The implementation of the Section 45Z Clean Fuel Production Credit represents a fundamental shift in federal energy policy, moving away from technology-specific subsidies toward a performance-based framework that rewards verified carbon reduction. Under the original Inflation Reduction Act of 2022 and the subsequent modifications within the One Big Beautiful Bill Act (OBBBA) of July 2025, the United States has transitioned into an era where a gallon of fuel is treated as a carbon-reduction service. While the core of the 45Z credit is built upon Carbon Intensity (CI) scores, the 2026 regulatory landscape is now defined by a strict geographic pivot known as the North American Mandate. This mandate requires that all qualifying transportation fuel be exclusively derived from feedstocks produced or grown within the United States, Canada, or Mexico.

The implications of this shift are profound for domestic producers who have previously relied on global supply chains to source low-carbon feedstocks. By effectively ending the eligibility for fuels made from imported materials such as Asian used cooking oil (UCO) or South American biomass, the IRS has signalled a "North American First" strategy intended to ensure federal tax incentives bolster regional agricultural independence. For producers and investors, this realignment necessitates a total re-evaluation of procurement strategies and a heightened focus on domestic feedstock security.

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The Mechanics of the North American Mandate

The 45Z credit is available for domestic producers of clean transportation fuel sold between January 1, 2025, and December 31, 2029. While the credit began in 2025, the OBBBA amendments introduced more restrictive eligibility requirements that take full effect for fuel produced after December 31, 2025. The primary enforcement mechanism for this geographic restriction is the 45ZCF-GREET model, which is used to establish the CI score of the fuel. Starting in 2026, the IRS is removing foreign feedstock pathways from this model, making it mathematically impossible for fuels derived from non-North American sources to qualify for the credit.

This change creates a sharp divide in the market between eligible and ineligible materials. For example, Canadian canola oil and Mexican agricultural products remains eligible, ensuring that cross-border trade within the continent continues to support the clean fuel economy. Conversely, feedstocks such as Chinese used cooking oil and Brazilian sugarcane ethanol, which were previously key components of the Sustainable Aviation Fuel (SAF) and renewable diesel sectors, are now classified as ineligible. This disruption is particularly significant for SAF producers using the alcohol-to-jet pathway, as they can no longer rely on low-CI imports to meet their carbon reduction targets.

To remain compliant, producers must maintain robust records that substantiate the origin of every unit of feedstock used in production. For materials sourced from aggregators in Canada or Mexico, taxpayers are required to demonstrate that the feedstocks do not contain any sub-components or additives that originated outside of the three authorized North American countries. This level of supply chain transparency turns feedstock procurement from a logistics function into a critical component of tax compliance.

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Market Disruptions and Domestic Opportunities

The exclusion of foreign feedstocks has created an immediate vacuum in the supply of low-CI materials, leading to increased demand for domestic soybean and corn oil. While this represents a windfall for American farmers, it also creates a competitive environment where fuel producers must vie for a limited pool of qualifying North American inputs. The market is effectively moving toward a two-tiered system where "45Z-compliant" feedstocks command a price premium over generic global commodities.

One of the most significant beneficiaries of this shift is the domestic ethanol industry. Along with the feedstock mandate, the 2026 regulatory update excluded emissions attributed to Indirect Land Use Change (ILUC) from CI score determinations. Previously, ILUC penalties added 20 to 25 points to the CI scores of corn ethanol, often disqualifying them from significant incentives. With these penalties removed for fuel produced after 2025, even standard ethanol plants are expected to qualify for credits ranging from $0.35 to $0.45 per gallon. This "windfall" moment allows grain-based biofuels to compete directly with other low-carbon alternatives, provided they adhere to the North American sourcing requirements.

However, the Sustainable Aviation Fuel sector faces a more challenging road. The OBBBA eliminated the higher credit cap for SAF, standardizing it at the same $1.00 level as road fuels like renewable diesel. When combined with the "volume penalty" of the alcohol-to-jet conversion process—which requires roughly 1.6 to 1.7 gallons of ethanol to produce a single gallon of SAF the lack of access to cheap, low-CI foreign feedstocks makes domestic SAF production less economically attractive on a per-gallon basis. Producers must now rely more heavily on domestic "climate-smart" agricultural practices to lower CI scores enough to bridge the financial gap.

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The Role of AFS Commodities in Strategic Procurement

In this complex regulatory environment, AFS Commodities provides essential expertise to assist clients in navigating the transition to a 45Z-compliant supply chain. The shift toward a performance-based clean energy economy means that the value of a commodity is no longer determined solely by its physical properties, but also by the data and documentation attached to it. AFS Commodities assists clients by bridging the gap between traditional agricultural trade and modern carbon accounting.

First, AFS Commodities helps clients secure North American feedstocks that meet the "exclusively derived" standard required by the IRS. By leveraging a deep network of domestic and regional suppliers, AFS can source materials that are guaranteed to be 45Z-eligible, mitigating the risk of credit disqualification due to foreign feedstock contamination. This is critical for producers who must provide "diligence records" to substantiate their sourcing during IRS audits.

Second, AFS Commodities facilitates the implementation of Climate-Smart Agriculture (CSA) partnerships between fuel producers and farmers. Since farming practices account for approximately half of ethanol's total carbon intensity, agricultural decarbonization is the next logical step for producers looking to maximize their 45Z value. AFS assists in managing the relationship between the plant and the grower, ensuring that practices like no-till farming, cover cropping, and optimized nutrient management are properly documented using the USDA Feedstock Carbon Intensity Calculator (FD-CIC). These on-field practices can lower a bushel’s CI by 10 to 20 points, translating to an additional $0.20 to $0.40 per gallon in credit value for the producer.

Finally, AFS Commodities provides guidance on the integration of Renewable Energy Certificates (RECs) into the broader decarbonization strategy. While the North American Mandate focuses on the "Scope 3" emissions of feedstocks, RECs address the "Scope 2" emissions associated with plant operations. AFS assists clients in purchasing and retiring RECs that meet the 2026 requirements for geographic and temporal matching. By optimizing both the energy intensity of the facility and the carbon footprint of the feedstock, AFS enables clients to capture the maximum possible value from the 45Z credit.

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Compliance and Risk Management

The 2026 regulatory shift has turned carbon accounting into a core financial function, moving it from the realm of sustainability reporting into tax compliance and treasury management. To claim the 45Z credit, producers must navigate a rigorous set of administrative requirements, including registration under Section 4101 of the Internal Revenue Code. This registration process involves an Activity Test, an Acceptable Risk Test, and a Satisfactory Tax History Test.

Producers must also be prepared for the sensitivities of CI modeling. For instance, a 100-million-gallon facility that miscalculates its inputs by a small margin could face a variance in its tax credit of several hundred thousand dollars. The proposed regulations require separate production accounting for facilities that produce multiple fuels with different emissions intensities, adding another layer of complexity to the operation.

The transferability of the 45Z credit under Section 6418 further emphasizes the need for data integrity. Credits can be sold to third parties for cash, which facilitates project finance, but these transfers are tied to specific production lines and require annual pre-filing registration. If the underlying data regarding feedstock origin or CI scores is found to be inaccurate, the financial and legal repercussions can be severe.

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Conclusion: The Strategic Takeaway for 2026

The transition to the Section 45Z framework is a transformative force for the North American energy sector. By rewarding the specific "how" of production over the "where" of volume, the federal government has catalyzed a wave of innovation across the agricultural and refining sectors. However, the "North American First" mandate serves as a reminder that this innovation must be rooted in regional supply chain security.

For producers to thrive in this era, they must move beyond viewing individual decarbonization tactics—like RECs or feedstock sourcing—as standalone solutions. Instead, they must weave these elements into a comprehensive strategy that prioritizes data integrity and supply chain transparency. In this new performance-based market, the ability to prove a carbon reduction is just as valuable as the fuel itself.

The current period of regulatory reliance, while the industry awaits the finalized 45ZCF-GREET model, is the time for producers to solidify their partnerships and procurement protocols. By working with experts like AFS Commodities to secure North American feedstocks and implement climate-smart agricultural practices, producers can position themselves to maximize the 45Z opportunity through the end of the decade. The 2026 realignment is not merely a change in the tax code; it is a fundamental reset of the clean fuel economy that rewards those who can master the intersection of agriculture, energy, and data.