Demand for biofuel production driven by the Renewable Fuel Standard (RFS2) has coincided with increased land in corn production and increasing nitrogen (N) loss to the Gulf of Mexico. Diversifying cropland with perennial energy crops (miscanthus and switchgrass) may reduce N loss and improve water quality. However, the extent of these benefits depends on the mix of biomass feedstocks (corn stover, perennials) incentivized by the RFS2 and the extent to which energy crops displace N-intensive row crops. We developed an integrated economic-biophysical model to quantify the water quality impacts of three potential policy scenarios that provided corn ethanol at levels before the RFS2 (RFS1 baseline); 15 billion gallons of corn ethanol (corn ethanol only); or 16 billion gallons of cellulosic ethanol in addition to corn ethanol (corn + cellulosic ethanol). Our results showed that economically optimal locations for perennial energy crop production were distributed across idle cropland with lower intrinsic N loss than active cropland. We found stover removal incentivized by the RFS2 offset N loss benefits of perennial energy crops. This finding suggests that targeted incentives for N loss reduction are needed to supplement the RFS2 to induce displacement of N-intensive row crops with energy crops to reduce N losses.