Fossil fuels remain an essential part of the European transport market. Without these fuels, the economy would grind to a halt; they are quite literally the engine of our society. Their major disadvantage, however, is their high level of emissions. For this reason, Europe has been introducing directives to promote the use of biofuels since 2003.

The European biofuel market has gained considerable momentum since the introduction of RED III on 1 January 2026. Demand is increasing, while incentives are shifting away from simply blending specified volumes towards achieving genuine reductions in CO2 emissions. Fuel retailers do not blend biofuels because consumers demand them, but because EU Member States are required to increase the share of renewable energy used in the transport sector. This makes the biofuel market fundamentally compliance-driven.

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Fundamentals: Demand, Supply and Price Formation

The biofuel and fossil fuel markets are largely complementary. While the supply of and demand for fossil fuels are heavily influenced by geopolitical conditions, such as the recent tensions surrounding Iran and the closure of the Strait of Hormuz, through which 20% of the world's oil passes, demand for biofuels is driven entirely by laws and regulations. Biofuels nevertheless benefit from the existing fossil fuel infrastructure, using the same storage tanks, refineries and transport networks.

There are, however, fundamental differences in how prices are determined. In addition to over-the-counter (OTC) trading, the fossil fuel market is exchange-traded. At the press of a button, a trader can purchase 100 tonnes of diesel through ICE Gasoil. Because there is no live exchange for biofuels, independent price-reporting agencies assess the market each day to establish benchmarks. Biofuel prices therefore do not track oil prices on a one-for-one basis. Biofuels are often traded at a premium over the fossil fuel price. This premium is determined by transport costs, production costs and the cost of procuring feedstocks. Consequently, when the price of Brent crude falls, biofuel prices may remain stable or even increase because of changes in the premium.

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Constraints Facing Both Markets

Both the fossil fuel and biofuel markets face significant, fundamental constraints. Fossil oil is finite. If the world continues extracting it at the current rate, reserves will be depleted around 2070. In addition, the need to reduce CO2 emissions is the EU's primary motivation for achieving the climate targets set under the Paris Agreement.

The biofuel industry, however, has its own limitations. Although biofuels currently work alongside fossil fuels through blending, they are not a definitive long-term solution to the climate challenge. It is simply impossible to meet the enormous global demand for fossil fuels entirely with biomass. Biofuel is a transitional product that serves as a temporary blending component.

There is also an intense food-versus-fuel debate. First-generation biofuels are produced from food crops such as sunflower oil, rapeseed oil, soy and palm oil. This means fertile agricultural land is used to make Europe's transport network more sustainable, potentially at the expense of food production.

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The Future

In the coming years, the European energy market will need to innovate substantially to enable the transition to a fossil-free future. The scarcity of raw materials is forcing the sector to do so. As a result, the market for e-fuels, or synthetic fuels, is growing rapidly. Numerous start-ups and scale-ups are now producing synthetic kerosene, diesel and methane. These fuels are chemically identical to their fossil equivalents but are 100% climate-neutral. They also offer a potential resolution to the food-versus-fuel debate.

In addition, the total volume of fuel sold at the pump will need to decline as the transport market undergoes large-scale electrification. As the critical threshold of 2070 approaches, the transport sector will look unrecognisable: the vast majority will be fully electrified, the fossil fuel industry will have largely disappeared, and the remaining demand for liquid fuels in aviation and shipping will be met by a highly advanced mix of next-generation biofuels and synthetic e-fuels.