The U.S. Department of the Treasury and Internal Revenue Service have released the long-awaited proposed rule implementing the Section 45Z Clean Fuel Production Credit. The proposed rule provides much-needed regulatory clarity for the biofuels industry after more than a year of uncertainty and includes a major victory for NEFI and heating fuel marketers.

NEFI members will recall that the Section 45Z Clean Fuel Production Credit was created under the Inflation Reduction Act of 2022. It was intended to replace all federal tax credits for renewable and alternative fuels, including the biodiesel and renewable diesel blenders' tax credit under Section 40A of the Internal Revenue Code. The 45Z credit was then modified under the One, Big, Beautiful Bill Act (OBBBA) of 2025 and was one of the only renewable or alternative energy provisions – other than nuclear – to have been preserved, demonstrating strong support from the Trump Administration and Congress for biofuels.

Since the 45Z credit was first proposed in 2022, NEFI has advocated that qualifying low-carbon fuels must be eligible regardless of their downstream end use, including in space and water heating applications. The proposed rule explicitly adopts this position, stating that "actual use as a fuel in a highway vehicle or aircraft is not required."

In practical terms, this means that renewable fuels, including biodiesel and renewable diesel, that meet ASTM specifications will qualify for the credit regardless of whether the fuel ends up in a truck, boiler, backhoe, or fishing boat.

Key Provisions of the Proposed Rule:

• Credit amount: Up to $1.00 per gallon for producers meeting prevailing wage and apprenticeship requirements; up to $0.20 per gallon otherwise. Credit value scales with emissions reductions, with lower emissions yielding a higher credit.

• Eligible fuels: Biodiesel, renewable diesel, ethanol, renewable natural gas, and other fuels with lifecycle emissions not exceeding 50 kg CO₂e/mmBTU.

• ILUC exclusion: Beginning January 1, 2026, controversial indirect land use change (ILUC) impacts are excluded from lifecycle emissions calculations, which will improve credit values for crop-based biofuels like soy biodiesel.

• Feedstock restrictions: Beginning January 1, 2026, only feedstocks produced or grown in the United States, Canada, or Mexico will be eligible.

• Foreign entity restrictions: Specified foreign entities are already excluded from the credit; additional foreign-influenced entities will be excluded beginning in 2027.

• SAF parity: The special higher rate for sustainable aviation fuel (SAF) is eliminated, creating a level playing field with transportation and heating fuels.

• Credit period: Available for qualifying fuels produced through December 31, 2029.

• Small Producer Credit: The OBBBA also offers a separate credit for small agri-biodiesel production of up to $0.20 per gallon which can be taken in addition to the 45Z credit. It is available from mid-2025 through the end of 2026.  This new credit is likely to be addressed in a separate rulemaking.

"This proposed rule is a significant step forward and should help restore confidence in the biofuels and downstream wholesale, retail, and consumer markets after a difficult transition period," said NEFI President and CEO Jim Collura. "The 45Z credit is vastly improved from what was originally enacted in 2022 and we are optimistic it will support renewed growth in biofuels production and adoption."

"While NEFI had hoped that Congress would keep the blenders' tax credit in place, we recognize that 45Z is currently the law of the land," he added. "We remain committed to working with our biofuel industry partners and policymakers to ensure our members can continue to offer competitive renewable liquid heating fuels and meet the demands of both state governments and customers for cleaner burning fuels."

The proposed rule is subject to a 60-day public comment period closing April 6, 2026. Treasury will host a public hearing on May 28, 2026, at 10:00 a.m. ET. NEFI will submit formal comments and participate in the hearing to ensure the final rule reflects the priorities of heating fuel marketers.

Members with questions or input should contact NEFI President & CEO Jim Collura at jim.collura@nefi.com.