Ag groups cheer biofuel tax changes

Agriculture interests are cheering recently announced tax changes that strengthen incentives for biofuel producers to use domestic feedstocks, but caution that more steps need to happen.

On Feb. 3, the Department of the Treasury and the Internal Revenue Service announced proposed 2026 changes to the 45Z Clean Fuel Production Credit (effective 2025–29) that create a significant, though indirect, opportunity for farmers to benefit from higher premiums for low-carbon crops. The changes were part of the “One Big Beautiful Bill” passed by Congress last year.

Key takeaways for farmers regarding the 45Z updates include:

• Increased demand and value: While the $0.20 to $1.00+ per gallon credit goes to fuel producers, they are incentivized to pay premiums for feedstocks with a lower carbon intensity score, benefiting farmers who use sustainable practices.
  
  
• North American sourcing requirement: Only feedstocks grown or produced in the United States, Canada or Mexico qualify for the credit, protecting domestic farmers from foreign competition for biofuels.
  
  
• Improved carbon scoring (indirect land-use change removal): The removal of ILUC in carbon intensity calculations makes it easier for crop-based biofuels to meet the sustainability thresholds required for the credit.
  
  
• Focus on regenerative practices: Farmers can secure higher premiums by documenting practices such as no-till, cover cropping, and optimized nitrogen fertilizer application, which lower the carbon intensity score of their crops.
  
  
• Timeline extension: The credit is extended through 2029, providing a longer, more stable, market signal for sustainable crop demand.

Ag, biofuel reactions
“We are grateful that Treasury’s proposed rule begins to provide ethanol producers and others more certainty and answers about how to claim the 45Z credit going forward, and we look forward to additional clarity on how ethanol producers can monetize low-carbon farming practices through the tax credit,” said Brian Jennings, CEO of the American Coalition for Ethanol, in a statement. “Since ag-based feedstocks represent about half of ethanol’s carbon intensity, ethanol producers need to have the opportunity to monetize low-carbon feedstocks to fully unlock the value of 45Z.”

“Updating federal biofuel policies to prioritize soy-based fuels is a key ASA priority, and we applaud Treasury for this action, which will help build domestic markets for U.S. soybeans,” said Scott Metzger, American Soybean Association president and Ohio farmer in a press statement.

The Clean Fuels Alliance said, “We greatly appreciate Treasury for moving forward with formal rules for the 45Z Clean Fuel Production Credit. The agency responded to many taxpayer concerns and resolved some uncertainties from the guidance issued a year ago. We anticipate this proposal will provide additional market certainty for biodiesel and renewable diesel producers,” said Kurt Kovarik, Clean Fuels’ vice president of federal affairs, in a press statement.

But he added, “The delay in rulemaking led to market uncertainty that took a heavy toll on our industry, undercutting fuel production and the value added to agriculture.”

Questions and answers
Mitchell Hora, CEO of Continuum Ag and a farmer himself, held a press event Feb. 3 to answer questions about the changes. Continuum Ag, founded by Hora in 2015, is a soil health data intelligence company that helps farmers improve profitability and sustainability through soil data analysis, carbon intensity scoring, and the TopSoil tool.

Hora said producers will have to wait for U.S. Department of Agriculture guidance on the new rules before any money can actually start flowing to them. The proposed changes are in a comment period, after which the final shape of the new rules will be announced, likely in May, although the announcement could come later.

“It could be late summer before all this is fleshed out,” he said.

Hora stressed that the tax credits go directly to biofuel processors, not ag producers. But ag producers can sell their carbon intensity data. The CI data attaches to fields and the crops they produce, even when those crops are later blended with other crops with lower CI scores.

Producers need to wait for an adjusted Federal Carbon Intensity Calculator that takes account of the new changes. “The big drivers today (for lower CI scores) are cover crops, reduced tillage and manure management,” Hora said.

To benefit from the credits, growers must sell to biofuel refiners, not livestock producers, he said. A “huge winner” in the updated changes are manure digestors and fuel produced from manures. Only fuel derived from manure is eligible for a negative carbon score (i.e., lower than zero).

Another big incentive rewards ethanol plants that do direct carbon capture. Hora estimated that between 10% and 20% of ethanol plants have that capability today, but estimated the number could rise to 50%.

Carbon accounting

Many questions to Hora concerned the method of carbon accounting the IRS and USDA will require. There are two models of carbon intensity accounting that track CI in the supply chain. The “book and claim” model decouples environmental attributes (certificates) from physical products, allowing for non-physical trading of emission reductions. Book and claim allows all farmers, including those not in close proximity to biofuel facilities, to participate in carbon markets.

The “mass balance” method requires that a portion of the actual product shipped contains the green attributes claimed, maintaining a physical link, Hora said. It requires more paperwork and documentation. Mass balance often limits participation to farmers near specific, certified processing infrastructure.

Agricultural interests generally favor book and claim over mass balance because book and claim offers maximum flexibility, lower costs, and better scalability for incentivizing sustainable practices without disrupting existing and complex logistics, Hora said. Unlike mass balance, which requires physical tracing of sustainable materials, book and claim decouples environmental attributes from the physical product, allowing farmers to sell carbon credits for practices like no-till or cover cropping regardless of where their crops are shipped or used.

Hora said the adoption of book and claim is the top priority of ag groups as the new rules are phased in.

“We need more clarity. There’s a long path ahead. This (change) did not get us all the clarity we need, but it’s a step forward,” Hora told the hundreds of people who logged into the call. Nevertheless, he called the changes a “massive day for American ag.”

Comments to the proposed changes may be submitted at https://www.regulations.gov/

David Murray can be reached at [email protected].