COMMODITIES 2025: US biomass-based diesel market faces cost, regulatory challenges

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

US renewable diesel production is expected to soar 13% in 2025, according to S&P Global Commodity Insights analysts. This growth will likely be driven by the Clean Fuel Production Credit providing incentives for domestic production, but uncertainty exists due to pending guidelines and potential policies from the incoming administration of Donald J. Trump.

In contrast, US biodiesel production is anticipated to slide by 5.6% in 2025, reaching 1.538 billion gallons. This decrease is largely attributed to diminishing road demand for fatty acid methyl ester biodiesel as renewable diesel captures a larger market share.

CFPC to support domestic output

The CFPC offers credits tied directly to the carbon intensity of fuel, effectively rewarding production methods and feedstocks that reduce greenhouse gas emissions. It provides up to $1/gal for non-sustainable aviation fuel and $1.75/gal for SAF, contingent on meeting wage standards. These credits are set to expire in 2027.

This transition to a producer credit is expected to reduce imports of biomass-based diesel, as domestic production is expected to be incentivized. According to Commodity Insights, US RD production is projected to reach 3.526 billion gallons in 2025, up 13% compared with 2024, while capacity is expected to reach 4.676 billion gallons, up 2% on the year.

CFPC offers fewer incentives but higher RINs, LCFS price expectations

Despite subsidies, RD and biodiesel remain more expensive than conventional diesel, posing a barrier to adoption without continued government support. Under the Blender Tax Credit, fuel blenders received $1/gal for biodiesel and RD added to fossil fuels, encouraging biomass-based diesel use, but not specifically rewarding emissions reduction.

The CFPC offers a lower overall incentive compared with the current BTC. For example, the current tax credit for 40-CI RD is $1/gal, whereas under CFPC with existing guidelines, it would be reduced to 15.60 cents/gal, an 84.4% drop.

Conversely, D4 RINs and Low Carbon Fuel Standard prices are projected to rise because of recent regulatory changes associated with CFPC and the new amendments introduced by the California Air Resources Board that include a 9% step-down in targets and a 20% cap on credit generation for biomass-based diesel produced from canola, soybean, and sunflower oil feedstocks, which is set to take effect in January 2028.

The D4 RINs price could rise to "fill the gap" created by the changes to IRA credits related to the CFPC, according to a market participant.

Low-carbon intensity feedstocks increase

The US biomass-based diesel market heavily relies on domestic feedstocks, including animal fats, used cooking oils, and vegetable oils such as soybean oil. Competition for these resources has increased due to rising demand from the biofuel sectors. In 2024, soybean oil's share of feedstocks has declined, giving way to tallow and canola oil.

Lower-cost Canadian canola oil imports have been rising since the US Environmental Protection Agency designated canola oil as a qualified feedstock for RD production at the end of 2022, contributing to a surge in canola oil imports to record levels in 2023 and continuing into 2024.

With the transition from BTC to CFPC, feedstocks with a carbon intensity above 50 kg CO2/MMBtu, such as soybean oil, will not qualify for the credit. Conversely, waste oils such as tallow, distillers corn oil, and used cooking oil are more likely to qualify.

China's recent removal of export tax rebates on UCO will potentially increase UCO export prices to the US. Additionally, as of Dec. 17, President-elect Donald Trump has vowed to impose an additional 10% tariff on Chinese imports. If enacted, this could redirect Chinese UCO flows from the US to other regions, potentially supporting a rise in US UCO prices.

Concerns regarding policy objectives

Guidance on the CFPC is pending and, after Jan. 20, the Trump administration will be able to reshape the credit guidelines to its own policy objectives. Trump has threatened to raise tariffs on almost all imports, particularly sharply higher duties on imports from China.