Today, the U.S. Treasury published a proposed rule regarding the 45Z Clean Fuel Production Credit, which was enacted by the Inflation Reduction Act of 2022 and amended by the One, Big, Beautiful Bill Act (OBBBA). The proposed rule would implement changes made in OBBBA and address additional concerns, including facility ownership and opportunities to reduce fuel emissions rates through certain agricultural practices.

The 45Z credit was created in 2022 to replace several existing tax credits for various types of fuels, including biodiesel, renewable diesel, second-generation biofuel, sustainable aviation fuel, and alternative fuels and fuels mixtures. 45Z is a sliding scale tax credit of up to $1.00 per gallon of biofuels produced and sold, based on GHG emissions.

The credit was extended and significantly expanded in OBBBA. While eligible fuels still must have an emissions rate that is not greater than 50kg of carbon dioxide equivalent per million British thermal units (mmBTU), OBBBA watered down eligibility requirements—including by explicitly excluded GHG emissions from land use changes. OBBBA also decreased the maximum payout for aviation fuel—originally $1.75 per gallon—down to $1.00 and restricted eligibility to feedstocks grown in the U.S., Canada, or Mexico.

These changes are costly. The Joint Committee on Taxation (JCT) estimated that the expansion and extension of 45Z would cost taxpayers $25.7 billion over the next decade. 45Z is now expected to cost taxpayers a total of $53.1 billion between FY2026 and 2035 (although the credit expires in 2030).

The proposed rule primarily implements these straightforward updates—new rate, new eligibility, etc. However, Treasury’s implementation also creates a clear pathway for corn ethanol to qualify, which risks greatly increasing the taxpayers costs and spurring other, unintended consequences: higher food and feed costs, negative impacts on landscape health, and wasted federal resources.

Since the creation of the domestic market for corn ethanol after the energy crisis of the 1970s, the federal government has nurtured and maintained the U.S. ethanol industry with a steady stream of subsidies. Ethanol producers have received favorable treatment under the tax code, tariff protection from foreign competition, a government mandate for its use, infrastructure subsidies, and more.

The ethanol tax credit began nearly 50 years ago but ramped up in taxpayer costs in the 2000s. In 2004, the Volumetric Ethanol Excise Tax Credit (VEETC) was a $0.51/gallon tax credit. By 2011, when Congress decided to end the credit, VEETC cost taxpayers approximately $6 billion annually.  Now, the proposed rule, in line with guidance released last year (Notice 2025-11), clearly outlines a path for corn ethanol to once again qualify for a lucrative tax credit.

Treasury’s proposed rule adds new loopholes for operators calculating their GHG intensity, likely enabling more biofuels—included corn ethanol and soy biodiesel—to qualify even though the industries have received taxpayer subsidies for a half century:

• OBBBA’s ban on incorporating land use changes in GHG emissions calculations will fail to account for the environmental and water quality impacts of converting pastures grasslands into corn production.
• The proposed rule would allow producers to use the 45ZCF-GREET model (weaker) to determine emissions rates for aviation fuels, even though Congress called for use of the CORSIA model (more accurate).
• The proposed rule would allow operators to benefit from favorable updates to an emission rate methodology (changes that lower GHG estimates), but not penalize a taxpayer if a methodology is updated unfavorably (changes that increase GHG estimates) during the taxable year.
• The proposed rule would codify use of the USDA Feedstock Carbon Intensity Calculator (USDA FD-CIC)—a beta version was published last month—to reduce a fuel’s final carbon intensity if feedstock producers used conservation practices like no till, reduced till, cover crops, and nutrient management.
• Fortunately for taxpayers, Treasury rejected a request to allow facilities to use an emissions rate table tied to the year construction of a facility began, as opposed to the year of the sale.

45Z was created as a technology-neutral incentive to support the production of transportation fuels with low or zero GHG emissions—not to subsidize the mature, corn ethanol industry. Weakening eligibility requirements and introducing additional pathways for eligibility would also allow more biofuels to be eligible for the credit, raising the final price tag for taxpayers and carrying significant costs for consumers.

TCS and others have also raised serious concerns about potential abuse of the 45Z tax credit. The proposed rules echoes these concerns, stating that “Treasury Department and the IRS are cognizant of potential abuses of the section 45Z credit, including situations in which a taxpayer produces and sells transportation fuel in a manner that is inconsistent with Congressional intent …. [and] other potential abuse, such as circular production, credit churning or wasteful production with no intended use, and abuse of the anti-stacking rules.” To minimize these risks, the proposed rules state that 45Z is not allowed if an operator’s primary purpose in producing and selling transportation fuel is “to obtain the benefit of the section 45Z credit in a manner that is wasteful, such as discarding, disposing of, or destroying the transportation fuel without putting it to a productive use.” While a good intention, details on how the IRS intends to enforce this are lacking.