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.