The Economics of 45Z Under the One Big Beautiful Bill

Matthew Gammans and Ming Wang

The 45Z Clean Fuel Production Credit, created by the 2022 Inflation Reduction Act (IRA), provides incentives for the production of low-carbon fuels. The size of the tax credit is determined by how much the fuel lowers carbon intensity relative to fossil-based fuels like gasoline and diesel. While many IRA tax credits are unlikely to survive the ongoing Congressional Reconciliation process, the 45Z tax credit almost assuredly will, as it has broad bipartisan support.  The House and Senate have both passed versions of the One Big Beautiful Bill (OBBB). Both bills propose key changes to 45Z. Table 1 outlines a few of the most impactful proposed changes and compares how they are handled in the House and Senate Bills. In this piece, we briefly look at each of these three changes and discuss what they might mean for the economics of 45Z.

	House Bill	Senate Bill
45Z Extension	Extends the credit through 2031 (was set to expire at the end of 2027).	Extends the credit through 2029.
Treatment of foreign feedstocks	Only crops and wastes grown/collected in the U.S., Canada or Mexico qualify. Used‑cooking‑oil and tallow from Asia/EU would not be allowed.	Same as House bill. North American feedstocks only.
Indirect Land‑Use‑Change (ILUC)	ILUC emissions are removed from the 45Z formula, lowering corn ethanol and soy renewable diesel CI scores by ~10–15 g CO₂e/MJ (U.S. DOE, 2024).	Same removal of ILUC emissions accounting.

Extension to 2029

Put simply, 45Z was never going to be effective at spurring investment in clean fuels with a December 31, 2027 expiration date. Refineries, ethanol retrofits, SAF facilities, and hydrogen production plants involve high upfront capital costs and long permitting timelines. To pay these costs, firms take out loans to build the facilities or invest in R&D, expecting to repay them over time through fuel sales or subsidy payments. How much does the 2029 extension increase the financeability of low-carbon fuel projects? It is hard to say, the extension will certainly benefit already-in-place facilities or firms that have diversified income streams beyond low-carbon fuels, but a two-year extension may not be enough to pull in new investment into SAF and hydrogen retrofits.  One silver lining is that this version of the OBBB demonstrates that 45Z has bipartisan support, which increases the likelihood that the tax credit will be extended again in the future.

Foreign feedstocks

There are two distinct arguments for the ban on feedstocks originating outside of North America. The first argument posits that cooking oil and tallow imported from Asia are often assigned inaccurate carbon intensity scores. Cooking oils that have already been used for cooking are assigned a much lower carbon intensity score than unused cooking oils, as standard life-cycle assessment frameworks do not assign upstream production emissions to products that are considered waste. This fact results in a big incentive to label oils as “used,” even if they really are not. Some reporting has suggested that unused palm oil (which would be assessed a high carbon intensity score) is being fraudulently passed off as used cooking oil (which receives a much lower carbon intensity score). Limiting feedstocks to North America may reduce the risk of paying out subsidies to fraudulent feedstocks, so long as North American producers are better able to implement accurate carbon accounting practices. The second argument in favor of the ban on foreign feedstocks is more familiar: this is an American policy and should favor American producers. The ban on foreign feedstocks enables North American feedstocks that might otherwise be too costly to still be competitive options for refiners looking for 45Z-eligible feedstocks.

Indirect Land‑Use Change

Agricultural land is scarce. Policies that increase the demand for agricultural crops in one region may result in higher prices, leading producers in other regions to convert land into agricultural production, an effect known as indirect land-use change (ILUC). This effect is “indirect” in the sense that it’s impossible to say with certainty which change in land use was due to a specific policy. However, many studies have estimated the size of these effects in aggregate. Recent estimates from the GREET model suggest values of 10–15 g CO₂e/MJ (we use a value of 12 g CO₂e/MJ for the calculation shown below). Figure 1 is taken from a meta-analysis of ILUC estimates for corn ethanol.

Figure 1: Comparison of various estimates of corn ethanol’s ILUC emissions. This figure is taken from Wicke et al. (2012).

How big a win is this for agricultural producers? A back-of-the-envelope estimate of the value to corn ethanol producers of waiving the ILUC component of GREET is equivalent to $0.35 per bushel:

Winners and Losers

So who are the winners and losers from these changes? The biggest winners are domestic soy crushers and ethanol refineries who benefit from all three major changes: the extension of the tax credit, the North American feedstock requirement, and the removal of ILUC emissions. Farmers who sell to these facilities will benefit if part of the premium for 45Z-eligible feedstocks is passed through in the form of incentive payments or increased local basis. Losers include West Coast SAF and ethanol facilities who have become reliant on imported used cooking oil and tallow that will no longer be eligible. Investors in next-generation SAF technologies aren’t “losers” exactly, although they benefit from these changes, most were surely hoping for an extension out through 2031, rather than the 2029 extension in the Senate Bill. Outside of the industry, fiscal hawks and environmental groups will both be displeased by the ILUC changes that will almost certainly increase total outlays of the program and create a precedent for ignoring ILUC in the carbon accounting required by federal policies.

Next stepsThe Senate Bill must now return to the House for approval prior to being sent to President Trump for signing.

References

Tang, A. (2025) ‘Malaysia will crack down on fraud in used cooking-oil exports, official says’, The Business Times, 14 February. Available at: https://www.businesstimes.com.sg/companies-markets/energy-commodities/malaysia-will-crack-down-fraud-used-cooking-oil-exports-official-says (Accessed: 1 July 2025).

U.S. Department of Energy (2024) Guidelines to Determine Life Cycle Greenhouse Gas Emissions of Sustainable Aviation Fuel Production Pathways using 40BSAF-GREET 2024. Washington, DC: Office of Energy Efficiency & Renewable Energy. Available at: https://www.energy.gov/sites/default/files/2024-04/40bsaf-greet_user-manual.pdf 

Wicke, B., Verweij, P., Van Meijl, H., Van Vuuren, D.P. and Faaij, A.P., 2012. Indirect land use change: review of existing models and strategies for mitigation. Biofuels, 3(1), pp.87-100.