Biofuel Policy Brief - January 2026

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Dear reader,

The first month of 2026 came and went with biofuel trade policy in major focus. The EU signed some of the largest trade agreements in history, while likely banning a major import feedstock. US policymakers may not penalize imported feedstocks towards federal mandates after all. China and Brazil are gearing up to ramp up UCO-based SAF exports. All this happening in a context of rapidly increasing demand, with final steps towards rising mandates being taken across several major markets. Key policy developments in January:

• EU Commission signs trade agreements with India and large biofuel producing countries in South America. Trump’s tariff threats over Greenland cause EU Parliament to elevate scrutiny over US-EU trade deal

• Soybean oil will likely be phased out as eligible feedstock towards EU biofuel mandates. Following the pre-existing palm oil ban, this would leave only rapeseed oil as a major crop based biomass-based diesel feedstock

• Spain and Italy take major steps towards RED III implementation. German and Dutch parliaments ask final RED III questions, and Ireland increases its 2026 biofuel mandate to the highest level across Europe

• US RFS may not discriminate against imported feedstocks after all, while year-round E15 implementation stalls. New Mexico becomes the first non-Westcoast US state with an emission reduction obligation to road fuel suppliers

• China’s whitelisting of additional SAF exporters and introduction of separate SAF HS codes could flood the EU market. Japan considers similar SAF levy as Singapore towards its mandate

• Brazil considers lifting UCO import ban to boost its SAF production whilst new RenovaBio emission reduction obligations are tabled for the coming decade

Trade agreements

The year started with yet another wild month for international trade policy. The EU Commission signed two of its largest trade agreements in history, with Mercosur and India. The US White House keeps weaponising tariffs without distinction between (former) allies or strategic competitors. Meanwhile, China and other countries are introducing specific HS codes for renewable diesel and SAF.

Mercosur countries like Brazil and Argentina are major conventional biofuel production hubs and some of the largest global suppliers of tallow and sugarcane feedstocks. The signing of the EU-Mercosur trade agreement is therefore a major development, expected to lead to a gradual increase of EU imports of ethanol, biodiesel and feedstocks from the South American bloc. In turn, EU exporters will see a growing market for their cars, pharmaceuticals and chemical products. The deal was presented as a flagship example of how multilateral blocks can still liberalize trade even in a context of growing US-led protectionism. It is a result of a quarter-century of negotiations, with many safeguards included around price distortion and sustainability. Nevertheless, for it to be fully certain and final a few hurdles remain. The EU Parliament voted to seek an opinion on the European Court of Justice, a process that could cast uncertainty about the deal’s legality for a period of up to 2 years. Moreover, national parliaments will also need to ratify the deal. In the meantime however, the deal will likely already be implemented provisionally.

Later in the month the EU and India signed a trade agreement which they hailed as the largest deal ever by measure of the 2 billion people it directly affects. It is estimated to reduce custom duties for the EU by EUR 4 billion and boost trade especially for cars, machinery, chemicals and pharmaceuticals. In return, the EU is opening its market for Indian textile, marine products, handicraft, gems, plastics and toys. Some details still need to be further fleshed out, but it looks like biofuels and feedstocks will largely be considered sensitive sectors that remain subject to the old tariffs. Apart from sending a signal to the world that the EU is a reliable trading partner in an increasingly protectionist world, the deal also helps in getting India to accept new EU carbon taxes (CBAM) which apply since January, as well as serving as an incentive to green India’s industry through direct funds and indirect clauses. US President Trump threatened to raise overall tariffs by an additional 10% against several EU countries with a military presence in Greenland, as well as the UK and Norway. The threat de-escalated quickly again after stock markets reacted and world leaders gathered in the World Economic Forum in Davos. Nevertheless, there is a sense that the trust has really been broken now with NATO and EU partners. The EU parliament emerges again as a relevant factor for what this breach of trust means on the EU-US trade front. This institution still needs to ratify the EU-US trade agreement that was reached last year. In response to Trump’s latest escalation, the parliament has frozen its implementation, and its three largest political groups are now discussing what safeguards could be added to void the deal if the US reiterates claims on the territory of EU countries.

Europe

While liberating trade on several fronts through above agreements, the EU is indirectly constraining the import of soy oil as a biofuel feedstock through its stricter indirect land use change (ILUC) criteria. At the same time, RED III implementation on the member state level remains in full speed. Major progress was made in January in Spain, Italy, Germany and several smaller countries.

ILUC emissions - occurring when land used for food or feed is diverted to produce biofuels - are notoriously hard to quantify. The EU has therefore opted to simply have two categories of feedstocks: high and low ILUC. High ILUC feedstocks are strictly capped and gradually phased out by 2030. For low ILUC feedstocks, these indirect emissions are de facto ignored. For the past few years, only palm oil was categorized as high ILUC. In a recently released delegated act however, the Commission is proposing to add soy oil to this category. This would leave only rapeseed oil as a major-scale crop-feedstock allowed towards European biofuel mandates in the diesel segment. If not deliberately, at least conveniently, rapeseed oil is the major feedstock produced in Europe. Palm oil is predominantly grown in Southeast Asia, whereas soybean oil is the top feedstock in the Americas. The timing is therefore noteworthy, just as the EU market is opening up to South American imports. If confirmed, the soy oil ban would further squeeze an already tight European FAME and HVO feedstock market.

The Spanish Ministry for Ecological Transition released an updated version of the country’s RED III transposition proposal for 2027-2040. Compared to the previous version from July 2025, the new proposal includes significant increases to the medium and long term GHG targets for the road sector (e.g. from 15.6% to 17.6% for 2030), while the medium term road GHG targets are lower now (e.g. from 10% to 8% in 2027). For coastal navigation, the GHG obligations via renewable fuels are substantially higher than previously and go much above FuelEU Maritime targets both in the medium and long term. Similarly, the obligations for non-electrified rail transport to decrease emissions via renewable fuels are substantially lifted throughout the period. The subtargets for Annex IX-A, 2G ethanol and RFNBOs remain largely unchanged from last year’s draft proposal. Likewise, the caps for crop-based biofuels (7%) and Annex IX-B biofuels (1.7%) remain unchanged from the previous version. Following a short public consultation, the proposal then needs approval by Spain’s broader legislative bodies. Further tweaks can therefore be expected in the coming months. In parallel, Spain in January raised its 2026 mandate from 12% to 14% (energy content based).

Italian lawmakers partially transposed RED III in January. Contrary to other large EU biofuel demand markets (e.g. Spain, Germany, the Netherlands, France), Italy will not be moving to a GHG-based system. Instead, it appears the country will stick to the energy-content based 29% renewable share by 2030. Double counting of waste feedstocks will be allowed under this scheme, and caps on crops and Annex IX-B feedstocks are kept as high as allowed under the EU framework. A relatively high combined Annex IX-A and RFNBO minimum quote is set at 8% by 2030. This high subtarget should be seen in the context of Italy’s vehicle fleet, however. The country has around 1 million CNG vehicles, more than the rest of the EU combined. This should make it relatively easy to meet much of the Annex IX-A submandate through biomethane, whereas other countries will have to lean much heavier on advanced biomass-based diesel feedstocks for these. Something else that makes Italy unique, is a separate pure-biofuel blending obligation, which comes on top of the other percentage-based mandates. This mandate started at 300 kt in 2023, and increases by 100 kt per year to reach more than 1 Mt by 2030. Lastly, B10 (10% FAME) blends will be allowed in Italy, and a previous ban on palm-oil-fatty-acid (PFAD) feedstock is reversed.

German and the Dutch parliaments discussed RED III transposition as part of the final step towards finalization in both countries, with retroactive application from 2026 expected. In the German Bundesrat, some parliamentarians proposed a higher 2027 mandate than the already quite ambitious proposed levels, to compensate for frozen credits reentering the market that year. In the Netherlands, parliamentarians in the Tweede Kamer asked about the potential to introduce higher FAME blending limits, raised concerns about HVO prices in inland shipping and requested a faster implementation of bio-LNG mass balancing. Furthermore, several smaller EU countries made some last minute changes to their 2026 biofuel mandates. For example, Ireland raised its overall mandate to a whopping 32% - the highest in Europe. At the same time, the Irish government somewhat lowered its Annex IX-A and RFNBO mandate to 5% out of concerns around POME availability. 

North America

Reports (by Reuters) are circulating that the US Trump administration will finalize the much-anticipated federal biofuel mandates for 2026-2027 by early March. According to the quoted sources, these RFS mandates would be only slightly below the originally proposed levels, which would imply a major demand increase especially for biomass-based diesel. More specifically, a range of 5.2-5.6 billion gallons is now considered for D4 biomass-based diesel, compared to the original proposal of 5.61 billion gallons for 2026, whilst the 2025 mandate was at 3.35 billion gallons. Notably, the originally included penalization of imported feedstocks and biofuels would reportedly be dropped in the final legislation. Treating these imported volumes equally as has been the case historically, would make it more realistic that the mandates can actually be met, without causing a major price spike as the spread between domestic and imported feedstocks would have risen to unsustainable levels. That said, it would not fully level the playing field yet, as domestic feedstocks are still the only ones qualifying towards the 45Z production tax credits, whilst import tariffs have also increased substantially over the past year. Year-round sales of E15 were excluded from the US spending bill. This means that for the time being gasoline with 15% ethanol content is only permitted during part of the year, whilst E10 remains the standard during the summer months. Instead, a task force will now be created to study the topic and make further recommendations. Although this seems to imply that the higher blend could still be approved later this year, it was seen as a major disappointment to the ethanol industry, which had counted on bipartisan support and rapid approval. In parallel, the US House in January has approved a package which serves as a policy guidance for federal agencies and includes explicit support for biomass and biofuels. This confirms that biofuels do remain broadly supported by both political parties in the US.

New Mexico regulators decided the state’s LCFS-type system will kick off from 1 April, with credit trading starting from August. This will make New Mexico the fourth US state with an LCFS system in place, and the first one outside the West Coast. Several more states (including New York, Minnesota, Illinois, Hawaii and Massachusetts) also have plans to introduce LCFS systems in the future, yet several legislative steps remain for this to become reality. Most LCFS systems are somewhat modeled on California, with emission reductions taking centre stage. Renewable diesel demand has been the prime beneficiary of such systems as a marginal compliance pathway. So far, obligations in each of these states only apply to the road sector, although SAF can typically generate compliance credits as well. New Mexico’s version mandates 20% emission reduction by 2030 and 30% by 2040 (against a 2018 baseline).

Asia Chinese policymakers whitelisted an additional SAF exporter, while naming the city of Puyang as a new pilot zone for SAF exports. SAF capacity around the world grew more rapidly than regulatory-driven SAF demand the past couple of years. This has led to a situation of global overcapacity, with the large EU demand market accessible tariff free to low-cost Chinese producers. Despite this situation, EU SAF margins were high as of recently, seeing as the Chinese government indirectly protected the EU market by only granting export licenses to a couple of Chinese producers and a limited number of port zones. This has changed drastically in recent months, with the number of whitelisted producers and export zones multiplying. The combined SAF capacity for Chinese whitelisted companies is now 1.4 Mt, which is more than the entire RefuelEU mandated SAF demand of 1.2 Mt this year. In parallel to this, China updated its customs classification with separate HS codes for SAF and renewable diesel. Until recently, exports of those products had fallen under pre-existing hydrocarbon fuel codes. This change is part of a global trend where more countries are differentiating those products as trade in them grows, making it easier to track flows, while reducing clearance delays.

Japanese lawmakers are reported to be working on a plan to introduce a SAF levy to subsidize the country’s planned 10% SAF mandate kicking off in 2030. This sort of scheme would be similar to the setup of Singapore’s SAF mandate, in force since January this year. Rather than putting the full burden on the individual jet fuel suppliers as is the case in Europe and for most other SAF mandates around the world, Japan would thereby aim to tax a SAF levy at the level of airline ticket purchases, which then go in a SAF fund to cushion the financial blow at the level of the fuel supply. An ambitioned advantage in Singapore’s case, is that pooled SAF purchases through the government fund may create more bargaining power and therefore lead to a more beneficial SAF price. Exactly how close Japan’s scheme will be to Singapore’s remains to be seen, with a more concrete proposal expected later this year.

The Indonesian government has set 2026 biodiesel allocation at 15.65 billion liters, a slight increase from the estimated consumption of 15.62 billion liters in 2025. In parallel, the palm oil export levy will be raised to put a lid on domestic feedstock prices, thus indirectly incentivizing production. Indonesia is one of the largest biodiesel producers in the world, and any developments in the country tend to have an outsized impact on global biomass-based diesel markets as the country dominates global palm oil production, which in turn serves as a price setter for many other feedstocks. The country has a B40 mandate in place, with plans to further increase this towards B50 later this year. Moreover, the Indonesian Ministry of Energy recently stated that an E10 (10% ethanol) mandate is expected to come in the country by 2028, with the excise duty for ethanol already waived in the nearer term for certain business categories. 

Latin America

The Brazilian government is considering lifting an existing ban on UCO imports. Currently, such imports are under moratorium given their categorized status of solid waste. To free up more waste feedstocks for the country’s growing HEFA (SAF) industry however, Brazilian policymakers now consider greenlighting UCO imports. In turn, UCO based SAF could then be used towards the country’s SAF mandate kicking off in 2027. With the move, it can also be suspected that lawmakers in the country want to capitalize on Brazil’s potential role as a refiner of South American and Asian UCO to export final SAF product to Europe. Global UCO prices have been suppressed by the US penalizing imported feedstocks towards domestic incentives. At the same time, Europe is putting more scrutiny on biofuel imports from China and other places. With the recent conclusion of the Mercosur agreement, this could put Brazil in a strategic position as a neutral third country with potentially favorable tariff regimes.

Still in Brazil, the country’s National Council for Energy Policy released a trajectory for the RenovaBio program in the coming decade. This program is somewhat comparable to the Californian or German road emission reduction mandates, albeit that the prime driver of biofuel uptake in Brazil to date still remains volumetric percentage-based biofuel obligations. Under the newly released trajectory, RenovaBio’s emission reduction obligation would increase to nearly 12% by 2035. It is too early to speculate on whether that means emissions become the prime driver over the long term, as this depends on how it compares to future volumetric obligations and how solid compliance mechanisms for RenovaBio are.