read the issue briefs linked in the above recommendations for more detail on how Treasury can ensure 45Z is a climate beneficial and fiscally responsible tax credit. See CATF’s full comments on 45Z for more information.