The cost of biofuels is a longstanding topic of discussion, especially in relation to the costs of competing fossil fuels. Two types of costs are involved: the costs of producing biofuels and costs that users have in adapting to biofuels. The latter costs are highly variable. Co-firing wood pellets in power plants to power electric trains has low adaptation costs, and the same holds for adding low percentages of biofuel to conventional gasoline and diesel. However, for instance, switching from diesel and gasoline to (biofuelled) electric traction is a major operation. Here we will further focus on the costs of transport biofuel production.

For producers, there again are two types of costs. Firstly, there are costs borne by the producer. Secondly, there are external costs or externalities (Pigou 1920). External costs are (fuel-linked) costs that are not reflected in actual prices. Such costs are associated with negative environmental impacts, including negative im­pacts of air pollution on health (Johansson 1999) and on ecosystems, and the future availability of natural resources. But there are also other external costs associated with fuels, such as the costs of strategic stockpiling and in the case of mineral oil, military costs involved in safeguarding the supply (Zaldivar et al. 2001; Delucchi and Murphy 2008). Such costs are substantial and may vary strongly between fuels (Johansson 1999). However, as long as governments do not succeed in fully ‘inter­nalizing’ such external costs, they will have very little impact on economic decision making. So here, only costs borne by the producer will be considered. Figure 1.3

shows cost estimates for per-litre, fossil-fuel-based transport fuels and the energetic equivalent thereof for varieties of bioethanol in 2006.

What have also emerged are major regional differences in biofuel production costs, probably linked to differences in costs of land and labour and yields of feedstocks. This is shown by Fig. 1.4, which gives biodiesel production costs for 2006 while not taking account of external costs. All prices in Fig. 1.4 refer to bio­fuels from terrestrial plants. Estimates about the costs of large-scale production of biodiesel from algal oil are in the order of US $2.90 per litre (Chisti 2007), whereas transport biofuels from cultivated macroalgae would even be more expensive as the price range of the latter is more in line with their use as a delicacy (Neushul and Badash 1998; Buschmann et al. 2001). The cost of biodiesel made from used cook­ing oil and animal fats has been estimated at about US $0.22-0.74 per litre (Johnston and Holloway 2007; Canakci and Sanli 2008; Royal Society 2008).

In Brazil, as indicated by Fig. 1.3, during 2006, ethanol from sugar cane could compete with fossil-fuel-based transport fuels, but in the USA and the European Union, ethanol prices in 2006 were such that they were not competitive with gaso­line when external costs of fuels and fuel production were not included. By mid­May 2008, the situation was changed. Then, when costs were compared, corn-based ethanol in the United States was competitive with fossil gasoline (Westhoff 2008).

Figure 1.4 shows that in 2006, biodiesel from vegetable oil produced in Europe or the USA was not competitive with fossil-fuel-based transport fuels, but that in Malaysia and Indonesia, it was competitive when external costs were not included. Costs for different types of biofuel partly reflect differences in maturity of the pro­
duction process. The relatively low price for sugar-cane-based ethanol partly reflects a long learning curve (Goldemberg et al. 2004), though there is still scope for ad­ditional cost reduction (Hayes 2008; Macedo et al. 2008). Ethanol from lignocellu — lose is in an early stage of development, and there is much scope for cost reduction (Hayes 2008). It has been claimed that lignocellulosic ethanol can ultimately be­come competitive with ethanol from corn (Frederick et al. 2008; Lynd et al. 2008).

Both mineral oil and biomass prices are subject to change, and this may strongly affect the relative attractiveness of biofuels. For instance, Brazilian ethanol produc­tion did well when oil prices were relatively high, but demand slumped when such prices were low. It is often argued that mineral oil prices will in the future probably remain relatively high, which seems to bode well for the competitive position of bio­fuels. However, experience shows that predictions as to when biofuels become com­petitive with fossil fuels are subject to a major uncertainty — the prices of feedstocks. This is exemplified by the situation in 2008. Crude oil prices temporarily achieved price levels in the order of greater than US $100 per barrel, but biofuel feedstock prices also rose sharply. So, for instance, in 2008 and dependent on feedstock, the biodiesel unit price was 1.5-3 times higher than that of mineral-oil-derived diesel (Canakci and Sanli 2008).

For feedstocks that may also serve as a basis for food, major changes in prices are well known from the past. For instance, coconut oil prices varied by more than a factor of seven over the last 40 years (Cloin 2007). The nominal (US $) price of vegetable oil changed by about a factor of two in the 1997-2000 period, and the nominal (US $) price of wheat increased by about a factor of two between 1999 and 2006 (OECD-FAO 2007). And over the February 2007 to February 2008 period, the price of palm oil roughly doubled (www. palmoil. com). From early 2006 to early 2008, the price of US corn went from US $87 per metric ton to US $217 per metric ton (Tyner 2008). Price volatility may increase due to climate change (Eaves and Eaves 2007; Lobell et al. 2008).

High feedstock prices have a strong impact on biofuel prices. In the mid-1990s, the cost of biodiesel feedstock was 60-75% of the total cost of biofuel, and by 2008, this was 85%, with a $0.20 per litre biodiesel price increase when the feedstock price increased by US $0.22 per kilogram (Canakci and Sanli 2008). Similar changes occurred for starch — and sugar-based alcohols (Claassen et al. 1999; Qureshi and Blaschek 2001; Huber et al. 2006; Demirbas 2007; Koizumi and Ohga 2007; You et al. 2008). Furthermore, changes in prices of by-products do not necessarily favour the profitability of biofuel projects. Mainly due to expanding biodiesel production, a glycerol glut has emerged, which has negatively affected glycerol prices (Willke and Vorlop 2004; Yazdani and Gonzalez 2007). In 2007, glycerol prices were low­ered to a level well below that previously used in the calculation of biofuel prices (e. g. Francis et al. 2005; Huber et al. 2006). That co-products of biofuel production may be subject to change may have consequences for prospective biofuel prices. For instance, the relatively low price for microalgal biodiesel suggested by Huntley and Redalje (2007) is dependent on the current high value for the co-product astaxan — thin, but the price of astaxanthin may plummet if the production of algal biodiesel were to expand greatly (Vasudevan and Briggs 2008).

Further rapid expansion of biofuel production has also been argued to contribute to relatively high prices for the major commodities from which biofuels are made: crops for vegetable oil, starch and sugar (Runge and Senauer 2007; Daschle et al. 2007; Naylor et al. 2007). Actual predictions about future prices for vegetable oil, starch and sugar crops are extremely variable (Naylor et al. 2007). So firm predic­tions as to the relative future costs of fossil and biofuels, if based on the crops from which they are currently largely made, are hard to make. However, when biofuel production from food crops becomes large scale, prices of crops that serve as major biofuel feedstocks are expected to follow the price of crude oil, when corrected for the energy content of the biofuel (Naylor et al. 2007; Westhoff 2008).

It has been argued that the situation will be different when lignocellulose is used as a basis for transport biofuel production. Here, estimates of feedstock costs are often in the order of 20-33% of total operational costs when feedstocks are currently ‘wastes’, while processing costs usually are usually in the 70-80% range (Dien et al. 2003; Huber et al. 2006; Lin and Tanaka 2006; Solomon et al. 2007; Dale 2008). In the case of specific wastes, the share of feedstock costs in operational costs may even be lower. Joelsson and Gustavsson (2008) have, for instance, argued that a synthesis of transport biofuels based on the gasification of black liquor in the paper industry is competitive with mineral oil when the price of crude oil is at least US $40 per barrel. Black liquor is a co-product of paper that is relatively rich in lignin. The gas can be used for powering the paper plant and the production of transport biofuels such as methanol and dimethylether. In the case of crops grown as lignocellulosic feedstocks, the share of feedstock costs in operational costs may be higher than in the case of feedstocks that are currently wastes. Borgwardt (1999) considered lignocellulosic ethanol production with switchgrass or hybrid poplar as a feedstock and found that the feedstock cost was nearly 60% of operational costs.

Also, whether the current low (zero or even negative) costs of wastes and the relatively low costs of other lignocellulosic feedstocks can be maintained when they turn out to be good feedstocks for transport biofuel production is very doubtful. Indeed, in the long term, it seems likely that in this case, biofuels will follow the cost of competing fossil fuels, when corrected for differences in energy content (Naylor et al. 2007). When lignocellulosic biofuels turn out to be competitive, this may offer scope for substantial prices to be paid for what is currently considered a waste.

Still, it has been argued that as there are many sources of lignocellulose, it may well be that the price of feedstocks will be more stable than in case of starch or oil crops. This, however, is not necessarily relevant for production units turning out lignocellulosic biofuels. These may well restrict themselves to a limited range of feedstocks. Both in the case of enzymatic production and in the case of gasification, one would expect that production units, as they will be built in the near future, would be fit for a limited part of the broad range of lignocellulosic materials (e. g. Nathan 2007; Hayes 2008; Olofsson et al. 2008). On the other hand, it may well be that further technological development may allow for the use of broader ranges of lignocellulosic feedstocks.

Capital costs for converting lignocellulosic biomass into biofuel will be much higher than the capital costs for, for example, starch-based ethanol (Nathan 2007; Rotman 2008). Also, the operational costs of current enzymatic ways to produce lignocellulosic transport fuels are relatively high, even when currently available op­tions for cost cutting and increasing the expected credit for co-products are imple­mented. For instance, in the case of enzymatic conversion, such costs are estimated to be greater than US $0.60 per litre (Sassner et al. 2008), whereas the 2006 costs for ethanol from Brazilian sugar cane were US $0.28-0.31 per litre (see Fig. 1.3). So, much reduced operating costs and increased yields would seem essential to the long­time financial viability of biochemical conversion of lignocellulose into ethanol. Overcoming the recalcitrance of cellulosic biomass, lower pre-treatment costs and lower costs of enzymatic conversions are priorities in this respect (Wyman 2007). Whether further research will indeed lead to much lower costs is an open question.

As to the prospects for future cost reduction of non-hydrolytic/fermentative ways to convert lignocellulosic biomass into transport fuels, the following may be noted. Some of the processes proposed for converting lignocellulose into transport fuels, such as the processes to convert synthesis gas into transport fuels, have been well researched and developed (Huber et al. 2006; Haryanto et al. 2007). However, gas­ification of biomass has only been subject to limited research, and it would seem that much can be done to optimize gasification of the wide range of feedstocks available (Nathan 2007; Wang et al. 2008b). In the field of gasification, there also would seem to be scope for cost reduction linked to technological developments such as mem­brane separation, supercritical water gasification and better control technology for tar, char and ashes (Han and Kim 2008; Haryanto et al. 2007; Wang et al. 2008b). The production of methane by anaerobic conversion of biomass is a well-developed technology, but scope for cost reduction and improvement of efficiency in the case of the conversion of lignocellulosic biomass to CH4 may still be substantial (Bagi et al. 2007; Boijesson and Mattiasson 2008; Rodriguez et al. 2008).

If crop prices remain high, it may well be that, while excluding external costs, prices for many road transport biofuels may remain higher than fossil fuels in the near future. The higher cost of biofuels in the past has led to government policies favouring the application of biofuels. For the long-term viability of transport bio­fuels, however, it would seem unlikely that they can be more expensive than com­petitive fossil fuels. This may have a strong selective effect on production processes and producer countries.