45Z takes off, but not to expand SAF

Jacqui Fatka

December 10, 2025

Key Points

• Ethanol producers can capture significant 45Z payments with minimal plant changes.
• For connected facilities, the launch of Tallgrass’ Trailblazer carbon pipeline creates an extra CI reduction boost.
• The elimination of the SAF incentive will further constrain liftoff for this infant industry.

The dawn of 45Z is here, with conventional biofuel producers entering 2026 poised to capitalize on significant changes in the Clean Fuel Production Credit that allow producers to monetize the tax credit. Changes made in the One Big Beautiful Bill Act preserved the federal tax credit program known as 45Z but equalized the benefit of on-road fuels with sustainable aviation fuel. As a result, ethanol refineries will benefit most from the extension of the tax credit, and SAF will continue to struggle to get takeoff. The 45Z tax credit can be transferred to other obligated parties, allowing facilities to sell those credits and guaranteeing income throughout the year.

The Inflation Reduction Act, passed in 2022, included the 45Z credit to streamline biodiesel and SAF tax credits and encourage reduced emissions. The One Big Beautiful Bill Act extended the tax credit two years, now expiring at the end of 2029. The latest changes also restrict feedstocks to North America and lower the SAF rate to $1 per gallon beginning in 2026.

One of the most significant changes to 45Z is a provision excluding emissions associated with indirect land use change (ILUC) from a fuel’s carbon intensity (CI) score. Eliminating the ILUC penalty can decrease CI scores of certain land-based conventional biofuels such as corn ethanol and soy biodiesel by disregarding up to 20–25 g CO₂e/MJ, yielding higher per-gallon tax credits for these fuels. The industry is still waiting to see how the Treasury Department and Internal Revenue Service address the removal of ILUC within the carbon intensity scores.

Although 45Z presents new opportunities for ethanol producers and other biofuel facilities to capture significant tax credits, it may limit direct profit potential for farmers. Unless biofuel producers are willing to pay premiums for lower carbon intensity feedstocks, farmers may not see substantial financial gains from the 45Z program. The incentive structure primarily benefits facilities that can monetize the credits by reducing their overall CI scores rather than those supplying the raw agricultural materials. The past administration published interim guidance that would allow CI scores to adjust lower based on certain climate-smart agricultural practices such as no-till and cover crops, but it is unknown whether the current administration will revisit climate-smart agricultural provisions.

A conventional ethanol plant producing 100 million gallons of ethanol per year can qualify for a CI range providing a credit amount of 10 to 20 cents per gallon, with some plants able to qualify for a higher credit. Ethanol plants able to capture and sequester CO₂ can reduce their carbon intensity by up to 33 points, thereby qualifying for up to 66 cents per gallon under 45Z. CO₂ shipments have commenced on the Tallgrass Trailblazer pipeline, which carries CO₂ from several plants located in Nebraska to a sequestration site in Wyoming. The ethanol plants located on the Trailblazer pipeline route began transacting 45Z sales at the higher amounts in the fourth quarter, with higher values anticipated in 2026.

A similar carbon capture and storage pipeline—Summit Carbon Solutions—has stalled in Iowa and South Dakota over lack of landowner support and legislative setbacks. The Iowa Renewable Fuels Association stated if Iowa’s 4.7 billion gallons of annual ethanol production all had access to CCS it could generate more than $3 billion of additional value for Iowa ethanol plants through 45Z tax credits.

SAF incentives diminished

With the 75-cents-per-gallon SAF production extra incentive coming to an end, the enticement for domestic investment in new or expanded SAF facilities is significantly reduced. Without these targeted domestic incentives, SAF produced within the United States may increasingly be exported to meet rising SAF mandates in the United Kingdom and European Union markets.

Many renewable diesel facilities in the U.S. are capable of toggling between producing renewable diesel (RD) and SAF. However, the cost of producing SAF can be two to five times more than conventional diesel, creating an economic incentive to run RD rather than SAF at these plants.

This situation exacerbates the existing mismatch between the available supply of SAF and the demand from aviation carriers. According to a report from Carbon Tracker, even if all current and announced SAF projects are completed, global output would satisfy only 5% of total jet fuel demand by 2030. This production level would offset just 17% to 30% of the expected demand growth in the aviation sector. Worldwide SAF production today amounts to a mere week’s worth of total airline fuel use. The International Air Transport Association reported SAF production in 2025 represents only 0.6% of total jet fuel consumption and is projected to tick up to 0.8% in 2026, illustrating that meeting the SAF target is unlikely.

Biodiesel and renewable diesel are currently more costly to produce than conventional diesel fuel. Unless oil prices increase significantly, production will be driven by current biofuel policies such as the federal Renewable Fuels Standard and California’s Low Carbon Fuel Standard. The Environmental Protection Agency’s final RFS renewable volume obligations and reallocation of small refinery exemptions issued for calendar years 2026 and 2027 will dictate U.S. biofuel consumption.