First-generation biofuels are relatively cheaper to produce than advanced biofuels (second-generation biofuels and beyond), but they still cost more than equivalent fossil fuels, and are also problematic from a sustainability perspective, as discussed in chapter “Environmental Issues in the Liquid Biofuels Industry”. Although advanced biofuels could address the latter issue, commercial production is yet to commence because of the higher start-up and operational costs associated with these production processes. This section will provide a comparison of the produc­tion costs of biofuels vis-a-vis fossil fuels.

The feedstock for first-generation biofuels, i. e. edible crops, accounts for nearly 55-70 % of the total production cost (IEA 2008). As a result, first-generation bio­fuels, in general, are unable to compete effectively with fossil fuels (UN 2008), particularly when government subsidies and other incentives are removed from the equation. Only sugarcane-based bioethanol produced in Brazil, which costs USD 0.25-0.35 per litre of gasoline equivalent[2] (lge), is competitive with gasoline at USD 0.34-0.42 per litre (i. e. USD 40-50 per barrel) (IEA 2007).[3] By way of con­trast, the cost of corn-based ethanol in the United States and sugar beet-based etha­nol in the EU vary between USD 0.60-0.80/lge (IEA 2007)—much higher than the then price of gasoline. Likewise, the cost of producing biodiesel from animal fat, vegetable oil, tallow fat and palm oil varies between USD 0.40-0.50, 0.60-0.80, 0.60-0.85 and 0.82-0.86/lde,[4] respectively (IEA 2007; RFA 2007), all higher than production costs of petroleum-based diesel. For some feedstocks, such as cooking oil, commercializable by-products could lower its effective cost (Demirbas 2009).

Second-generation biofuels are produced from the cellulosic content of inedible plants. While the cost of such feedstock is comparatively lower, it still represents around 36 % of the net production cost of the biofuel (USDA 2010). Processing — related expenses, including chemicals such as enzymes, are substantial. Although technological advances have significantly lowered the cost of cellulosic ethanol (Wyman 2008), the processing technique employed continues to be most signifi­cant determinant of the fuel’s net production costs. The IEA (2007) estimated the cost of second-generation bioethanol and biodiesel at approximately USD 1.00/lge (assuming feedstock price of USD 3.6/GJ) and USD 0.90/lde (assuming feedstock price of USD 3.6/GJ), with a potential reduction to USD 0.50/lge and 0.70-0.80, respectively, by 2017. Furthermore, the cost of setting up a second-generation biofuel refinery is potentially up to ten times that of establishing an equivalent first-generation production unit (Eisentraut 2010). While this additional outlay partially negates the advantage of using lower-cost feedstocks, larger plants may be able to capture economies of scale and achieve some cost savings (UN 2008). Nevertheless, high capital investments are a major concern, particularly for those plants being proposed in less developed countries (Eisentraut 2010).

Eisentraut (2010) theoretically deduced the cost of second-generation biofuels pro­duced in different countries by assuming capital costs to be 50 % of the total produc­tion costs, feedstock 35 %, operation and maintenance, energy supply for the plant, and other expenses between 1 and 4 % each. Table 3 summarizes these estimates.

Eisentraut (2010) also compared the probable production cost of second-generation biofuels if an oil price of USD 120/bbl is assumed. He concluded that bioethanol and biodiesel would cost USD 1.09 and 1.07, respectively, in the short term. In the long term, prices are projected to fall to USD 0.72 and 0.73, respectively, which would be lower than gasoline and rapeseed biodiesel, and also competitive with first-generation bioethanol. The above figures should be considered in tandem with the then price of fossil fuels. This, however, does not greatly change the cost efficiency of biofuels as the cost of biofuels continues to increase with the rise in price of feedstock and other inputs (OECD 2011). In addition, these costs are purely economic and do not include the various environmental costs typically included in life-cycle analyses (LCAs), as explored in chapter “A Comparison Between Ethanol and Biodiesel Production: The Brazilian and European Experiences”. Other costs associated with production, and that of first-generation biofuels in particular, relate to storage, especially given the seasonal nature of biofuel production (Moreira and Goldemberg 1999; Karp and Richter 2011).