Climate Matters
By
Peter Taylor, Managing Director - Commodity Markets and Finance
Clothilde Venereau, Manager - Climate Intelligence Unit
May 2025 – 7 min read
With 2030 climate targets looming, liquid biofuels are becoming a key decarbonisation solution for hard-to-electrify sectors such as heavy transportation. The inherent compatibility of biofuels with existing engines and their ability to be blended with fossil fuels make them both a cost-efficient and immediately viable solution for the transition.
Despite their potential, biofuels face challenges, with feedstock supply being a central issue. Biofuels are made from diverse feedstocks including crops, waste fats and oils, and agricultural residues. Concerns around feedstock availability, sustainability, and cost are growing, and these factors will play a decisive role in determining the scale and pace of biofuel adoption.
In the near term, biofuel demand is likely to be dominated by road transport, especially in emerging markets. As road transport electrification accelerates globally, the role of biofuels is expected to plateau1, shifting the demand to aviation and marine fuels. The recent ramp-up in biofuel demand has largely been driven by regulation (e.g., EU, UK and US mandates to decarbonise transport) and energy security concerns (e.g., feedstock-rich Brazil, India and Indonesia seeking to reduce oil imports). The International Energy Agency (IEA) estimates that by 2030, aviation and shipping will be responsible for more than 75 per cent2 of new biofuel demand.
The primary liquid biofuel end-products are ethanol, biodiesel and renewable diesel, each with its own advantages and limitations. Regardless of the end-product, feedstock generally constitutes 60-80 per cent of production costs3 and is contingent on availability.
| Biofuel | Typical feedstocks | Key production pathways | Typical end-uses |
|---|---|---|---|
| Ethanol | Starches and sugars (e.g. crops, food waste), forestry (e.g. wood chips) | Fermentation | Blended with gasoline, mainly in road transport |
| Biodiesel/FAME | Oil crops (e.g. rapeseed, palm oil) | Transesterification process | Blended with diesel, mainly in road transport |
| Renewable diesel/HVO | Vegetable oils and animal fats (e.g. rapeseed, animal fat, cooking oils) | Hydrotreatment, gasification or pyrolysis | Drop-in replacement for petroleum fuel |
| SAF/renewable jet fuel | Vegetable oils and animal fats (e.g. rapeseed, animal fat, cooking oils) | Hydroprocessing (HEFA), Alcohol to Jet (AtJ), Fischer-Tropsch (FT) | Blended with jet fuel in aviation |
| Bio-methanol | Municipal solid waste, forestry or agricultural residues | Gasification | Blended with fuel oil in shipping |
Source: Macquarie Climate Intelligence Unit, BloombergNEF (2024). Note: FAME denotes “Fatty Acid Methyl Ester”, HVO “Hydrotreated Vegetable Oil”, SAF “Sustainable Aviation Fuel” and HEFA “Hydroprocessed Esters and Fatty Acids”.
In 2024, global biofuel investment rose by 39 per cent4 year-on-year, largely dominated by renewable diesel and Sustainable Aviation Fuel. Whilst countries like Brazil may be self-sufficient in terms of feedstock, Europe and the US are struggling with feedstock availability and are turning to external markets for supply, particularly China. This dynamic is building tension in the market and resulting in uncertainty around the outlook for biofuel adoption, and a potential feedstock crunch in the long term – a situation which could be further compounded in the US by tariffs on Canada and China, both major suppliers of US feedstocks.5
Source: BloombergNEF (2024). Note: DCO denotes “distillers corn oil”, UCO “used cooking oil”, and tallow includes animal fat. Total feedstock demand is for both renewable diesel and biodiesel production in a business-as-usual scenario.
To date, the biofuel industry has depended on agro-based feedstocks, but this reliance is starting to cause issues due to competition with food production, high emissions associated with feedstock production and transportation, concerns around deforestation, biodiversity loss and water and fertiliser use.
Governments are trying to address this challenge by legislating the types of feedstocks that can be used, such as promoting waste-based feedstocks. However, these alternatives are also limited and face scalability challenges. Processing these feedstocks can also require energy-intensive refining and aggregation is much more labour-intensive than in the traditional oil market. Differing governmental approaches to determine which feedstocks are sustainable (e.g., US and EU6 divergence on Sustainable Aviation Fuel feedstock criteria) are also complicating market decisions about which production pathways to prioritise.
In response, the biofuels industry is innovating to develop sustainable feedstocks. Novel technologies such as non-food crops (e.g., Nufarm’s Carinata7), algae-derived feedstock development8, or woody-waste based Fischer-Tropsch9 processes show promise, but uncertainties remain around their future scalability.
While biofuels are crucial to accelerate the energy transition in the short to mid-term, feedstock constraints may limit their long-term potential. By 2050, biofuels could face strong competition from alternative pathways, especially synthetic e-fuels, provided technology advancements in the sector begin to drive the current costs down.
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