Understanding 45Z: 2025 changes, business impacts, and strategic opportunities

Introduction

As the global economy shifts toward clean energy and sustainability, businesses must stay ahead of evolving regulations and incentives. In the United States, one of the most significant developments in this space is Section 45Z, a tax credit designed to promote the production of low-carbon transportation fuels. With major changes set to take effect in 2025, including the inclusion of Renewable Energy Certificates (RECs) in the program, understanding 45Z is crucial for organizations looking to capitalize on new opportunities while mitigating risks.

This blog explores:

1. What is 45Z?
2. What is happening in 2025 related to the inclusion of RECs in this program?
3. The business impacts and opportunities of 45Z.

1. What is 45Z?

Section 45Z, officially known as the Clean Fuel Production Credit, was introduced under the Inflation Reduction Act of 2022 to incentivize the production of low-carbon transportation fuels. Unlike previous tax credits, 45Z rewards producers based on the carbon intensity (CI) score of their fuels, rather than offering a flat subsidy.

Key features of 45Z:

• Eligibility: Applies to fuels produced after December 31, 2024, and sold before December 31, 2027.
• Tax credit structure: Provides a base credit of $0.20 per gallon, which can increase up to $1.00 per gallon for fuels produced in facilities meeting prevailing wage and apprenticeship requirements.
• Carbon Intensity-based incentives: The lower the CI score, the higher the financial reward, encouraging producers to adopt decarbonization technologies.
• Applicable fuels: Includes ethanol, biodiesel, SAF, and other clean transportation fuels.

By shifting incentives toward carbon reduction, 45Z aims to accelerate the transition to these fuels, benefiting both the environment and businesses that adapt to the new framework.

2. What is happening in 2025 related to the inclusion of RECs in 45Z?

The year 2025 marks the official implementation of 45Z, bringing several key changes that will reshape the biofuel, agriculture, and transportation industries. One of the most significant developments that is evolving is the inclusion of Renewable Energy Certificates (RECs) in the program.

What are RECs?

Renewable Energy Certificates (RECs) represent proof that one megawatt-hour (MWh) of electricity was generated from a renewable energy source. These certificates allow businesses to claim renewable energy usage, even if they are connected to a grid that includes fossil fuel-generated electricity.

How could RECs impact 45Z?

• Lowering Carbon Intensity (CI) scores: Ethanol producers can use RECs to offset emissions, thereby reducing their CI scores and increasing their tax credit eligibility.
• Compliance with 45Z and 45V tax provisions: The IRS has outlined guidance on how RECs can be used to meet clean fuel production standards, ensuring that ethanol producers can maximize their tax benefits.
• Market expansion for RECs: The demand for RECs is expected to rise as more ethanol producers seek to integrate them into their carbon reduction strategies.

Regulatory guidance on RECs

The U.S. Treasury Department and IRS have released Notices 2025-10 and 2025-11, providing initial guidance on emissions rate calculations and qualifying fuel pathways. Businesses must comply with these regulations to maximize their tax credit eligibility.

3. Business impacts and opportunities of 45Z

The introduction of 45Z presents both challenges and opportunities for businesses across multiple industries.

Impact on biofuel producers

Biofuel producers stand to gain substantial financial incentives by reducing their carbon footprint. Investments in carbon capture technology, energy efficiency upgrades, and renewable energy infrastructure will be crucial for maximizing tax credits.

Impact on agriculture

Farmers supplying corn and soybeans for biofuel production will experience shifts in demand. The phase-out of the 40A tax credit could lead to price fluctuations, but 45Z offers new opportunities for farmers adopting low-carbon agricultural practices.

Impact on transportation and logistics

Companies in transportation and logistics will need to evaluate their fuel sources. With 45Z incentivizing cleaner fuels, businesses relying on traditional fossil fuels may face competitive disadvantages compared to those integrating low-carbon alternatives.

Opportunities for ethanol producers using RECs

• Maximizing tax credits: By integrating RECs, ethanol producers can significantly reduce their CI scores, making them eligible for higher tax credits.
• Enhancing sustainability credentials: Companies that leverage RECs can position themselves as leaders in clean fuel production, attracting investors and customers focused on sustainability.
• Strategic partnerships: Collaborating with REC providers ensures that ethanol producers can quickly access certificates that meet IRS guidance.

Conclusion

45Z represents a transformative opportunity for businesses across biofuels, agriculture, and transportation. By understanding its impacts and implementing strategic initiatives, organizations can maximize financial incentives, drive sustainability, and gain a competitive edge in the evolving clean energy market.

As the policy landscape continues to evolve, staying proactive, informed, and adaptable will be key to successfully navigating the 45Z framework.