Hearing “45Z” may bring a lot of different images to mind ……. a sports car, a new zero turn radius mower, or maybe an advanced computer chip.  But since the Inflation Reduction Act passed in 2022, the potential impact of a new tax credit outlined in section 45Z of the IRS tax code gave a new meaning to the term for many in agriculture.  More specifically, it isan increasingly significant topic for the ethanol industry and the farmers supplying the corn used to produce ethanol.  Some feel it could be one of the biggest opportunities that growers have ever had to turn the environmentally friendly production practices they employ into economic benefits.

The Section 45Z Clean Fuel Production Credit was first enacted as part of the Inflation Reduction Act of 2022.  It incentivizes the production of fuels with low greenhouse gas emissions.  The credit targets ethanol plants that meet certain operational standards based on scoring their production practices and final product.  Up until the recent amendments in the 2025 One Big Beautiful Bill Act (OBBBA) there was not much impact seen in the marketplace because of uncertainty around final guidance and scoring by the IRS.  For example, the OBBBA did clarify that the grain used would be a factor in the calculation of the ethanol’s carbon intensity (CI) score.  This was assumed, but not completely certain based on the 2022 bill.  The longevity of the credit was also an impediment to establishing new practices.  It was initially authorized for 2025-2027 but the OBBBA extended the credit through 2029 and further extensions are in discussion.

Although the tax credit goes to the ethanol producer based on the carbon intensity (CI) score of the biofuel produced, about 60% of that score is determined by the CI score of the grain used to produce the ethanol.  The expectation is that purchasing practices will emerge in the marketplace which offer incentives (i.e., premiums) for grain which a farmer can document has a lower CI score.  The grain itself won’t have to be handled or stored separately, but the lower CI score of those bushels can be averaged into the total grain used and can add value through the impact on the ethanol plant’s average CI score of the total grain used.

So how much value are we talking about?  One of the companies most active in scoring grain currently being produced scored about 400M bushels of the US crop.  They found that those corn producers already reduced their CI score by about 18 points from the Department of Energy baseline.  An average CI improvement of 18 points equates to approximately:

• $0.40 per gallonof ethanol, or
• $1.08 per bushelof corn

This could translate into billions of dollars flowing through the national farm economy.  The share of that value which will go to growers (some estimates are in the 30-50% range) will be determined by the market.  However, it will clearly be in the best interest of an ethanol producer to use the tax credit dollars to establish grain purchasing practices that reflect an effective incentive for the farmers who supply them.  The incentive should reward those who adopt the agronomic practices that result in a lower CI score assigned to the grain they deliver, thereby further increasing the benefits the ethanol plant can receive.

Although the opportunity that this tax credit could represent appears to be very significant, it will require a lot of good, detailed record-keeping and possibly changes in farm management practices to reap the benefits.  The carbon intensity score will be assigned on a field-by-field basis and will reflect factors such as commercial fertilizer used, timing of applications, fuel used in trips across the field, cover crops, reduced tillage and other soil health practices, as well as overall farm efficiencies.  The emissions assigned to a field based on the production practices employed are essentially split among the bushels produced in the field, so higher yields lower the CI score on each bushel and lower yields increase the CI score on each bushel.  It’s expected that this will require third party verification to certify a farmer’s practices and records to the point of withstanding an audit.  There are already firms active in the marketplace offering software and services specifically designed for tracking grower production practices and CI scoring.

More rules and guidance should be coming soon from the IRS and the Office of Management and Budget (OMB).  Those will be necessary for the marketplace to fully digest the new credit and begin to establish new grain purchasing practices.  One issue is that the scoring mechanism must be clearly defined and finalized so all involved can be certain of the specific scoring procedure. There are currently two CI calculators that are being considered, one from the Department of Energy (the GREET model) and one from the USDA.

Another big decision to finalize is whether the CI score of the grain will remain attached to the specific bushel produced.  This type of system is called Mass Balance.  This would result in only the farmers delivering grain to ethanol plants being affected, since other grain buyers would not qualify for 45Z credits and would therefore be unable to pass on a share of the benefits to growers.  The alternative system is called Book and Claim.  This system would allow any grower to verify his CI score and market the credit for which it would qualify separately from his grain.  This allows grain to continue to follow normal flow patterns based on local needs and transportation efficiencies.  It allows all farmers to participate regardless of their proximity to a biofuel facility.

It’s taken a long time to develop, and a little more time is needed to determine important details, but we may soon start to see a real impact on the ag economy from the 45Z tax credit.  This type of profit enhancement could be a very positive factor for landowners as increased profit potential for growers through changing production practices will also increase the value of land on which the crop is grown.  At Halderman Farm Management we closely monitor the regulations surrounding 45Z and its implementation.  This will materially impact farms we manage and the opportunities our tenants can benefit from in the future.