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.