TL/DR –
The Clean Fuel Production Credit, referred to as “45Z,” is a tax credit for biofuel producers that could potentially impact Midwest corn and soybean farmers. This is because the size of the tax credit is tied to the carbon intensity score of the biofuel produced, thus incentivizing biofuel producers to lower the carbon intensity of the fuel they sell by seeking lower-carbon feedstocks. Although farmers wouldn’t receive the tax credit directly, the policy could potentially increase the value of lower-carbon grain, depending on specific market conditions.
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The Clean Fuel Production Credit, otherwise known as “45Z” due to its position in the tax code, has been receiving significant attention for its potential impact on farmers. In particular, there is interest in the potential for “low carbon” grain to receive price premiums if biofuel producers start to place a higher value on feedstocks with lower carbon intensity scores. The information related to 45Z can be highly technical, involving terms such as “CO2e”, “mmBTU”, and “ILUC”. Also, there are concerns that some private-sector messages might mislead by suggesting guaranteed premiums for “carbon money” without clearly explaining the market mechanisms and record requirements. This article delves into the 45Z tax credit and its potential impacts, especially for Midwest corn and soybean farmers.
A Look Back
The Clean Fuel Production Credit was established by Congress in the Inflation Reduction Act of 2022 and is part of Section 13704 of the Tax Code with Section 117-169; 26 U.S.C. §45Z. It was later amended to restrict its use to foreign feedstocks, stating that such fuel must come from a feedstock produced or grown in the United States, Mexico, or Canada (P.L. 119-21, at Sec. 70521).
Historically, 45Z follows a series of tax credits for ethanol and biofuels. Before 45Z, there was the Volumetric Ethanol Excise Tax Credit (VEETC), which provided a $0.45 per gallon tax credit to gasoline suppliers who blended ethanol with their gasoline. The VEETC was enacted as part of the “American Jobs Creation Act of 2004” and expired on December 31, 2022 (P.L. 108-357; Rept. 108-755; 26 U.S.C. §6426; Sautter, Furrey and Gresham, 2006; Diggs, 2012; Cunningham et al, February 26, 2019). Before the VEETC, the ethanol blending tax credit was created in the Energy Tax Act of 1978 in response to the second oil crisis and the Iranian revolution (P.L. 95-618; Duffield, Xiarchos and Halbrock, 2008; farmdoc daily, March 12, 2026).
Differences and Similarities
Even though they are both tax credits for biofuel production, 45Z and VEETC have significant differences. One important similarity is that neither of these credits goes directly to farmers. The VEETC was a fixed tax credit for entities blending ethanol with gasoline, while 45Z is a flexible tax credit for biofuel production entities, and its value adjusts based on the emissions factor for the fuel produced.
Financial Impact and Farmer Benefits
Benefits to farmers from these credits are indirect. The benefits flow to the farmer through the potential that biofuel producers will seek lower-carbon feedstocks to reduce the total carbon intensity score for the fuels they produce. This could result in a differentiated grain market where lower-carbon grains are more sought after, and producers of such grains may find themselves better positioned under these new market demands.
How It Works?
Based on the stipulations of the statute, the maximum 45Z tax credit can go up to $1 per gallon for ethanol and $1.75 for sustainable aviation fuel (SAF). However, the actual amount depends on how low the carbon intensity score of the fuel is relative to the policy benchmark (50 kilograms of CO2e per mmBTU). Notably, the policy creates a direct financial incentive for biofuel producers to lower the carbon intensity of the fuel they sell.
Benefits to Farmers
Despite not receiving the tax credit directly, the 45Z policy could still have an impact on farmers by influencing the incentives for biofuel producers. Research indicates that feedstock production contributes between 40% and 60% of total biofuel lifecycle carbon intensity, creating a potential situation where low-carbon grains could attract a premium. This could give producers of such grains an advantage under these new market conditions.
Key Takeaways
While the Clean Fuel Production Credit was designed to incentivize lower carbon intensity in biofuel productions, it’s important to note that the benefits to farmers are indirect and not guaranteed. They hinge on specific market conditions and the willingness of biofuel producers to offer a premium for lower-carbon feedstocks. Future articles will delve further into this topic, exploring carbon intensity and its implications for individual farms.
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