TL/DR –
The 45Z biofuel production tax credit, which values biofuel feedstocks based on their carbon intensity, is nearing completion but key questions remain. Specifically, the way the carbon intensity of biofuels is accounted for under the credit is a contentious issue. While the USDA’s framework uses a “mass balance system” to track sustainability attributes through the supply chain, many in the industry advocate for a “book-and-claim” system which separates the physical product from its sustainability traits—proponents argue this would provide more flexibility and benefits for farmers.
The finalization of the 45Z biofuel production tax credit is on the horizon after more than four years. However, it’s unclear if farmers using qualifying sustainable practices will fully benefit from the credit.
At the heart of this issue is how carbon intensity, a measure of how much carbon dioxide emissions a biofuel creates, is calculated in relation to 45Z – the Clean Fuel Production Credit. The credit’s value to American farmers could depend on the calculation method chosen, which quantifies the carbon benefits of regenerative agriculture practices such as using manure as a nutrient and using fertilizer stabilizers to limit greenhouse gases.
The USDA’s biofuel feedstock framework, now being integrated into the Treasury Department’s almost finalized 45Z rule, employs a mass balance system. This system links the sustainability characteristics to the physical feedstock, such as soy oil, throughout the supply chain. However, various agricultural and biofuel organizations, including the American Soybean Association and the National Corn Growers Association, advocate for a book-and-claim system. The book-and-claim system separates the physical product from its sustainability traits, which many farmers believe would offer more flexibility and opportunities under the 45Z credit.
Mitchell Hora, the founder of Continuum Ag, a soil health and data company, is one such proponent of the book-and-claim system. Fifth-generation South Dakota farmer Drew Peterson supports this view, suggesting that the system would allow farmers to separate their sustainable practices from the sale of their crops, potentially improving their ability to benefit from 45Z.
Although the final 45Z rule from the Treasury Department is still pending, last week’s guidance from the Trump administration, which confirmed that the USDA’s biofuel feedstock guidelines released in June apply to 45Z, has been well received in the sector. The 45Z credit was first introduced in the Inflation Reduction Act during Biden’s administration and was amended last year following the passage of the One Big Beautiful Bill Act by Congress. The credit replaces a flat $1 per gallon blenders’ tax credit for biomass-based diesel that had been in place for nearly two decades.
Critics of the mass balance system argue that it could negatively affect pork producers, who may face increased transportation costs if they need to source feed crops from further afield because local growers cannot separate their grain from its low-carbon traits. Fuel costs are a significant concern given the recent surge in diesel prices.
However, Hora remains hopeful as the USDA has not definitively ruled out the adoption of the book-and-claim system in the future, although it seems unlikely to transition to it within the next couple of years.
Maya Patel, a natural resources specialist at the USDA, explained during a webinar last month, that under the mass balance system, all parts of the supply chain handling the grain must comply with the rule and track carbon intensity scores. Kathryn Zook, acting director of the Office of Energy and Environmental Policy at the USDA, also noted that the book-and-claim system could be considered in the future.
Meanwhile, the vice president of renewables policy at Calumet’s Montana Renewables, Corey Lavinsky, posted on social media last Tuesday advocating for the book-and-claim system, arguing that it would lead to cheaper sustainable aviation fuel. The Renewable Fuels Association also expressed concerns to Treasury Secretary Scott Bessent last year about the potential disruption of grain flows and pricing under the mass balance system, which could limit greenhouse gas emissions benefits and program participation.
Despite the current situation, Hora is confident about integrating farmers into the 45Z program under the existing mass balance guidance. He is also actively communicating with the USDA to encourage the adoption of a book-and-claim approach in the future.
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