New Proposed Rules for Clean Fuel Credits

On February 6, the Internal Revenue Service proposed new regulations regarding the clean fuel production credit, aimed primarily at biofuels, such as renewable/bio-propane made from vegetable and seed oils, and manure. The proposal aims to expand consideration for domestic production of biofuels, increase credit rebates, and diversify the transportation fuel market. Most importantly, eligible fuel for the tax credit must be suitable for use in transportation, but need not be actually used in transportation. Therefore, transportation-grade renewable propane used for heat would be eligible for the credit.

The rule, Section 45Z – Clean Fuel Production Credit is a technology-neutral federal tax credit enacted under the Inflation Reduction Act of 2022, and later extended and modified by the One Big Beautiful Bill Act of 2025, recorded in Title 26 of the Code of Federal Regulations, Parts 1 and 48.

The 45Z credits apply to the producers of transportation fuels with low lifecycle greenhouse gas emissions. Under the new amendments, producers will be able to qualify for rebates under a broad range of production methods, replacing older fuel-specific tax incentives that screened out fuels made as by-products. The proposed amendments clarify that credits will be applied only to source producers of fuels, not transporters or consumers. Producers are defined as processors who alter source-elements into useable fuels—which in the case of propane, applies to the refiner. The credits will apply retroactively to all fuels sold during 2025 and thereon until the end of 2029.

Specific fuel eligibility is determined using the DOE’s 45ZCF-GREET lifecycle modeling framework already in use. The up-to-date GREET model will be required for each year of tax filing, eliminating grandfathered statuses based on previous years’ standards. Additionally, GREET will now disregard indirect land-use changes, including unintended emissions from the cultivation of previously fallow land, reducing emissions portfolios for biofuels. One of the largest new points of interest is a requirement that producers be American-owned or controlled and use American-sourced feedstocks to produce fuel. No specific fuels are highlighted in this new regulation for favor by evaluators, levelling the playing field for new and improved biofuels.

45Z establishes a base credit of twenty cents per gallon, equivalent for fuels under 50 kg CO₂e/MMBtu and a maximum credit of up to one dollar per gallon. Paragraph (b)(20)(iv) of the proposed amendment provides the lower heating values of some non-liquid fuels for qualifications purposes: The lower heating value of low-GHG dimethyl ether is 12,417 Btu per pound, liquefied petroleum gas (LPG) (other than propane from HEFA) is 19,873 Btu per pound, and LPG (propane from HEFA) is 18,568 Btu per pound.

How 45Z Impacts Propane

45Z explicitly recognizes low-greenhouse gas LPG—including bio-propane—as a qualified transportation fuel eligible for tax credits. This is a major structural shift, as bio-propane now receives equal policy treatment with SAF, renewable diesel, ethanol, biodiesel, and renewable natural gas. Because bio-propane is co-produced alongside renewable diesel and SAF, the new amendments to 45Z encourage large refinery expansions that automatically increase bio-propane output, making renewable propane economically attractive, even though it is a byproduct, driving supply scaling, lowering costs and expanding market availability over time.

Under the new amendments, bio-propane qualifies for very high 45Z credit values because it typically scores well below the 50 kg CO₂e/MMBtu threshold required. There are also multiple production pathways that may qualify for near-maximum credits, allowing producers to price bio-propane competitively. The extra earnings could help to expand current blending into conventional propane supplies and penetrate fleet, heating, industrial, and backup power markets dominated by non-renewable fuels.

Next Steps

The proposed amendment will now undergo a comment and response period; Written or electronic comments must be received by April 6. A public hearing to address these amendments will be held on May 28, at 10:00 EST. Requests to speak and outlines of topics to be discussed at the public hearing must be received by April 6. Requests to attend the public hearing must be received by 17:00 EST on May 26, 2026.

To learn more about 45Z Clean Fuel Credits, contact Ben Nussdorf or Chris Wagner.