Biofuels policy saw multiple improvements in 2025, yet key issues remain unresolved heading into the year ahead.
By the end of 2025, a year into the new Congress and the change of administration, there were positive proposed biofuel policies awaiting finalization. But in some respects, little had changed. Year-round E15 was still in limbo. Final renewable volume obligations (RVOs) for 2026 and 2027 under the Renewable Fuel Standard (RFS) (Set 2 Rule) were still unknown. What would happen with small refinery exemptions (SREs) still uncertain. And the final shape of the 45Z Clean Fuel Production Tax Credit awaited unveiling. The resultant uncertainty was unsettling enough for ethanol producers but devastating for independent biodiesel producers and difficult for the entire biomass-based diesel supply chain.
“A year ago, in mid-December, we were closer than we had ever been to getting bipartisan E15 legislation through Congress,” says Brian Jennings, CEO of the American Coalition for Ethanol. “Elon Musk, who was a special advisor to the president at the time, went on kind of a rage on Twitter about the extraneous, in his view, provisions that were part of that. And sadly, and very unfortunately, Congressional leaders then cut the E15 provision, among many others. We were so close and quite enthusiastic about the possibility of finally getting this done and then it was taken away from us. Then we began 2025 hopeful that a new Congress, particularly new Senate majority leader John Thune of South Dakota, would help find opportunities for us to move that legislation sooner rather than later. And here we are a year later, and we haven't gotten it done.”
“Leader Thune is an incredible partner,” concurs Matt Ziegler, public policy director on renewable fuels for the National Corn Growers Association (NCGA). “We owe a lot of corn grower wins to him.” One win was the extension and enhancements of 45Z in the One Big Beautiful Bill. “All the great members of Congress from the Midwest see the promise of this tax credit for their states and districts. The only way you can attribute the preservation and extension of the credit is to our great friends on the Hill.” Those friends are also critical to getting year-round E15, Ziegler says. “We’re really happy where our support lies on the Hill and in the administration. It’s a matter of timing and what legislative vehicle is the best home for this bill.”
NCGA is also pleased with several of the U.S. EPA’s rulemakings. “We're happy to see some of the tailpipe standards and fuel economy standards taken back to a spot where biofuels really have a seat at the table and can be competitive right now and in the future,” Ziegler says. “We’re also really pleased with how the RFS has been managed to this point and with the administration's overall posture toward biofuels policy. We welcomed the volume set proposal and EPA’s take on the small refinery exemptions and reallocation components. We’re waiting for clarity on the final rulemaking, but we really appreciate EPA’s work. I think they’ll get it done in a timely manner. I hope they maintain their pro biofuels posture that they had throughout the year.”
Jennings suggests the reason for the delayed RVOs relates to SREs. “I think what's complicated is how much reallocation of any small refinery exemptions will be part of the 2026 and 2027 overall package. That's taking a lot of time for EPA to sort through the comments and figure out how they want to rule on that.”
ACE’s comments urged EPA to fully reallocate SREs, rather than the proposed option to do partial reallocations. “If the volumes of renewable fuel represented by the SREs are not reallocated, obligated parties could use the oversupply of low-priced RINs to satisfy future renewable volume obligations instead of buying and blending physical gallons of ethanol and other renewable fuel. This type of demand destruction would undermine the integrity of the RFS,” Jennings wrote in his comments. He cited the SRE-induced demand destruction in 2018 and 2019 that cratered D6 RIN values from $1 per gallon to 20 cents or less. Ethanol producers don’t see that value directly—their generated RINs are passed along with the fuel—but they experience the impact, nonetheless. More than 4 billion gallons of blending obligations were erased, discouraging refiners from blending ethanol above E10 and restraining sales of E15, E30 and E85.
Beyond reallocation, ACE reiterated support for EPA’s proposal to set record-high renewable fuel volumes and encouraged EPA to consider conventional biofuel levels exceeding 15 billion gallons to offset potential export market losses and ensure conventional ethanol maintains its role in the fuel supply.
“The higher RVOs proposed for biomass-based diesel for 2026 and 2027 are advantageous for the ethanol industry as well,” Jennings explains. “In years past, those inadequate RVOs for biomass-based diesel—so low that production greatly exceeded the RVOs—meant that surplus D4 or D5 RINs could be used by refiners to comply with the conventional biofuel portion of the RFS instead of those refiners purchasing ethanol and physically blending E15 or E85 with gasoline.”
Biomass-Based Diesel Impact
The Set 1 RVOs for 2023, 2024 and 2025 vastly underestimated biomass-based diesel production capacity. The 2025 RVO at 3 billion gallons compares to biodiesel capacity of 2 billion gallons and renewable diesel of more than 5 billion gallons, says Donnell Rehagen, CEO of Clean Fuels Alliance America.
The rapid growth in renewable diesel capacity came largely from oil and gas refiners retrofitting older refineries to process fats, vegetable oils and greases into drop-in renewable diesel, most of it destined for the California market. Capacity exploded from just 700 million gallons in 2020 to 5 billion by 2025. “That’s a massive increase, which I would argue is a good thing for renewable fuels and feedstock companies,” Rehagen says. “Any time the industry is growing, that’s a good signal, but it hasn’t been without challenges, especially for the smaller independent biodiesel producers.”
The Set 2 proposal for 2026 and 2027 is a big improvement, he adds, setting the biomass-based diesel RVO in the ballpark of 5.61 billion gallons, with a domestic preference assigning a half RIN to imported fuels or feedstocks. The 5.61-billion-gallon RVO is a ballpark figure, Rehagen explains, because EPA had to estimate import volumes.
EPA’s proposals pleased the industry. “They actually were better elements than what we expected,” Rehagen says. “We had gotten together as a clean fuels industry with the ethanol industry and for the first time with the oil and gas refiners through the American Petroleum Institute to come up with a plan that everybody could live with.”
While the expanded RVO promises to put biomass-based diesel back on track in the RFS in 2026, the underwhelming volume for 2025 combined with uncertainty over 45Z rules made for a tough year, Rehagen says. “Couple those together and there’s not big reasons for some of our producers to produce biodiesel. And that’s a huge problem for everybody. Feedstock growers and processors have seen less demand this year.”
“I'm heading into my 22nd year in this industry,” Rehagen says, “and this is by far the most difficult time I’ve seen up and down the supply chain. Farmers are struggling to find adequate prices for their commodities and at the same time biodiesel margins were negative a lot of the year. So, it's been really, really hard on the whole entire industry.”
45Z Impacts
For biodiesel and renewable diesel producers, 45Z presents major changes. It replaces the 40A $1-per-gallon blenders tax credit, in place for 20 years, where producers verified gallons produced and received a check from the government. Under 45Z they will receive a tax credit against tax obligations, with the amount of the credit dependent upon carbon intensity (CI) reductions.
While credit is transferable, there are hoops to jump through, Rehagen says. “You’ve got to find a party who has a tax obligation who wants to buy a tax credit. Then they have to be comfortable with the validity of those credits. There are broker fees involved. There are insurance requirements that the marketplace is putting on those credits. All that deducts from the value of credit. By the time the credit is realized by the actual fuel producer, 85 or 90% of that credit value gets stripped out.”
“It’s taking a long time for fuel producers to really be able to access the value of the credit,” Rehagen says. Even for the big guys in the industry, it took time for brokers and potential buyers to get comfortable with the brand-new program. The first reports of credit sales weren’t made until the third quarter. “When you compare that scenario for an independent biodiesel producer to the one they had in 2024, where they were producing gallons every single day and being eligible for a tax credit in the form of a check, those are two very, very different scenarios.”
Though final guidance for 45Z was still pending in 2025, the credit was in effect for the entire year, Jennings notes. “Some producers who have looked at this with their tax advisors believe there is sufficient information in the interim guidance for them to make a claim on this credit for 2025.”
Midsummer legislation made big improvements that will impact more ethanol producers going forward, Jennings adds. “It's kind of remarkable that Congress, as part of that large legislation that was signed into law on July 4, essentially dismantled every single tax credit from the Biden Inflation Reduction Act with one exception—the 45Z Clean Fuel Production Tax Credit. They not only salvaged it, but improved it by extending it to the end of 2029, as opposed to originally expiring in 2027. And they removed the accounting of indirect land use change (ILUC) for 2026 through 2029 when calculating carbon intensity scores.”
Removing ILUC promises to nearly double the tax credit value for biomass-based diesel producers, according to a spokesman for the American Soybean Association. And, it will likely tip the scales for many more ethanol producers to make a tax credit claim, Jennings says.
There are still big unknowns, Jennings says. “We do not have final guidance, final rules for how 45Z is supposed to work, including no information on whether treasury will allow low-carbon farming practices to qualify. That's a huge, gigantic question.”
“However the tax credit is implemented and structured in the future, I think our growers are ready to rise to the moment,” NCGA’s Ziegler says. “The ag practices enumerated in [USDA’s preliminary guidance] are a step in the right direction. We’d love to see a lot more practices included to where a broader group of growers get credit for everything that they're doing. We've come a long way in the past several decades from a sustainability standpoint that we'd love to get credit for.”
Looking out on 2026, Jennings says biofuels policy needs to wrap up 2025’s developments. “We are anticipating a decision from EPA relative to final RVOs for 2026 and 2027, along with the consequential question of whether they will require reallocation of the small refinery exemptions. We need clarity in 2026 on how low-carbon farming practices might or might not factor in carbon intensity calculations for 45Z. Legislatively, E15 will remain our top priority. So, it’s a lot of unfinished business from 2025.”