Outlook for US biofuels

January 2, 2025 | Kriss Nelson

It is unclear what the future holds for renewable diesel (RD) and Fatty Acid Methyl Ester (FAME) biodiesel.

“The biggest uncertainty is how the new Trump administration will approach the setting of RVOs for 2026,” says Scott Irwin, Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois Urbana-Champaign. “The implementation of 45Z tax credit is another major source of uncertainty. I wish I could be more specific in outlook, but policy markets like RD and FAME are most uncertain when policy is highly uncertain.”

Irwin shared his thoughts on the future of FAME and RD during a webinar last month.

In the beginning

Irwin says there has been three booms of biofuel production and use since the turn of the century.

“The first is the ethanol boom that took off around 2005. That grew rapidly to little under 15 billion gallons of production in the U.S. around 2010,” he says. “The second boom is biodiesel and that started about the time the ethanol boom was easing off and we soon saw rapid growth in FAME biodiesel production. The third boom happened in the past three years and that was in renewable diesel production, and that took over as the FAME biodiesel boom began to plateau.”

Irwin added there has been a lot of discussion about a potential fourth boom in U.S. biodiesel production with Sustainable Aviation Fuel, however, production remains low at this time.

Policy impacting RD and FAME biodiesel

Irwin claims the key policy impact of RD and FAME biodiesel is the Renewable Fuel Standard (RFS) mandate which sets the total size of domestic market for RD and FAME.

“That is the No. 1 most important policy incentive in this marketplace,” he says. “I am not saying other policies don’t have important economic impacts, but all of the other policies such as Biodiesel Tax Credit (BTC), Low Carbon Fuel Standard (LCFS) and 45Z tax credit to come are purely distributional.”

For example, the BTC for RD and FAME biodiesel production only shifts the cost burden from taxpayers to consumers without altering the total amount produced.

“BTC is a cost to federal taxpayers and LCFS tax credit is the tax to California drivers,” says Irwin.

Is there a difference between domestic and imported RD and FAME biodiesel regarding non-mandate policies?

“The same two policies have an important impact because the BTC applies to both domestic and imports as does LCFS so they have incentivized imports, but yet doesn’t change the overall demand ceiling.”

What effects do BTC and LCFS have on where RD and FAME biodiesel are used? According to Irwin, LCFS has a large impact due to the extra cent credit given in California and most recently, Washington, Oregon and New Mexico.

The carbon intensity (CI) scoring within the LCFS is a main driver of what feedstock is being used in RD and FAME biodiesel. This CI scoring portion of the LCFS is the reason much of the feedstock goes into biofuels such as tallow and used cooking oil other than soybean oil.

Irwin believes there could be too much of a focus on these policies, whereas eyes should be kept more on the Environmental Protection Agency’s (EPA) Renewable Volume Obligations (RVOs) in the RFS and the Estimated Maximum Biomass-Based Diesel (BBD) need for compliance.

“From the perspective of U.S. soybean producers, my argument is the most important policy parameter moving forward in the new Trump administration will the 2026-2028 numbers following the total mandated RVO of 23.51 billion gallons total be flat? Will they go up? Could they possibly go down? The most political pressure is on that number. That number feeds directly down to computation of the demand ceiling.”

Predicting the unpredictable

To try and anticipate the unexpected, Irwin explained three wildcard scenarios.

Wildcard No. 1: RFS RVOS

The proposed rulemaking for 2026-28 RVO was due before the end of 2024. The Biden Administration EPA kicked that can to March 2025, and now the new Trump EPA Administration proposed a rulemaking for 26-28 something in 2025.

“Personally, there is a huge amount of uncertainty here,” says Irwin. “A good starting point is to assume that the Trump 1.0 approach to setting RVOs will be similar under Trump 2.0.”

Who are the players going to be and what are they going to push for?
“Ag will push for higher conventional and advanced RVOs,” says Irwin. “Some refiners may push for higher advanced RVOs because of investment in renewable diesel plants. Some merchant refiners will push for small refinery exemptions (SREs) and/or lower conventional RVOs. A big change from the last four years, I think is environment and climate groups will not have much of a seat at the RVO table.”

Wildcard No. 2: Five issues to revolving around the 45z Clean Fuels Production Tax Credit

1. Scheduled to replace the $1 per gallon “biodiesel” blenders tax credit starting in 2025 (expires in 2027).
2. Only domestically produced clean fuels are eligible for new credit.
3. Credits keyed to carbon intensity (CI)scores as determined by the GREET model.
4. To be eligible, Must have a CI score of 50 kg CO2 /MM BTU or less to earn credit (corn ethanol without carbon sequestration unlikely to qualify). RD made from soybean oil may receive 30 cents per gallon. RD made from used cooking oil may receive 65 cents per gallon.
5. Most important part of this new policy, is that it will have large trade impacts. Irwin says it will likely dramatically reduce RD and FAME biodiesel imports into the U.S. and possibly incentivize RD exports to increase renewable diesel exports from the U.S., especially to Canada.

“Besides trade points, the new 45Z is going to be, in general, less generous than the old BTC, which was $1 a gallon, and it will only amplify the skew of current policy incentives to low CI feedstocks to used cooking oil and tallow,” he says. “In essence, 45Z nationalizes this skew toward low CI feedstocks that previously were really only in California, Washington and Oregon, and now it will be national.”

Irwin adds the trade impacts are important.

“FAME and RD imports have been pouring into the U.S. in recent years, about 80 million gallons per month,  recently approaching a rate of billion gallons per year, and that’s what is at stake with 45Z implementation,” he says. “What is going to happen with U.S. domestic FAME and RD production is going to have a lot to do with whether 45Z is implemented because whether we are going to slow down those imports or not, depends on whether we get 45Z. Bottomline, the outlook for 2025 depends crucially on 45Z implementation because of its expected impact on imports.”

Wildcard No. 3: The potential for trade wars

President-elect Trump has announced plans to impose 25% tariffs on Canada and Mexico and an additional 10% tariff on goods in China.

Within biofuels, there is political pressure to impose punitive tariffs on RD feedstock imports, especially used cooking oil (UCO) from China.

“The idea is renewable fuels should be American made and that intersects with the downturn in the ag economy,” says Irwin. “Maybe we will get a possible exclusion of imported feedstock from 45Z eligibility or a revised BTC, but again, there is huge uncertainty.

“It is important to point out that the tit-for-tat reaction of other countries to imposing new tariffs is very unpredictable and can set off damaging economic chain reactions. Dramatic trade war impacts can be on market prices and unpredictably so”

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