US SAF Production Threatened by Reduced Section 45Z Tax Credit

The March 2026 oil shock, which saw global jet fuel prices surge to $209.00 per barrel, has highlighted the dual role of Sustainable Aviation Fuel (SAF) as both a decarbonization tool and a buffer against price volatility. However, a recent legislative change in the United States threatens to undermine domestic SAF production, potentially leaving airlines more exposed to future energy market disruptions.

The core of the issue is the reduction of a key federal tax incentive. The One Big Beautiful Bill Act (OBBBA) of 2025 amended the Section 45Z Clean Fuel Production Credit, cutting the maximum credit for SAF from $1.75 per gallon to $1.00 per gallon, effective January 1, 2026. This change creates parity with renewable diesel, a fuel that is often cheaper to produce, incentivizing refiners to shift capacity away from aviation and jeopardizing the U.S. government's ambitious SAF production targets.

The Shifting Policy Landscape

The previous incentive structure, established under the 2022 Inflation Reduction Act (IRA), provided a higher credit for SAF to acknowledge its greater production costs and environmental benefits compared to other biofuels. The July 2025 OBBBA legislation eliminated this premium. According to IRS guidance on the Clean Fuel Production Credit, the new $1.00 per gallon base credit for both SAF and renewable diesel is intended to simplify the tax code but has created an unintended market distortion.

For U.S. SAF producers like World Energy and Montana Renewables, the loss of the $0.75 per gallon bonus credit significantly reduces margins. This development could stall new facility investments as capital shifts to the more economically favorable renewable diesel market. Scott Lewis, Division President at World Energy, stated that restoring the $1.75 per gallon SAF tax credit "will provide confidence for new investors and production facilities."

Airline and Market Impact

The timing of this policy shift is critical for U.S. airlines. The 2026 oil shock is estimated to add $11 billion in annual fuel costs industry-wide, according to IATA analysis. In response, carriers are implementing capacity discipline by cutting unprofitable routes and grounding older, less fuel-efficient aircraft. Unhedged airlines are particularly exposed to the spot market volatility, where prices have remained elevated since March.

While corporate buyers continue to fund SAF purchases to meet their net-zero pledges, the underlying supply is now at risk. In 2025, U.S. SAF production reached approximately 300 million gallons, generating over 460 million Renewable Identification Number (RIN) credits under the EPA's program. Without a strong financial incentive to favor SAF over other biofuels, reaching the national goal of 3 billion gallons by 2030, as outlined in the SAF Grand Challenge, becomes increasingly difficult.

Contrasting the U.S. approach, the European Union's ReFuelEU Aviation regulation mandates that fuel suppliers blend a minimum of 2% SAF in 2025, a figure that rises to 6% in 2030 and 70% by 2050. However, some industry leaders have expressed skepticism. Ryanair CEO Michael O'Leary has questioned the viability of aggressive SAF mandates without a corresponding surge in affordable and available supply, a concern now amplified in the U.S. market.

Historical Parallels

The current situation mirrors previous energy crises. In July 2008, the global oil shock saw jet fuel peak at $147 per barrel, an event that drove multiple airline bankruptcies, forced aggressive capacity cuts, and accelerated the retirement of fuel-inefficient aircraft. That precedent demonstrates how sudden fuel price spikes can compel structural changes across the industry, a pattern that appears to be repeating as airlines respond to the 2026 price surge. The reliance on a stable and growing supply of alternative fuels is a key strategy to mitigate such shocks in the future.

What Comes Next

The industry is closely watching for further regulatory developments. The Internal Revenue Service (IRS) has scheduled a public hearing on the proposed regulations for Section 45Z for May 28, 2026. This hearing will provide a forum for stakeholders to advocate for changes to the credit structure. Barring further legislative action, the Section 45Z Clean Fuel Production Credit is set to expire entirely on December 31, 2029, creating long-term uncertainty for biofuel investors.

Why This Matters

This policy change places the U.S. aviation industry at a critical juncture. The reduction of the SAF tax credit creates a direct conflict between the nation's stated decarbonization goals and its fiscal policy. For airlines, it undermines a key pathway to achieving both environmental targets and long-term energy cost stability. For the burgeoning U.S. SAF industry, it introduces significant market uncertainty that could stifle growth and investment for years to come.