In EU-27, the biomass consumption accounts approximately for 95.7 Mtoe, of which only a small part is used for biofuels, the rest for heat (40 Mtoe) and for electricity (48 Mtoe). If the renewable targets of the EU are to be met, an additional 120 Mtoe

45 40 35 30 25 20 15 10 5 0

of biomass needs to be produced by 2020, which would have to be obtained mainly from additional forest resources, but also new sources such as aquatic biomass, and eventually imports that will have to meet sustainability criteria.

In the European Union, the utilized agricultural area (UAA) is 178.44 million of hectares (Mha) which represents 41 % of the whole EU27 territorial area, while arable land represents almost one-quarter of European territory (24 %). In Europe, it is estimated that approximately 2.5 Mha of agricultural land is dedicated to bio­energy crops for liquid biofuels (Aebiom 2012), which represents about 1.4 % of the utilized agriculture area (UAA). ‘The European Commission (2011) calculated that 17.5 million ha of land would be required to reach the 10 % biofuels target, which would amount to about 10 % of the total utilized agricultural area (UAA) in EU27’ (Panoutsou et al. 2011: 3).

For this reason, the biodiesel companies of different member states have invested in third countries and in particular in Africa, to produce vegetable oil from Jatropha. But in order to be sustainable, the use of biomass for fuel and energy purposes must not jeopardize European and third countries’ ability to secure its people’s food supply, nor should it prevent achieving environmental pri­orities such as protecting forests, preventing soil degradation and keeping a good ecological status of waters.

The European agricultural land for biodiesel is used to produce oilseed crops (rape — seed, sunflowers, soybean) which are the major feedstock used to produce biodiesel (Fig. 6). Increased demand for oils from biodiesel producers has become over the past few years one of the driving forces of the global vegetable oil market. Any changes in biofuel policies in the European Union and in the USA as well as any advances being made on the next generations of biofuels is bound to alter the demand of vegetable oils for non-food purposes. Furthermore, in the coming years, national biofuel poli­cies may also increasingly affect international trade in vegetable oils used as biodiesel feedstock as well as trade in biodiesel itself (OECD-FAO 2012).

At global level, rapeseed oil, sunflower oil, soybean oil, and palm oil are the most produced vegetable oils. According to USDA data (Fig. 7), the global produc­tion of palm oil accounted for 39 % of all vegetable oils in 2011, followed by soy­bean oil (33 %), rapeseed oil (18 %), and sunflower oil (11 %). Figure 7 shows that

60.00

50.00

40.00

30.00

20.00

10.00

the production of palm oil from 2000 to 2011 had a constant positive trend with an increase of 108 %. Remarkable results, in the same period, are also observed for rape — seed oil with an increase of 75 %, followed by sunflower (63 %) and soybean (59 %).

Although rapeseed oil and soybean oil are projected to remain the main feedstock, the use of palm oil is expected to more than double over the coming decade, with around 9 % of global palm oil production absorbed by the biofuel industry in 2021.

EU-27 and China are the world’s largest importers of vegetable oils, followed by India which shows an increase of 55 % respect to 2007. Despite Malaysia and Egypt being the countries with the highest increase of imports (81 and 73 %, respectively), their import levels are still low (USDA 2011). Indonesia, Malaysia, and Argentina have dominated the export market since 2007, even with Argentina’s decrease (-17 %) with respect to the previous years. Russia and Ucrania are the countries with the highest increase of exports (263 and 100 %, respectively), but their contri­bution to the export market remains marginal (USDA 2011).

Demand from the biodiesel industry is set to grow less than in the previous dec­ade when biofuel demand accelerated as policies were put in place. The use of vegetable oil for biodiesel is still expected to expand to 30 Mt, which corresponds to a 76 %increase over the 2009-2011 and raises the share of vegetable oil con­sumption used for world biodiesel production from 12 % in 2009-2011 to 16 % in 2021 (Fig. 8) (OECD-FAO 2012).

In the developed world, biodiesel demand should account for 73 % of total consumption growth. Biodiesel demand growth should continue to be lead by the European Union, where biofuel producers are expected to absorb 51 % of domes­tic vegetable oil up from 40 % in 2009-2011. Starting from a relatively small base, demand from the biodiesel industry is expected to almost double in the developing world, with growth in absolute terms not far behind the one projected in developed countries. Growth is expected in the traditional producers, Indonesia, Malaysia, and Argentina, but also in other parts of Asia (Thailand, India) and South America (Brazil, Colombia). Argentina further expands its export-oriented biodiesel indus­try, which, by 2021, could absorb 31 % of domestic vegetable oil output (OECD — FAO 2012).

Frequency indicates the degree of recurrence a transaction is performed (Williamson 1985), which according to Azevedo (2000) has a twofold role. First, when it is very frequent, the average fixed costs reduce, which are related to infor­mation collection and the preparation of a complex contract that sets restrictions to opportunism. Second, the higher the frequency, the less reasons for agents to impose losses on their partners, since an opportunistic attitude could lead to a disruption of the transaction and result in future earning losses from the transac­tion. In other words, for recurring transactions, the parties can create a reputation, which limits their interest in opportunistic attitudes for short-term gains, since according to the agents’ interpretation, gains tend to be higher in the long term (Azevedo 2000).

Repeating a transaction results in the parties getting to know each other through a reliable agreement stipulated around common interests. Even negotiations in the spot market have a cost reduction with recurring transactions due to a higher repu­tation (Farina et al. 1997). By establishing a reputation, trust on that agent also increases, which can lead to reducing safeguard clauses, hence reducing contrac­tual and monitoring costs (Bonfim 2011).

The governance structure regulated by the market itself is recommended for occasional or recurrent non-specific transactions, but in both cases, they are subject to standardization. Thus, the market can coordinate the relationships between the agents in a particular chain. The second one is characterized by a multilateral governance structure intended for occasional transactions, but it is characterized by mixed or highly specific investments. Therefore, this structure will inevitably be coordinated by contracts, that is, companies will try to elabo­rate individual or collective contracts for each type of transaction and for each type of agent. The third case is the one with a vertical governance structure, related to different types of recurring transactions and characterized by their high investment specificity, in other words, requiring more specific investments. Thus, this structure is characterized by incorporating a specific activity by the contracting party or even by all activities associated with the final product. This incorporation can be identified by a full or partial verticalization (Garcia and Romeiro 2009).

3.1 Uncertainty

The second key attribute discussed by Williamson (1996) is uncertainty. The impor­tance of considering this attribute results from the safeguards not addressed in the contracts. In an environment of uncertainty, agents are unable to predict all the events. Thus, the lower this prediction, the greater the gaps in the contracts and therefore the higher the chances of losses arising from the agents’ opportunistic behavior: In agri­culture, uncertainty may stem from various forms, such as natural disasters or unan­ticipated interventions in the food markets. Given this situation, contract renegotiation conflicts are plausible, which adds costs to the system as a whole (Azevedo 2000).

The biofuel industry has experienced remarkable growth over the last decade. Global production has tripled from about 18 billion litres in 2000 to about 60 billion litres in 2008 and has continued to grow after a slight pause in 2007-2008 (Kristoufek et al. 2012; Mandil and Shihab-Eldin 2010). However, production and consump­tion of biofuels worldwide returned to growth in 2010. According to US Energy Information Agency (EIA) data, total world biofuel production increased nearly six­fold over the 2000-2010 period, that is, from about 18 billion litres to about 104 billion litres. Supply is currently dominated by bioethanol, which accounted for approximately 75 % of total biofuel production in 2010 (Mandil and Shihab-Eldin 2010; Moschini et al. 2012). Similar figures are also reported for biofuel demand. Despite the growth in the biofuel industry, global consumption of biofuels in 2012 represented 3 % of total fuel consumption (IFPEN 2012), i. e. 55 million tons oil equivalent, of which 73 % is bioethanol consumption. Global production and con­sumption of biofuels, over the 2000-2011 period, are presented in Fig. 1.

At present, biofuel production and consumption are concentrated in a small number of countries or regions, with the United States, Brazil and the EU being particularly salient. Bioethanol has been the leading biofuel in the United States (from corn) and in Brazil (from sugarcane), whereas biodiesel is the preferred biofuel in Europe (from [1]

bioethanol production (thousand barrels per day) bioethanol consumption (thousand barrels per day) biodiesel production (thousand barrels per day) biodiesel consumption (thousand barrels per day)

Fig. 1 Global biofuels production and consumption (2000-2011) (US EIA 2013)

rapeseed oil) (Moschini et al. 2012). In 2006, the United States surpassed Brazil as the world’s largest bioethanol producer and consumer and, by 2010, was producing 57 % of the world’s bioethanol output. The EU follows as the third major producer (Mandil and Shihab-Eldin 2010; Moschini et al. 2012). By way of contrast, the EU is the largest producer and consumer of biodiesel. Over the period of 2009-2011, the EU accounted for about 60 % of global biodiesel production and about 70 % of global biodiesel consumption. The production and consumption levels in these three regions over the 2009-2011 period are summarized in Tables 1 and 2.

Of particular importance is that the industry is very much reliant on first — generation fuels (explained in Sect. 2 in chapter “Environmental Issues in the Liquid Biofuels Industry”). While these are generally produced from food crops (such as sugar cane, sugar beet or corn in the case of bioethanol, and vegetable oil derived from oleaginous crops in the case of biodiesel), they also have a variety of other commercial applications (such as stock feed in the case of corn, or use in industrial products such as cosmetics and engine lubricants, in the case of vegeta­ble oils). The cost-effectiveness of first-generation fuels is therefore closely tied to the global price of the feedstock used—a price set not only by demand for these feedstocks for energy, but also for other purposes.

The geographic distribution of the production and consumption of ethanol is related to many factors, such as production destinations, government policies, natural resources’ availability, and environmental regulations. Different world regions can be understood as distinct markets with diverse demands and supply possibilities (Jovanovic 1993). The production, consumption, exports, and imports of ethanol in major countries (including the European Union) that is estimated for 2013 and 2020 can be observed in Fig. 2.

Estimates indicate that the USA is clearly the largest producer and consumer of ethanol and it is followed by Brazil. Upon analyzing these main producers, a difference from the perspective of the increase in production by 2020 is observed. According to the estimate, the increase in consumption will be greater than the increase in production in the USA. Therefore, even though the USA is the world’s greatest ethanol producer, it will eventually have a need for ethanol imports. Because the Brazilian capacity of production by 2020 will be higher than the domestic demand, the surplus of ethanol could be redirected to supply the needs of international markets.

The great potential for production in Brazil might be related to the favorable climate conditions and the appropriate areas for agriculture, which are currently abandoned, uncultivated, or used as extensive pasture. Another contributing fac­tor is the improvement in technology in recent years, which has particularly been applied to feedstock.

Brazil plans to expand the area for sugarcane cultivation from approximately 4.4 Mha (2008) to 8 Mha (2017) by occupying the currently extensive area that is devoted to cultivating pasture (IEA 2010). Today, 50 % of the produced sug­arcane is used for biofuel production. Another destination of the produced sugar­cane includes its use as feedstock and to supply the (domestic and international) sugar market. Furthermore, the Brazilian sugar mill sector can sell bioelectricity produced from bagasse (IEA 2011).

Feedstock is the main cost of conventional biofuels, which accounts for 45-70 % of the total production costs. In contrast, for advanced biofuels, the main factor is the capital costs (35-50 %), which is followed by the feedstock cost (25-40 %) (IEA 2009). In the USA, ethanol is mainly produced from corn. In certain areas, sorghum grain, wheat, and barley are also used as feedstock.

Another important producer and consumer of ethanol is the European Union. The EU is a net importer; and in 2013, estimative indicates it exhibit consump­tion that should be 27 % higher than the production. This perspective indicates a similar condition by 2020 (24 % more imports than what should be produced).

Because the land availability is a potential limiting factor for the production, the improvement of the waste and residues that are produced would play an important role in enabling further development of the biofuel sector (IEA 2011).

The fast growth of the Chinese economy and its potential for maintaining this behavior has led to rising demand for energy. In response to this demand, the search for alternative sources of energy has become a priority for the Chinese gov­ernment (Qiu et al. 2010). Oil deficits and an increasing dependence on oil imports have exposed China to risks due to its reliance on the international oil markets, which has motivated the development of ethanol production (Tao et al. 2011).

In 2013, China presented a domestic demand for ethanol that was higher than its production. Although the ethanol production is expected to increase, this situ­ation would remain in future years. In 2003, the trade of bioethanol and a gaso­line blend (with 10 % ethanol that is known as E10) was initiated in China (Qiu et al. 2010). According to the Medium — and Long-Term Development Plan for Renewable Energy, which was issued in 2007, China aims to increase the produc­tion of ethanol from non-food-grain feedstock. The predominant feedstock used was corn, which was followed by wheat, but the government committee incentiv — ized ethanol production from a diversity of feedstocks including cassava, sweet potatoes, sugarcane, and sweet sorghum (Tao et al. 2011). Currently, E10 is used in the transport sector in the five provinces (Heilongjiang, Jilin, Liaoning, Anhui, and Henan) and 27 cities in Jiangsu, Shandong, Hubei and Hebei (Qiu et al. 2010).

Similar to China, India is one of the fastest growing economies of the world. Thus, the energy input is a strategic component of the national economic activity in India. To study the financial and operational aspects of E5, the local govern­ment presented three projects in 2003. In 2008, the national biofuel policy made the use of E5 mandatory, and it set a target of E20 for 2017. Today, the production of ethanol amounts to 549 million gallons (which is mainly produced from sug­arcane), but the domestic demand is greater. However, despite the projected increases in the domestic demand by 2020, the amount of ethanol production is expected to fulfill this demand.

As in other countries, the diversification of energy sources is an important objective of Canada. The ethanol feedstock source was 70 % corn and 30 % wheat in 2007. According to Balat and Balat (2009), the country reported the seri­ous intention of increasing the development of corn-based ethanol. In 2008, the Canadian government amended the Environmental Protection Act to require the use of E5 in all ground transportation fuels, which naturally increased the demand for it. Canadian ethanol production represented 74 % of the domestic demand in 2013. The current projection indicates the maintenance of these levels of produc­tion, and therefore, Canada would remain a net importer in 2020.

In general, the estimates show increase in the production and consumption of eth­anol. National biofuel policies tend to vary according to both the availability of feed­stock for fuel production and national agricultural policies. With the introduction of new government policies in America, Asia and Europe, the total biofuel (mainly eth­anol) demand could grow to 33 billion gallons by 2020 (Demirbas 2007).

Due to this increasing demand, fluctuations in prices can be expected. Figure 3 shows the ethanol prices and the global ethanol fuel production in recent years. From 2006, when production reached more than 10 million gallons, to 2012, an increase of 119 % was observed in the total production. During the same period, ethanol prices increased 60 % worldwide. From 2006 to 2009, the ethanol prices oscillated at a low rate, namely, between $1.60 and $1.80 per gallon. The ethanol price reached its highest cost in 2011 ($3.33 per gallon), and then it declined until 2012. The local price (in US dollars) for ethanol, which is presented in Fig. 3, showed a similar trend during this period.

New technologies offer considerable potential growth over the coming decades. However, traditional biofuels are expected to play a key role in ramping up the production in many developing countries. Thus, the associated technology is cost — effective and less complex than is the case for advanced biofuels.

Agriculture and the science community today are actively pursuing renewable energy production. Many research and implementation efforts involve producing ethanol or other liquid biofuels from nonfood agricultural feedstocks in a cost- efficient manner. Various feedstocks are being considered including crop residues,

M. Wlodarz (*)

Department of Management, Technology and Economics, Center for Energy Policy and Economics, ETH Zurich, 8032 Zurich, Switzerland e-mail: marta. wlodarz@gmail. com; wlodarzm@ethz. ch

B. A. McCarl

Department of Agricultural Economics, Texas A&M University, College Station, TX 77843-2124, USA e-mail: mccarl@tamu. edu

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_7, © Springer-Verlag London 2014

energy crops (e. g., switchgrass, miscanthus, hybrid poplar, willow, and others), logging residues, and agriculture/forest processing by-products. At the same time, current market penetration barriers (like car capabilities, service stations, and pipe­lines) pose a significant barrier to further ethanol market expansion (Szulczyk et al. 2010; Wlodarz and McCarl 2013).

The main purpose of this chapter is to report on an economic investigation of current and future prospects for agricultural feedstock-based liquid biofuels expansion developing information on:

• Needed cost reductions in cellulosic biofeedstock-based liquid fuels production to make them competitive.

• The effects of renewable fuel mandates and carbon dioxide credit prices.

• The effect of infrastructure barriers on market penetration.

• Tipping points that stimulate cellulosic ethanol.

• Impact of carbon pricing on bioethanol production.

1 Literature Review

The possibility of second-generation biofuels production from agricultural materials has been explored by many (Tyner 1979; Apland et al. 1982; McCarl and Schneider 2000). Bioethanol from crop residues, wood residues, and energy grasses can pro­vide GHG offsets with potentially lower demand shocks in the food commodity markets. Farrell et al. (2006) found that bioethanol production on the large indus­trial scale will definitely require further development of the lignocellulosic etha­nol production technology. The need for further improvements in the biochemistry of reactions and cheaper enzymes is recognized by many (EPA 2009; Dwivedi et al. 2009; Babcock et al. 2011; Lau and Dale 2009). Wlodarz and McCarl (2013) showed that processing costs need to decrease by at least 25 % to make cellu­losic ethanol production economically viable. Chovau et al. (2013) analyzed the cost of cellulosic ethanol production and they claim that lignocellulosic ethanol will become more economical and environmentally attractive than corn ethanol. Littlewood et al. (2013) indicate production modes utilizing less costly agricultural residues, e. g., sugarcane bagasse (Alonso-Pippo et al. 2013), are preferred from an economic standpoint. Governmental subsidies or carbon emission pricing mecha­nisms (Schneider and McCarl 2003) also increase the viability of lignocellulosic bioethanol production.

There are some studies which investigate the possibility of drop-in liquid fuels such as butanol or methanol (Lee et al. 2008; Green 2011; Qureshi and Blaschek 2000; Ezeji et al. 2007). Drop-in fuels do not have corrosive characteristics so they do not require major infrastructure adjustments. Both service points and distribu­tion networks are appropriate for drop-in fuels dissemination.

The thermochemical conversion route is largely based on existing technologies that are in operation for several decades (IEA 2008). In the past, the focus was on conversion of coal to liquid fuels and chemicals; however, in the recent years, the focus has also been on the conversion of natural gas resources into fuels. The thermochemical route basically involves the production of syngas (synthesis gas), which should be purified before it can go into the Fischer-Tropsch (FT) process to synthesize liquid fuels for application in aviation and marine industries, and chem­icals chiefly synthetic diesel. Syngas (mix of CO and H2 with some CO2, meth­ane, and higher carbon compounds) is produced by a severe heat treatment process of dry lignocellulosic feedstock in a controlled atmosphere, so that gasification is
initiated. The main stages of thermochemical route involve: (1) biomass fuel con­ditioning, (2) gasification process, (3) gas purification, and (4) FT conversion.

The thermochemical route can provide a number of additional co-products in addition to biofuels. These co-products can be exploited as a feedstock for produc­tion of value-added chemicals. The products profile from FT conversion can vary significantly depending on the synthesis temperature. High temperature leads to production of synthetic gasoline and chemicals, whereas low temperature produces waxy products that can be further cracked to make naphtha, kerosene, or diesel fuel (Griffin and Schultz 2012). The advantage of thermochemical route over biochemi­cal route is that the former can essentially convert all organic component of the bio­mass into products. However, the major limitation of thermochemical route is the need of high-temperature gasifier that imparts high cost to the process.

1.3.1 Effect of Catalyst Loading

The data regarding effects of prepared catalysts at 623 K and 10 % loading on HDPE degradation into liquid, gas, residue, and waxy products yield are presented in Fig. 2 and Table 2. It is well noted that AlSBA-15 catalyst showed good degrada­tion activity to produce light hydrocarbon liquids while HZSM-5 catalysts having greater microporous surface area (Si/Al ratio 80 and 14) produced higher amounts of gaseous products. It is further explained that the primary cracking reactions might have occurred on the external surface which was in contact with the poly­mer. Meanwhile, the smaller fragments which were products of the initial reaction were mainly cracked within the microporous surface of the catalysts. However, the amount of coke was found to be lower as compared to the other degraded products.

In a previous study, Hwang et al. (2002) reported that the strong acid sites could accelerate cracking and deactivation reactions which resulted in the higher yield of coke as observed in case of prepared catalysts HZSM-5 and acid-treated SBA-15 in this study. Significant production of solid wax compounds using SBA-15 was also observed, and this could be due to insufficient number of acid sites in the material. Large wax formation after thermal degradation at the

Table 2 HDPE degradation-based product yield (%) by different catalysts

bottom of reactor could cause difficulty in the collection of other products such as liquid and gases. However, Mastral et al. (2006) reported that HZSM-5 pos­sessed an excellent stability that could effectively prevent the formation of coke due to its particular structure. Based on these findings, it could be concluded that the pore size, acidity, and shape are the important parameters that can affect the degradation activity of zeolitic catalysts. Similar findings have been reported by Hernandez et al. (2006) who observed that catalytic degradation using HZSM-5 yielded higher gas products during HDPE degradation. In another study con­ducted by Mastral et al. (2006) who carried out degradation process at different temperatures in a fluidized bed reactor, mesoporous materials such as SBA-15 did not show adequate degradation results. These observations confirmed our present findings as presented in Fig. 2. According to Urquieta et al. (2002), higher acidity in zeolitic catalysts might result in higher gaseous yield and a reduction in liquid yield. Again, the results confirmed findings made in this study.

The gas fraction compositions after HDPE degradation using different catalysts are shown in Fig. 3. It is noted that the catalysts HZSM-5(80) and HZSM-5 (14) exhibited the highest fraction for carbon chain C4 (37.1 and 30.2 %, respectively) and the lowest for carbon chain C5 (4.4 and 1.4 %, respectively). Meanwhile, SBA-15 and AlSBA-15 catalysts yielded the highest fraction for C3 (47.2 %) and C4 products. It should be noted that C1 products were not detected in the GC analysis. Both SBA-15 and AlSBA-15 catalysts produced more significant amount of C5 gaseous products (12.3 and 11.6 %, respectively). In the case of the mixture of HZSM-5 (80) and AlSBA-15 as catalyst, the gas carbon chain distribution was more uniform.

Findings and degradation trends using these catalysts for liquid product yield are shown in Fig. 4. The catalysts exhibited higher liquid products in favor of C8-Ci2, followed by Ci3-Ci6 and Ci7-C20. HZSM-5 (80) and HZSM-5(14) had

36.4 and 34.7 % liquid products, respectively, for C8-C12. Meanwhile, AlSBA-15 catalyst had the highest percentage of liquid products for C8-C12 (40.9 %). The pro­portion of liquid products for C13-C16 was also found to increase (37.3 %) when AlSBA-15 was used as catalyst instead of HZSM-5 catalysts as in the earlier case.

Production costs associated with biofuels are, in general, very high, with Brazilian bioethanol production being the exception. The gap between high costs of biofuel production and relatively low petroleum prices creates large deadweight costs that may overwhelm any external benefits. de Gorter and Just (2009a, 2010) have shown that policies favouring biofuel production, i. e. tax credits, generate what they term ‘rectangular deadweight costs’ that are much higher than those resulting from a standard analysis that estimates inefficiency costs in the form of deadweight cost tri­angles. Indeed, the deadweight cost triangles are also a component of inefficiency costs of biofuel policies. Gardner (2007), together with de Gorter and Just (2008b; 2009a), all estimated triangular deadweight costs in the United States and found them to be in the USD 300-600 million range. However, de Gorter and Just (2008b; 2009a) also found that rectangular deadweight costs resulted in an additional annual waste of over USD 2 billion. In estimating inefficiency costs in the form of dead­weight costs, we must also add the external costs of added gasoline consumption, oil dependence, increased CO2 emissions and a decline in terms of trade in oil imports. In particular, the annual deadweight costs owing to the combination of the biofuel mandate and tax credit alone are expected to be about USD 11 billion by 2022 (de Gorter and Just 2009b). As a result, biofuel policies may not generate social welfare improvement; rather, they may have adverse impacts on social welfare. They also have the potential to exacerbate negative externalities associated with gasoline con­sumption (de Gorter and Just 2008a, 2009b).

Pro-biofuel policies are generally used in various combinations, but de Gorter and Just (2010) have shown that these policies can be contradictory. At present, a quantity-based biofuel mandate (i. e. biofuel blend mandate) and a price-based consumption subsidy (i. e. biofuel tax credit) are most common (e. g. in the United States, Brazil and the EU). While a quantity-based biofuel mandate is theoreti­cally and empirically superior to a price-based consumption subsidy (Lapan and Moschini 2009; de Gorter and Just 2008b, 2009c), when mandates are used in conjunction with biofuel subsidies, they can have adverse policy interaction effects. Here, the benefits of a market-based policy like mandates can easily be nullified (de Gorter and Just 2009b, c). This is because, when a tax credit is intro­duced alongside the mandate, blenders will compete for the government sub­sidy and increase profits by lowering the retail price. Such behaviour results in an increase in the total amount of fuel consumed, which means that more petro­leum-based fuel will be consumed because of the binding mandates. Therefore, tax credits will unintentionally subsidize gasoline consumption instead. This con­tradicts the oft-stated objectives of reducing dependency on oil, improving the environment and enhancing rural prosperity. Furthermore, higher gasoline prices induced by a biofuel policy magnify the inefficiency of the preexisting wage tax by reducing real wages and thus discouraging work (Searchinger et al. 2008).

Given that pro-biofuel policies exist in a setting of multiple objectives and, at the same time, other policies targeting the same objectives also exist, policy-mak­ers should carefully evaluate the interaction between biofuel polices and other pol­icies to ensure that the stated objectives are achievable at an acceptable cost. The effects of each biofuel policy and their interaction with other policies are clearly very complex owing to the intricate interrelationships between energy and com­modity markets and the varied environmental consequences. The effects of biofuel policies become even more complicated if general equilibrium effects that seek to explain the behaviour of supply, demand and prices in a whole economy with many interacting markets are incorporated in the analysis. At present, given the high cost of biofuel production, together with the competitive pressure of com­paratively cheap oil, taxpayer costs resulting from biofuel and renewable energy policies in general are very high relative to their benefit, all of which can be highly negative owing to adverse policy interaction effects.

In sum, this chapter raises doubts about biofuels in relation to the specific objec­tives for which they have been supported. The production of biofuels that are being promoted to reduce dependence on fossil fuels actually depends on fossil fuels, and users will therefore find it difficult to escape from ongoing oil price volatility. Finally, the positive impact of biofuels on regional development, and employment in the agri­cultural sector in particular, is not immediately obvious. The frequent linking of bio­fuel policy to the goal of enhancing rural economies is questionable since the use of biofuels may result in shifts between sectors rather than the creation of new economic activity. To be precise, problems associated with biofuels have been intensified by the fact that economic issues are intricately related to biofuel policy objectives. Current biofuels in commercial production, except bioethanol produced from sugarcane in Brazil, are not yet competitive with fossil fuels. However, their competitiveness, espe­cially that of advanced biofuels using a lower cost proportion of feedstock not sensi­tive to food prices, will gradually improve as the price of oil increases.

HHI is defined by the sum of squares of the participation of each company when compared to the industry’s total size. This index considers all the companies in the industry and is calculated as follows:

N

HHI = £ Pi2 (2)

i=1

where P is the market share of firm i in the market and n is the number of firms. The Herfindahl-Index (H) ranges from 1/N to one, where N is the number of firms in the market. Equivalently, if percents are used as whole numbers, as in 75 instead of 0.75, the index can range from 10,000/n, when companies have an equalitarian participation in the market, up to 10,000 (monopoly). The HHI increases according to the increase of inequality among the companies belong­ing to the industry, thus being a good indicator of the market situation. Do note that the company size is considered by its squared participation (Pi), i. e., smaller companies have a smaller role in this index. Thus, the higher the index, the more concentrated the market is, and, as a consequence, smaller the competition among companies is.

According to Usdoj (1997), the market is not concentrated when the HHI value is under 1,000, it is moderately concentrated between 1,000 and 1,800, and it is highly concentrated when it reaches a value higher than 1,800. This research sought to use the companies’ integrality, where we used secondary data regarding the biodiesel production in m3 from January 2005 to December 2012.

The ‘environmentally friendly’ rhetoric with respect to biofuel production and consumption, such as that advanced by Shapouri et al. (1995, 2002), has often been disputed, most emphatically by Henke et al. (2005) and Patzek et al. (2005). Some have suggested that, up until this point, the net contribution of biofuels to reducing global GHG emissions might have been negative (Eggert et al. 2011), mainly as a result of (1) land-use changes (LUC) and (2) deforestation in tropi­cal areas, particularly so as to allow the planting of biomass used for biofuel pro­duction (Searchinger et al. 2008; Fargione et al. 2008). Moreover, Anderson and Fergusson (2006) contend that biofuels, regardless of type, cannot be regarded as truly carbon neutral (or even carbon negative) when the stages of production, transportation and processing are taken account. Patzek et al. (2005) accepted this contention after a meta-analysis of a wide array of previous studies.

To gain a deeper insight into whether biofuels represent an improvement over conventional liquid fuels with respect to their overall GHG footprint, it is necessary to consider the entire biofuel life cycle, including the production phases. In addition to the tailpipe emissions discussed earlier, these include (1) type of feedstock, (2) processing of feedstock and (3) the cultivation and harvesting of the feedstock.