Biofuel Mandates and Market Volatility: Navigating Risks and Opportunities in US Renewable Diesel

The U.S. Environmental Protection Agency's (EPA) proposed biomass-based diesel mandates for 2026 and 2027—5.25 billion gallons and 5.75 billion gallons, respectively—mark a pivotal moment for the biofuel sector. These ambitious targets, paired with unresolved small refinery exemption (SRE) backlogs and pending clarity on the 45Z tax credit, create a landscape of volatility and opportunity. For investors, the path forward requires discernment between companies positioned to thrive and those vulnerable to regulatory headwinds.

The Regulatory Landscape: Mandates, Exemptions, and RINs

The EPA's proposed quotas represent a 57% increase from 2025's 3.35 billion gallons, signaling a push to accelerate renewable diesel adoption. This growth hinges on two critical factors:
1. RIN Credit Volatility: Renewable Identification Numbers (RINs), the compliance currency under the Renewable Fuel Standard (RFS), have swung between $0.90 and $1.02 in 2025, driven by speculation over mandate outcomes and SRE resolutions.
2. Small Refinery Exemptions: Over 100 pending SRE requests linger unresolved, potentially reducing obligated parties' demand for biofuels. Each exemption delays compliance costs, creating uncertainty for RIN prices and refinery obligations.

The interplay of these factors creates a high-stakes environment for investors.

Opportunity 1: Biorefinery Expansion and Feedstock Demand

The 5.25–5.75 billion gallon mandate targets are expected to spur biorefinery construction and feedstock purchases, particularly for soybean oil, used cooking oil, and corn-based feedstocks.

Investment Play:
- Feedstock Suppliers: Companies like Archer-Daniels-Midland (ADM) and Bunge (BG) stand to benefit from rising demand for agricultural feedstocks. ADM's diversified portfolio, including its 42% stake in renewable diesel producer Neste, positions it as a leader in this space.
- Biorefinery Operators: Renewable Energy Group (REGI) and Valero (VLO) are expanding capacity to meet mandates. REGI's focus on low-carbon biofuels and VLO's scale in refining and distribution make them key players, though VLO's exposure to SREs requires caution.

Risk 1: RIN Credit Volatility and Its Drivers

RIN prices are a double-edged sword. While higher prices incentivize production, volatility can deter investment. Key risks include:
- SRE Backlogs: Each unresolved exemption reduces the pool of obligated parties, weakening demand for RINs. A sudden SRE approval could trigger a price collapse.
- Carryover RINs: Unused 2022 RINs (expiring in 2024) and 2023 credits could flood markets in 2024–2025, adding downward pressure.

Mitigation Strategy: Investors should favor companies with hedging programs or physical RIN holdings, such as REGI, which retains RINs for compliance rather than selling them immediately.

Risk 2: Small Refinery Exemptions and Their Lingering Impact

The unresolved SRE backlog—stemming from legal disputes over venue and procedural fairness—has created a regulatory limbo. A Supreme Court ruling on SRE venue (expected in 2024) could retroactively invalidate exemptions, reshuffling compliance costs.

Investment Caution:
- Refiners with SREs: Companies like Andeavor (ANDV) and Marathon Petroleum (MPC) face reputational and financial risks if exemptions are revoked. Their stock prices may remain volatile until clarity emerges.
- RIN-Liable Refiners: Those without exemptions (e.g., HollyFrontier (HFC)) could benefit from higher mandates but require close monitoring of RIN price trends.

The 45Z Tax Credit: A Critical Catalyst for Growth

The proposed extension of the 45Z tax credit through 2031—offering up to $1.50 per gallon for clean fuels produced from U.S. feedstocks—could bridge the profitability gap for biofuel producers. However, Treasury's pending rules on foreign feedstock eligibility and transferability will determine its efficacy.

Investment Play:
- Tax Credit Leverage: Companies like Neste (NE) and REGI, which focus on U.S. domestic feedstocks, are well-positioned to maximize 45Z benefits.
- Infrastructure Plays: Pipeline operators (e.g., Enbridge (ENB)) and storage facilities serving biorefineries may also gain from increased production.

Investment Strategy: Navigating the Risks and Seizing the Opportunities

1. Buy Feedstock Exposure: ADM and Bunge offer stable, diversified exposure to rising feedstock demand.
2. Select Biorefinery Operators: REGI's focus on RIN retention and 45Z eligibility makes it a top pick. Avoid refiners with SREs until exemptions are resolved.
3. Hedge Against RIN Volatility: Use futures contracts or invest in companies with hedging programs to mitigate price swings.
4. Monitor Regulatory Triggers: Track the Supreme Court's SRE ruling and Treasury's 45Z regulations as catalysts for market shifts.

Conclusion

The EPA's biomass-based diesel mandates are a clarion call for renewable fuel adoption, but the path to profitability is fraught with regulatory and market risks. Investors who focus on feedstock suppliers and RIN-liable refiners with strong hedging strategies will be best positioned to capitalize on this transition. As the U.S. pivots toward energy independence and decarbonization, biofuels—and the companies enabling their growth—are primed to deliver long-term gains for the bold and the prepared.