Biofuels are expected to enhance sustainability and minimize GHG emissions. The argument in favour of biofuels with respect to reducing emissions is that biofu­els, especially cellulosic-based biofuels, emit much less carbon dioxide than con­ventional petroleum fuels. Yet there are many economic issues that currently work against these interests, these being (1) the high production costs of biofuels, partic­ularly advanced (second-generation onwards) biofuels and (2) the comparatively low conventional fuel prices that do not yet internalize the cost of GHG emissions associated with its extraction, production and combustion. This section provides an insight into the economic issues relating to shifting towards a biofuel regime that intends to realize GHG abatement goals.

As discussed earlier in Sect. 3, the production costs of biofuels, except for sugarcane-based bioethanol produced in Brazil, are much higher than those of fossil fuels (IEA 2007; UN 2008). Furthermore, the substitution of fossil fuels with first-generation biofuels raises concerns with respect to social and ecologi­cal sustainability, and also the scope to reduce net GHG emissions (Searchinger et al. 2009). Advanced biofuels could overcome the disadvantages associated with first-generation biofuels, but they are yet to be produced en masse. The technolo­gies employed for advance biofuel work very well at a laboratory scale, but the most significant challenge is to find ways to produce these biofuels at a commer­cial scale, and at a competitive price (EMBO 2009). The EMBO report added that biofuel companies are often too optimistic with their biofuel plans given that they tend to look at projected production costs based on the availability of mature tech­nology at commercially feasible prices.

Let us consider the case of Shell and its advanced biofuels projects. In 2008, Shell was working on ten such projects, most of which have now been shut down (Shell 2013). Furthermore, none of those that remain is ready for commercializa­tion. Shell has admitted that bringing these biofuels to the market will take longer time than expected (Economist, 2013). Acknowledging the issues of producing advanced biofuels at a competitive price, and consequently the limited incentive for biofuel producers, the United States Environmental Protection Agency (EPA) revised its target for cellulosic biofuels from about 76 million litres between 2010 and 2012 to 53 million litres for 2013 (IEC 2013). The two potential drivers of a truly sustainable biofuel regime thus appear to be the following: (1) an increase in the price of fossil fuels as we move towards a post-peak oil period, or as conven­tional fuel becomes depleted and the cost of extracting unconventional fuel (from oil sands or shale) becomes uneconomical and (2) the potential decrease in the costs of biofuel production (mainly advanced) as technology slowly matures.

First, we discuss the likelihood of the former, i. e. an increase in the price of fossil fuels. Since the golden age of oil discovery in the 1950s and 1960s (Fleay 1995), the rate of oil consumption has risen steeply (Grant 2007; Leder and Shapiro 2008). Kilsby (2005) reported that the world is consuming oil four times faster than the rate at which it finds new petroleum sources. Although the quantity of world’s oil reserves and the end of the fossil fuel age are highly debat­able (Hirsch 2005; Leder and Shapiro 2008), there is little doubt that this point will eventually be reached. This does not mean that the stock of fossil fuels will run out; rather, ‘cheap oil’ will certainly come to an end (Kilsby 2005). To illus­trate, let us look at the post-peak oil period, when oil reserves and overall supply begin to shrink. In the face of rising demand, this situation would create a sub­stantial imbalance between oil supply and demand (Grant 2007), and the price of oil would rise rapidly as a consequence (Hirsch 2005; Leder and Shapiro 2008). Furthermore, as the world’s stocks of fossil fuels decrease, exploration and extrac­tion activities of the remaining reserves will become increasingly uneconomical, while the energy costs associated with doing so will also rise (Hall et al. 2008; Bardi 2009). These costs could conceivably push the oil price high enough to ena­ble the global biofuel market to evolve sustainably. From an economic perspective, one of three possibilities may occur: (1) oil is the only source of energy supplied in the economy when the price of oil is lower than the price of backstop energy; (2) both oil and backstop energy are supplied in the economy when the price of backstop energy becomes competitive vis-a-vis the price of oil; or (3) backstop energy dominates energy supply in the economy when backstop energy tech­nologies mature and the price of oil is high. At present, with pro-biofuel policies favouring first-generation biofuels, we are experiencing the case of both fossil and subsidized biofuels being supplied in the market.

The second potential driver is the technological advances in the production of advanced biofuels, such as cellulosic-based biofuels. The three main technological conversion pathways for cellulosic biofuel production are selective thermal process­ing, hydrolysis and gasification (Baker and Keisler 2011; Bosetti et al. 2012). Each of these pathways consists of two major steps. The first step involves breaking down the biomass into an intermediate product consisting of simpler substances, while the second step involves processing the same intermediate product into a commercial fuel. The technologies involved in the latter process, such as biooil and biocrude refining, are similar to those used in fossil oil refining. These technologies are relatively mature compared to the technologies involved in the first step. Fischer- Tropsch is worth mentioning here as it is one of the most cost-effective and estab­lished technologies used in the second step. The overall cost efficiency of cellulosic biofuels therefore mainly depends on technological advances for the first step of primary biomass conversion, in particular gasification and hydrolysis (Mandil and Shihab-Eldin 2010; Bosetti et al. 2012). With growing public and private funding towards research and development of advanced biofuels, these technologies are expected to mature by 2030 (Bosetti et al. 2012). Future projected costs (USD/lge) for these technological paths are summarized in the following Table 4, where it is assumed that the feedstock used is switchgrass costing USD 70/tonne.

Given that the increasing demand for biofuels cannot fully be met by first — generation biofuels derived from food crops, the market for advanced biofuels seems to be large enough to accelerate the development and commercialization of advanced biofuel technologies. At present, most of the market demand for biofuels is policy driven. For example, the recently introduced Renewable Fuel Standard 2

(RFS2) in the United States and the Renewable Energy Directive (RED) in the EU both require a reduction in GHGs emission by at least 20-35 %. This can only be achieved by increasing the share of advanced biofuels, which, in turn, creates sig­nificant demand for these fuels. Furthermore, demand comes from industries pur­suing an interest in biofuels for enhancing a socially responsible image, or because they recognize that their business will need to shift to a cost-effective renewable fuel in the future if it is to survive. For example, the US Navy has announced that it wants to source half its nonnuclear fuel from renewables by 2020 (DofNavy 2010), and particularly advanced biofuels, since these avoid the controversial food-versus-fuel issue. Likewise, major commercial airlines (e. g. United, British Airways, Lufthansa and Qantas) that are aiming to become carbon neutral by 2020 have expressed their interest in including cellulosic biofuels within their fuel mix. With the increasing costs of conventional jet fuels owing to the implementation of carbon taxes (e. g. Australia’s carbon tax requires airlines to pay more than AUD 20 per emitted ton of carbon) and increasingly stringent climate change regulatory policies around the world, the airline industry sees renewable energy as a key to its continuing growth (Qantas 2013; IFPEN n. d.).

Despite the market potential discussed above, a neoliberal approach, where only market forces prevail, will not allow advanced biofuels to reach sufficient global market penetration at the required level so as to meaningfully combat GHG emissions from the transport sector. This is because it is unlikely that conventional fuels will ever be priced—at least in the immediate future—at a level that internal­izes all external costs, including the cost of GHG emissions associated with their extraction, production and combustion. It is therefore desirable that some form of government intervention takes place so as to ensure the growth of the biofuel industry, particularly if the projected GHG emission reductions are to be realized at a lower cost than would be the case in a business-as-usual scenario.

Thus, an increased adoption of biofuels at a global level will largely depend on the position that governments take on the trade-off between the environmental and economic justification of biofuels, more so given that current pro-biofuel policies are claimed to be very costly and have a negligible net effects on emissions. For example, taking the US biofuel market into consideration, Jaeger and Egelkraut (2011) found the then approach to be 14-31 times more costly than alternatives such as increasing the gasoline tax or promoting energy efficiency improvements.

In addition, RFS2 and RED have sparked a debate over their effectiveness in reducing GHG emissions owing to potential ‘carbon leakage’ that may occur in other sectors and countries not covered by the same sustainability standards. For example, these standards would provide incentives to bioethanol producers to use relatively clean inputs (e. g. natural gas), while the dirtier inputs (e. g. coal) that might otherwise have been used are shifted to other uses not covered by the sus­tainability standards. Carbon leakage also happens at an international level when Indonesia exports sustainable biodiesel and consumes unsustainable biodiesel at home, or when the United States purchases Brazilian bioethanol to comply with its RFS2, while Brazil imports emission-intensive corn-based ethanol from the United States that does not meet RFS2. Significant volumes of bilateral trade of bioethanol between the United States and Brazil driven by their different biofuel policies have been seen in recent years, but no global changes to emissions were achieved (de Gorter and Just 2010; Meyer et al. 2013).

In the end, of course, the two potential drivers signalled above will have a more important role. In other words, for advanced biofuels to be sustainable in the long term, they will need to be economically competitive vis-a-vis conventional fossil fuels without government subsidies, especially if one takes into account an appro­priate credit allocation for emissions reduction. When the above two driving forces become more entrenched, partially as a result of strategic government intervention, the biofuel industry will be ready to operate independently and according to the precepts of free-market economics.