Energy Credit Guidance: Treasury and IRS Issue Proposed Regulations Under the Clean Fuel Production Credit

Overview

On February 4, 2026, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued proposed regulations (Proposed Regulations) under Section 45Z,[1] the clean fuel production credit. Enacted by the Inflation Reduction Act of 2022 (IRA) and subsequently amended and extended by the One Big Beautiful Bill Act (OBBBA), Section 45Z replaces prior federal fuel incentives with a unified credit regime based on lifecycle greenhouse gas (GHG) emissions and establishes a comprehensive framework for credit eligibility, emissions measurement, certification, registration, and related administrative requirements.

Key Takeaways

• The Proposed Regulations, in a departure from prior guidance in Notice 2025-10, provide that fuel “sold for use in a trade or business” does not require sale for “use as a fuel.” Thus, fuel sold to wholesalers or dealers may qualify for the credit.
• The Proposed Regulations provide a broad “look through rule” in the case of related party sales, allowing a taxpayer to sell fuel to a related intermediary who ultimately sells to an unrelated person.
• The Proposed Regulations, consistent with the statute and generally consistent with prior guidance, provide rules to prevent the stacking of credits.
• The Proposed Regulations provide rules for emissions rate determinations, including the use of the 45ZCF-GREET model or CORSIA, and a provisional emissions rate (PER) process for fuels not covered by the emissions rate table.
• The Proposed Regulations provide guidance for the use of energy attribute certificates (EACs) to reduce the GHG emissions of electricity used in the production of fuel.

Prior guidance under section 45Z includes Regulation § 1.45Z-3 (final regulations with respect to the prevailing wage and apprenticeship (PWA) requirements) and three IRS notices, Notice 2024-49 (guidance under the registration requirements), Notice 2025-10 (which announced Treasury’s intent to propose regulations and included an appendix containing draft regulatory text), and Notice 2025-11 (which provided initial guidance on emissions rate determinations, including an emissions rate table). The long-awaited Proposed Regulations follow more than a year after the draft rules of Notice 2025-10 and provide additional guidance to taxpayers on several key aspects of credit qualification and administration.

Statutory Background

Section 45Z replaced a patchwork of prior biofuel credits (e.g., Section 40A biodiesel credit or Section 40B sustainable aviation fuel credit) with a single, technology-neutral credit. The credit applies to transportation fuel produced after December 31, 2024, and before January 1, 2030, and incentivizes the production of zero or low lifecycle GHG emissions fuel. For fuel with zero greenhouse gas emissions and for which the prevailing wage and apprenticeship requirements are satisfied, the credit amount equals $1 per gallon or gasoline gallon equivalent. The amount of the credit phases out for emissions factors between zero and 50 kilograms CO2e per mmBTU. To claim the credit, taxpayers must produce transportation fuel at a qualified facility, be registered as a producer under Section 4101 at the time of production, and sell the fuel to an unrelated person in a qualified sale.

The recently enacted OBBBA made a number of changes to Section 45Z, including extending the credit an additional two years (through 2028 and 2029); removing the special rate for sustainable aviation fuel; limiting the credit to fuels from feedstocks grown or produced in the United States, Canada, or Mexico; providing Treasury with authority to issue guidance regarding related party sales of qualifying fuels; providing statutory rules for calculating the GHG emissions factor (discussed further below); and preventing double crediting. In addition, the OBBBA enacted the new prohibited foreign entity (PFE) regime, under which Section 45Z (as well as a number of other credits) may not be claimed by taxpayers that are specified foreign entities (SFEs) or foreign-influenced entities (FIEs).

Proposed Regulations

The Proposed Regulations build on the earlier guidance in the draft regulatory tax guidance provided by Notice 2025-10 while also incorporating the statutory changes to Section 45Z made by the OBBBA. The changes generally made the credit align with current industry practices. Key provisions include:

Qualified Sale

The Proposed Regulations provide that a “qualified sale” includes a sale for use in a trade or business and provide that the term “sold for use in a trade or business” includes fuel sold to an unrelated person who subsequently resells the fuel in its trade or business. Critically, the direct purchaser of the fuel does not have to use it. This is a departure from Notice 2025-10, which required “use as a fuel” by the purchaser. As Treasury and the IRS explained, the prior rule was meant to prevent double crediting. This is now unnecessary, as Section 45Z(d)(5), as amended by the OBBBA, statutorily prevents double crediting. Lifting the “use as a fuel” requirement allows producers who sell to wholesalers or dealers to qualify for the credit. Further, the Proposed Regulations provide that production of a transportation fuel may take place in an earlier taxable year than the taxable year in which the qualified sale of such fuel occurs, but a qualified sale cannot take place before the date the fuel is produced.

Look Through Rules

Notice 2025-10 provided that a sale by another member of a taxpayer’s consolidated group may be attributed to the taxpayer for purposes of the unrelated sale requirement. The Proposed Regulations retain this rule and, using authority given by the OBBBA, include a broader look through rule in the case of related party sales. Under this rule, a related intermediary’s sale of fuel to an unrelated person may be attributed to the taxpayer. This allows a taxpayer to sell fuel to a related intermediary or wholesaler who ultimately makes the third-party sale. 

Non-Sustainable Aviation Fuel (SAF) Transportation Fuel

The Proposed Regulations define non-SAF transportation fuel as transportation fuel eligible for the Section 45Z credit that is not sustainable aviation fuel. The Proposed Regulations provide a list of such fuels but make clear that the list is nonexhaustive. This leaves breathing room for transportation fuels that, for instance, do not meet all proposed ASTM specifications to qualify. As Treasury and the IRS explained, prescribing exclusive fuel-by-fuel specifications in these proposed regulations would be impractical and may unintentionally restrict future market developments.

Processor Is Producer

The Proposed Regulations, consistent with Notice 2025-10, clarify that the “producer” eligible for the Section 45Z credit with respect to conventional or alternative natural gas (CANG), including renewable natural gas, is the processor that processes the gas to remove impurities, not the party that later removes such gas from a pipeline for compression. A taxpayer later in the production chain, such as a compressor of the CANG, would generally be ineligible for the credit. Further, a later-produced fuel that is produced from a feedstock for which the section 45Z credit is eligible (including CANG) is also ineligible for the credit.

Anti-Stacking 

The Proposed Regulations, consistent with the statute and prior guidance, provide anti-stacking rules, under which a taxpayer may not claim the Section 45Z credit for a taxable year if the taxpayer is claiming, with respect to the same qualified facility, the Section 45V credit for clean hydrogen, the investment tax credit for a hydrogen facility under Section 48(a)(15), or the Section 45Q for carbon oxide sequestration. In addition, the Proposed Regulations, consistent with prior guidance, clarify that electricity is not a fuel. Thus, a taxpayer may not claim the Section 45Z credit with respect to electricity, for which the Section 45Y credit is instead available.

Emissions Rate Calculation

The Proposed Regulations provide guidance on how emission rates are calculated. In general, rates are calculated under the emissions rate table, CORSIA (in the case of sustainable aviation fuel), and 45ZCF-GREET (in other cases). Unless such fuel is produced from a primary feedstock that is an animal manure, a negative emissions rate is not allowed. Further, consistent with OBBBA changes to the credit, for fuel produced after 2025, the emissions rate does not include any emissions attributed to indirect land use change.

For feedstocks that use climate-smart agriculture, such as cover cropping or no-till farming, Treasury and the IRS announced in the preamble to the Proposed Regulations that they anticipate publishing additional guidance on the use of the U.S. Department of Agriculture’s Feedstock Carbon Intensity Calculator to calculate emissions.

For transportation fuel that is not on the emissions table, the taxpayer may request an emissions value request (EVR) from the U.S. Department of Energy (DOE) to receive a calculated emissions value letter (CEVL). The taxpayer may then, after obtaining a CEVL, submit a provisional emissions rate (PER) request with the IRS. As of this writing, however, DOE has not opened the EVR process for Section 45Z.

EACs

Consistent with Notice 2025-10, the Proposed Regulations provide that rules similar to those under Section 45V (the credit for the production of clean hydrogen), apply for purposes of accounting for emissions associated with hydrogen, natural gas alternatives, electricity, and carbon capture and sequestration. The Proposed Regulations go beyond Notice 2025-10 and provide that energy attribute certificates (EACs) may be used to determine an emissions score, under rules similar to those under Section 45V. Under the Section 45V Regulations, an EAC may be used to attribute electricity to specific clean generation sources provided that the electricity satisfies the “three pillars” of incrementality, deliverability, and temporal matching. 

PFE and Foreign Feedstock

The Proposed Regulations provide the first guidance with respect to the PFE regime since the enactment of the OBBBA. Those rules mirror the statutory requirements and provide that SFEs and FIEs may not claim the credit for any taxable year beginning after July 4, 2025 (the date of enactment of the OBBBA), and that an FIE may not claim the credit for any taxable year beginning after July 4, 2027. Additional guidance is expected with respect to the definitions of PFE, SFE, and FIE under Section 7701(a)(51).

The Proposed Regulations also restate the statutory proscription for fuel produced after December 31, 2025, outside of the United States, Canada, or Mexico.

Registration

The Proposed Regulations provide rules under the registration requirement of Section 4101. The rules are modeled off of those applicable to fuel excise taxes and prior credits. Of note, in the case of a fuel producer that is a disregarded entity (DRE), these rules require the DRE to register, not its regarded tax owner. This contrasts with the registration rules under Section 6417 (direct pay) and Section 6418 (transferability), under which the tax owner must register.

Effective Date

The Proposed Regulations generally apply to taxable years ending on or after the date of publication of final regulations. However, the rules for the emissions rate tables apply to qualified sales occurring in taxable years ending on or after January 10, 2025 (the date of publication of the emissions rate tables in Notice 2025-11). Taxpayers may rely on these proposed regulations until final regulations are published in the Federal Register, provided taxpayers follow them in their entirety and in a consistent manner.

Conclusion

While largely following prior guidance in Notice 2025-10, the Proposed Regulations account for statutory changes made by the OBBBA and comments from industry. For example, the change to the definition of qualified sale and the broader look through rule ensure that industry use of intermediaries will not cause a loss of the credit. As such, the Proposed Regulations provide needed clarity.

Endnotes

[1] Unless indicated otherwise, all section references are references to the Internal Revenue Code of 1986, as amended (the Code), and references to “regulations” are references to the Treasury regulations promulgated under the Code.