Biofuel adoption in the transport sector: The impact of renewable energy policies

• Diesel inventories and ethanol prices drive the issuance of advanced biofuel certificates. • Agricultural commodity prices have a growing influence on biofuel dynamics. • Fossil fuel stocks initially reduce the incorporation of low-carbon fuels in transport. • Trading of biofuel certificates generates volatility and weakens long-term adoption. • Structural fossil fuel market barriers limit the effectiveness of renewable energy policies. This study quantifies the impact of the European Union’s Renewable Energy Directive (RED) on the adoption of biofuels in Portugal’s transportation sector. To this end, the study analyzes the interaction between regulatory instruments and market dynamics using a vector error correction model with two complementary econometric specifications. The first specification captures the administrative dimension of the certificate market by assessing how the issuance of advanced biofuel certificates (TdB) respond to agricultural and energy market prices. The second specification focuses on the physical incorporation of biofuels and examines the relationships among fossil fuel stocks, TdB, and the integration of low-carbon fuels into the energy mix. Variance decomposition shows that diesel is the main factor influencing TdB issuance (19.14%), followed by ethanol (12.75%) and distillates (4.51%). Agricultural commodity prices have a smaller but growing impact (soy: 2.94%, palm: 4.44%, rapeseed: 3.51%). The incorporation of low-carbon fuels remains primarily determined by fossil fuel inventories, especially gasoline (11.59%) and distillates (7.28%). This study provides new evidence on the interaction between agricultural commodities prices, fossil fuels, and regulatory mechanisms, highlighting how RED measures respond to market fluctuations and contribute to the broader challenges of the energy transition.