The Section 45Z Clean Fuel Production Credit is one of the largest transferable tax credit opportunities in the United States. In Rimba's recent webinar, "Turning 45Z Tax Credits into Climate Capital," host Timothy Daniel sat down with Faith Larson, VP of Renewables & Legal Counsel at Mickelson & Company, for a practical walkthrough of how clean fuel producers qualify for the credit, structure a sale, and get to closing. Here are the key takeaways.

0145Z at a glance: a production tax credit with staying power

Section 45Z became effective at the beginning of 2025 and — in a strong signal of policy durability — was extended through 2029 under the One Big Beautiful Bill Act (OBBBA). The credit is generated through the production and sale of clean transportation fuel: producers earn it on each gallon (or gallon-equivalent) produced and sold within the same tax year.

Eligible fuel categories span the biofuels landscape: ethanol, biodiesel, renewable diesel, renewable natural gas (RNG), hydrogen, and sustainable aviation fuel (SAF) — separate industries of varying size, all capable of generating the same credit.

Less risk means more demand. The most active buyers are C-corporations with U.S. federal tax liability, and 45Z sits inside a 2026 transferable credit market expected to exceed $60 billion — with 45Z alone generating several billion dollars of credit value annually, potentially more than $20 billion over the program's life.

02The biggest misconceptions — and how they've evolved

Prevailing wage looked scarier than it is. Producers must pay prevailing wages not only to employees but to contractors performing work at the facility — limited to repairs and alterations for existing plants (new construction carries broader requirements). Early on, many producers questioned whether the compliance cost was worth it. In practice, the credit is often large enough — with a runway through 2029 — that the investment clearly pays off. The heavy lifting happened in 2025; producers now have processes in place, making ongoing compliance far more routine.

More producers qualify than expected. At the start of 2025, many producers doubted they could hit a qualifying emissions factor under the 45ZCF-GREET model, which differs from the models used in LCFS and other markets. Subsequent proposed regulations clarified the ability to purchase Environmental Attribute Certificates (EACs) to lower CI scores — a tool now readily available. The regulations also defined placed-in-service timing for the clean energy sources supplying EACs: a facility is considered placed in service when it can first verify and document an emissions factor of 50 or below, and EACs can be sourced from facilities placed in service up to three years prior to that date. Heading into 2026, nearly all producers should have a path to qualify.

03What it takes to qualify

On registration, Larson was unequivocal: there is no retroactive fix. Form 637 registration needed to be submitted by roughly July 1, 2024 to guarantee eligibility from January 1, 2025 — fuel produced before an approved registration cannot recover 45Z eligibility after the fact. Submit early, receive approval, then produce.

The qualified sale requirement carried early drama. Draft language attached to Treasury's initial notice added three words — "as a fuel" — to the trade-or-business sale bucket, creating confusion in a market where producers routinely sell through third-party intermediaries who aggregate and market biofuel on their behalf rather than directly to blenders. The proposed regulations issued the needed technical correction removing that language, and Treasury has granted reliance on those regulations. The regs also provide a form certification for qualified sales that offers a safe harbor for 2026 and beyond.

04Structuring and closing a credit transfer

Assemble your advisors. A CPA or law firm supports validation via a tax credit eligibility memo or tax opinion. A tax credit broker markets your credits to corporate buyers matched on size, timing, and tax year — calendar versus fiscal year matters a great deal. Your third-party verifier produces the CI verification report, which carries an IRS safe harbor when performed by a qualified verifier. Prevailing wage documentation rounds out the core diligence package.

Negotiate the term sheet. The term sheet sets the terms you'd accept: pricing (historically 90–94% of face value, with roughly 93.5% the high-water mark for 45Z), whether tax credit insurance is required or an indemnity suffices, credit size, and funding structure. Every seller provides an indemnity — typically no-fault, meaning if the IRS disallows the credit, the seller makes the buyer whole — and an indemnity is only as good as the seller's creditworthiness. Buyers bring their own "buy box" defining acceptable risk and pricing.

Close the transfer. The producer applies to the IRS for a registration number that ties seller and buyer together. Both parties file a transfer election statement with their tax returns to evidence the transfer and the claim. Definitive documents are signed following due diligence, and multi-year or quarterly structures continue from there.

05Realistic timelines

Larson's guidance on planning: engage advisors as early as possible. 2025 saw a massive industry-wide catch-up on prevailing wage compliance — some producers were still completing 2025 compliance work in April 2026 — and advisors serving the biofuels industry face the same capacity constraints.

All-in: anywhere from 30 days to 60–90+ depending on documentation readiness and whether insurance is required. Deals have closed in a matter of weeks when sellers were prepared — and stretched past 90 days when they weren't.

06Feedstock eligibility after OBBBA

Several rules are now clear. Fuel produced in 2026 and beyond must use feedstocks grown and sourced in the United States, Canada, or Mexico. Only manure-based feedstocks may carry a negative CI — currently capped at −51 under the existing GREET model, even though OBBBA and the regulations allow for much deeper negative values (real-world measurements often land between roughly −250 and −350). An updated GREET model is anticipated that may unlock those deeper scores.

Open items remain. The industry is waiting on removal of the indirect land use change penalty — highly consequential for corn and for soybean oil inputs into biodiesel and renewable diesel. And there is currently no provisional emissions rate (PER) process: pathways exist for manure-based feedstocks, landfill gas, and wastewater, but producers using organic food waste are still waiting for a pathway.

One new diligence layer applies market-wide: foreign entity of concern (FEOC) and prohibited foreign entity restrictions. Diligence now runs in both directions — buyers vet sellers as always, but sellers must also confirm their buyer is not a prohibited foreign entity. Larson noted 45Z carries less FEOC exposure than credits like solar, wind, or Section 45X advanced manufacturing — one reason 45Z continues to elevate as one of the most attractive credits for 2026.

07How the credit math works

The credit equals gallons produced and sold, multiplied by the emissions factor — calculated as (50 kg CO₂e per mmBTU minus the fuel's emissions rate) divided by 50 — multiplied by the applicable amount ($1.00 per gallon where prevailing wage is satisfied) with an annual inflation adjustment ($1.06 for 2025).

For producers just starting out, the threshold question is whether the facility can reach an emissions rate of roughly 47.5 or below — the band where credit generation begins. Levers include getting the CI model inputs right, purchasing EACs, bringing RNG into the facility to displace natural gas, and investments like combined heat and power, carbon sequestration, or pipeline interconnection. Most producers already have a verifier or consultant relationship from LCFS and other compliance markets — the same relationship can carry into 45Z.

In practice, CI runs on a rolling basis. For quarterly-funded deals, the verifier affirms CI on cumulative production data — January through March for the first funding, January through June for the second, and so on — smoothing out swings (say, from mid-year sequestration coming online) so the final annual CI holds no surprises. The intensive verification comes at year-end, when the verifier audits utility consumption against invoices and issues the certified report required for the IRS safe harbor. That CI applies to that year only; the process repeats annually through the life of the credit.

08Documentation is the deal

Asked about the most common diligence gaps, Larson pointed back to 2025's prevailing wage delays — compounded by OBBBA's July timing, which pushed most 2025 fundings into September and December. The fix is process: transfer agreements now build in a funding notice (or purchase notice) delivered typically 5–10 days before each estimated payment date, containing a prevailing wage compliance report for the period, a short-form CI verification report, the estimated credit amount, and continued representations — a truncated documentation packet that lets the buyer wire funds with confidence.

"It's important that we underwrite, that we provide very safe, very well-diligenced credits with the strongest documentation. That is our path forward."

Faith Larson · Mickelson & Company

Her closing outlook: pricing should hold in the 90–92% range, though with $60 billion+ in transferable credits hitting the 2026 market and corporate tax capacity compressed by other OBBBA provisions, well-documented, well-diligenced credits will command the premium.