US renewable diesel production has surged in recent years, driven by climate policy and substantial investment from oil companies. But as the Republican administration of President Donald Trump settles into Washington, doubts about future policy are stalling investment in future growth.
Renewable diesel seemed like a safe bet on green energy, allowing US refiners to avoid steep compliance costs from government mandates and produce a versatile, drop-in replacement for petroleum diesel. Companies including Valero, Phillips 66, and Marathon Petroleum — the country's largest producers — could also source the lowest-carbon feedstocks from around the world for US Gulf and west coast biorefineries, an advantage over landlocked competitors. Profitable renewables have offered some respite against lower US refining margins.
The Inflation Reduction Act, which scrapped a tax credit that benefited biofuel imports and created a new one starting this year solely for domestic producers, provided another tailwind. Government agency the EIA early last year forecast that US renewable diesel production would hit an all-time high of 294,000 b/d in 2025, five times greater than domestic output four years ago. But the agency's forecast has since dropped by 21pc. Government data show fewer credits tied to biomass-based diesel were generated in January than in any month in more than two years despite recent capacity additions.
US policy, which spurred refiners to produce renewable diesel, is now giving them pause. Former president Joe Biden's administration first missed a deadline for setting new biofuel blend mandates, a crucial demand signal, and then was late issuing guidance around the new tax credit. The climate law provided general rules around the clean fuel incentive, known as 45Z — saying, for instance, that lower-carbon fuels earn more subsidy but letting agencies hash out how to track emissions from various feedstocks, farm practices and production processes.
More critically, Biden issued only preliminary instructions around 45Z, leaving it to Trump's administration to finalise regulations codifying credit rules. Tax lawyers say the new administration could shift course, as Biden's guidance is not binding, and that the mere threat of changes has stifled confidence in the sector. But refiners need answers to questions such as how to claim credit for fuels not included in current emissions modelling. "It's really impacting the ability for projects to get financing or for sales to occur," law firm Vinson & Elkins partner Lauren Collins says. "We're seeing that in real time, and I expect that's going to last."
Live by the subsidy, die by the subsidy
An ironic challenge for refiners dissatisfied with the halting roll-out of 45Z — many lawmakers agree that changes are needed. Republicans are developing legislation they can pass without Democratic support, and some House tax-writers express interest in using that process to modify 45Z. So Trump has little incentive to quickly finalise 45Z rules as Congress might reshape the credit anyway.
Some farm-state Republicans have floated keeping 45Z but more aggressively limiting foreign feedstocks, while other lawmakers support scrapping the incentive altogether. Neither option would benefit refiners. And even if 45Z survives unaltered, Republicans' desire to curb spending makes the top priority of the biofuel lobby — extending the temporary incentive for longer — more challenging.
Diversified refiners could be more able to weather the storm than pure-play biofuel producers. But new investments in expanded capacity are largely out of the question. CVR Energy has been weighing sustainable aviation fuel production at two refineries, but chief executive David Lamp says the company could not move forward without more policy certainty. "These subsidies are just scary," he says.
