You’d never know it from the lofty environmentalist rhetoric they often use, but many clean-energy companies exploit federal laws and regulations to an extent that traditional oil and gas companies could only dream of. If the Internal Revenue Service (IRS) adopts the regulations it recently proposed to administer the Section 45Z Clean Fuel Production Tax Credit, then “clean” fuel producers will have a lucrative new loophole to exploit.
In 2022, Congress passed the Inflation Reduction Act (IRA). Among hundreds of other provisions, the IRA sought to reduce greenhouse-gas emissions by inserting Section 45Z into the Internal Revenue Code to create a tax credit for producers of lower-emission transportation fuel. In 2025, the One Big Beautiful Bill Act extended the 45Z tax credit until the end of 2029, resulting in a total cost of $53.1 billion to the Treasury.
Section 45Z creates a tax credit for the domestic production and sale of transportation fuels with low levels of greenhouse-gas emissions. The IRS proposes administering this tax credit to allow fuel producers to purchase Energy Attribute Certificates from clean-energy producers for the amount of electricity they use, as a way to reduce their reported emissions. Such certificates are not required or mentioned in the underlying statute.
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This certificate scheme would minimize the administrative burden on the IRS by turning enforcement into an accounting exercise, in which bureaucrats simply match energy usage to certificates in an accounting ledger. The problem is that the trade in these certificates bears no inherent relationship to actual energy transfers.
Energy Attribute Certificates Ignore the Physical Realities of Power Markets
Such certificate schemes have been tried before, and an extensive body of research shows that regulatory programs that rely on these certificates do not change behavior or reduce greenhouse-gas emissions. The problem is that the certificates are interchangeable in a way that the underlying energy commodities are not.
As a simple analogy, Brent Crude and West Texas Intermediate are both relatively light and sweet oil types. They have different chemical characteristics, but more importantly, they are extracted from different parts of the world, which connects them to different infrastructure, markets, and risk profiles. As a matter of logistics and price, Brent Crude and West Texas Intermediate oil are emphatically not interchangeable, in the way that, for example, cash and the financial transactions often regulated by the Treasury are. This is also why natural-gas prices are consistently higher in Europe than in the United States.
These price discrepancies are supercharged in the context of renewable energy, particularly wind, which is expected to account for most of the certificates. Wind energy prices experience dramatic volatility within the same day, as wind patterns fluctuate irrespective of energy usage. In fact, wind energy prices often go negative, at times when winds are strong, and demand is low (like the wee hours before dawn). Similarly, wind patterns will lead to geographic price differentials, as some locations become windy while others remain calm. Absent storage and a deliverable path on the grid, these geographic differences lead to diverging prices.
How the IRS Can Close the 45Z Energy Certificate Loophole
If the IRS insists on using certificates, it should build guardrails to ensure the certificates reflect real-world behavior (and emission reductions), rather than creative accounting. For example, the IRS could require temporal matching, so that the fuel producer must show that the certificate they purchased corresponds to energy actually consumed within the same hour, to mitigate price manipulation over time. The IRS could also require a deliverable pathway between the energy provider and the fuel producer; California already has standards that show how this could be done.
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Yet while the IRS would require some geographic proximity, the clean-fuel producer and the renewable power source could still be hundreds of miles apart, without a deliverable pathway between them. In other words, it would be possible (and legal) for an ethanol plant to run on baseline fossil fuels, but purchase certificates reflecting similar amounts of wind energy that they don’t even use, and which they cannot use on the existing power grid.
The lack of enforceability for the temporal requirement is arguably more egregious. The IRS proposes annual matching, which would require that the energy represented by the underlying certificate be used in the same year as its purchase. Given the dramatic volatility of wind energy prices, end-of-year matching is meaningless. The IRS has shown that it recognizes the desirability of a closer temporal match by establishing hourly matching as the eventual goal. Yet, in a brazen move, the IRS has delayed the transition from annual to hourly matching until the day after the 45Z tax credit expires.
Clean-fuel producers and their lawyers and consultants alike will eagerly await the final regulations. The 45Z certificate program, as proposed, will allow fuel producers to pad their income statements to the tune of billions—all at the taxpayer’s expense.
This piece originally appeared in The National Interest
