Tax credits have become a financial lifeline for U.S. biodiesel plants, with recent federal and state subsidies preventing what would otherwise be continuous shutdown signals since early 2025, according to "Biodiesel Production Profits and Tax Credits" by Scott Irwin, Department of Agricultural and Consumer Economics, University of Illinois, March 19, 2026.
The biodiesel industry has faced significant headwinds over the past decade, including the COVID pandemic, competition from surging renewable diesel production and the biomass-based diesel industry going over the "RIN cliff" in the second half of 2023. Several biodiesel plants have been shuttered as a result.
Analysis of a representative 30-million-gallon Iowa FAME biodiesel plant reveals stark differences in profitability with and without tax credits. During 2007-2020, production profits averaged 5 cents per gallon with tax credits included. That figure dropped to negative 10 cents per gallon during the renewable diesel boom years of 2021-2026.
Without tax credits, the financial picture becomes dramatically worse. Average profits over 2021-2026 would have fallen to negative 26 cents per gallon instead of negative 10 cents per gallon. The impact is especially pronounced in 2025 and 2026, when tax credits totaled 45 cents and 79 cents per gallon, respectively. Previous to 2025, total tax credits ranged between 5 and 8 cents per gallon.
Three tax credits currently support biodiesel production. The Iowa Biodiesel Production Credit provides 3.3 cents per gallon for the modeled plant. The federal Small Agri Producer Credit, recently increased from 10 cents to 20 cents per gallon, works out to 10 cents per gallon for eligible facilities. The federal 45Z Clean Fuel Production Credit, which went into effect in 2025 and replaced the $1 per gallon blender tax credit, provides an estimated 66 cents per gallon in 2026 based on carbon intensity scores.
A shutdown analysis comparing biodiesel prices to variable production costs reveals the critical role of tax credits. When tax credit revenue is included, extended periods of prices below shutdown levels are relatively infrequent. However, without tax credits, biodiesel plants would have received shutdown signals every single week since the beginning of 2025.
The 45Z tax credit functions as an indirect production subsidy that effectively shifts the biodiesel supply curve downward, resulting in lower biodiesel prices. By design, the credit offsets those lower prices.
Looking ahead, the situation raises stakes for the upcoming EPA final rulemaking on Renewable Volume Obligations for 2026 and 2027. Strong RVO mandates for biomass-based diesel would boost biodiesel prices and provide crucial additional revenue for biodiesel plants. Without meaningful RVO increases, the profitability outlook for the U.S. FAME biodiesel industry remains challenging.
