The 45Z clean fuel production tax credit is being used for unjustified giveaways to the conventional biofuels industry. The Senate should stop it.
The House and Senate reconciliation bills gut the Inflation Reduction Act’s clean energy credits, with the notable exception of the 45Z clean fuel production tax credit, which was extended and ballooned in cost. This purported attempt to incentivize “clean fuels” is little more than a giveaway to the conventional biofuels industry. The changes made by the Senate will only serve to subsidize mature industries for doing the same things they’re already doing (actually, for doing even less, as explained below) – to an even greater extent than the House’s changes. Before finalizing the reconciliation bill, the Senate should modify 45Z to ensure that it incentivizes only truly innovative clean fuels, such as synthetic or biogenic sustainable aviation fuel (SAF), which would simultaneously save tens of billions of dollars and preserve funding for the clean hydrogen tax credit (45V).
The Senate-passed version of 45Z is costly and fiscally irresponsible
Extending the lifetime of 45Z will compound extraneous spending on mature industries that use conventional technologies over four additional years. Further, the Senate reconciliation bill broadens 45Z eligibility of conventional biofuels beyond the access these fuels already have to the credit, which would be fiscally irresponsible. The Joint Committee on Taxation (JCT) estimates that the tax credit will cost an additional $57.1 billion through 2034 on top of the $8.4 billion under the current policy, bringing the total projected 45Z spending to $65.5 billion. Under the Senate bill, almost all of these funds will be claimed by producers of conventional biofuels (e.g. on-road fuels like ethanol, biodiesel, and renewable diesel). If 45Z were scaled back to focus more on aviation fuels, it would drastically reduce costs and make room in the budget for other important tax credits, like 45V that are critical to the development of innovative low-carbon, energy-dense fuels that the transportation sector needs going forward. For example, the score of the House-passed 45Z ($57.1 billion) is eight times larger than the score of the unmodified 45V clean hydrogen production tax credit ($7.1 billion), which is essentially eliminated in both versions of the reconciliation bill. Cutting back extraneous 45Z spending by even 12.5% would be enough to fund 45V as originally written in the IRA. 45Z could be revised to only be available to producers of advanced aviation fuels, or at least such that the credit value for incumbent fuel producers is significantly decreased while the credit value for advanced aviation fuel producers is increased.
45Z as drafted will lead to wasted investment in established technologies
The Senate version also weakens the criteria for determining whether a fuel qualifies for 45Z by removing a requirement that producers must account for the ways biofuel-driven indirect land use changes affect net emissions. Instead of lowering the bar on credit eligibility, the Senate could have incentivized biofuel producers to use non-conventional biomass resources that offer environmental benefits (like agricultural wastes and residues, winter crops, and herbaceous and woody perennials on marginal land), install non-conventional bioconversion technologies and carbon capture systems, recycle soil amendments from bioconversion facilities, or take other real steps to improve their fuels’ performance. Conventional biofuels also already benefit from financial support from other regulatory programs, like the Renewable Fuel Standard (RFS). The RFS requires Americans to buy record-high volumes of fuels like corn ethanol and biomass-based diesel; EPA’s recent RFS regulatory proposal sets the corn ethanol consumption mandate at the maximum level allowed by law, and for biomass-based diesel by 75% over the next two years. After decades of state and federal assistance, these fuels do not need lavish tax credits. It’s a multi-billion-dollar giveaway to an existing, mature industry, plain and simple.
The handout for conventional biofuels comes at the expense of innovative aviation fuels. The Senate version of 45Z repeals the special higher tax credit rate for SAF, making production uneconomical for SAF producers and virtually excluding them from 45Z. The Senate revision ensures that 45Z funds would be useful only to producers of conventional biofuels, and would be detrimental to the domestic development of innovative SAF and related supply chains, putting the U.S. at a competitive disadvantage.
Without modifications, 45Z will be bad for innovation and for the environment
The Senate reconciliation version of 45Z will not incentivize production of clean fuels. Lavishing this subsidy on conventional on-road biofuels like corn ethanol and biodiesel would frustrate the development of bio-based SAF. While we applaud the retention of transferability in the Senate bill, in the proposed version of 45Z, early-stage SAF producers would still have to compete with overly subsidized conventional biofuel producers for a limited supply of environmentally sustainable bio-feedstocks. Additionally, the Senate version eliminates any incentives for fuel producers to take extra refining steps to upgrade fuels like renewable diesel or ethanol into SAF. If the government is going to pay producers a premium to keep making the same basic fuel they have been making for decades, there is no incentive to invest in newer, better, cleaner fuels. These tax credits should reward innovation and bolster the competitiveness of U.S. industries; they should not double down on the status quo as 45Z does under the Senate reconciliation bill.
Refocusing 45Z would decrease the cost and make room for other important incentives, like 45V, which is essential for clean fuels and other industrial processes
Modifying 45Z to target it at SAF rather than conventional biofuels would not only promote innovation but also dramatically decrease spending. Funds that would otherwise go to mature on-road fuels could be redirected to other tax credits that are crucial to making clean fuels, like 45V. The House and Senate bills both gut 45V, making it unavailable for projects initiated after the end of 2025. The detrimental effects of this decision are already being realized, as innovative SAF producers are expressing doubt that their operations can continue without 45V and as hydrogen projects around the country worth billions of dollars are already being paused or abandoned entirely. Killing the domestic hydrogen industry before it starts would put the U.S. at a severe disadvantage on the global market for fuels and other hydrogen derivatives. Hydrogen is critical to the transportation sector, as an important feedstock for a variety of fuels, including methanol, ammonia, bio-SAF, and synthetic SAF. It is also of crucial importance to many industrial processes required for mass fuel production, in addition to other non-transport industrial processes.
45V would help support all of these industries. For example, important projects in Texas, like the HyVelocity hydrogen hub and Baytown, which together would employ thousands of people (45,000 and 300 respectively), aim to produce hydrogen that could be used for on-site processes or as feedstock for other fuels, like bio-SAF and synthetic SAF. 45V would help boost production, lowering costs of both hydrogen and the processes in which it is used. Additionally, there is a lot of Gulf Coast interest in producing and exporting low-carbon ammonia, which creates demand for low-carbon hydrogen and positions the U.S. to be competitive in the global fuels market.
China is surpassing the U.S. on domestic clean fuel production and supply chain development, including clean methanol, ammonia, and SAF. These clean fuels (including bio-SAF) require clean hydrogen as a feedstock. There is an international market for clean fuels that the U.S. will exclude itself from in the absence of 45V. The United States is well positioned to be the world leader in clean fuel production, but it won’t happen if federal policy rewards conventional fuel production at the expense of advanced fuels. Refocusing 45Z and reviving 45V are important steps for capitalizing on this opportunity.
It doesn’t have to be this way. It’s not too late for the Senate to save money, support innovation, and bolster American competitiveness in an emerging global market by revising the 45Z tax credit so that it’s available only to companies that produce advanced aviation fuels. If that’s too bold, the Senate could at least increase the value of the credit that can be earned by advanced aviation fuel producers while significantly decreasing the value of the credit that incumbent fuel producers can earn. Either approach would both shrink the ballooning cost of 45Z and target public investment toward technologies that need it the most.
