Economics of Biofuels
NCEE Topic Pages
Replacing fossil fuels with biofuels—fuels produced from renewable organic material—has the potential to reduce some undesirable aspects of fossil fuel production and use, including conventional and greenhouse gas (GHG) pollutant emissions, exhaustible resource depletion, and dependence on unstable foreign suppliers. Demand for biofuels could also increase farm income. Biofuel production and use has drawbacks as well, including land and water resource requirements, air and ground water pollution, and increased food costs. Depending on the feedstock and production process, biofuels can emit even more GHGs than some fossil fuels on an energy-equivalent basis. Biofuels also tend to require subsidies and other market interventions to compete economically with fossil fuels, which creates deadweight losses in the economy.
Currently available biofuels are made from sugar crops (sugarcane, sugarbeet), starch crops (corn, potatoes), oilseed crops (soybean, sunflower, rapeseed), and animal fats. Sugar and starch crops are converted through a fermentation process to form bioalcohols, including ethanol, butanol, and propanol. Oils and animal fats can be processed into biodiesel. Ethanol is the most widely used bioalcohol fuel. Most vehicles can use gasoline-ethanol blends containing up to 10% ethanol (by volume). Flexible fuel vehicles can use gasoline-ethanol blends containing up to 85% ethanol.Currently there are only about 700 fueling stations in the U.S. that offer E-85 fuel, most of which are in the upper Midwest. 1
Second generation biofuels, or cellulosic biofuels, are made from cellulose, which is available from non-food crops and waste biomass such as corn stover, corncobs, straw, wood, and wood byproducts. Third generation biofuels use algae as a feedstock. Second and third generation biofuels are not yet produced commercially.
Economic Benefits of Biofuel Production:
Replacing fossil fuels with biofuels can generate a number of benefits. In contrast to fossil fuels, which are exhaustible resources, biofuels are produced from renewable feedstocks. Thus, their production and use could, in theory, be sustained indefinitely.
Biofuels’ carbon emissions can be offset by their feedstocks’ carbon uptake. As plants grow, they absorb carbon dioxide from the atmosphere. In contrast, fossil fuel production and use removes carbon from the Earth’s crust and introduces it to the atmosphere, where it will contribute to global warming for centuries.
Biofuels can be produced domestically, which could reduce our dependence on unstable foreign suppliers of fossil fuels. If biofuel production and use reduces our consumption of imported fossil fuels, we may become less vulnerable to the adverse impacts of supply disruptions. Reducing our demand for fossil fuels could also reduce their price, generating economic benefits for American consumers.
Biofuels may reduce some pollutant emissions. Ethanol, in particular, can ensure complete combustion, reducing carbon monoxide emissions.
It is important to note that biofuel production and consumption, in and of itself, will not reduce GHG or conventional pollutant emissions, lessen imports or consumption of petroleum, or alleviate pressure on exhaustible resources. Biofuel production and use must coincide with reductions in the production and use of fossil fuels for these benefits to accrue. These benefits would be mitigated if biofuel emissions and resource demands augment, rather than displace, those of fossil fuels.
Economic Costs of Biofuel Production
Biofuel feedstocks include many crops that would otherwise be used for human consumption directly, or indirectly as animal feed. Diverting these crops to biofuels may lead to more land area devoted to agriculture, increased use of polluting inputs, and higher food prices. Cellulosic feedstocks can also compete for resources (land, water, fertilizer, etc.) that could otherwise be devoted to food production. As a result, biofuel production may give rise to several undesirable developments:
- Land use patterns may change, resulting in GHG emissions. Biofuel feedstocks grown on land cleared from tropical forests, such as soybeans in the Amazon and oil palm in Southeast Asia, generate particularly high GHG emissions.2 Even when feedstocks are not directly grown on forests or native ecosystems, higher crop prices can encourage the expansion of agriculture into undeveloped land, leading to GHG emissions and biodiversity losses.
- Biofuel production and processing practices can release GHGs. Fertilizer application releases nitrous oxide, a potent greenhouse gas. Most biorefineries operate using fossil fuels. The magnitude of the total GHG emissions resulting from biofuel production and use, including those from indirect land use change, might even exceed those generated by fossil fuels in some circumstances.3
- The quantity of food brought to market might decrease, resulting in higher food prices and possibly more malnutrition. There are a wide range of estimates of the impact of biofuel production on agricultural commodity prices, with several studies finding an increase in the range of 20 to 40 percent in food prices during 2007 to 2009. 4
- Water quality could suffer as rising prices for agricultural commodities induce more intensive agricultural practices (e.g., greater use of inputs such as fertilizer).
- Increases in irrigation could unsustainable deplete aquifers.
Air quality could also suffer if the total impact of biofuels on tailpipe emissions plus the additional emissions generated at biorefineries increases net conventional air pollution.
U.S. Policy Approaches for Biofuel Production
The Energy Policy Act of 2005 used a variety of economic incentives, including grants, income tax credits, subsidies and loans, to promote biofuel research and development; production of biodiesel, ethanol and cellulosic biofuels; education and outreach; and small-agribusiness development. Energy Policy Act of 2005.
The Energy Independence and Security Act of 2007 (EISA) uses similar economic incentives, as well as production standards. EISA set a Renewable Fuels Standard, aiming to increase biofuel production to 9 billion gallons by 2008 and 36 billion gallons by 2022. Of the latter goal, 21 billion gallons must come from cellulosic biofuel or advanced biofuels derived from feedstocks other than cornstarch. To limit GHG emissions, the Act states that conventional renewable fuels (corn starch ethanol) are required to reduce life-cycle GHG emissions relative to life-cycle emissions from fossil fuels by at least 20%, 5 biodiesel and advanced biofuels must reduce GHG emissions by 50%, and cellulosic biofuels must reduce emissions by 60%. EISA also provides cash awards, grants, subsidies, and loans for research and development, biorefineries that displace more than 80% of fossil fuels used to operate the refinery, and commercial applications of cellulosic biofuel. Energy Independence and Security Act of 2007. (PDF, 310 pp., 828K, About PDF)
In addition to EISA, numerous other policies encourage the production and use of biofuels in the US. 6 These include the Volumetric Ethanol Excise Tax Credit, the Volumetric Tax Credit for Agri-Diesel, federal subsidies to small biofuel producers, and other incentives provided by State governments.
2 Fargione, J., et al. 2008. “Land clearing and the biofuel carbon debt.” Science 319: 1235–1238.
3 Searchinger, T., et al. 2008. “Use of US croplands for biofuels increases greenhouse gases through emissions from land-use change,” Science 319: 1238-1240.
4 National Research Council. 2011. Committee on Economic and Environmental Impacts of Increasing Biofuels Production. Renewable Fuel Standard: Potential Economic and Environmental Effects of U.S. Biofuel Policy. Washington, DC: The National Academies Press.
5 However, any corn starch ethanol refinery in operation or whose construction commenced prior to EISA’s enactment is exempt from this requirement. Preliminary estimates suggest that the aggregate capacity of “grandfathered” corn starch ethanol refineries may equal or even exceed EISA’s mandated level of 15 billion gallons per of year.