The recent regulatory approval of Germany’s THG (greenhouse gas) quota legislation marks a pivotal shift for the biofuel and renewable energy sectors. Following prolonged industry-wide impacts from an oversupply of GHG credits, this legislation aims to revitalise demand and drive a more stable market trajectory. Effective for 2025 and 2026, this legislation restricts companies from carrying over surplus GHG quotas, aligning Germany’s renewable energy approach with EU Renewable Energy Directive II (RED II) goals and addressing concerns raised by producers and market stakeholders.

1. Impact of Surplus Quotas on Producers and Market Demand

For the past few years, the German biofuel industry has been grappling with an excessive surplus of THG credit. While this surplus appeared as a climate achievement on paper, it led to a sharp decrease in demand for physical biofuel as market participants could easily rely on excess credits rather than investing in biofuel and other renewable energy alternatives. Consequently, the industry experienced a downturn, with demand for physical biofuels dwindling and investment stalling. Producers, who rely on a robust demand for biofuels and other renewable solutions, have been pushing for regulatory change to counteract these effects.

With the new legislation, the German government acknowledges the threat this surplus posed to the industry, potentially eroding the biofuel market and undermining progress toward climate targets. By prohibiting the carry-over of surplus quotas in 2025 and 2026, the government aims to bring demand for biofuels and renewable energy back to the forefront. This move should restore balance in the market, creating a more stable environment that encourages investments and supports the biofuel sector’s recovery.

2. Temporary Nature of the Regulation and Calls for Long-Term Solutions

While the industry has responded positively to this legislative update, they have also voiced concerns that the solution remains temporary. Producers and market participants agree that although restricting surplus quotas is a step forward, a more permanent, long-term solution will be necessary post-2026 to prevent future market distortions. The temporary ban on carry-over quotas helps alleviate immediate pressures but does not fully address the structural issues in the THG quota system that led to the oversupply in the first place. Industry stakeholders are calling for a comprehensive overhaul of the GHG quota framework, one that fosters consistent demand and avoids reliance on regulatory fixes. For many, the concern remains that without additional adjustments or structural reforms, Germany could see a recurrence of surplus issues, once the temporary regulation expires. Therefore, stakeholders are urging policymakers to consider further interventions that promote stable, long-term demand for biofuels and renewable energy sources.

3. Market Forecast: Growing Demand and Potential Price Increases

With carry-over quotas no longer available in 2025 and 2026, demand for physical biofuels is expected to pick up, potentially reversing the downward trend that surplus quotas had previously caused. This regulatory change could lead to a bullish market for biofuel producers and other renewable energy sectors as a possible outcome could be an increase in demand to meet year-specific compliance obligations. In addition, anti-dumping duties recently imposed by the EU on Chinese biofuel imports reduce the risk of another surplus, as imports from China are expected to decrease. This further supports a favourable environment for domestic biofuel demand and pricing stability. Moreover, 2024 tickets have shown a bearish trend, with demand declining since the draft’s introduction. While the limited carry-over options may impact future market dynamics, current conditions for 2024 reflect softer demand, especially for those holding surplus quotas.

4. Long-Term Market Stability and Future Legislative Considerations

This regulatory change represents a strong signal from the German government to support the renewable energy sector, ensuring that biofuel producers receive a boost in demand that aligns with national and EU climate targets. However, given the temporary nature of this adjustment, the industry must remain vigilant about long-term stability. To maintain growth and support investment, additional reforms may be required to foster a more predictable and resilient demand structure beyond 2026. As Germany seeks to meet its 2030 GHG reduction targets, the government may need to further adapt its policy framework, ensuring that market participants do not encounter similar oversupply issues in the future. Long-term solutions may include enhanced biofuel blending mandates, stronger incentives for green hydrogen and electromobility infrastructure, and continued coordination with EU directives to create a more robust market for renewable energy solutions.

Conclusion

Germany’s new THG quota legislation is a welcome change for an industry that has been strained by an oversupply of GHG credits. By halting the carry-over of surplus quotas for 2025 and 2026, the government has taken an essential step to reinvigorate demand for biofuels, counteracting the downward pressure on physical biofuel that had stymied industry growth. While this move promises short-term relief, producers are clear that a sustainable, long-term policy solution will be critical to avoid future market disruptions. As demand for biofuels is set to rise, and with anti-dumping measures in place to protect against foreign surplus, the industry can look forward to a more stable market. For now, the bullish trend in 2025 credits reflects optimism, but sustainable, long-term adjustments will be necessary to secure Germany’s path toward its ambitious climate goals.

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