Build It and Hope They Mandate It?
A pair of century-old oil refineries in the San Francisco Bay Area recently switched from processing crude oil to processing vegetable oils and animal fats. Instead of producing gasoline, diesel, and jet fuel, the Phillips 66 facility in Rodeo and the Marathon-Martinez facility in Avon now produce enough renewable diesel to meet 40% of the state’s transportation diesel demand. Renewable diesel is a fuel made from oils and fats that is processed to be chemically the same as petroleum diesel.
This transformation is part of the nationwide buildout of renewable diesel capacity that occurred from 2021 to 2023. The plot below from Farmdoc Daily shows that renewable diesel annual production capacity grew from 0.8 billion gallons (bgal) in 2020 to over 5 bgal in 2024.
However, this capacity expansion has outpaced the policies that renewable diesel relies on to be profitable.
The US Renewable Fuel Standard (RFS) is known mostly for mandating ethanol use in gasoline, but it also specifies minimum quantities of biomass-based diesel (BBD) to be used each year. In addition to the RFS, BBD receives policy support from federal tax credits and from state low carbon fuel standards in California, Oregon, and Washington.
BBD consists of two distinct products: biodiesel and renewable diesel. Biodiesel is produced through a chemical process that reacts organic oils and fats with alcohols and catalysts, but it has some limitations that restrict the amount that can be blended into diesel. Renewable diesel doesn’t have such drawbacks because it is a hydrocarbon just like petroleum diesel, but it is more expensive to produce.
In 2024, the US actually consumed 3.7 bgal of renewable diesel, of which 3.2 were produced domestically and the remainder was imported. American drivers consumed an additional 1.9 bgal of biodiesel of which 1.7 bgal was produced domestically.
These magnitudes far exceeded the RFS mandate for BBD. The RFS required at least 3.04 bgal of BBD in 2024, yet we used 5.6 bgal.
The graph below shows particularly large quantities of renewable diesel used in 2023 and 2024 as new production capacity came online. The Annual Energy Outlook projects a slight consumption drop in 2025 to 4.9 bgal of BBD, which is still far above the required RFS volume (3.35) and below domestic capacity (5.2). Thus, not only has production capacity outpaced policy mandates, so has actual production.
Why has BBD use been so far above the RFS mandate since 2023?
One possible answer is that the graph above understates the quantity of BBD incentivized by the RFS. The reasons can be summarized in three steps using 2025 numbers as an example. (Feel free to skip the three steps and go directly to the summary in the next paragraph.)
The RFS requires that 22.3 bgal of renewables be used in transportation, of which about 14.8 will be ethanol because it is the least expensive biofuel when blended with gasoline at a 10% ratio. This leaves 7.5 bgal for other biofuels.
The RFS essentially requires 1.4 bgal of renewable natural gas under the cellulosic biofuel sub-mandate. This leaves 6.1 bgal that could potentially be satisfied by BBD.
The numbers in steps 1 and 2 are in gallons of fuel with the same energy density as ethanol. On average, BBD has an energy density 60% higher than ethanol. Thus, it takes only 3.8 bgal of BBD to get the same amount of energy as 6.1 bgal of ethanol.
In summary, the RFS incentivizes up to 3.8 bgal of BBD in 2025, which is more than the required minimum (3.35), but much less than the projected consumption of 4.9 bgal. So, accounting for the weedy details of the RFS doesn’t explain the excess BBD consumption.
A second possible answer is that BBD is profitable to produce without a mandate. This is not the case. In 2024, biodiesel prices were about $2 per gallon higher than petroleum diesel, and renewable diesel prices were about $2.30 higher than petroleum diesel. No cost-minimizing diesel provider would use BBD without a couple of dollars per gallon of policy support to cover the price gap.
A third possible answer is that other policies pushed BBD consumption above the RFS mandate. The graph below shows that the RFS offers much larger per-gallon subsidies for renewable diesel made from soybean oil than the state programs. It also shows that, without the RFS, the other policies do not come close to covering the cost gap between renewable and petroleum diesel.
A $1 per gallon federal tax credit was in place for BBD blenders in most years from 2003 through 2024. It was renewed periodically throughout this period, sometimes retroactively. Under the Inflation Reduction Act, the blender’s tax credit was replaced by a production tax credit under Section 45Z. These 45Z credits vary by carbon emissions intensity and, under current guidance, would be worth only $0.15 per gallon for renewable diesel made from soybean oil. This new lower tax credit started January 1, 2025.
A fourth potential answer is that BBD producers in 2023 and 2024 were front-running the tax credit change. The RFS and LCFS allow excess biofuel used in one year to be used for compliance in the next year, so by using more in 2024 and less in 2025, they get the larger tax credit. This incentive was particularly acute for foreign producers, which cannot benefit from 45Z because it applies only to domestic producers. This dynamic may be why projected BBD use in 2025 is below 2024 levels, but AEO still predicts 2025 use significantly above the RFS mandate, so this explanation is insufficient to explain the excess BBD use.
Incidentally, 45Z is the only Inflation Reduction Act tax credit to be extended in the recent reconciliation bill passed in the US House of Representatives. If this bill becomes law, then 45Z would be extended through 2031, would apply only to fuel produced from feedstock produced or grown in the US, Mexico, or Canada, and would prohibit accounting for carbon emissions caused by the land use change that results from biofuel production.
This brings me to my last potential answer to the question of why BBD use has been so high and is projected to continue to be high: the BBD mandate in the RFS is likely to expand. The BBD and soybean industries are lobbying intensively to expand the BBD mandate in the RFS to 5.25 bgal in 2026 and to establish “consistent growth for 2027 and beyond”. The RFS statute states that EPA is to determine future biofuel volumes based on several factors, including the “expected annual rate of future commercial production of renewable fuels”. The industry has successfully demonstrated that they can produce and use more than 5 bgal of BBD per year.
The RFS statute also specifies that the determination of future RFS volumes account for the impact on environmental outcomes including climate. The estimated climate benefit of replacing petroleum diesel with renewable diesel varies depending on the production process and feedstock used, as well as the assumptions underlying the model of land use change. How much climate benefit do we get from renewable diesel?
This article is cross posted at the Energy Institute blog.