The Treasury Department and the Internal Revenue Service (“IRS”) issued Notice 2024-49 (the “Notice”) on May 31, 2024, regarding the Clean Fuel Production Tax Credit under section 45Z of the Internal Revenue Code, enacted by the Inflation Reduction Act of 2022. Section 45Z offers a tax credit for the production of clean transportation fuel available beginning on January 1, 2025, through December 31, 2027, replacing expiring credits for biodiesel, sustainable aviation fuel (“SAF”), and other alternative transportation fuels.

Although the clean fuel industry has been anxiously awaiting the promulgation of proposed regulations regarding eligibility for the section 45Z credit, the Notice does not present proposed regulations regarding the credit generally or critical issues relating to the carbon intensity that will be assigned to certain fuels; these topics are reserved for future guidance. Instead, the Notice largely pertains to the requirement under section 45Z that a taxpayer must be “registered as a producer of clean fuel” under Code section 4101 at the time of production in order to qualify for the tax credit and sets forth the details regarding the registration process. For taxpayers that wish to claim the credit for fuel produced as of January 1, 2025, the IRS recommends submitting an updated Form 637 by July 15, 2024.

Background

Section 45Z provides a tax credit for SAF and non-SAF transportation fuels. The available tax credit amount under section 45Z is calculated by multiplying the applicable amount per gallon of qualifying fuel by the “emissions factor” for the fuel. Under section 45Z(b)(1)(A), the “emissions factor” for each fuel is calculated by subtracting the “emissions rate” of the fuel from 50 kilograms of CO2e per MMBTu, and then dividing this amount by 50 kilograms of CO2e per MMBTu. Thus, the greater the emissions rate, the smaller the emissions factor and the smaller the tax credit.

Under section 45Z(b)(1)(B), emissions rates will be published annually by Treasury in a table that “sets forth the emissions rates for similar types and categories of transportation fuels” based on lifecycle greenhouse gas (“GHG”) emissions as described in section 211(o)(1)(H) of the Clean Air Act. Taxpayers may file a petition for a “provisional emissions rate” for any transportation fuel for which an emissions rate has not been established.

For non-SAF transportation fuel, lifecycle GHG emissions must be based on the most recent determinations under the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (“GREET”) model developed by Argonne National Laboratory or a successor model. SAF GHG lifecycle emissions must be calculated either using the Carbon Offsetting and Reduction Scheme for International Aviation adopted by the International Civil Aviation Organization ("CORSIA") or a “similar methodology” that satisfies criteria under section 211(o)(1)(H) of the Clean Air Act. SAF producers must provide third-party certification of compliance with various CORSIA requirements.</strong<corsia<>

Section 45Z Registration Requirements

July 15 Target

The Notice states that a taxpayer must have a signed registration letter from the IRS at the time of production in order to establish its eligibility for the section 45Z credit. In other words, taxpayers cannot take the credit for any fuel produced prior to the date listed on the registration letter: if a taxpayer receives a letter of registration on, say, June 30, 2025, the taxpayer cannot claim the section 45Z credit for any fuel produced and sold by the taxpayer before that date, even if the fuel otherwise meets all the qualification requirements for the credit. The Notice recommends that taxpayers apply for registration as soon as possible. The IRS intends to issue registration letters by January 1, 2025, to applicants who meet the requirements in the Notice and submit applications by July 15, 2024. The IRS cautions that taxpayers applying for registration after July 15, 2024, are less likely to receive registration letters by January 1, 2025, because the agency is expecting a large volume of applications.

Form 637

Applications for registration must be made using IRS Form 637. The Notice details how the form should be completed and the required information. In general, applicants must provide information regarding:

• the type of transportation fuel produced,
• annual volumes of fuel produced,
• the feedstock and country of origin for each feedstock,
• a description of the applicant’s production facilities and their locations,
• each production facility’s annual fuel production capacity,
• whether the facilities are currently producing volumes of qualifying transportation fuel, and
• the names of business entities to which the applicant sells the qualifying transportation fuel (i.e., its customers) as well as business entities from or with which the applicant buys, trades, transfers, or exchanges the transportation fuel.

Applicants must also provide the names and addresses of those who act as agents or brokers in buying, selling, or transporting any qualifying transportation fuel for the applicant. For many fuel producers, this information may be voluminous; the IRS may not be aware of the extensive nature of its information requirements.

The IRS is revising Form 637 to include Activity Letters “CN” for producers of non-SAF transportation fuel and “CA” for a producer of SAF. Until the revised form is released, applicants may use the current Form 637 and write in Activity Letter “CN” or “CA.” The IRS notes that depending on the transportation fuel, a producer may have additional registration requirements under section 4101 and Treasury Regulations section 48.4101-1. Producers should examine the registration requirements under these sections to determine whether they need to register with additional Activity Letters.

Other Requirements

The IRS will register an applicant only if (1) the IRS concludes the applicant is producing or is likely to produce transportation fuels that may be eligible for the section 45Z credit, and (2) the IRS is satisfied with the filing, deposit, payment, reporting, and claim history for the applicant and any related person’s federal taxes. The IRS notes that whether a taxpayer receives a registration letter is not determinative of whether that taxpayer qualifies for the section 45Z tax credit. The other section 45Z requirements (such as the GHG reduction requirement) must still be met, and the IRS plans to issue additional guidance on these other aspects of section 45Z.

Eligible Fuels

With regard to non-SAF transportation fuel, the IRS and Treasury in consultation with the Department of Energy anticipate that “low-GHG” forms of the following fuels may qualify for the tax credit:

• biodiesel,
• butanol,
• diesel fuel,
• dimethyl ether,
• ethanol,
• gasoline,
• hydrogen,
• LPG,
• methanol, and
• natural gas.

By “low-GHG,” the IRS simply means the forms of each fuel that meet the emissions rate requirement discussed above. The IRS and Treasury state that most fuels derived from palm fatty acid distillates, petroleum, natural gas, and coal (including lignite) are not expected to qualify as non-SAF transportation fuel based on the emissions rate threshold. The Notice does not, however, specify the emissions rate for these fuels; that information will presumably be contained in the forthcoming guidance that is to present the tables of fuels and rates.

The Notice reiterates that transportation fuel derived from co-processing an applicable material with a feedstock that is not biomass is not eligible for the section 45Z credit. Section 45Z(d)(5)(B)(i) defines the term “applicable material” to mean monoglycerides, diglycerides, triglycerides, free fatty acids, and fatty acid esters. SAF under section 45Z is categorized as either a fuel that meets the specifications of one of the ASTM D7566 Annexes for SAF synthetic blending components or a co-processed liquid fuel produced by co-processing petroleum with synthesized hydrocarbons derived from synthesis gas via the Fischer-Tropsch process under ASTM 1655 Annex A1. For SAF produced by co-processing petroleum with SAF hydrocarbons, the Notice states that the co-processor is the party that should apply for registration.

Eligible Feedstocks Under Appendix A

In a table format, Appendix A of the Notice lists feedstocks and feedstock types used to make fuels that may be eligible for the section 45Z tax credit. In completing Form 637, producers are to list the feedstocks that are the main inputs to their fuel production process. The feedstock types listed are:

• agricultural residue,
• algae,
• biogas,
• biomass energy crops,
• carbon dioxide,
• ethanol,
• fats, oils, and greases,
• industrial byproducts,
• isobutanol,
• manure,
• mixed organic waste,
• natural gas,
• oil seed,
• other alcohols,
• second or intermediate crops,
• starch crops,
• sugar crops, and
• woody biomass.

Each of these feedstock types is further broken into specific feedstocks (e.g., barley straw and corn stover as subcategories of agricultural residues). The table also includes a catch-all row for “other” feedstock categories not listed in the table that are used to produce fuel eligible for the section 45Z credit. The IRS and Treasury emphasize that this list is not determinative of whether a fuel qualifies for the tax credit.

The Notice explains that “feedstock” means the main input into the fuel production process. For example, an alcohol-to-jet fuel producer importing ethanol from another facility should list ethanol as the feedstock. If, instead, the producer produces ethanol on-site and upgrades it into SAF, the relevant feedstock is the feedstock used to produce the ethanol.

Additional Guidance Will Be Forthcoming

The Notice states that it is the intention of the IRS and Treasury to issue additional guidance regarding other aspects of the section 45Z tax credit at a later date. Important outstanding issues regarding the section 45Z tax credit include the emissions rate table and procedures for obtaining a provisional emissions rate. The granularity of the emissions rate table and the emissions rates assigned to various fuels, as well as the designation of plant-specific carbon intensity scores, will largely determine how instrumental section 45Z will be in incentivizing low-carbon behaviors in fuel production.

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We will continue to monitor the Inflation Reduction Act guidance initiatives from the IRS and Treasury and will provide further updates as guidance is released. In the meantime, Baker Botts would be pleased to assist you in your analysis of the Inflation Reduction Act and clean energy tax incentive matters.

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