Biofuel Policy Is Failing Consumers and the Climate

Farmers are among the hardest hit by China’s new retaliatory tariffs, developed in response to President Trump’s tariffs announced earlier this year. During the 2017-18 trade dispute with China, U.S. agricultural exports fell sharply, prompting the Department of Agriculture (USDA) to send farmers $23 billion to cover their losses. A larger trade war with China seems sure to bring about more export losses and larger bailouts. Policymakers are already considering new compensation for farmers and rightly so. Without support, many farms could go bankrupt, weakening U.S. agricultural output and rural economies long after the trade war ends.

But policymakers are also eyeing a less visible set of policies to increase farmer income: subsidies to artificially expand the biofuel market. Currently, over one-third of corn and nearly half of soybean oil produced by U.S. farmers is used for biofuels such as ethanol and biodiesel. Farmers hope to dramatically expand biofuel use to make up for at least part of lost exports.

Yet any new biofuel subsidies would be a mistake, entrenching wasteful spending and environmental harm. Biofuels increase food prices; incentivize more agricultural land-use and thus risk deforestation and other environmental problems; and are an inefficient way to support producers. Rather than establishing long-term subsidies with such large societal costs, the federal government should directly provide one-time compensation to farmers for lost profits due to trade disruptions. To further boost farmer income, policymakers should focus on supporting farmers to grow more crops for food or animal feed,such as by expanding overseas markets, funding research and deployment of productivity-enhancing technologies, and modernizing biotechnology regulations.

Policymakers Hitting the Gas on Biofuels

Congress, the White House, and state governments alike are pushing forward policies that would increase biofuel use. The most prominent among these are federal agency efforts to establish the Clean Fuel Production Tax Credit (commonly known as 45Z) and to require higher amounts of corn ethanol to be mixed with gasoline.

The 45Z tax credit, established in the Inflation Reduction Act but not yet finalized by the Department of Treasury, would offer tax incentives to U.S. producers of transportation fuels that have a low enough carbon footprint (50kg CO₂e/million BTU). Producers are eligible for larger credits for lower emissions fuels, with larger credits also available for alternative aviation fuel. Specifically, the credit is worth 2 cents per gallon for each kg CO₂e abated for non-aviation fuel and 3.5 cents per gallon for aviation fuel. Accounting for the energy density of the fuels (ethanol stores about ⅓ less energy per gallon than gasoline) this equates to an effective carbon price as high as $86 per tonne CO₂ for the non-SAF credit and about $138 for the aviation credit. This is a much larger payment than many effective climate programs or policies provide, several times higher than the price of a tonne of carbon under California’s cap & trade policy, for example. Though fuel producers would claim the credit, they may offer price premiums to farmers for corn, soy and other feedstocks grown using practices that USDA claims would reduce the fuel’s carbon footprint (despite evidence to the contrary).

Another idea policymakers are considering is to raise the amount of biofuel that fuel companies are required to sell. Since the Renewable Fuel Standard was created in 2005, the Environmental Protection Agency (EPA) has set yearly targets—called Renewable Volume Obligations (RVOs)—that dictate to oil refiners and importers how much ethanol, biodiesel, and other renewable fuels they must blend into the fuel supply. This April, the oil industry, biofuel industry, and a bipartisan group of senators called for EPA to significantly raise those targets, proposing more than a two billion gallon increase in soy biodiesel.

A variety of state-level policies under development would further promote biofuels. California is revising its Low-Carbon Fuel Standard, which requires fuel suppliers to either lower the carbon intensity of their fuels or purchase credits from producers of corn ethanol, biodiesel, and other fuels considered to be low-carbon. Massachusetts is finalizing a Clean Heat Standard that will require energy providers to reduce heating-related emissions by either delivering biofuel or installing electric heat pumps. In New York, a new rule will take effect in July 2025 requiring all heating oil sold statewide to contain at least a 10% biodiesel blend.

The Multi-Billion Dollar Biofuel Bill

Biofuel subsidies and mandates certainly achieve one goal of policymakers: to increase farmers’ income. But expanding biofuel production would also raise food prices and provide expensive tax breaks to fuel producers, blenders, and others in the supply chain.

Over the three years that Congress authorized the 45Z credit, 2025–2027, it would cost an estimated $8.4 billion to $16.6 billion primarily in foregone tax revenue that fuel producers would otherwise pay, according to Congress and the Department of the Treasury. In the long-run however, it seems likely to cost more. Once tax credits are created, they are often renewed. For example, federal tax credits for wind and solar that were originally temporary have been renewed for decades. Some members of Congress have already introduced legislation to extend the 45Z tax credit through 2034 and make it easier for biofuels to qualify.

Moreover, if the credit is successful in launching a new market for aviation fuels made from crop-based biofuels, an even larger share of U.S. corn and soy would be diverted from food and feed uses, pushing crop and food prices higher and expanding agricultural land-use. Replacing just one-tenth of jet fuel in the U.S. with corn-derived alternatives by 2030 would require eight to 11 million acres, equivalent to about one-tenth of total corn acreage for all purposes. Soy-based aviation fuel is currently cheaper and more technologically mature than corn-based alternatives and appears more likely to be scaled up. However, meeting demand with soy-based fuel would require at least four-times more farmland because soy yields per acre are lower.

This may seem speculative, but is precisely what has happened under the Renewable Fuel Standard. Though there is reasonable debate over whether greater use of corn ethanol and soy biodiesel typically raises or lowers gas prices, there’s near universal agreement that it increases crop and food prices. Simply put, any expansion of the biofuel market results in an increase in demand for corn, soy and other crops used as biofuel feedstock. This raises prices not only for these crops but also for others, such as oats and barley, that farmers choose to replace in order to grow biofuel feedstocks. This then increases prices of meat, dairy, and eggs, given that livestock consume large amounts of crop-based feed. For example, EPA estimated that the 2023-25 biofuel requirements would raise total food costs by $4.9–6.8 billion. According to a different 2025 EPA report reviewing the academic literature, each billion gallon increase in corn ethanol raises corn prices by 3–5% while a one billion gallon increase in biomass-based diesel increases soybean prices 1.8–8.9%. As shown in the figure below, various other estimates find similar effects.

More Fuel, Less Forest

Diverting crops from food or feed to biofuel production shrinks the global food supply, raising commodity prices. In response, farmers expand cropland elsewhere to meet demand—often by clearing forests or grasslands that store large amounts of carbon. The carbon released into the atmosphere from this land-use change typically outweighs any possible emissions savings from replacing gasoline or aviation fuel with biofuels.

Consider the impact of replacing one acre of corn that was diverted to biofuel by expanding cropland elsewhere in the world at average yields. This is the carbon opportunity cost of using land for biofuel. Think of it as the carbon cost of creating land, which is attributed to crops, similar to how the greenhouse gas emissions from building a new smartphone factory are considered part of a phone’s life cycle emissions. The carbon opportunity cost of corn ethanol and soy biodiesel are about 3–4.5 times larger than the direct emission savings from using them to replace gasoline or diesel.

To be sure, cropland diverted from food or feed to biofuels won’t be replaced precisely one-for-one. If it was, then biofuels wouldn’t reduce overall food supply and there should be a minimal impact on commodity prices. When biofuels raise commodity prices, they modestly reduce food consumption, offsetting some of their impact on cropland. The rise in prices may also spur farmers to invest more in their operations, increasing their productivity and reducing the amount of land needed.

However, the reduction in food consumption or increase in farmer productivity would need to reach implausible levels in order to keep land-use change low enough for biofuels to be climate-beneficial. For example, GTAP, the primary model cited to “prove” biofuels result in little land-use change, assumes that half of the reduction in food consumption caused by higher prices is not replaced. GTAP also assumes that 80% of any increase in cropping area in the U.S. and most other regions comes from growing crops more frequently on the same land (e.g., double cropping), rather than expanding onto new land. This assumption has no empirical basis, contradicts U.S. data showing that double cropping rates for soy have declined to less than 5%, and drastically reduces the predicted indirect land use changes associated with biofuel production.

Leveraging the Efficiency of U.S. Farmers

Rather than subsidizing biofuels to indirectly propping up farmers, policymakers should provide targeted financial assistance directly to farmers affected by new tariffs. They should also support U.S. farmers in enhancing their productivity and competitiveness in the long term.

First, policymakers should aim to expand international markets for U.S. farmers. The U.S. is a global leader in crop yields. Increasing exports reduces the global land footprint of agriculture. Negotiating bilateral agreements to reduce tariffs and remove unscientific trade barriers, such as the EU’s and China’s restrictions on genetically engineered crops, would help farmers access high-value markets and displace lower-yield production abroad.

Second, policymakers should invest in innovation, which can boost farmers profitability by reducing their input costs and making them internationally competitive, while also keeping food prices low. Advances in biotechnology, precision agriculture, and mechanization have historically increased crop yields, lowered input use, and raised farm profitability.For example, insect-resistant corn and herbicide-tolerant soybeans yield up to 7% and 12% more, respectively, than conventional varieties. Looking ahead, gene-editing tools like CRISPR could further speed crop improvement, enhancing yields while reducing the need for water, fertilizer, and pesticides.

Third, Congress and the Trump administration should modernize biotechnology regulations, which currently hinder commercialization and adoption. USDA’s lengthy, costly approval process for genetically engineered crops delays farmers’ access to improved seeds and prevents many varieties from ever reaching the market. Likewise, the Environmental Protection Agency (EPA) regulates many genetically modified and gene edited crops under a cumbersome approval process, slowing innovation and adoption. Policymakers should streamline regulatory frameworks to focus reviews just on high-risk crop traits and to harmonize regulations across agencies.

These reforms to trade, research and biotechnology policy—unlike biofuel policies—would directly support U.S. agricultural competitiveness globally, raising farmer income from exports, reducing food prices for consumers through lower food prices, and shrinking agriculture’s environmental footprint.