From ambition to action: The role of policy in scaling renewable fuels

Regulation is often seen as a constraint. But in the case of renewable fuels, it can act as a strategic enabler: creating markets, guiding investment, and providing long-term visibility in a volatile energy landscape.

“Without legislation and regulation, we would have practically no demand for renewable fuels,” says Tuukka Väisänen, Head of Market Intelligence at Neste. “A very large part of the fact that the market exists is based on legislation. If you follow how the demand for products and the size of the market develop on an annual basis, there is a complete causality. From a data perspective, the link is absolutely direct.”

Policy instruments such as blending mandates, tax incentives, and emissions trading schemes are not just about cutting emissions – they help build stable demand that allows producers to invest in capacity and innovation. “The green transition costs money, as in any other sector. But regulation creates markets, markets create capacity and investments, and investments generate money and jobs. The green transition, also in the transport sector, is not just a cost but also a huge benefit,” notes Väisänen.

Lessons from frontrunners: the US, EU, and beyond driving renewable fuel growth

Examples from around the world illustrate this dynamic clearly. California’s Low Carbon Fuel Standard (LCFS) has become a benchmark policy. Väisänen points out how it is long-term, technology-neutral, and provides predictable demand. As a result, California’s renewable diesel market has grown larger than that of the entire European Union. “Up to 80% of the diesel pool in California is bio-based,” says Väisänen. “Other west coast states and British Columbia in Canada have followed suit, and blend rates are already 20–30%.”

In Europe, Italy has pioneered beyond traditional blending mandates by requiring the use of unblended, or “neat”, renewable fuels. This has encouraged major investment in biofuels production and boosted transformation of fossil assets into renewable fuel assets, supporting both decarbonization and energy security in the country.

The European Union’s ReFuelEU Aviation regulation is another example of forward-looking policy. It introduced a sustainable aviation fuel (SAF) mandate across the bloc in 2025. “This regulation is clear and far-sighted. It provides certainty to the operating environment and develops the market,” says Väisänen. “However, the ramp up of the EU SAF mandate only every five years creates cyclical demand plateau effects. It should instead increase linearly, to better reflect the continuous production capacity build-up, like it is with the RED national mandates."

In contrast, abrupt policy changes can have the opposite effect. The Swedish reduction mandate obliging fuel suppliers to blend in biofuels to lower greenhouse gas (GHG) emissions used to be the highest in the EU, at over 30%, but was lowered to just 6% in 2024, causing a sharp increase in fossil fuel use and emissions. This year, the mandate was again raised to 10%.

“Predictability is essential,” Väisänen stresses. “When investment decisions are made, legislative ambitions and existing laws are analyzed very carefully, because they are the foundation for the business.”

Carrot, stick – or both?

When it comes to scaling sustainable solutions, which works better: incentives or obligations? According to Väisänen, both are needed.

“The production costs for renewables are still much higher than for fossil fuels. Producers need payback for their investments,” he explains. “Willingness to pay a premium on top of a fossil alternative driven by pure goodwill is rare. You need to use the stick to force usage, or the carrot to bridge the cost."

Examples of effective carrots include tax credits such as the US Inflation Reduction Act’s SAF credit or Sweden’s tax breaks for high-blend biofuels. Examples of effective sticks include blending mandates or emissions reduction obligations at national and EU level.

Challenges and the road ahead

The main challenges in developing regulation are often political rather than technical. Policymakers worry about public reaction to fuel prices, or about resistance from market players across the value chain whose short-term competitiveness benefits from the status-quo. For that reason, policies need to deliver mid- to long-term incentive mechanisms, so that solutions to reduce GHG emissions are rightly seen as a competitiveness enabler for both users and suppliers. Compliance can also lag: In 2020, only half of the EU Member States reached the 10% renewable energy target in transport set by the Renewable Energy Directive.

Still, the direction of travel is clear. “North America and Europe have built very similar regulatory logics,” says Väisänen. “In Asia-Pacific, policies are still developing, but many governments are benchmarking against EU and US models.”

Looking ahead, globally aligned regulation may play a bigger role, especially in aviation. “Air transport is fundamentally global. A globally uniform regulation could make sense, both for the environment and for fair competition between airlines,” Väisänen notes. Initiatives such as the International Civil Aviation Organization’s CORSIA framework already lay groundwork for such cooperation.

Policy as the foundation of the transition to renewable fuels

From renewable diesel on US highways to SAF adoption in Europe, evidence shows that well-designed, long-term regulation accelerates the transition to renewable fuels. It reduces risk, boosts investor confidence, and ensures that the benefits of decarbonization are shared across industries and societies.

“Sometimes I feel that when following political debate, there is not always enough understanding of how regulation-driven this business is,” Väisänen concludes. “But the data is clear: regulation is not just a supporting factor – it is the foundation of the renewable fuels market and key to accelerating the transition away from fossil fuels.”