Policies Support US Biofuels Market, but EVs Threaten to Steal Share

The US biofuels market continues to recover from the demand crash of 2020, and recent government policies will offer continued support. However, biofuels such as ethanol and biodiesel could face increasing competition from EVs for short-distance road transportation.

Short-Term Lifelines Provide Little Assurance Post-2025

The US biofuels market has always depended heavily on the federal Renewable Fuel Standard (RFS) program, which sets production targets and requires manufacturers to blend lower carbon oxygenates into gasoline consumed in the US. In December 2022, the U.S. Environmental Protection Agency (EPA) slightly increased its production volume obligations for 2023-2025, with ethanol blending targets rising from 15 billion gallons in 2023 to 15.25 billion gallons for both 2024 and 2025. Moreover, the Inflation Reduction Act (IRA) extended existing biofuels production tax credits (PTCs) through 2024, ensuring the market does not contract in the near term.

However, the EPA and IRA measures do not offer much certainty beyond 2025—and in fact, both moves introduce potential obstacles for biofuels growth. While higher blending mandates will help underpin the ethanol market through 2025, the EPA also proposed a major new regulatory component to the RFS program to recognize electricity produced from biomass and used to fuel EVs. The EPA’s eRIN proposal, which builds on the renewable identification number (RIN) credit scheme already in place for oil refiners, would assign billions of new D3 RINs to renewable natural gas (RNG) used to generate power for EVs. The number of D3 RINs could increase from 750 million in 2023 to 2.13 billion in 2025, mostly in the form of eRINs to incentivize the use of RNG-generated electricity to power EVs. Likewise, the IRA extends the PTCs for biofuels but also provides tax incentives for EVs, which could pose a significant risk to the US biofuels industry by substantially reducing demand for road transport fuels in the medium to long term.

North American Biofuels Market Value Should Continue to Grow Beyond 2025

Despite rising EV adoption, North American liquid biofuel demand should remain strong and continue to grow beyond 2025 as the economy recovers from inflation and the pandemic and as existing blending mandates ensure biofuels account for a growing percentage of US transportation fuels, according to Guidehouse Insights’ latest Market Data: Bioenergy Production and Utilization Market report. Bioenergy offers a key advantage, as it is capable of decarbonizing especially hard-to-abate sectors such as aviation. Further, refining biofuels into renewable diesel and RNG allows the use of existing infrastructure and can lead to faster adoption. Bioenergy also offers regions and countries the opportunity for energy self-sufficiency and a reprieve from the volatility of fossil fuel prices.

However, bioenergy use faces several obstacles that must be removed for the market to realize its full potential. For one, most bioenergy products cannot be used directly without performing expensive equipment retrofits or total replacements. In addition, while biomass feedstocks have evolved to include nonedible sources, food and water issues persist. Lastly, the market faces headwinds from high costs, policy uncertainty, a relatively lower energy output compared with other fuels, and competition with other technologies.