Strategic Opportunities in U.S. Biofuels: Navigating Policy Shifts and Market Realignment

The U.S. biofuel industry has long been a battleground of policy, regulation, and market forces. Under the Trump administration (2017–2021), a reorientation of the Renewable Fuel Standard (RFS) and the proliferation of small refinery exemptions (SREs) reshaped the landscape for renewable diesel and biodiesel producers. While these policies initially seemed to destabilize the market, they inadvertently created a fertile ground for strategic investors to identify winners and losers. The key lies in understanding how regulatory realignment and technological differentiation—particularly between biodiesel and renewable diesel—have redefined competitive advantages.

The Trump-Era RFS and the SRE Paradox

The Renewable Fuel Standard, enacted in 2005 and expanded in 2007, mandates the blending of renewable fuels into the U.S. transportation fuel supply. Under the Trump administration, the Environmental Protection Agency (EPA) granted unprecedented numbers of SREs to small refineries, effectively exempting them from RFS compliance if they claimed economic hardship. By 2019, SREs had reduced the biomass-based diesel (BBD) mandate from 2.1 billion gallons to 1.92 billion gallons, creating an oversupply of Renewable Identification Numbers (RINs). D5 RIN prices, which represent biomass-based diesel, plummeted from $1.80 per gallon in 2017 to a historic low of $0.15 in March 2019.

This policy shift had divergent impacts. Biodiesel producers, particularly those producing fatty acid methyl ester (FAME) biodiesel, faced a collapse in demand. The FAME biodiesel blend rate fell by 1.1 percentage points during the SRE period (December 2017–January 2020), translating to a 1.53 billion gallon demand loss. In contrast, renewable diesel—a chemically identical but structurally distinct fuel—experienced minimal disruption. Its blend rate, initially at 1%, surged to nearly 7% by late 2024, driven by its technical and economic advantages.

Structural Advantages of Renewable Diesel

The divergence in performance between renewable diesel and biodiesel underscores the importance of technological differentiation. Renewable diesel, unlike biodiesel, is a "drop-in" fuel that can be used in diesel engines without blending, eliminating the need for infrastructure modifications. It also generates 1.7 RINs per gallon compared to biodiesel's 1.5, offering a 13% advantage in compliance credits. Additionally, renewable diesel earns higher credits under state-level Low Carbon Fuel Standards (LCFS), particularly in California, Oregon, and Washington, where its carbon-intensity score is lower than that of biodiesel.

These advantages were amplified by the Trump administration's deregulatory approach. While the EPA's SREs weakened the RFS's enforcement, renewable diesel producers leveraged state-level incentives and their inherent efficiency to capture market share. For example, Phillips 66 and Marathon converted petroleum refineries into renewable diesel plants, achieving economies of scale that biodiesel producers could not match.

Investment Implications and Future Outlook

For investors, the Trump-era policy shifts highlight a critical lesson: regulatory uncertainty creates opportunities for those who can anticipate and adapt. Renewable diesel producers, with their superior RIN economics and LCFS eligibility, have demonstrated resilience even in a weakened RFS environment. This trend is likely to persist under a potential second Trump administration, where SREs could again be expanded. Biodiesel, by contrast, remains vulnerable to policy-driven volatility.

Moreover, the phase-out of the biodiesel blender's tax credit (BTC) and the transition to the 45Z Clean Fuels Production Credit under the Inflation Reduction Act have further tilted the playing field. Renewable diesel's compatibility with existing petroleum infrastructure and its ability to meet both federal and state mandates make it a more attractive long-term investment.

Strategic Recommendations

1. Prioritize Renewable Diesel Exposure: Investors should overweight companies with renewable diesel production capacity, such as Neste, Renewable Energy Group (REG), and companies converting traditional refineries (e.g., Phillips 66, Marathon).
2. Monitor SRE Petitions: The current EPA faces 139 pending SRE petitions for 2016–2025 compliance years. A repeat of the Trump-era SRE surge would disproportionately harm biodiesel producers.
3. Leverage State-Level Incentives: California's LCFS program remains a critical driver of renewable diesel demand. Companies with LCFS credit generation capabilities should be prioritized.
4. Diversify Feedstock Strategies: Renewable diesel producers that utilize low-cost, non-competitive feedstocks (e.g., used cooking oil, animal fats) will outperform those reliant on soybean oil, which is subject to agricultural price swings.

The U.S. biofuel sector is at a crossroads. While the Trump-era RFS adjustments initially created chaos, they have ultimately accelerated the transition to a more efficient, technology-driven industry. For investors with a long-term horizon, renewable diesel represents a compelling opportunity to capitalize on regulatory realignment and market evolution. The key is to align portfolios with the fuels and technologies that will dominate the next phase of the bioenergy transition.