The Section 45Z Clean Fuel Production Credit
September 27, 2023
The Section 45Z Clean Fuel Production Credit
P.L. 117-169, commonly known as the Inflation Reduction
nonprofits, states, localities, and other tax-exempt entities—
Act (IRA), created the clean fuel production credit (CFPC)
to receive tax credits as direct payments even if they do not
for qualifying transportation fuel produced after 2024 and
owe federal taxes. Transferability allows entities which are
sold on or before December 31, 2027. Some also refer to
not eligible for elective pay to sell/transfer their credits to
the CPFC as the 45Z credit after its applicable Internal
other entities; this could prove advantageous for
Revenue Code (IRC) section.
organizations whose tax credits exceed their tax liabilities.
Payments received for the sale of tax credits are excluded
The CFPC, in effect, consolidates and replaces several fuel-
from income, and hence not subject to taxation, but
related credits currently scheduled to expire at the end of
purchases of credits cannot be deducted from income.
2024, including credits for the production of biodiesel, agri-
biodiesel, renewable diesel, second-generation biofuel,
Firms cannot use the same production facility to claim both
sustainable aviation fuel, alternative fuels, and alternative
the CFPC and the Section 45V clean hydrogen production
fuels mixtures. In contrast to these expiring provisions,
credit, the Section 48 investment credit for a specified clean
which subsidize specific types of low-GHG emission fuels,
hydrogen production facility, or the Section 45Q credit for
the CFPC is technology neutral and is intended to subsidize
carbon oxide sequestration.
the production of any transportation fuel with zero or low
greenhouse gas (GHG) emissions.
Maximum Credit Values
The CFPC is structured on a sliding scale so that producers
This In Focus provides an overview of the eligibility
become eligible for larger credits as the GHG emissions of
requirements, credit amounts, and budgetary cost of the
the fuels they produce approach zero. For producers
CFPC. Guidance on implementing the CFPC is required no
meeting prevailing wage and registered apprenticeship
later than January 1, 2025, and the Department of the
requirements, the maximum credit is $1.00 per gallon of
Treasury and Internal Revenue Service (IRS) issued a
nonaviation fuel and $1.75 per gallon of aviation fuel. To
request for comment on November 3, 2022. The IRS
satisfy the wage requirements, laborers and mechanics
requested that comments be submitted by December 3,
constructing, altering, or repairing a facility must be paid
2022. However, the agency clarified that it would consider
wages at or above the “prevailing wage” (as determined by
comments submitted beyond that date “if such
the Secretary of Labor) of workers performing similar work
consideration will not delay the issuance of guidance.”
in the same locality. The apprenticeship requirements
stipulate that registered apprentices must provide at least
Credit Requirements and Restrictions
12.5% or 15% of the total labor hours associated with
The following criteria must be satisfied for credit eligibility:
constructing, altering, or repairing any facilities claimed
under the CFPC. (However, under the “good faith effort
• Producers must be registered with the IRS.
exception,” firms are deemed to have met the
apprenticeship requirements if they request apprentices
• All production facilities used to claim the credit must be
from a registered apprenticeship program and either do not
located in the United States or its possessions (i.e.,
receive a response within five business days or are denied
Puerto Rico, Guam, the U.S. Virgin Islands, and other
for reasons other than their refusal to comply with the
territories).
requirements.) For producers not meeting prevailing wage
and registered apprenticeship requirements, the maximum
• To be considered “clean,” fuel produced at such
credit is 20 cents per gallon of nonaviation fuel and 35
facilities must emit no more than 50 kilograms of CO2
cents per gallon of aviation fuel.
(or CO2 equivalent) per 1 million British Thermal Units
(mmBTU).
The maximum credit values are adjusted annually for
inflation using the Gross Domestic Product (GDP) implicit
• To meet the credit’s definition of “transportation fuel,”
price deflator.
fuel must be deemed “suitable for use as a fuel in a
highway vehicle or aircraft.”
Credit Phaseout
Producers of fuels with low but nonzero GHG emissions
• All fuel qualifying for the credit must be sold to
may still receive a credit depending on the given fuel’s
“unrelated persons” as defined in Section 52(b) of the
GHG emissions rate.
IRC.
To determine the size of each producer’s credit, the
The CFPC is eligible for elective pay and transferability.
maximum credit value is multiplied by an emissions factor
Elective pay allows certain organizations—generally
that is a function of the fuel’s “carbon dioxide equivalent”
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(CO2e) per mmBTU. For greenhouse gases other than CO2,
Assumed
the carbon dioxide equivalent is the quantity of CO2 that
kilograms of
Does not
would produce the same amount of global warming as the
CO2e per
Emissions
meet
Meets W&A
given non-CO2 GHG. Specifically, the emissions factor is
mmBTU
Factor
W&A reqs
reqs
determined as:
Nonaviation Fuels
Emissions Factor = [(50 kg. of CO2e per mmBTU) – (Fuel
kg. of CO2e per mmBTU)] / [50 kg. of CO2e per mmBTU].
50 kg. /
0.0
$0.00
$0.00
mmBTU
As an example, the emissions factor for fuel emitting 40
kilograms of carbon dioxide equivalent per mmBTU would
Aviation Fuels:
be:
0 kg. / mmBTU
1.0
$0.35
$1.75
Emissions Factor = [50 – 40] / [50] = 0.2
10 kg. /
0.8
$0.28
$1.40
mmBTU
Table 1 displays the credits available to producers at
25 kg. /
various assumed CO
0.5
$0.18a
$0.88a
2e emissions rates, depending on the
mmBTU
type of fuel produced (aviation or nonaviation) and whether
the producer meets prevailing wage and apprenticeship
40 kg. /
0.2
$0.07
$0.35
requirements.
mmBTU
Table 1. Estimated §45Z Clean Fuel Production
50 kg. /
0.0
$0.00
$0.00
Credit Values
mmBTU
Estimated credit per ton of fuel produced, by fuel type and
Source: Calculations by CRS based on IRC §45Z.
compliance with wage and apprenticeship requirements, at
Notes: “W&A” stands for “wage and apprenticeship.” “CO2e”
assumed CO
stands for “carbon dioxide equivalent.”
2e emissions rates
a. Value has been rounded to the nearest cent.
Assumed
kilograms of
Does not
Budgetary Costs and Credit Transition
CO2e per
Emissions
meet
Meets W&A
As noted earlier, the CFPC will, in effect, consolidate a
mmBTU
Factor
W&A reqs
reqs
number of clean-fuel tax credits that are set to expire after
2024 into a single credit. As a replacement for these credits,
Nonaviation Fuels
P.L. 117-169 will allow producers to begin claiming the
CFPC starting in 2025, with the stipulation that all fuel
0 kg. / mmBTU
1.0
$0.20
$1.00
claimed under the credit must be sold no later than
10 kg. /
December 31, 2027. The Joint Committee on Taxation’s
0.8
$0.16
$0.80
mmBTU
cost estimate of P.L. 117-169 projects that the CFPC will
cost $2.9 billion between FY2025 and FY2028. Under
25 kg. /
0.5
$0.10
$0.50
current law, the CFPC will not incur any additional
mmBTU
budgetary costs after FY2028.
40 kg. /
0.2
$0.04
$0.20
mmBTU
Nicholas E. Buffie, Analyst in Public Finance
IF12502
https://crsreports.congress.gov
The Section 45Z Clean Fuel Production Credit
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