By Jonathan Coppess and Zhangliang Chen
The Clean Fuel Production Credit, enacted in the Inflation Reduction Act and often referred to simply as “45Z” for its placement in the tax code, remains the subject of much attention (Brooks, February 11, 2026; Bausch and Squire, February 5, 2026; Warnes, November 1, 2025; McNaughton-Peterson, October 14, 2025; Ayoub and Parum, July 24, 2025). For farmers, interest has centered on the possibility that “low carbon” grain could receive price premiums if biofuel producers begin to place greater value on feedstocks with lower carbon intensity scores. Most existing 45Z information remains highly technical, filled with tax, legal, and policy language, as well as life-cycle analysis terms such as “CO2e” “mmBTU,” and “ILUC.” At the same time, some private-sector messages may overpromise by suggesting guaranteed premiums or simple “carbon money” without clearly explaining market mechanisms, data collection needs, or supporting record requirements. This article begins a discussion of the 45Z tax credit with particular attention to the potential impacts for Midwest corn and soybean farmers.
Background
Congress created the Clean Fuel Production Credit in the Tax Code with Section 13704 of the Inflation Reduction Act of 2022 (P.L. 117-169; 26 U.S.C. §45Z) and subsequently amended it to restrict its applicability to foreign feedstocks, adding that such fuel must be “exclusively derived from a feedstock which was produced or grown in the United States, Mexico, or Canada” (P.L. 119-21, at Sec. 70521). Historically, 45Z joins a line of tax credits for ethanol and biofuels; before there was 45Z, there was the Volumetric Ethanol Excise Tax Credit (VEETC). It provided a $0.45 per gallon tax credit to gasoline suppliers who blended ethanol into the gasoline they sold. Congress enacted VEETC in the “American Jobs Creation Act of 2004” and allowed it to expire 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 there was VEETC there was the ethanol blending tax credit created in the Energy Tax Act of 1978, coinciding with the second oil crisis and the Iranian revolution (P.L. 95-618; Duffield, Xiarchos and Halbrock, 2008; farmdoc daily, March 12, 2026).
While they are both tax credits for biofuels production, 45Z differs significantly from VEETC. One key similarity, however, is that neither tax credit goes directly to the farmer. VEETC was a fixed tax credit for the entity blending ethanol with gasoline, while 45Z goes to the entity producing the biofuels. Importantly, the 45Z credit is flexible and adjusts based on the emissions factor for the fuel produced (IRS, updated March 16, 2026; 91 FR 5160 (February 3, 2026), proposed rule).
Despite its differences, research on VEETC provides useful perspectives for 45Z, including for setting expectations on the benefits to farmers. Researchers have concluded that about 5% of VEETC made its way to corn farmers (Gerveni et al., 2026). In general, the benefits from VEETC worked their way through the supply chain to the farmer via prices paid for ethanol and from ethanol production for the corn purchased. Researchers have estimated that VEETC’s tax credit may have been worth about $0.135 per bushel of corn (Bielen, Newell and Pizer, 2018). Notably, VEETC also overlapped with the Renewable Fuels Standard enacted in 2005 and expanded in 2007; combined, the two different policies (tax credit to blenders vs. mandate on them) raised the cost of the tax credit to about $5 billion per year. If 5% of that expenditure made its way to farmers, it was worth about $250 million per year.
Discussion
In the statute, Congress defined a qualified facility as “a facility used for the production of transportation fuels,” but not for clean hydrogen production. Congress defined transportation fuel as “suitable for use as a fuel in a highway vehicle or aircraft,” and “has an emissions rate which is not greater than 50 kilograms of CO2e per mmBTU,” or carbon dioxide equivalent for greenhouse gases per 1 million British thermal units. Congress also limited the definition for fuels, restricting those “[d]erived from coprocessing an applicable material . . . with a feedstock that is not biomass” (P.L. 117-169, at Sec. 13704; 26 U.S.C. §45Z(d)). Simply, 45Z is a tax credit for qualified biofuel producers, such as ethanol, biodiesel, and sustainable aviation fuel (SAF).
Source : illinois.edu