With the Strait of Hormuz effectively closed and oil above $112 a barrel, an obscure corner of the US tax code might be an unexpected tool for relief.
If you've filled up your car or purchased raspberries recently, you already know fuel prices have skyrocketed. The national average for a gallon of gasoline hit $3.93 this week. In California, it's $5.62. Diesel, the fuel that moves freight, heats homes, and powers farms, is at $5.38, up nearly two dollars from a year ago.1
The reason is straightforward, even if the geopolitics behind it are not. Since late February 2026, the US-Iran conflict has effectively shut down the Strait of Hormuz, the narrow waterway through which roughly one-fifth of the world's oil supply flows every day. The International Energy Agency has called this the "greatest global energy security challenge in history."2
The scale of disruption is staggering. Over 150 tankers sit anchored outside the strait. Major shipping lines like Maersk, CMA CGM, and Hapag-Lloyd have suspended all transits. Iran has set up what amounts to a maritime toll booth, charging some vessels $2 million to pass.3 Goldman Sachs estimates that $14 to $18 of every barrel of oil you're paying for right now is pure geopolitical risk premium.4
The Strait of Hormuz normally carries 20.1 million barrels of oil per day. Since March 2, 2026, roughly 17.8 million barrels/day have been disrupted, roughly 20% of global supply.
And it's not just oil. Iranian strikes damaged two of Qatar's fourteen LNG processing trains, knocking out 17% of the country's liquefied natural gas export capacity, or 12.8 million tonnes per year. Qatar supplies roughly a fifth of the world's LNG. Full repairs will take three to five years, because only three companies on Earth make the gas turbines these facilities need, and all of them entered 2026 with order backlogs stretching past 2029.5
Despite what public equities market may seem to indicate, this isn't a temporary price spike that will resolve itself in a few weeks. While diplomatic channels remain open, Iran rejected direct talks with the US on March 25, suggesting this disruption has staying power.6
What can actually be done? The policy options are limited. The US can release more oil from the Strategic Petroleum Reserve, but that's a Band-Aid. OPEC+ spare capacity is thin, and really only Saudi Arabia has meaningful room to ramp up. Expanded production from existing fields takes years to come online.
But there's a tool that's already in place, already funded, and already beginning to change the economics of fuel production in the United States. And most people have never heard of it.
Annotated with key conflict events. Hover over points for details.
In August 2022, Congress passed the Inflation Reduction Act. Buried deep in the legislation (Section 13704) was a new tax credit called 45Z, the Clean Fuel Production Credit. In July 2025, the One Big Beautiful Bill Act extended and expanded it through 2029.9
If you produce a clean transportation fuel in the United States, the federal government will pay you a tax credit for every gallon. The amount of the credit depends on how clean your fuel is. The cleaner your fuel's "carbon intensity" score, the bigger your credit.
For ethanol, the corn/sorghum dervied fuel that already makes up about 10% of the gasoline you buy, this is a game-changer.
Previous biofuel tax credits were flat. Every producer got the same dollar amount per gallon, regardless of how efficiently they operated. There was no reason to be cleaner than the minimum requirement, because being cleaner didn't pay more.
45Z is fundamentally different. The credit is variable, meaning it scales with how low your carbon intensity is. The formula is simple:
Emissions Factor = (50 − your emissions rate) ÷ 50
Your Credit = Applicable Production × Emissions Factor
With prevailing wage compliance, the applicable amount is $1.00 per gallon. So a plant with a carbon intensity of 30 kg CO2e/mmBTU gets: (50 − 30) ÷ 50 = 0.40 × $1.00 = $0.40/gallon.
A plant at 10 kg CO2e/mmBTU gets: (50 − 10) ÷ 50 = 0.80 × $1.00 = $0.80/gallon.
The efficient plant gets double the credit. That's the mechanism that creates winners and losers.
This changes the ethanol production competitive landscape. Under the old flat credits, everyone was in the same boat. Under 45Z, a plant that has invested in carbon capture, sources low-carbon feedstock from farmers using climate-smart practices, meets labor standards, or simply runs more efficiently than its neighbors can earn 10, 15, even 25 times more per gallon than a plant that hasn't.
And that brings us to how the money flows.
The 45Z credit creates a chain of incentives that connects federal tax policy to what farmers grow and what you pay at the pump.
The top row is the direct mechanism: Treasury pays producers, producers need low-carbon feedstock, farmers get paid premiums for growing it with better practices. Former USDA Secretary Vilsack suggested premiums could reach $1 or more per bushel, though that estimate was likely optimistic. The math is more conservative but still meaningful: each bushel of corn produces roughly 2.8 gallons of ethanol, and each CI point below the 50 kg threshold is worth about $0.02 per gallon in credit value to the plant. So a farmer whose practices reduce feedstock CI by just 2 points generates over $0.11 per bushel in additional credit value for the ethanol plant. Industry analyses have estimated actual farmer premiums in the range of $0.10 to $0.32 per bushel ($18 to $60 per acre) depending on plant economics and how much of the credit value gets passed along.10
The bottom row shows how 45Z creates competitive pressure. When one plant has a $0.60 per gallon credit advantage over another, it can afford to price its ethanol lower and still make the same margin. That forces competitors to either become more efficient or lose market share. The result is downward pressure on fuel prices subsidized by government tax credits.
Critically, these credits aren't just paper tax deductions. Under IRC Section 6418, enacted as part of the IRA, producers can sell their 45Z credits to unrelated buyers for cash. A growing ecosystem of marketplaces and advisors facilitates these transactions, including Crux, Mickelson & Company, and Vericap (part of the Clean Fuel Credit Consortium). Credits typically sell at $0.85 to $0.94 per dollar of face value; the discount reflects the cost of due diligence, tax credit insurance, and the inherent risk profile of production credits, where eligibility depends on verified carbon intensity scores rather than a fixed asset. Roughly $1 billion in 45Z credits transacted in 2025 alone. For smaller ethanol producers, this is transformative: a plant that doesn't have enough federal tax liability to use the credit internally can still convert it to working capital within the same tax year.29
There's also a paired credit called 45Q that pays producers for capturing and storing CO2. Ethanol fermentation produces a relatively pure CO2 stream, making ethanol plants among the cheapest carbon capture opportunities on the planet. A facility can't claim both 45Z and 45Q in the same year, but the option to switch between them adds strategic flexibility.11
If you're skeptical, you should be. The US has subsidized biofuels for decades, and the evidence that those subsidies actually lowered gas prices is mixed.
A widely cited Resources for the Future study found that the old ethanol blender's credit, a flat $0.45 per gallon that expired in 2011, was almost entirely captured by producers. Consumers saw essentially none of it.12 The Congressional Budget Office, the Government Accountability Office, and multiple academic studies have reached similar conclusions about prior biofuel programs: the money went to producers, not to lower prices at the pump.13
So why might 45Z be different? Because flat credits don't create competition. Variable credits that scale with efficiency do.
Under 45Z, the credit a plant receives isn't a fixed amount. It's a direct function of that plant's carbon intensity score and its labor compliance. The range across the US ethanol industry is enormous.
The same federal credit produces vastly different outcomes depending on plant efficiency and compliance.
| Plant Profile | Carbon Intensity | 45Z Credit (w/ PWA) | Annual Value (65M gal) |
|---|---|---|---|
| Gevo Net-Zero North CCS since 2022, 160K MT CO2/yr captured |
~20-22 kg CO2e/mmBTU | $0.58–$0.75/gal | $38M–$49M |
| "Plain vanilla" plant Post-OBBBA baseline, no CCS, no CSA sourcing |
~35-42 kg CO2e/mmBTU | $0.16–$0.30/gal | $10M–$20M |
| "Left Behind" plant 47.5 kgCO2e/mmBTU, rounds to zero credit |
~47-50 kg CO2e/mmBTU | $0.00–$0.05/gal | $0–$3M |
The Iowa Renewable Fuels Association illustrated just how sharp the edges are in its April 2025 comments to the IRS. They described two hypothetical 100-million-gallon plants with nearly identical carbon scores. One lands at 47.5 kgCO2e/mmBTU and its emissions factor rounds to zero: no credits at all, despite technically qualifying under the 50 kg threshold. The other, at 47.4 kgCO2e/mmBTU, sees its factor round up to 0.1 and collects $10 million. A difference of one-tenth of a point in carbon intensity equals a $10 million annual swing.15
At the top end of the spectrum, Gevo completed its $210 million acquisition of the former Red Trail Energy plant in North Dakota on January 31, 2025, specifically for its low carbon intensity profile and operating carbon capture system. By the end of 2025, Gevo had sold $52 million in 45Z production tax credits from that single facility.14
When Plant A gets $0.60 per gallon in credits and Plant B gets $0.20, Plant A can lower its fuel price by $0.40 and still make the same margin, opening the door for price competition.
The investment response is already visible. Only three ethanol plants have commercial-scale carbon capture today. But 34 more are in advanced development, and according to Enverus Intelligence Research, about half of US ethanol production capacity is now aligned with CCS projects, though most are still in planning or construction stages.16 Market consolidation is following: the FTC published its annual report on ethanol market concentration in January 2026, signaling that regulators are watching.17
Labor compliance adds another dimension. The 45Z credit has a base rate of just $0.20 per gallon. Meeting prevailing wage and apprenticeship requirements unlocks $1.00 per gallon, a five-times multiplier. For a 65-million-gallon plant, that's the difference between $13 million and $65 million a year. The Iowa RFA has described these requirements as "at best a compliance nightmare and at worst an impenetrable barrier" for plants in rural areas where PWA-familiar contractors are scarce.18 But for plants that can meet them, the reward is massive, and the competitive gap over non-compliant plants is devastating.
I want to be upfront about what this does and doesn't mean for what you pay at the pump. Ethanol currently makes up about 10% of blended gasoline in the US (E10 is 95-98% of all gasoline sold). If competitive dynamics driven by 45Z reduce the ethanol price component by $0.10 per gallon, that translates to roughly one cent per gallon at the pump for E10 blends.19
However, several factors can amplify the effect. E15 (gasoline with 15% ethanol) is expanding, and both parties support making it year-round. Renewable diesel, which can substitute directly for petroleum diesel, already has 5.1 billion gallons per year of US production capacity. And because 45Z credits pay producers per gallon based on carbon intensity (not fuel market prices), biofuel plants have a guaranteed revenue stream that doesn't disappear when oil prices drop. That $2 to $3 billion flowing into the industry annually, potentially up to $65.5 billion through 2034, means biofuel producers can keep competing on price even in a downturn. Petroleum refiners have no equivalent backstop.20
The argument isn't that 45Z will slash gas prices overnight. It's that the competitive dynamics it creates (efficient plants undercutting inefficient ones, investment dollars pouring into carbon capture and clean feedstock, an entire industry racing to lower its carbon intensity because lower scores mean more money) will produce sustained, structural downward pressure on fuel prices over the next several years. And that pressure arrives at a moment when every penny matters.
About half of corn ethanol's total carbon footprint comes from growing the corn itself. Not from the distillery, not from transportation, but from what happens in the field.21
That means what a farmer in central Illinois does with their soil, their fertilizer, and their cover crops directly affects how much tax credit the ethanol plant down the road receives. Under 45Z, farm-level decisions become fuel-level economics.
The proposed regulations published in February 2026 formally confirmed this connection. The IRS and Treasury affirmed that feedstock carbon intensity feeds directly into the lifecycle model that determines a plant's 45Z credit, and that agricultural practices at the farm level can meaningfully reduce a fuel's carbon score.22
Practices like no-till farming, cover crops, nitrification inhibitors, and optimized fertilizer timing can dramatically reduce the carbon intensity of biofuel feedstock. Farmers in McLean County, Illinois, using these combined practices have demonstrated feedstock CI reductions of up to 70%. Sorghum producers using similar approaches have achieved up to 90% reductions.23
The economics for farmers are compelling. Ethanol plants need low-carbon feedstock to maximize their 45Z credits, so they're willing to pay premiums, whether through basis bumps on corn prices or patronage dividends, to the farmers who can deliver it. The 45Z credit pays roughly two cents per gallon for every point of carbon intensity reduction below the threshold. At scale, each farm-level CI point is worth real money.24
A verification infrastructure is being built to make this work. USDA's interim rule (7 CFR Part 2100) established the Feedstock Carbon Intensity Calculator, a county-level tool for quantifying the carbon impact of specific farming practices. Third-party auditors verify adoption. A chain-of-custody system tracks certified feedstock from farm to fuel plant. It's not simple, but the plumbing is going in.25
And an entire ecosystem of companies, including Indigo Ag, Bayer, Pinion Global, Verdova, and others, is racing to build the platforms that connect farmers to this value chain.26
There's one more piece to the biofuel tax credit picture, and it's aspirational. Sustainable Aviation Fuel, or SAF, is the biofuel industry's next frontier.
Today, SAF is a rounding error in the jet fuel market. US capacity is about 633 million gallons at just six plants, but actual 2025 production was only 196 million gallons through November. The EIA projects SAF will reach about 2% of US jet fuel consumption in 2026. The federal SAF Grand Challenge targets 3 billion gallons by 2030, a massive stretch from where we are.27
But the infrastructure groundwork is being laid. Over the past two years, major soybean crush expansions (ADM and Marathon's Green Bison facility in North Dakota, Bunge and Chevron's partnership in Louisiana, Louis Dreyfus in Ohio, Cargill's expansion in Sidney) have added roughly 189 million bushels per year of new processing capacity. Most of this is currently feeding renewable diesel production, but the conversion path to SAF exists at these facilities.28
The OBBBA actually cut the SAF-specific tax credit from $1.75 per gallon down to $1.00, which may slow development. But the broader 45Z framework still applies, and the renewable diesel industry (5.1 billion gallons per year of capacity at 22 plants) is building the supply chains and logistics that SAF will eventually use.
SAF won't lower your gas bill tomorrow. But in a world where aviation accounts for roughly 3% of global carbon emissions and airlines are under increasing pressure to decarbonize, the infrastructure being built today under the 45Z framework could matter enormously in the next decade.
The United States is navigating the most severe global energy disruption in a generation. The Strait of Hormuz, a chokepoint for 20% of the world's oil, is functionally closed. Qatari LNG infrastructure lies damaged and will take years to rebuild. Oil is above $112 a barrel, and American families are paying for it every time they fill their tanks.
There is no silver bullet that will reduce growing global energy demands or quickly bring prices back to pre-war levels. However, 45Z tax credits for clean biofuel production create a new pathway towards negative price pressure via a competitive mechanism that rewards efficiency, drives investment, and generates structural progress toward lower fuel prices. The money is substantial (potentially $65 billion through 2034), the credit gap between plants is already reshaping who wins and who loses, and the investment response is underway (half of US ethanol capacity is now aligned with carbon capture projects).
The mechanism also reaches all the way back to the farm, creating new revenue streams for the farmers who grow the feedstock that becomes the fuel. The entire chain, from field to fuel tank, runs on domestic soil. That distinction gets sharper every day tankers sit idle in the Gulf of Oman.
Is it enough? On its own, probably not. But combined with E15 expansion, renewable diesel growth, and the broader biofuel infrastructure being built right now, the 45Z framework represents one of the most underappreciated tools in the American energy policy toolkit. And right now, we need every tool we have.