Renewable diesel reshapes Canada's biofuel market

Consumers have paid more at the pump this year. Last week, we examined how higher diesel prices affect costs from farm to table. In this report, we take a deep dive into Canadian biofuel production, feedstock use and market conditions, as well as how biofuels compare with their fossil fuel counterparts on cost.

Renewable diesel pushes past ethanol

Canadian biofuel production is expanding, but fuels that replace gasoline and diesel are following different paths. Ethanol production has averaged 156 million litres per month so far this year, up 5% from the same period last year and 20% from 2020. The gains reflect a mature industry focused on operational improvements (Figure 1).

Biodiesel dominated the “other renewable fuels” category until 2023, but renewable diesel, a direct substitute for conventional diesel, is now driving growth. It can earn higher carbon-credit values and, unlike biodiesel, is chemically similar to conventional diesel, allowing year-round use with fewer blending constraints. Canada’s first commercial renewable diesel facility opened in 2023, followed by additional plants in 2024 and 2025. Together, they increased annual capacity from zero to nearly 2.4 billion litres by 2025.

Production of other renewable fuels—biodiesel and renewable diesel combined—averaged 150 million litres per month during the first seven months of the year, up 152% from last year and 294% from 2020. Once equivalent to roughly one-quarter of ethanol output, the category now surpasses it in some months. Monthly output remains volatile as plants face policy uncertainty and changes affecting their economics.

Figure 1: Surge in Canadian biofuel production driven largely by renewable diesel

Sources: Statistics Canada, FCC Economics

Vegetable oils are the primary input to biodiesel and renewable diesel

The growth in renewable diesel is broadening biofuel feedstock demand beyond cereal grains. From January to July 2026, Canadian plants used about 800,000 tonnes of vegetable oil – more than double what was used over the same period in 2025. This nearly matches cereal grain use of roughly 860,000 tonnes. Actual cereal grain consumption is 2.6 million tonnes, but only 33% of that gets converted into ethanol, the remainder is distillers’ grain, carbon dioxide, and corn oil – this allows for direct comparison to vegetable oil which is also a by-product of crushing. Fats, tallows and greases also rose to about 235,000 tonnes after remaining below 100,000 tonnes in earlier years (Figure 2).

The increase in domestic renewable diesel production is clearly supportive of Canadian oilseed demand. Vegetable oils drive most of this growth, as supply constraints in the livestock harvesting sector limit the availability of lower-carbon fats and greases. Canadian canola oil is the primary oil used by facilities in Western Canada, although imported feedstocks are still used.

Figure 2: Inputs into Canadian biofuels production (January-July)

Sources: Statistics Canada, FCC Economics

Biofuels continue to increase their share in finished fuels

Biofuels account for a growing share of Canada’s finished fuel supply. Ethanol’s share of gasoline increased steadily from about 8% in 2020 to roughly 11% in early 2026 (Figure 3). Biodiesel and renewable diesel blending into diesel remains seasonal, but recent peaks near 6.5% are well above the 3% to 4% range recorded earlier in the period.

Government policy supports the continuation of both trends. Canada’s Clean Fuel Regulations reward lower-carbon blending, while provincial mandates set minimum biofuel shares. Ontario, the largest gasoline market, requires an 11% ethanol blend, rising to 15% by 2030; Quebec requires 12%, well above the federal minimum of 5%. For low carbon diesel, the federal minimum blend is 2% but many provinces have a higher requirement.

Regulatory requirements are likely to be supportive of ethanol blending, although vehicle electrification could eventually shrink the gasoline pool. A higher ethanol share could therefore coexist with lower total ethanol demand. For now, the bigger concern for Canadian ethanol production remains imports from the U.S. Last year, imports provided 60% of the ethanol blended into Canadian gasoline. That could change as Environment and Climate Change Canada recently proposed changes to support domestic biofuel production, with a 75-day public consultation beginning October 30.

Growing renewable diesel use is lifting both summer and winter blend rates. Historically, biodiesel blends peaked near 5% because poor cold-weather performance limited winter use. Renewable diesel avoids this constraint, supporting more consistent year-round blending and a higher renewable share of diesel. However, similar to ethanol, U.S. imports still supply more than half of the biodiesel and renewable diesel consumed in Canada.

Figure 3: Ethanol and biodiesel blend rates setting new records to start 2026

Sources: Statistics Canada, FCC Economics

High fossil fuel prices favour ethanol more than renewable diesel

Ethanol has generally retained a price advantage over gasoline after adjusting for its lower energy content (Figure 4). At the latest observation, energy-adjusted imported ethanol prices cost about $1.20 per litre compared with roughly $1.75 per litre for gasoline. The gap has widened as gasoline prices increased faster, strengthening the economic case for blending ethanol. The comparison does not include every supply cost and is not a direct measure of blender margins or consumer savings.

Figure 4: Ethanol is price competitive with gasoline

Sources: Statistics Canada, NRCan, FCC Economics

The economics are less compelling for canola-based renewable diesel (Figure 5). At the latest observation, the canola oil needed to produce one litre of renewable diesel cost a hefty $4.70 (even before other input costs are considered), compared with a diesel price near $2.60. So, higher diesel prices alone do not ensure better renewable diesel margins because canola oil prices, with which they are highly correlated, have also risen sharply. What can improve the economics here is continued government support e.g., Clean Fuel Regulation credits and provincial incentives.

Figure 5: Comparing cost of canola oil to diesel price in Canada

Sources: Statistics Canada, FCC Economics

Bottom line

Cross-border policy remains important for Canadian biofuels and feedstocks. In 2025, Canada used nearly 1 million tonnes of vegetable oil for biodiesel and renewable diesel production, while exporting 2.5 million tonnes of canola oil to the U.S. which also uses it for biofuel production. U.S. producer credits favour American-made fuel, but higher blending targets support vegetable oil prices, creating both opportunities and risks for Canadian producers and crushers.

Canada’s biofuel market is shifting toward renewable diesel. New plants are boosting output, demand for vegetable oils and fats, and biofuels’ share of finished fuel. High fossil fuel prices strengthen ethanol’s cost advantage but do not offset renewable diesel’s high feedstock costs. Changing government policies, including updates to the Clean Fuel Regulations, will be a watch item going forward as they can redirect fuels and feedstocks across borders.

Justin Shepherd

Senior Economist

Justin is a Senior Economist at FCC. He joined the team in 2021, specializing in monitoring agricultural production and analyzing global supply and demand trends. In addition to his speaking engagements on agriculture and economics, Justin is a regular contributor to the FCC Economics blog.

He grew up on a mixed farm in Saskatchewan and remains active in the family operation. Justin holds a master of applied economics and management from Cornell University and a bachelor of agribusiness from the University of Saskatchewan.