Senate Finance Committee Proposes Major Energy Tax Credit Overhaul, Prioritizing Biofuels and Carbon Capture
Key Insights
The Senate Finance Committee's FY2025 budget reconciliation bill extends and expands biofuel (45Z) and carbon-capture (45Q) tax credits, costing $57 billion and $14.2 billion respectively over a decade.
The proposal slashes Inflation Reduction Act credits for EVs, hydrogen, wind, and solar, while preserving oil-and-gas drilling cost deductions under the corporate alternative minimum tax.
Changes to the 45Z credit include relaxed GHG standards, allowing food-based biofuels like corn ethanol to qualify, and reducing credits for foreign feedstock use after 2025.
The bill introduces new foreign-entity restrictions and ends double-dipping between biofuel and sustainable aviation fuel credits, aiming to curb costs but potentially slowing clean energy investment.
The Senate Finance Committee has unveiled its FY2025 budget reconciliation bill, proposing sweeping changes to energy tax credits that prioritize biofuels and carbon capture while rolling back incentives for electric vehicles (EVs), hydrogen, wind, and solar. The bill, dubbed the One Big Beautiful Bill Act, is estimated to cost over $4 trillion over the next decade, with the Joint Committee on Taxation (JCT) scoring the tax provisions at $441 billion under current policy assumptions. The majority of the bill’s cost stems from extending Tax Cuts and Jobs Act (TCJA) credits, but the trade-off includes gutting Inflation Reduction Act (IRA) incentives.
The proposal significantly expands the Section 45Z Clean Fuel Production Credit, extending its expiration from 2027 to 2031 and loosening lifecycle greenhouse gas (GHG) assessment standards. This change broadens eligibility to include first-generation biofuels like corn ethanol and biodiesel, while reducing credits for fuels using foreign feedstock after 2025. The JCT estimates this expansion will cost $57 billion from FY2025 to FY2034. Additionally, the bill ends the overlap between 45Z and the Sustainable Aviation Fuel (SAF) excise tax credit, establishing parity between SAF and other transportation fuels.
For carbon capture, the Senate proposal boosts the Section 45Q credit for enhanced oil recovery (EOR) and other uses to $17 per ton ($36 for direct air capture), matching the credit for geological sequestration. This adjustment, combined with foreign-entity restrictions, is projected to cost an additional $14.2 billion over the next decade. Meanwhile, the bill leaves the Section 45U Zero-Emission Nuclear Power Production Credit unchanged but imposes foreign-entity restrictions on fuel sourcing.
In a controversial move, the proposal allows oil-and-gas operators to deduct intangible drilling costs (IDCs) when calculating the corporate alternative minimum tax (CAMT), effectively exempting them from the tax. While the JCT estimates this provision at $427 million over a decade, prior analyses suggest it could cost up to $1.1 billion. The bill also introduces a refund mechanism for dyed fuel excise taxes and expands qualifying income for Publicly Traded Partnerships (PTPs) to include hydrogen storage, advanced nuclear, and geothermal energy.
The Senate’s approach contrasts sharply with the House-passed reconciliation bill, which preserved IRA credits for clean energy. Critics argue the Senate proposal risks slowing investment in emerging technologies while favoring legacy fuels, potentially undermining U.S. climate goals. The bill’s intricate foreign-entity rules, designed to curb costs, may also complicate compliance for domestic and international investors alike.