The IRS has issued an important update to the clean-fuel tax credit, which could reshape the future of transportation fuel production in the U.S. Under the changes outlined in President Trump’s One Big Beautiful Bill (OBBB), U.S. companies producing lower-carbon transportation fuels can now more clearly determine their eligibility for the federal tax credit.
The new guidelines are intended to bring clarity and consistency to an industry that has long faced challenges in navigating the complex and sometimes ambiguous rules surrounding clean-fuel credits. With the rise of global focus on reducing carbon emissions, these changes could further incentivize the production of cleaner fuels, benefitting the environment and bolstering U.S. manufacturing jobs.
Proposed Changes to the Clean-Fuel Production Credit
The IRS’s proposed regulations mark a substantial shift in how domestic producers of clean transportation fuels, like ethanol, can qualify for the tax credit. The rules extend the credit through 2029, creating long-term stability for producers. According to the IRS, this extension is designed to foster greater investment in cleaner fuel technologies, as companies will now have a more predictable future in terms of financial incentives.
The new rules come with several significant restrictions. Most notably, the eligible feedstocks for the tax credit must be produced in the U.S., Mexico, or Canada. This change, according to reports, limits the use of foreign materials, which is likely aimed at protecting local agricultural industries. Additionally, certain foreign entities that previously could qualify for credits will now be excluded, and there are new rules regarding the sale of fuel to unrelated parties. These modifications will likely affect the structure of many fuel companies’ operations, as they adjust to these new restrictions.
Important Clarifications on Emissions and Eligibility
One of the most critical aspects of the update is how fuel producers will now need to calculate their fuel’s emissions rate to qualify for the credit. The IRS has confirmed that the clean-fuel credit applies to both denatured and undenatured ethanol, ensuring that all types of ethanol-based fuels can be counted.
The proposed changes also clarify how fuel producers can apply for the credit, with an emphasis on certification and registration. The IRS has implemented a more structured process to confirm the environmental benefits of fuels. This clarity comes after producers raised concerns about the lack of clear guidelines in the past, particularly regarding how to track and demonstrate the environmental impact of their products.
Emily Skor, CEO of Growth Energy, praised the changes, stating that the updated rule offers producers the flexibility they need to continue expanding cleaner fuel options while ensuring accountability.
A Path Forward for Cleaner Fuels
These adjustments to the clean-fuel tax credit come at a time when the U.S. government is increasingly focused on reducing carbon emissions across all sectors. According to the U.S. Treasury, these changes reflect a broader commitment to encouraging clean energy development. Despite positive feedback, some industry leaders, like Brian Jennings of the American Coalition for Ethanol, argue that more clarity is still needed regarding how low-carbon farming practices will be monetized under the new system.
As the IRS moves forward with finalizing these proposed regulations, stakeholders in the clean-fuel industry will closely monitor the next steps. Public comments will be taken into consideration before the rules are finalized, ensuring that producers have a voice in how these important changes are implemented.
