Understanding Section 45Z: What Landowners Should Know

If you own farmland, you may have heard about “Section 45Z”—a newly instated fuel production tax credit that could influence farming practices in the years ahead. While it may seem like something for energy companies and ethanol producers to worry about, this policy could have ripple effects that reach your fence line. Here’s what landowners should know.

What is Section 45Z?

Section 45Z was introduced as part of the Inflation Reduction Act under the Biden Administration and offers tax credits to fuel producers for creating low-emission transportation fuels. The credit is designed to reward lower carbon intensity (CI) of biofuels, encouraging the use of feedstocks produced with practices that result in fewer greenhouse gas emissions. It is in place for fuel produced and sold from 2025 through 2027 and replaces the existing blender’s tax credit for biofuels. At this writing, the tax credit is being proposed to be extended until the end of 2031 as part of a Congress budget-reconciliation bill.

Why It Matters to Landowners

While landowners aren’t the direct recipients of this tax credit, the demand for low carbon feedstocks—like corn for ethanol, soybeans for biodiesel, or either crop for sustainable aviation fuel— could increase. But it’s not just about what you grow; it’s about how you grow it.

Practices that improve soil health and reduce emissions— like cover cropping, reduced tillage, use of livestock manure, or enhanced fertilizer management—may become more valuable. That’s because fuel producers may seek out crops grown using “climate smart” methods to help lower their CI scores and qualify for the 45Z credit. As of this writing, the IRS is still determining how CI scores will be calculated on the farm level, so it is uncertain how much of the tax credit might be shared with farmers.

If your land is leased to a tenant, this may prompt new conversations around implementing sustainable practices. As the credit becomes more influential, producers might be asked to track farming practices more closely or consider new cropping strategies. That makes open communication and well-structured lease agreements critical.

However, it should be noted that the easiest way for biofuel producers to lower their CI score is to capture the carbon before it is emitted. Carbon capture pipelines have been proposed across Iowa, Nebraska, Minnesota, South Dakota, and North Dakota to store carbon below ground. This would reduce a plant’s carbon emissions by over half, easily putting them “in the money” to benefit from the 45Z tax credit. Utilizing low carbon corn or soybeans is not expected to be as significant of a reduction to a plant’s CI score, keeping the immediate focus on whether the carbon capture pipeline is implemented.

Things to Watch For 

• Market Shifts: As demand for low-CI feedstocks grows, it could affect commodity pricing, crop selection, and land value. Landowners should stay informed to understand how those changes might influence their property.
• Data Sharing Expectations: Fuel producers may require documentation on how crops were grown to qualify for the credit. That could mean more attention to record-keeping on your farm or with your tenant.
• Lease Agreements: As farming practices evolve, landowners and tenants may need to revisit lease terms to define who bears the cost—and who benefits— from adopting climate-smart practices.
• Carbon Capture Pipeline Status: All states along a major pipeline route have approved the pipeline except for South Dakota. The pipeline must run through South Dakota in order to store the carbon in the ground in North Dakota.
• Government Policy: It is unknown when CI scoring rules will be finalized by the IRS. Additionally, since the 45Z tax credit is currently only in effect until 2027, its long-term future is also uncertain, as subsequent policies are still subject to change.

The Bottom Line

Over the past several years, companies and governments across the globe have enacted commitments to reduce greenhouse gas emissions. Section 45Z is another signal that agriculture can be part of the solution for the increased focus on a climate-conscious future. For landowners, staying proactive—by understanding the policy, having informed conversations with tenants, and staying in touch with trusted advisors—will be key to navigating the changes ahead.

If you’re wondering how conservation practices might align with your goals or your tenant’s operation, we’re here to help. Connect with a Farmland Professional to explore what makes the most sense for your land. Hertz Conservation Resources

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