Biofuels as an interim solution for hard-to-electrify sectors

The clean energy transition is advancing at remarkable speed. Solar and wind capacity is growing faster than anticipated, battery costs continue to fall, and electric vehicles (EVs) are better and cheaper than gasoline-powered engines for most uses. But some gaps remain, even if only temporarily. 

Aviation, maritime shipping, heavy trucking, and industrial heat are often called the “hard-to-abate” sectors for good reason: The liquid fuels that power air, sea, and long-haul road transport pack a punch—high energy density and compatibility with existing infrastructure. Similarly, besides the process emissions innate to the chemical reactions that occur in steel and cement production, these industries also require extremely high temperatures that have traditionally been reached only with fossil fuels. 

Biofuels can help stopgap emissions while battery energy storage systems and technologies like electrochemistry and green hydrogen become ready for widespread industrial-scale commercial deployment. Derived from crops, residues, or waste, biofuels are one of the few scalable "drop-in" substitutes for fossil fuels. 

Today, they account for about 4 percent of global transport energy use, but their role is poised to expand across transport and, to a lesser extent, heavy industry in the short term. 

The United States currently leads the biofuels market, with a $100 billion industry that is expanding at around 8 percent per year. The European Union, Brazil, and major emerging economies are also investing heavily, with the EU increasing its sustainable-biofuel consumption by ~5 percent annually, Brazil expanding its production and raising blending mandates, and India targeting double-digit growth under its E20 program.  

Four key points highlight how biofuels are evolving, what constraints they face, and why policy and financial innovation will be decisive for their future. 

Key Insight #1: Biofuels are filling a gap where electrification cannot yet compete 

Electrification is at the center of the clean energy transition, but there are limits to what electrons, with current technology and infrastructure, can do. Take aviation as an example: No battery today can power transcontinental flights. Sustainable aviation fuel (SAF)—a type of biofuel—is currently the only deployable decarbonization pathway for long-haul air travel. SAF demand is projected to grow fivefold by 2030, driven in part by mandates like the European Union’s ReFuelEU and the International Civil Aviation Organization’s CORSIA. 

Heavy-duty trucking also illustrates the challenge. While electric passenger vehicles compete on cost and performance with their internal combustion engine counterparts, long-haul road transport still relies largely on diesel for range. Biofuel alternatives like renewable diesel offer a provisional way to reduce emissions until batteries, hydrogen fuel cells, or technologies now in the R&D stage can replace them. Likewise, though maritime shipping may ultimately be powered by ammonia, hydrogen, or methanol, for example, biodiesel and biomethane can substitute fossil fuels in the interim.  

Key Insight #2: Feedstocks are evolving from crops to circular waste and advanced sources 

The evolution of biofuel technology is defined by the type of feedstock used. First-generation biofuels—namely ethanol and biodiesel—are derived from crops like corn, sugarcane, soy, and palm oil, and dominate the industry today. However, while cost-competitive and backed by mature supply chains, they compete with food production for feedstock and have been linked to land-use change and biodiversity degradation. 

Second-generation biofuels represent a more sustainable model. They use circular, non-food inputs for feedstock, including agricultural residues, forestry by-products, used cooking oil, animal fats, and municipal waste. This avoids land-use conflicts and reduces lifecycle emissions by more than 80 percent compared with fossil fuels. 

Third- and fourth-generation biofuels, derived from algae and engineered microorganisms, respectively, remain largely at pilot scale. However, they signal the longer-term potential of bio-based fuels that generate high yields on marginal land and integrate nature-based carbon capture into production. 

The shift toward circular inputs is already evident in the market. With many U.S. and European refineries being retrofitted to process used cooking oil and, in some facilities, tallow, residues, and waste already make up more than 60 to 80 percent of inputs. 

The challenge for the transition to more sustainable inputs is a constrained and inconsistent supply. Residues and waste oils are limited by nature, geographically concentrated, and vulnerable to trade and policy volatility; with blending mandates expanding, both the United States and the European Union are projected to become net importers of feedstocks by 2050. This underscores the urgent need to diversify sources, establish recovery systems, and develop international trade systems that balance scale with sustainability. 

Learn more about Columbia Business School’s Climate Knowledge Initiative: Biofuels

Key Insight #3: Advanced technologies make drop-in fuels compatible with existing infrastructure 

Conventional biofuels (like ethanol and biodiesel) typically require blending with fossil fuels, which increases their carbon intensity. The next innovation frontier is advanced “drop-in” fuels that can be used directly in today’s engines, pipelines, and refineries. Such compatibility enables rapid deployment without parallel investment in new engines or infrastructure for faster scale and emissions reductions. 

Leading the advanced biofuels category is hydroprocessed esters and fatty acids (HEFA), though it’s constrained by limited feedstock availability. Hydrotreated vegetable oil (HVO) has emerged as an alternative drop-in option, with global production capacity expected to nearly double by 2028. Other innovations include Fischer-Tropsch and Alcohol-to-Jet production pathways, which broaden the range of usable feedstocks to include cellulosic residues and alcohols. Pyrolysis, though earlier in development, adds further feedstock flexibility. 

These newer technologies come with steep costs: Feedstocks represent 65 to 80 percent of total production expenses, and overall costs often fall in the range of $100 to $160 per barrel—significantly higher than conventional biodiesel and ethanol, which typically range from $50 to $100 per barrel. 

Nevertheless, momentum is building. More than 100 SAF projects are under development worldwide, and costs are expected to decline with technological learning, economies of scale, and improved feedstock supply chains. 

Key Insight #4: Market growth is accelerating, but policy certainty and financial innovation will determine the future of biofuels

Global production of biofuels is expected to expand 2.5-fold by 2050, with nearly 90 percent of that growth expected to come from advanced biofuels produced from residues, waste oils, and other low-carbon feedstocks. This transition is already evident in the United States, where renewable diesel output grew nearly 80 percent annually between 2020 and 2024, even as conventional biodiesel production declined due to refinery conversions and repurposing of existing plants. 

Yet across all categories, feedstock volatility remains a key constraint. Unlike fossil fuels, whose costs are shaped by extraction and geopolitics, biofuel prices are tied to agricultural markets that fluctuate with weather, land management, and policies. 

Trade dynamics are also shifting. Countries like Indonesia and Brazil may reduce feedstock exports as domestic blending programs expand, creating uncertainty for global markets. Emerging producers in Africa and Latin America could fill the gap but only with substantial infrastructure investment and international financing.

Coordinated policy frameworks are necessary for market expansion, and long-term mandates are central. California’s Low Carbon Fuel Standard, the European Union’s SAF blending quotas, and Brazil’s ethanol and biodiesel programs demonstrate how regulation can create demand and attract capital. Carbon pricing can further internalize environmental costs, making biofuels more competitive with fossil fuels.

Advanced biofuel projects require heavy upfront investment and face uncertain revenue streams. This is where innovative financing comes in, including mechanisms like public-private partnerships, blended finance, loan guarantees, production tax credits, and contracts for difference. Green bonds and sustainability-linked loans are already financing projects across the sector, while public procurement programs that commit fleets to SAF or renewable diesel can provide stable early demand. 

Policies to scale waste collection, support next-generation feedstock innovation, and enable cross-border trade of sustainable inputs will be essential to securing feedstock supply. As the United States and European Union become net importers, international cooperation with emerging suppliers will determine whether the industry can expand without creating new sustainability problems. 

Bio-fueling the clean energy transition’s last mile 

Biofuels are uniquely positioned to cut emissions in sectors where electrification cannot deliver—not yet, at least. Their importance will wane in passenger transport, precisely because of EVs, while it will only grow as aviation, maritime, and industrial demand accelerates. 

There are hurdles aplenty: Cheap corn-ethanol biofuels often do not deliver the promised emissions reductions, while next-generation biofuels still face high costs, limited feedstocks, and dependence on strong policy support. One clear advantage of advanced biofuels: their plug-in nature, with many engines that now use fossil fuels ready for a one-to-one swap. With clear mandates, innovative financing, and international cooperation, biofuels can bridge the gap between today’s fossil-fuel dependence and tomorrow’s net-zero economy. 

Learn more about Columbia Business School’s Climate Knowledge Initiative: Biofuels