investment viewpoints

Do biofuels have a role in a sustainable world?

Do biofuels have a role in a sustainable world?
Jose Lazuen - Senior Sustainability Analyst

Jose Lazuen

Senior Sustainability Analyst
Jane Leung, PhD - Associate, Systemiq

Jane Leung, PhD

Associate, Systemiq

This is an educational research commentary from holistiQ Investment Partners, the sustainable asset-management business formed by LOIM and Systemiq.

When it comes to sustainability, biofuels are a complex topic. On the one hand, depending on the feedstock origin, they can have 20% to 90% lower CO2 emissions than fossil fuels, when measured over a full lifecycle.1 On the other hand, there are significant sustainability challenges associated with their production – including land-use change and competition with food production. On balance, we believe biofuels have an important role to play in the energy transition now that key shifts are taking place in the type of feedstocks used to produce them and in their end use.

We expect biofuels to have a transitional use in heavy goods road transport while electrification gains scale. We see longer term use in aviation, an industry that is much harder to electrify. 

  • Biofuels are liquid fuels derived from biological sources like agricultural crops (`first-generation’ biofuels) or from biological waste with an urban or agricultural origin, like waste cooking oils or crops and forest residues (`second-generation’).

    Today’s biofuels are mainly first-generation and used in light-duty road transportation (e.g., passenger vehicles). They are primarily ethanol – an alcohol used as a blending agent with petrol to reduce greenhouse gas (GHG) emissions – and biodiesel, a fuel also blended in the pool of fossil diesel.

    When we fill up our tanks at petrol stations in places like the US, Brazil and some European countries, the fuel is likely to include varying degrees of biofuels. This is because regulators have increasingly required that a proportion of ethanol be blended in the supply of petrol (typically less than 10% by volume or unit of energy) and a proportion of biodiesel in the fossil diesel pool.2 This means the market is being driven primarily by regulations and incentives, given that biofuels are still 50-100% more expensive than fossil equivalents.3

    We should note that several governments backtracked on their biofuel mandates in the wake of the energy crisis and subsequent fuel price inflation that unfolded in Europe in 2022. Sweden, for example, reduced its 30% blending mandate for diesel to 6% starting in 2024.4 Finland made a similar move.5

    Even so, biofuels represent a market of about USD 150 bn, or roughly 3% of the global oil demand. We expect those numbers to increase, but the market is changing. To have a sustainable future, the biofuels system must undergo the following key shifts, which we will explore in more detail:  

    1. from first-generation fuels to second-generation fuels
    2. from being used in cars to being used in hard-to abate transport sectors like aviation and shipping, and for heavy trucks in the interim until the fleets are fully electrified


    First-generation feedstocks 

    General definition

    Crops grown for the purpose of being used as biofuel feedstocks.


    Corn                 Sugar Cane           Soybean oil
    grown for           grown for                grown for

    bioethanol          bioethanol               biodiesel

  • Any discussion of biofuels needs to look beyond their role as a decarbonisation solution. We must weigh the positives against the harm that can result from the production process – particularly in relation to deforestation  and competition with food production. We can summarise the key risks associated with first-generation feedstocks as follows:

    Competition with food production. While biofuels represent about 3% of total liquid fuels demand worldwide, their production requires using 13% of global croplandwith current technologies. Most biofuels today are based on crops that either encroach on or take over space that could be used to grow food. This can lead to shortages and exacerbate food inflation. This tension was felt particularly acutely when an increase in blending mandates in the US coincided with lack of output from Ukraine.7

    Land use change. These effects can be either direct or indirect:

    • Direct: Palm crops for palm oil can be linked to deforestation. This harms nature and can also thwart efforts to control GHG emissions, as forests have a high potential to store carbon. As such, deforestation might, in fact, offset any progress made in lowering GHGs by replacing fossil fuels with biofuels
    • Indirect: Land purchased for biofuel feedstocks can drive deforestation by pushing food crops and cattle farther into the forest frontier (soybean oil/sugar cane)

    It is difficult to pinpoint direct cause-and-effect with these issues. While certain certification standards exist to prove the deforestation-free origin of the biofuel feedstocks,they have limitations and vary across geographies. First-generation energy crops could have a role, albeit very limited, in a sustainable system if they are grown on land with no better potential uses or if the fuel is expressly supplied to `high-priority’ end-uses like aviation.However, this can also be very difficult to establish.

    For these reasons, enabling a sustainable future for biofuels must involve moving away from first-generation and toward second-generation (waste-based) fuels.

  • Second-generation feedstocks can be defined as biomass that is converted to biofuels and that otherwise would be typically regarded as a by-product or waste stream. While first-generation biofuels have the potential to reduce GHG emissions by a meagre 20-40%, these waste-based fuels can cut them by >80% relative to fossil fuels.10 This is because their waste-based origin means they require no additional agricultural production or land, so the indirect land-use emissions (e.g., from clearing land, fertilisers, pesticides) are avoided.11


    Second-generation feedstocks

    General definition

    Biomass that had a primary purpose (s) other than as biofuel feedstock and can be repurposed for biofuels.




    Biomass from

    municipal solid waste

    for bioethanol

    Biomass from

    industrial waste

    for bioethanol

    Used cooking oil

    for biodiesel


    While these feedstocks are preferable to the first-generation group, they come with their own set of challenges:

    • Waste feedstocks can be difficult to source and available in limited quantities. Even if all food waste were processed into biofuels today, that would still only deliver 6% of the world’s liquid fossil fuel demand. However, that would cover the fuel needs of the aviation industry alone, which equates to about 6% of global oil demand. When targeted to certain hard-to-abate sectors, in other words, biofuels can have a much larger proportional impact on emissions  
    • Certification schemes will need to demonstrate that their methodologies can transparently address concerns about the origin of second-generation biofuels (e.g., that first-generation fuels can be passed off as second-generation because they look similar)


    On balance, second-generation biofuels are preferable in a sustainable system where strict certification standards can ensure credible waste origins. Given their limited availability, biofuels should also be prioritised for sectors where they have the most potential to reduce emissions. 

    This brings us to the second key shift taking place.

  • As previously noted, most biofuels today supply the light road transport market (cars) as blending fuels.  However, as electric vehicles (EVs) increasingly provide a more efficient and less costly way to decarbonise road transportation, the biofuels market is moving to industries that are harder to abate, like trucking (which is already in the early stages of electrification), aviation and, potentially, shipping.

    These industries will take longer to electrify, largely because of the lack of commercially available technologies today, although we note that the rapid advances in battery densities and charging times are likely to drive an acceleration in direct electrification. Indirect electrification (via green hydrogen-derived fuels) is another competitor to biofuels, for example in shipping. Currently, aviation seems to be the sector where biofuels (in the form of sustainable aviation fuels, or SAF) might be the most difficult to displace on a large commercial scale, particularly for long-haul flights.

    However, even when these technologies become commercial, the long lives of trucks, planes and ships (15-30 years) means that many of them could still be operating in 2050 as their owners seek to squeeze out their economic value. As such, biofuels are a straightforward solution to decarbonise the large fleet of polluting transport assets until the replacements using cleaner technologies can be deployed at scale.

    More than 200 new biofuel projects, both greenfield and brownfield, are under way across the US, Europe and Asia. Most focus on renewable diesel and SAF, the two types of biofuels that regulators target because of their impact on decarbonising hard-to-abate sectors.

    TheEU's ReFuelEU initiative, for example, calls for a 2% blending of SAF into standard jet fuel by 2025, 6% by 2030, 34% in 2040 and 70% by 205012. Other jurisdictions offer economic incentives, subsidies and tax credits.13 The US Inflation Reduction Act (IRA), for instance, provides tax credits of $1.25 per gallon14 for biofuel producers. The EU also targets an increasing share of `synthetic’ fuels, a type produced through green hydrogen and captured carbon, although their large-scale commercial availability is expected after 2030.

    We estimate that demand for SAF will grow ca. 50% p.a. until 2030, albeit from a small base. Renewable diesel for sectors like trucking will grow at 5% p.a. from a much larger base. We expect the supply-demand balance for biodiesel and renewable diesel to ease from 2025 as more projects come online. On the other hand, supply of SAF needs to increase to avoid shortages in coming years, especially in Europe.


    Potential use of biofuels by transport sub-sector

    Light-duty road transportation. There is wide consensus that internal combustion engines (ICEs) will be largely phased out for light-duty road transportation as EVs grow to dominate the market. While EV sales are quickly ramping up, at Lombard Odier we estimate that around 60% of the passenger car fleet will still have ICEs by 2035 and their use will decline rapidly thereafter. Biofuels could therefore provide an interim solution until those cars are completely replaced by EVs (though the economic and environmental costs could be considerable).

    Heavy-duty road transportation. Electrification is likely to be the preferred decarbonisation route for much of the trucking market, but we do not yet know how much this can be applied to long-distance routes. The role of sustainable liquid fuels – biodiesel, renewable diesel or synthetic fuels from green hydrogen – is therefore still in question. As is the case with light duty transport, it will take many years to electrify the existing fleet, and biofuels are thus likely to play a medium-term role in blending.

    Marine. The shipping industry is largely looking to ammonia or methanol as low-carbon fuels of the future. They will probably be produced mostly from green hydrogen over the long term, again implying a limited role for bio-derived fuels. Very few, if any, biofuels are currently used in shipping.

    Aviation. Most mid- to long-range flights are unlikely to be decarbonised this decade or next via electrification or H2 as fuel. Liquid fuels will therefore continue to be used in the aviation sector. Biofuels are expected to play a critical role in being a source for these until liquid alternatives like synthetic fuels become commercially available in the late 2030s.

  • Two key takeaways are clear, in our view. First, biofuels have a sustainable future for at least the next decade, but for a specific market segment: hard-to-abate transport sectors. Demand will shift from passenger cars to sectors like aviation and trucking (to service existing fleets). This means that the demand for ethanol (for cars) will decrease (unless it can be repurposed for aviation), while the demand for renewable diesel and SAF will increase.

    Second, the policy environment is shifting. Sustainability requirements like feedstock origin and carbon intensity are now an integral part of regulations in places including the US and Europe. Second-generation biofuels using waste oils and other biological residues will be prioritised.

    For example, the EU RED II & III frameworks are introducing mechanisms like `multipliers’ to make second-generation biofuels count double towards renewable energy targets.15 Multipliers incentivise the purchase of potentially costlier low-carbon fuels by making them more effective in meeting policy aims. Similarly, the US IRA tax credit is adding a `carbon intensity’ requirement for biofuels producers to obtain an additional 50 cents per gallon of SAF.16

    This is already having an impact on the types of production plants in the pipeline. We estimate that biodiesel supply is increasing at a meagre 1.5%, while renewable diesel (second-generation) supply capacity will increase by 20% p.a. and SAF supply capacity by 50% p.a.

    Finally, promoting transparency and access to robust data is crucial in developing safeguards that will ensure a sustainable future for biofuels, in our view.   

Click here to visit the Planetary Transition strategy page

important information.

For professional investors only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This document is approved at the date of publication.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person. A summary of investor rights and information on the integration of sustainability risks are available at:

Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. ©2023 Lombard Odier IM. All rights reserved