On January 10, 2025, the Internal Revenue Service (IRS) issued Notice 2025-10 and Notice 2025-11. Notice 2025-10 summarizes proposed regulations (Proposed Regulations) that Treasury and the IRS plan to issue with respect to the clean fuel production credit (CFPC) under Section 45Z of the Internal Revenue Code (IRC) and includes draft text of the Proposed Regulations in an appendix. Notice 2025-11 provides initial guidance on determinations of emissions rates for purposes of the CFPC and includes an emissions rate table in an appendix.
Highlights
Set forth below is a summary of key aspects of the Notices and draft text of the Proposed Regulations.
- 45ZCF-GREET Model. The Proposed Regulations adopt the 45ZCF-GREET model, as developed by the Argonne National Laboratory (ANL) and published by the Department of Energy (DOE), for use in determining the amount of life cycle greenhouse gas (GHG) emissions under IRC Section 45Z. In this regard, adoption of the 45ZCF-GREET model was defended on the basis of three key parameters: (i) user-friendliness and consistency, (ii) technical robustness of the pathways represented, and (iii) consistency with the requirements of IRC Section 45Z. The first version of the 45ZCF-GREET model is intended to include the most commonly used types and categories of fuel that are expected to meet the eligibility requirements to claim the CFPC, with the possibility that additional types and categories of fuel could be added in future versions of the 45ZCF-GREET model.
- Facility. A “facility” would be defined as a single production line that is used to produce a transportation fuel, which would include all components that function interdependently to produce such fuel through a process that results in the life cycle GHG emissions rate used to determine the CFPC. A facility can include carbon capture equipment if such equipment contributes to the life cycle GHG emissions rate of the production process. A facility does not include, however, (i) equipment used to condition or pressurize fuel, or to transport fuel beyond the point of production, (ii) feedstock-related equipment or (iii) electricity production equipment.
- Fuel. A “fuel” would be any liquid or gaseous substance that can be consumed to supply heat or power, and would expressly exclude electricity.
- Gallon Equivalent. For any non-liquid fuel, its “gallon equivalent” would mean the amount of such fuel that has the energy equivalent of a gallon of gasoline, which refers to the amount of such fuel having a Btu content of 116,090 (lower heating value). For this purpose, fuel is considered non-liquid if it is in a gaseous state at ambient pressure and temperature of 1 atmosphere and 60 degrees Fahrenheit, respectively. In defining gallon equivalent, gasoline was viewed as the most appropriate baseline fuel for a gallon equivalency for non-liquid fuels because (i) gasoline is the most common transportation fuel and (ii) incentivizing cleaner transportation fuels as alternatives to existing fossil fuels is the objective of IRC Section 45Z. Use of a lower heating value of gasoline, rather than a higher heating value, was perceived as a better representation of the useful energy provided by a transportation fuel.
- Production. Production would begin with the processing of primary feedstock(s) and end with a transportation fuel ready to be sold in a qualifying sale. Minimal processing, such as blending a fuel mixture or otherwise engaging in activities that do not result in a chemical transformation, would not be considered a production activity. Thus, so-called “splash blending” would not be sufficient to qualify for the CFPC.
- Producer. A producer of transportation fuel would not be required to own any portions of the qualifying facility in order to claim the CFPC. If multiple producers use the same facility, the production of transportation fuel would be allocated among them based on their respective gross sales. The producer of alternative natural gas, including renewable natural gas (RNG), would be the person that processes the alternative natural gas (a “processor”) to remove water, carbon dioxide, and other impurities such that it is interchangeable with fossil natural gas. As such, any person that removes conventional or alternative natural gas (CANG) from a pipeline, compresses it further after removal, and then sells such further-compressed CANG (a “compressor”) would not be considered a producer because compression is not a chemical transformation, and the compression process is viewed as minimal processing.
- Qualifying Sale. A “qualifying sale” means a sale of transportation sale by the taxpayer to an unrelated person if the fuel is sold (i) for use in the production of a fuel mixture, (ii) for use in a trade or business or (iii) for re-sale at retail, with the fuel being placed in a fuel tank. The Proposed Regulations would define a sale “for use … in a trade or business” by reference to IRC Section 162, relating to the deduction of expenses in carrying on a trade or business. The CFPC can be claimed only in the taxable year in which a qualifying sale of transportation fuel occurs, which can be a taxable year later than the taxable year of production.
- Transportation Fuel. To qualify as transportation fuel, the relevant fuel must (i) be suitable for use as a fuel in a highway vehicle or aircraft, (ii) have an emissions rate that is not greater than 50 kilograms of CO2e per mmBTU and (iii) not be derived from co-processing an applicable material with a feedstock that is not biomass. Under the Proposed Regulations, the term “suitable for use as a fuel in a highway vehicle or aircraft” (suitable for use) would be defined to mean that the fuel either has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft, or may be blended into a fuel mixture that has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft. Actual use as a fuel in a highway vehicle or aircraft would not be necessary.
- Emissions Rate. The emissions rate of a transportation fuel is such fuel’s life cycle GHG emissions rate expressed as kilograms of CO2e per mmBTU based on the amount of life cycle GHG emissions of the fuel and the applicable emissions rate table (to be published annually) or, for a fuel not included in the table, a provision emissions rate (PER). The Proposed Regulations would allow for the filing of petitions for determination of PERs in cases where emissions rates are not found in the 45ZCF-GREET model (but not in situations where a taxpayer disagrees with the background data or calculation approach reflected in the 45ZCF-GREET model). Future guidance will provide the procedures for taxpayers to request a PER. The IRS will not accept requests for PER determinations, and the DOE will not issue emissions values, until after such guidance is published. The emissions rate first determined for any new type or category of fuel established on the applicable emissions rate table, or determined through the PER process, will apply on January 1, 2025, regardless of when the rate is established.
- Allowed Methodologies. If a type and category of non-sustainable aviation fuel (SAF) transportation fuel is established in the applicable emissions rate table (attached to Notice 2025-11), a taxpayer producing such type and category of fuel would determine the fuel’s emissions rate using the 45ZCF-GREET model, as directed by the applicable emissions rate table. If a type and category of SAF transportation fuel is established in the applicable emissions rate table, a taxpayer producing such type and category of fuel would determine the fuel’s emissions rate using (i) the most recent version of the CORSIA Default Life Cycle Emissions Values for CORSIA Eligible Fuels life cycle approach (CORSIA Default), (ii) the CORSIA Methodology for Calculating Actual Life Cycle Emissions Values life cycle approach (CORSIA Actual) or (iii) the 45ZCF-GREET model, as directed by the applicable emissions rate table. For each type and category of SAF transportation fuel, a taxpayer would be required to use the same methodology to calculate life cycle GHG emissions associated with all stages of fuel feedstock production and distribution. Under the Proposed Regulations, taxpayers would use the most recent version of an allowed methodology that is publicly available on the first day of the taxable year during which the taxpayer produced the transportation fuel for which the CFPC is claimed. If a version of an allowed methodology adds a type or category of fuel after the first day of a taxable year, taxpayers must use such version for such new type or category of fuel for the entire taxable year. If an updated version of an allowed methodology becomes publicly available after the first day of the taxable year of production (but still within such taxable year), then the taxpayer can choose to treat such updated version as the most recent version of such methodology.
- Additional Reductions. Future guidance reportedly will allow taxpayers to claim additional reductions in calculating the life cycle GHG emissions rates of SAF and non-SAF transportation fuels by utilizing certain climate smart agriculture (CSA) practices for cultivating domestic corn (CSA corn), domestic soybeans (CSA soybeans), and domestic sorghum (CSA sorghum) (collectively, CSA crops) for use as SAF and non-SAF transportation fuel primary feedstocks.
- Registration, Recordkeeping and Certification Requirements. Registration with the IRS is a pre-condition to entitlement to the CFPC. For this purpose, the registration rules under Treasury Regulation Section 1.4101-1, relating to registration for the federal excise tax on taxable fuels, would be adopted. A taxpayer is not considered registered until a Letter of Registration is issued by the IRS that has not been suspended or revoked. Additionally, taxpayers claiming the CFPC are required to maintain adequate records to establish their eligibility, including records on primary feedstocks and how the emissions rates for their fuels are determined. A safe harbor is provided for non-SAF transportation fuels under which an emissions rate determined using the 45ZCF-GREET model will be considered substantiated if the taxpayer complies with the certification requirements substantially similar to those that would be made applicable to SAF transportation fuel. Under such requirements, the life cycle GHG emissions rate of SAF transportation fuel must be certified by an unrelated party (a “qualified certifier”). The Proposed Regulations would set forth accreditation requirements for qualified certifiers.
Final Thoughts
The Notices and Proposed Regulations address a number of important issues relating to the CFPC, but other issues of interest to the industry remain subject to future guidance. Both Notices are effective January 10, 2025, and the Proposed Regulations would apply to qualifying sales occurring on or after publication of the Proposed Regulations in the Federal Register. Treasury and the IRS have requested comments on the Notices and the draft text of the Proposed Regulations, which should be submitted by April 10, 2025. Pillsbury will continue to monitor and provide updates concerning the CFPC and is prepared to support parties interested in submitting comments concerning the Notices or Proposed Regulations.
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