Measuring concentration is necessary to analyze the market structure in an indus­try and, thus, to identify relevant elements in this structure, such as competi­tiveness and barriers to entrance, among others. These elements interfere in the conduct and performance of these firms, as well as in the structuring of the mar­ket itself. In order to address the problem of this research, we analyzed the data using two methods that demonstrate the concentration level of companies in their markets: the partial concentration rate (CR) and the Hirschman-Herfindahl Index (HHI).

Similar to second-generation biofuels, so-called third-generation biofuels are pro­duced from non-edible specially engineered low-cost, high-energy and entirely renewable crops such as algae (Chris ti 2007). These are capable of generating more energy per acre than conventional crops and can also be grown on land and in water that is not suitable for food production. Fourth-generation biofuels use genetically modified crops (Table 2). The conversion process in this case is similar to that employed for second — and third-generation biofuels, but involves an addi­tional step where the carbon content in the fuel is oxidized by processes such as oxy-fuel combustion (Gray et al. 2007). The CO2 released is then absorbed and stored in oil and gas fields or saline aquifers (ZEP-EBTP 2012).

A distinction often used in favour of third — and fourth-generation biofuels is that they are produced from carbon neutral or negative biomass. However, as Centi et al. (2012) note, this has not yet been proved empirically, while Gasparatos et al.

(2012) point out that the technologies involved are still in their infancy. In the light of these uncertainties, this chapter focusses on first — and second-generation biofu­els, more so given that many environmental aspects of third — and fourth-generation biofuels hold true for second-generation fuels.

The logistics of Brazilian ethanol is poor. Most of the distribution for the domes­tic market is carried out by road transportation, which is not in good condition in some main key perimeters. For the overseas market, ethanol uses road transport associated to the duct mode, which connects the mills to the harbors. Although they are more efficient than road transport for long distances, the rail and water­ways are still little used for both the domestic market and to the external market (Milanez et al. 2010).

‘The costs of cutting, loading, and transporting account for 30 % of the total cost of production of sugarcane, and only the transport costs are equivalent to 12 % of that total’ (EMBRAPA 2013:1). The average cost of road freight for ethanol in Brazil was R$ 0.1557/m3/km in 2010, ranging between R$ 0.0568/m3/ km and R$ 0.9588/m3/Km (SIFRECA 2011). Therefore, efficient logistic system would result in lower production costs, providing Brazil more competitiveness both in the domestic as in the international market.

Milanez et al. (2010) argue that the logistics of the Brazilian ethanol prevents the supply in some states, especially in northern Brazil due to the lack of efficient infrastructure. Furthermore, most of the infrastructure associated with the trans­port of ethanol is in the Central-South region of the country, mainly in Sao Paulo.

Figure 3 shows the main transport corridors of sugar and ethanol in Brazil. It can be observed that the concentration of the infrastructure is in the state of Sao Paulo and adjacent areas, while the surrounding areas (including those not shown in the figure) have lower modal infrastructure, imposing additional difficulty in the product process of distribution.

The insufficient offer of more efficient transportation modes lead to road trans­port, in which ethanol is transported in fuel tank trucks similar to the way gasoline and diesel are transported. Other modes also lack expansion and modernization,

such as the rail systems, which are not usually used due to ‘the lack of tank wagons, the locomotive enhanced traction capacity, and the low capacity of the railways because of poor maintenance […]’ among other factors (Milanez et al. 2010:69). Moreover, according to the authors, the waterway mode is also not via­ble to transport this fuel since they are mostly in the Amazon Basin, which has no interconnection link to the Central-South modes.

Ducts are not feasible to transport ethanol, mainly due to the high invest­ment and low availability of infrastructure, but this reality might be changed with the completion of ducts that will connect the Midwest region to Santos-SP and Paranagua-PR harbors, crossing some of the largest consumer centers in Brazil, where they can interact with other modes, allowing the distribution to other regions (Milanez et al. 2010).

Alternative fuels are becoming increasingly attractive. The reason for this devel­opment is simple. While crude oil demand is continuously on the rise, the cor­responding increase in supply is lagging, thus driving crude oil prices. The independence of alternative fuels from finite raw materials for fossil fuels has encouraged politicians to incentivise the production of biofuels. However, current tax advantages are only temporary. So, in order for biofuels to gain market share, it is essential that production costs reach competitive levels in the future.

The Brazilian government has started several national programmes to enhance its technical, economic and environmental competitiveness of biodiesel produc­tion in relation to fossil fuel since 2002. To date, Brazil has achieved consider­able progress, especially due to its wealth in required raw materials (Ramos and Wilhelm 2005; Nass et al. 2007). However, with regard to Brazilian bioethanol, an import tariff of US$ Cent 54 per gallon (de Gorter and Just 2009), which had been established due to economic and environmental reasons, impeded market access in the USA until 2012. The fact that import tariffs are a decisive factor for market acceptance of Brazilian biofuels becomes clear when production costs are considered. In 2009, biodiesel production costs stood at approximately US$ Cent 34 per litre. Estimates then saw the potential of production costs some­where in between US$ Cent 20 per litre and US$ Cent 26 per litre (van den Wall Bake et al. 2009).

In the EU, biofuel demand and biofuel production were stimulated through pol­icies on national and international levels. However, with regard to first-generation biofuels, the EU faces one very difficult issue. EU countries are unable to pro­duce sufficient amounts of biofuel feedstock domestically in order to fulfil these policies. This forces the countries (and therefore the EU) to import biofuel crops, which, in return, results in higher agricultural trade deficits. Furthermore, this leads to an increased production of biofuel crops in countries with a comparative advantage, e. g. South and central American countries such as Brazil (Banse et al. 2011).

2 Conclusions

As mentioned earlier in the chapter, the decisive factor for a biofuel’s market suc­cess is the fuel price which can compete with that of fossil fuels. Therefore, it is necessary that biofuels can be produced at competitive costs, which was the main focus for our comparative analysis. In order to compare production costs for dif­ferent types of biofuels, we extrapolated publicly available, historical market prices for raw materials in the course of crude oil reference scenarios. We incor­porated scale and learning effects into our model in order to compare and identify economically promising biofuel technologies. In other words, our approach ena­bles the comparison of different biofuels’ production costs while considering the specific development state and economies of scale in context of realistic scenarios for the market prices for biomass.

Plausibility checks based on current data as well as consistency of the results across production technologies enhanced the accuracy of the results. At the same time, we assessed the comparability of data and performed corresponding adjust­ments, if necessary.

This chapter focused on three major goals: (1) a projection of future feedstock prices for biofuels based on the development of the price for crude oil, (2) a simu­lation of the effects of likely economies of scale from scaling-up production size and technological learning on production costs and (3) a scenario analysis compar­ing different biofuels and fossil fuel.

Our study demonstrated that modelling biofuel production costs based on three standardised production process steps is possible and enables a better understand­ing of cost competitiveness. As the most important model parameter, besides the crude oil price, the price development of the underlying biomass raw materials can be endogenously projected by their correlation with the price for crude oil.

One can conclude that in general feedstock for first-generation biofuels is expensive and that these are produced with optimised technologies. Second — generation biofuels, on the contrary, have relatively lower raw material costs while demonstrating an increasing efficiency in the conversion processes.

In the short and medium term, when production costs are compared, second — generation biodiesel from waste oil and from palm oil are the most promising alternatives to fossil fuels. For the 2015 crude oil scenario of 200 Euro/barrel, only these two types of biodiesel are likely to be produced at competitive costs.

Except for biodiesel from palm oil, all first-generation biofuels’ production costs exceed those of fossil fuels. This in return leads to a poor financial perfor­mance. If increasing feedstock costs were also to be taken into account, the gap to economic viability becomes even wider. As cost-saving potentials from production scale have already been fully exploited, any potential competitive improvements of first-generation biofuels are due to experience-driven learning effects.

On the contrary, second-generation bioethanol and second-generation biodiesel, in particular, are the more attractive alternatives to conventional fuel. Mid — to long­term economies of scale and learning curve effects will positively impact their production costs. Furthermore, these types of biofuel will be largely unaffected from the development of crude oil prices and therefore possess the ability to be produced competitively. In other words, second-generation biofuels seem to be the only real long-term option in order to replace fossil fuels.

There are essentially two types of liquid biofuels: alcohols (ethanol and butanol) and diesel substitutes (such as biodiesel and hydro-treated vegetable oils). Figure 1 highlights the evolution of ethanol and biodiesel production around the world.

The production of these biofuels has intensified since 2000. Ethanol is more representative when one considers the produced volume. In 2012, the volume of ethanol produced was approximately four times larger than the production of biodiesel.

Table 1 shows the total production of ethanol and biodiesel both in the world and in ten leading countries. Dividing the production by countries, note the

lllllllllllll

1991 1992 1993 1994 1995 1996 199? 1992 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

■ Biodiesel ■ Ethanol

Fig. 1 The world’s production of Liquid biofuel (in millions of gallons). Source Compiled by the Earth Policy Institute from Licht ( 24 April 2012)

representativeness of the USA, which leads the production of ethanol and biodiesel. Indeed, Brazil and the USA accounted for more than 87 % of the worldwide produc­tion of ethanol in 2011. In addition, even though the world’s biodiesel production is less concentrated than is the case with ethanol, Brazil and the USA are among the largest producers.

Regarding the global market for ethanol, biodiesel, and biofuels, data about the consumption, production, imports, and exports in 2013 and projected numbers for 2020 in leading countries are presented below.

Marta Wlodarz and Bruce A. McCarl

Abstract Today, many countries are increasing the biofuel share in national energy supply, mainly to strengthen their domestic energy security and to protect against sudden oil price hikes. Some biofuels also provide greenhouse gas emis­sion offsets, becoming a part of climate change mitigation framework. Second- generation liquid biofuels (e. g., lignocellulosic ethanol, algae fuel, biomethanol) are under ongoing research effort investigating conversion technologies and eco­nomic feasibility. In this chapter, we will concentrate on the economic prospects of bioethanol production from lignocellulosic materials in the USA in terms of their cost-efficiency and profitability, and implications for global commodity markets. Moreover, we will analyze the emergence of drop-in fuels (e. g., fuels that can be used in existing infrastructure) and the relative difference this makes in the poten­tial for future market penetration.

Hong To, Suman Sen and Michael B. Charles

Abstract Biofuel policies around the world have, in general, been driven by concerns relating to energy security, greenhouse gas (GHG) abatement and regional develop­ment. However, in major biofuel markets, these policies have led to market distortions that have problematized the achievement of the longer-term objectives associated with biofuels. In particular, prioritization of certain economic goals, like assisting rural areas, has hindered the achievement of other outcomes, such as decoupling national energy security from fossil fuel prices and achieving the greatest possible emission abatement. A shift towards next-generation equivalents is desirable, but the currently low price of conventional fuel and the high production costs of advanced biofuels currently act as a barrier to commercialization. These barriers are most likely to be overcome as conventional fuel resources become depleted and advanced biofuel tech­nologies mature over time. Until then, government intervention will be crucial in determining the industry’s future.

1 Introduction

Today, more than 99 % of all biofuels produced are first-generation biofuels made from edible crops. Yet the long-term viability of these fuels is questionable owing to the following: (1) the use of feedstock optimized for food production, rather than for energy production, thereby resulting in direct competition with food supply; (2) ris­ing prices of certain crops and food stuffs owing to the rapid expansion of global biofuel production and, in return, increasing costs for biofuel production; and (3) the utilization of only a portion of the plant’s total biomass, which results in waste, so that land-use efficiency is low from energy supply and/or greenhouse gas (GHG)

H. To • S. Sen • M. B. Charles (*)

Southern Cross University, Gold Coast, Australia e-mail: michael. charles@scu. edu. au

A. Domingos Padula et al. (eds.), Liquid Biofuels: Emergence, Development and Prospects, Lecture Notes in Energy 27, DOI: 10.1007/978-1-4471-6482-1_1, © Springer-Verlag London 2014

mitigation perspectives.1 As a consequence, there are growing concerns about the economic, environmental and social sustainability of biofuels if they are to replace a significant proportion of the world’s petroleum use. Although biofuel production and support policies are usually expected to reduce dependence on fossil fuels, miti­gate anthropogenic climate change and support rural development, arguments for biofuel policies should also be made from an economic perspective, i. e. in the case of market failures that impede a desirable allocation of resources.

The chapter starts by describing the growth of the biofuel industry over the last decade, with emphasis on developments in the United States, Brazil and the European Union (EU), all of which are now significant biofuel markets. It then presents an assessment of the economic impacts of a growing biofuel industry, beginning with production cost issues. In particular, the chapter looks closely at the interrelationships between biofuels and agricultural and energy markets, all of which raise important implications for biofuel production scale, together with food security and biomass prices. The chapter also analyses the cost-effectiveness and competitiveness of biofuels as well as their macroeconomic impacts. To do this, we will look at effects of pro-biofuel policy on the three most commonly touted benefit areas associated with biofuels: (1) promoting energy security; (2) reducing the environmental impact of liquid fossil fuels; and (3) enhancing rural economies.

This index measures the proportion represented by a fixed number of the largest companies of an industry when compared to the total of such an industry. Its cal­culation is as follows:

k

Cr (k) = Pi (1)

i=1

where к is the number of companies that are part of the calculation and Pi = participation of the ith company in the market. The index is easy to interpret, since it varies from 0 (zero) to 100. The closer it gets to 100, the higher the industry concentration is, i. e., if a small number of companies responsible for a big pro­portion of production, sales, or employment inside the industry, that means that the concentration will be higher. In this research, we will use the measure Cr(4), where the four largest companies will be considered in this analysis.

In this context, Bain and Qualls (1968) analyzes the market concentration clas­sifying markets into: Cr(4) equals or higher than 75 %: highly concentrated oli­gopoly; Cr(4) between 50 and 74 %: moderately concentrated oligopoly; Cr(4) between 25 and 49 %: weakly concentrated oligopoly; and Cr(4) lower than 25 %: atomistic.

As introduced above, a strong argument in favour of biofuels is that they emit less GHGs than fossil fuels when combusted (i. e. without taking into account emis­sions created during fuel extraction, growing, production and/or refining) and therefore mitigate a number of environmental issues associated with conventional fuels. Yet, it should be noted that all biofuels may not be equally environmentally friendly since the nature of the gases emitted depends on the specific composition of the biofuel in question, together with engine specifications. This section will provide a brief overview of bioethanol and biodiesel contents, the gases that they release and their respective health impacts.

Bioethanol contains oxygen, which helps create a more complete combustion of the fuel itself. An E10 blend of bioethanol (10 % bioethanol), for example, reduces the level of carbon monoxide produced by 30 % and particulate materials by 50 % in comparison with conventional gasoline (Whitten 2004). Benzene, which accounts for 70 % of toxic emissions from conventional gasoline, is also reduced by 25 % when E10 is combusted (EPA 2002). Furthermore, bioethanol contains no sulphur. As a result, there is no potential threat of sulphur emissions, which can contribute to the formation of acid rain. However, if the blended fuel contains a low percentage of bioethanol (e. g. less than 10 %), some low-level ozone could be emitted, though not to the extent of 100 % conventional gasoline (Natural Resources Defence Council 2006). In contrast to high-level ozone, which protects people from ultraviolet rays, low-level ozone can adversely affect the human respiratory system, together with plant life. By way of contrast, a higher percentage of conventional fuel in bioetha­nol blends produces carbon monoxide, unburned hydrocarbons, benzene and nitrous oxides (Demirbas 2009). When these combine with moisture and suspended air particulates, smog is formed. High-bioethanol-content fuels, such as E85, may also have negative effects on human health. They release aldehydes, such as acetalde­hyde, which causes nasal and eye irritation, and even breathing problems if the con­centration is high (McCarthy and Galvin 2006). Table 3 below presents a synopsis of the percentage variation of emissions from two blends of bioethanol in comparison with conventional gasoline.

Like bioethanol, the oxygen content in biodiesel is higher (usually 10-12 %) than for petroleum diesel. This reduces the emission of smog-forming particulate materi­als such as carbon monoxide by 11 % and unburned hydrocarbons by 21 % (EPA 2002). Though biodiesel may contain traces of sulphur, the risk of sulphur oxides and sulphate emissions is minimal. Some blends of biodiesel such as B20, however, could emit 2 % more nitrous oxide than conventional diesel (EPA 2002). This affects

the quality of air since nitrous oxide undergoes a chemical reaction in the presence of sunlight and causes smog formation. Table 4 above summarizes the findings of the US Environmental Protection Agency on the exhaust emissions from two vari­ants of biodiesel, viz. B100 and B20, compared to conventional diesel.

As mentioned earlier, emissions also vary by engine type. Vehicles with conven­tional catalytic converters are capable of minimizing the emission of aldehydes from bioethanol blends of up to 23 % ethanol. These engines can be easily adapted for using high-bioethanol-content fuels such as E85 (Greene 2004). More advanced engines were found to reduce formaldehyde emission by 85 % and acet­aldehyde by approximately 58 % (MECA 1999). With regard to biodiesel, Kousoulidou et al. (2008) concluded, from studies conducted in the USA, that pre — 1998 diesel engines emit less nitrous oxide than 2004 diesel engines equipped with exhaust gas recirculation (EGR) and that the percentage of emissions increases with the share of biodiesel in the fuel blend. 2Of particular concern is the high per­centage of nitrogen dioxide (NO2), the most harmful of all nitrous oxides, released when such blends are used in modern (e. g. Euro 4) engines (Kousoulidou et al. 2008). The emission of particulate matter is usually low for all types of engines, except for those which emit a high soluble fraction and consume more lube oil.3

From the above discussion, it appears that the combustion of biofuels, in gen­eral, affects the environment to a lesser extent than fossil fuels. However, tail­pipe emissions are only the end result and therefore do not really explain the

2 These assertions are based on the findings of EPA (2002) and Sze et al. (2007).

3 Refer to Dwivedi and Sharma (2013) for further details on emissions from the various varieties of biofuels, together with engine specifications.

net emission or absorption of GHGs throughout the life cycle of biofuels, which includes cultivation of feedstock, the processing of the biomass and, finally, its combustion for end use.

Domestic price of Brazilian ethanol is regulated by the government since the cre­ation of PROALCOOL. For this reason, domestic price is stable along the time (Fig. 4).

In Brazil, the prices of ethanol show relative stability despite the instability of prices in petroleum international market. This fact is due to economic policy in Brazil, especially the price policy, that is regulated by the government.