The 45Z Tax Credit Explained: Who Gets Paid for Low-Carbon Biofuel, and How Much Reaches the Farm
The new clean fuel credit pays biofuel producers, not farmers. Whether growers see a premium for regeneratively grown corn and soybeans depends on where they farm, what they grow, and how well they document it.
Under the federal 45Z Clean Fuel Production Credit, corn grown using both cover crops and no-till practices could generate nearly $1 per bushel in additional value for biofuel production. But how much of that value will actually reach the farmer?
The answer depends on how the biofuel industry responds to the new incentive. The credit goes directly to biofuel producers, not farmers, and can be worth up to $1 per gallon of qualifying low-carbon fuel. Whether farmers receive a premium for adopting or maintaining carbon-reducing practices depends on competition among biofuel plants, supply chain arrangements, verification requirements, and the rules governing which practices qualify.
These questions are the focus of the latest episode of Clearing the Air on Agricultural Policy, the Barry Flinchbaugh Center for Ag and Food Policy's monthly podcast. Guest Matthew Gammans, an agricultural economist and Associate Professor of Ag Policy at North Dakota State University who has closely followed the development of 45Z, joins regular panelists Jennifer Ifft of Kansas State University, Brad Lubben of the University of Nebraska-Lincoln, and Mark Edelman of Iowa State University.
Recorded shortly before Treasury's anticipated final rule, the conversation examines how 45Z works, what determines the value of lower-carbon feedstocks, and how that value might be distributed among farmers, grain elevators, and biofuel producers. The panel also explores broader questions about the credit's potential influence on production practices, agricultural markets, and the effectiveness of federal biofuel policy.
What the 45Z Tax Credit Is And How It's Calculated
Congress created 45Z, formally the Clean Fuel Production Credit, in the Inflation Reduction Act of 2022. It took effect on January 1, 2025, and was revised in the One Big Beautiful Bill Act of 2025. Gammans described it plainly:
"45Z is a tax credit, so it's money that you get back when you do something... If you produce a transportation fuel that meets these certain criteria of being low carbon, you are eligible for this subsidy or this incentive when you file your taxes."
The credit is based on a fuel's carbon intensity score: the total greenhouse gas emissions from producing the fuel, counting the fertilizer on the field, the trucking, and the energy used to run the plant, measured per unit of energy. Fuels qualify once their score falls below 50 kilograms of CO2 per million BTU, which is about half the score of gasoline. The credit starts near zero at that line and increases as the score drops, reaching $1 per gallon for a fuel with a score of zero.
The full credit requires producers to meet wage and apprenticeship standards. Without them, the maximum is 20 cents a gallon, though Gammans expects most producers to comply.
Many plants are already close to qualifying. Soybean biodiesel typically scores between 20 and 30, well under the threshold. A conventional corn ethanol plant usually scores in the 50s, depending largely on whether its electricity comes from coal, natural gas, or wind. Gammans expects most corn ethanol plants to participate.
The credit is currently set to expire at the end of 2029. Most observers expect it to be renewed.
Two changes in the 2025 law shaped who can benefit. First, it limited eligible feedstocks to those from the United States, Mexico, and Canada, which shut out imported used cooking oil from countries such as China and Malaysia. Second, it removed indirect land use change from the carbon calculation. Including those land use emissions would have added roughly 20 points to corn ethanol's score, Gammans estimated. Biodiesel would still qualify with that penalty, but many ethanol plants would not. He called its removal "a very big win, especially for corn ethanol."
Gammans said the most important thing for farmers to understand is who receives the money.
"This is a tax credit that is paid to the biofuel producer. No one else has a legislative claim on any money from the Treasury."
A plant can lower its carbon score in two ways: by improving its own operations or by buying crops grown with lower emissions. Improvements inside the plant, such as cleaner electricity, efficiency upgrades, or carbon capture and storage, can be worth a lot to the plant. Gammans doesn't expect any of that value to reach farmers.
What farmers control is how they grow the crop. Under the current rules, practices such as no-till, cover crops, and reduced nitrogen use lower the carbon score of the grain, and the plant that buys it can count that reduction toward its own score. Gammans sees reason for some optimism here. For a large plant, moving from all conventional to all regeneratively grown feedstock could be worth millions of dollars. Uncertainty about whether 45Z will be renewed after 2029 also works in farmers' favor. A plant may hesitate to spend heavily on a major upgrade that could lose its payoff in a few years, while buying regenerative grain is a lower-risk way to collect the credit.
For farmers who don't change their practices, Gammans expects no benefit. When asked whether 45Z would raise grain prices generally, he said "the answer is actually a pretty clear no." His reasoning rests on how the biofuel market works, which is covered below.
How much a farmer keeps depends on how many plants compete for the grain.
The potential value per bushel can be substantial. For corn grown with both cover crops and no-till, Gammans said the total value available is "getting close to a dollar per bushel." But several parties will want a share. The farmer needs a reason to keep records or adopt new practices. The elevator, which handles verification and carries the audit risk, needs to be paid for that work. The biofuel producer will want to keep some of the value too.
Gammans expects local competition to decide how the value gets split. Farmers in areas with many ethanol plants and soybean crush plants competing for grain, such as much of Iowa and Illinois, should be able to negotiate a large share. Farmers who sell to the only plant in the area may get much less. If they already use no-till for other reasons, Gammans said, a premium of 10 cents a bushel, roughly enough to cover verification, may be all they're offered.
Mass balance ties the premium to the grain itself.
One of the biggest decisions in the rules is how low-carbon bushels are tracked from the farm to the plant. USDA chose what is called a mass balance system. Gammans explained it with a simple example: an elevator takes in 100 bushels, 50 grown with no-till and 50 grown conventionally. The grain is mixed together, but the elevator keeps records showing it can sell 50 bushels' worth of no-till grain to a biofuel plant. This accounting happens at the first point where grain is combined, usually the elevator.
The alternative, book-and-claim, would work more like a certificate. A farmer would verify practices on the farm and receive a credit for a certain number of bushels, which could be sold to any plant anywhere in the country, whether or not the grain itself went there.
Under mass balance, a farmer has to sell the crop to the same place that pays for its low-carbon value. Gammans described the problem that creates:
"From a farmer's perspective, I want to sell my crop to where it's most valued, but I also want to sell this premium characteristic to where it's most valued. And if there's a tension there... if I'm in a mass balance system, I have to make some tough choices."
Lubben gave an example: the bushels with the best carbon scores may be grown next to a feedlot, while the bushels next to the ethanol plant score worse. Under mass balance, the low-carbon grain has to go to the plant instead of the nearby feedlot that would otherwise be its natural buyer.
Gammans said several efficiency arguments favor book-and-claim. It would cut verification and transportation costs, and it would allow regenerative practices to spread where they are cheapest to adopt, not just near biofuel plants. He also thinks it would send more of the money to farmers. If every plant in the country were bidding for the same low-carbon credits, he reasons, competition would push farmers' share of the value much higher. He said USDA may have chosen mass balance because it doubted it had the legal authority or the tracking systems for a nationwide certificate program, or because it was concerned that a broader program would increase the cost to the Treasury. Some groups are still pushing for book-and-claim.
Edelman asked what book-and-claim would mean for a farmer far from any plant, such as a Kansas grower using manure and regenerative practices. Gammans said it would be a windfall for farmers already using those practices far from biofuel plants and would encourage their neighbors to adopt them. Based on the most recent county-level data from USDA's 2022 Census of Agriculture, he does not expect that to produce a glut of low-carbon grain. Currently, he said, there is much more demand from biofuel plants than there are bushels grown with qualifying practices.
Soybeans earn less per bushel than corn under 45Z
The law treats all feedstocks the same: plants are scored on their carbon intensity, whatever crop they use. But corn and soybeans move through the supply chain differently, and that affects the premium. Corn goes directly to an ethanol plant. Soybeans go to a crush plant and come out as soybean meal and soybean oil, and only the oil goes on to make fuel.
Under Gammans' reading of the rules, only the oil share of a soybean's carbon reduction counts toward 45Z. An analysis by the American Soybean Association reaches a similar result, putting soybean premiums at roughly 30% of what they would be if the full bushel counted. Gammans called this "a classic problem in carbon accounting": when one process produces two products, emissions have to be divided between them somehow. He thinks the regulations are fairly clear but would like them to say so explicitly.
Earning the premium means field-level records and possible contracts.
To claim a premium, a farmer needs records for each field: all nitrogen applied, plus receipts and documentation for every practice claimed. Soil testing is not required. Gammans described a likely process. The farmer assembles the records for each field and submits them to the elevator, which arranges third-party verification. Some farmers would be randomly audited, but most could participate for years without being selected. Other arrangements are possible, including private firms that prepare a farmer's paperwork and find buyers. Gammans thinks farmers keep the largest share of the value when they do the record-keeping themselves and deal directly with the elevator or plant.
Edelman asked whether 45Z could move grain toward production contracts, the way the broiler and hog industries moved decades ago. Gammans wasn't sure, but he drew a distinction. For a farmer using only no-till, worth roughly 10 to 25 cents a bushel, the premium probably isn't large enough to change how the operation is run. For farmers combining several practices and earning premiums above 50 cents a bushel, the risk of going without a guaranteed buyer is higher. "Those folks, I think, would need to be contracting," he said.
There is also a rule against being paid twice for the same carbon reduction. A farmer who sells carbon credits from a field through a private program can't also claim 45Z for that field. But a farmer with a USDA EQIP contract for water quality or wildlife habitat can still qualify, because that program isn't paying for the carbon reduction itself.
45Z probably won't expand biofuel production, but it can lower its carbon footprint.
Lubben asked about the broader policy picture. 45Z rewards biofuel production, but national demand for biofuel is set largely by the Renewable Fuel Standard (RFS), the federal requirement for how much biofuel is blended into the fuel supply, along with state programs such as California's Low Carbon Fuel Standard. So does a tax credit actually change anything?
On production volumes, Gammans expects little change:
"Policy drives what the demand for biofuel is, and that demand is going to be filled really regardless of the profitability of a gallon. So I would not expect that 45Z is going to drive a huge boom in biofuel production."
As long as the RFS sets demand, extra money per gallon shouldn't result in many more gallons. Gammans said RFS decisions such as small refinery exemptions matter much more to the size of the industry. Exports and other market factors could complicate that picture, and actual data will be needed to test it.
On carbon, he expects 45Z to lower the carbon intensity of the fuel supply, though not by as much as the payments might suggest. Some of the credit will pay for things producers would have done anyway; soybean biodiesel already qualifies, for example. He compared it to the child tax credit: "you don't see a lot of people racing out to have more kids to claim it." Still, the payments are large compared with the cost of many upgrades and regenerative sourcing contracts, so he expects plants to keep lowering their scores.
Edelman asked whether 45Z effectively becomes part of the farm safety net. Gammans called that a fair description, with one qualification: the payment compensates farmers for practices that take extra work, cost, and risk. It is part of a growing list of government payments tied to environmental results, along with USDA's EQIP and CSP conservation programs, which the Inflation Reduction Act also expanded.
What Remains Unsettled
The basic structure of 45Z is set. Biofuel producers receive the credit, the size of the credit depends on carbon intensity, and farmers can share in it only by growing crops that lower a plant's score and selling them through the right channels. Several questions that matter most to farmers remain open. How the value gets split will depend on local competition, and there is little evidence yet. The choice between mass balance and book-and-claim may come up again as the rules are revised. How soybeans' oil and meal are scored could be clarified. And the credit's expiration at the end of 2029 affects every investment decision along the way.
Gammans' advice comes down to one point. For any individual farmer, what matters most is whether the nearby biofuel plant decides to participate actively. "What really matters is that your local refinery is excited about this program and wants to do a lot of it," he said, "and that's what's going to create demand for regenerative practices, which ultimately is going to create the premiums for those practices."
Clearing the Air is produced as a monthly collaboration between the Flinchbaugh Center and Smoke and Mirrors: Ag Policy Unfiltered, Jennifer Ifft’s podcast on agricultural policy.
Watch the full conversation with Beth Johnson, Founder and Principal, Food Directions, LLC.
About Clearing the Air
Clearing the Air is a monthly podcast brought to you by The Flinchbaugh Center in partnership with the Smoke and Mirrors podcast. Hosted by Eric Atkinson, the show offers thoughtful, fact‑driven conversations for anyone interested in the intersection of agricultural economics, policy, and real‑world decision‑making. Each episode features insights from Jennifer Ifft, Mark Edelman, and Brad Lubben, along with a rotating monthly guest.
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