"Honda will allocate its energy management and fuel technologies as well as knowledge amassed through F1 activities to this area of power unit and energy technologies and take initiatives while focusing on the future realisation of carbon neutrality," Honda wrote in a statement.
"Toward this end, Honda made the decision to conclude its participation in F1.
"Motorsports activities are in Honda's DNA, and therefore Honda will continue to be passionate about taking on challenges and striving to become No. 1 in all categories of racing in which Honda participates.
"In F1, in order to fulfil the expectations of its fans, Honda will work together with Red Bull Racing and Scuderia AlphaTauri to continue competing with its utmost effort and strive for more victories all the way to the end of the 2021 season."
Reportedly under current rules, with only Mercedes, Ferrari and Renault supplying power unites, Renault would be forced to supply Red Bull as they have the fewest customers.
Currently, Mercedes supply Williams, Racing Point (which will be renamed Aston Martin next season) and McLaren from 2021, while Ferrari supply Alfa Romeo and Haas.
Renault are the only team without a customer team after McLaren moved to Mercedes engines.
As Red Bull signed the Concorde Agreement, the teams are committed to championship until at least the end of the 2025 season.
Red Bull team principal Christian Horner said the team had been in the situation before and said in a statement he understood Honda's decision.
"As a Team we understand how difficult it has been for Honda Motor Company to reach the decision to step back from Formula 1 at the end of the 2021 season," he said.
"The shifting focus within the automotive industry has led to Honda's decision to redeploy their resources and we understand and respect the reasoning behind this.
"Their decision presents obvious challenges for us as a Team but we have been here before and with our strength in depth we are well prepared and equipped to respond effectively, as we have proven in the past.
"Our joint focus for the remainder of the 2020 and 2021 seasons are unchanged, to fight for victories and challenge for the championship. As a signatory to Formula 1's latest Concorde Agreement, Red Bull Racing remains committed to the sport in the long term and we look forward to embarking on a new era of innovation, development and success.
"As a group, we will now take the time afforded to us to further evaluate and find the most competitive power unit solution for 2022 and beyond.
"Whilst we are disappointed not to continue our partnership with Honda, we are enormously proud of our joint success, delivering five wins and 15 podiums for both Red Bull owned teams and we thank everyone at Honda for their extraordinary efforts and commitment."
