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The economics of biofuels or biofuels economics is the quantitative and theoretical study of biofuels, typically combining economics with other fields such as energy, geology and the living environment. It refers to the production, or loss, of wealth related to the use of biofuels. Biofuels and biodiesel have long gained worldwide acceptance and attraction as one of the solutions for the growing problem of environmental degradation, energy security and rural development. As a result, the study of the cost and benefits associated with biofuels has grown and is known as the economics of biofuels.

Biofuel production and consumption trends
Biofuels are liquid fuels made from renewable biological feedstock such as plant wastes and animal matter. The major biofuels globally are ethanol and biodiesel consumed predominantly in transport and energy. The production and use of biofuels have experienced remarkable growth over the last decade. The production trend depicted in the picture shows a slow albeit steady growth up to the new millennium, and a markedly increased growth rate over the last decade, expected to continue until 2035. The growth in production has been supported by key policy decisions in the past decade. Internationally, biofuel production and consumption are dominated by the U.S and Brazil, in 2011, the two nations represented 70 per cent of global biofuel consumptions and 74 per cent of global production.

Biofuel technology can be classified into a number of generations of technological development including first, second and third generation.

·        First generation – conventional biofuels are manufactured from sugar, starch, and vegetable oil, derived primarily from food crops. The majority of biofuels current produced in commercial quantities fall into this category.

·        Second generation – advanced biofuels are those manufactured from non-food crops and lignocellulose wastes. The manufacturing process requires enzymatic digestion and fermentation.

·        Third generation – algae biofuels are sometimes referred to as third-generation biofuel and are manufactured from photosynethic algae.

Benefits
Replacing fossil fuels with biofuels has the potential to generate a number of benefits. In contrast to fossil fuels, which are exhaustible resources, biofuels are produced from renewable feedstocks.

Environmental Benefits
The production of biofuels results in Greenhouse Gas (GHG) emissions at several stages of the generation process, however academic studies that use economic models find that biofuels can lead to reductions in lifecycle GHG emissions relative to conventional fuels because feedstocks can be produced using marginal land. Once biofuels are blended with gasoline, it can result in carbon-savings of approximately 0.89kg of CO2 per gallon consumed. Another research study finds that based on 1.6 billion gallons of biodiesel, the biodiesel industry reduced GHG emissions by approximately 14.8 million tons, which is equivalent to 3.2 million passenger vehicles off the road in the U.S. In the cases of waste biomass, no additional agricultural production is required, and emissions can be minimal if wastes have no other productive uses. However, agricultural production for biofuels is increasing, which effects the aggregate contribution of biofuels to emissions.

Socioeconomic Benefits
The biofuel industry provides economic stimulus through job creation, regional income growth, investments and purchases. For example, the direct value added by the biofuel production industry consists of labour income or wages and salaries paid to its employees, the gross operating surplus it generates and the net production taxes less subsidies it pays. In 2017, the biofuels industry generated $21.6 US billion in economic output, equivalent to $6.5 US billion in GDP. In addition, the industry supported 61,900 jobs, paying over $3.8 US billion in wages and benefits. However, taxation used for subsidies may cause job losses in other industries.

Security of Supply
The security of energy supply refers to the generation of energy within a nation, which may have otherwise been imported and diminish the percentage of fuel supply that would be subject to disruption if the supply of fossil fuels. In other cases, such as the EU, a substantial fraction of biofuels and feedstock will be imported, also creating a security of supply issue. It is estimated that the security of supply would provide a positive effect but small relative to costs.

Costs
The production costs of biofuels include operational costs including raw materials, utilities, labour, supplies and general works, and capital costs.

Environmental Costs
First-generation biofuels, such as biofuels, produce fewer overall GHG emissions than gasoline, however, its production is still an energy intensive process with secondary effects. The emissions accrue from agriculture production, crop cultivation and ethanol processing. Beyond emissions, biofuel production has many indirect effects. Unlike fossil fuels, the production of biofuels requires arable land for production, in addition to land for the physical conversion plants. The Joint Research Centre (JRC) lists a number of environmental impacts from the increased production of biofeed stocks and refining, such as:

·       Higher rates of nitrate and phosphate leaching into surface and ground water;

·       Pesticide contamination;

·       Soil degradation;

·       Loss of biodiversity; and,

·       Deterioration of landscape amenity.

Some studies estimate that producing first-generation biofuels from current feedstocks at the beginning of the production cycle and change in land use might take years to balance out the effects and, in some cases, could show fossil fuels to be more efficient than biofuels. This is most relevant in rain forests, peat lands, savannahs or grasslands because more carbon could be sequestered by converting a cropland for a biofuel feedstock to forest than the production of the fuel itself. For example, when carbon stored in forests or grassland is released from the soil during land conversion. A study found that while maize produced for ethanol can generate greenhouse gas savings of about 1.8 tonnes of carbon dioxide per hectare per year, and switchgrass (a second generation crop) can generate savings of 8.6 tonnes per hectare per year, the conversion of grassland to produce these crops can release 300 tonnes per hectare, and conversion of forest land can release 600- 1000 tonnes per hectare.

Food Supply
The opportunity cost of using resources for biofuel generation such as land and human capital, is food production. Economic models show that biofuel use can result in higher crop and world food prices, though the range of estimates in the literature is expansive. An estimate by the International Food Policy Research Institute indicates that biofuels may be responsible for 30% of weighted food price increases from 2001-07, whilst a 2013 study found projections for the effect of biofuels on corn prices in 2015 ranged from a 5 to 53 per cent increase. However, these impacts on retail food in the US are deemed small, whilst higher crop prices may lead to higher rates of malnutrition in developing countries. 2005 corn figures suggest that it would take 14.9 per cent of the US corn production to meet 1.72 per cent of the domestic energy equivalent to gasoline.

Cost Benefit Analysis
Cost-benefit analysis (CBA) can be applied to biofuels by conducting analyses of implementing and operating biofuel systems, including setup and input costs, and capital (land) and operational costs throughout the project’s lifetime. The analyses also attempt to quantify external benefits that may not necessarily have a market price. In this case, these include environmental benefits, social benefits (employment) and security of supply. Results vary from country, implied assumption and time frame.

Result 1
A study by the EU in 2007 finds that the costs to produce biofuels will, even in the best cases, exceed the value of the external benefits that can be achieved. This is largely attributed to welfare loss (net cost to society) imposed on taxpayers, throughout the time horizon of 2007-2020, of between 33 and 65 billion euro.

Result 2
A Net Present Value (NPV) is a method used to show the projected value of an investment and to determine if it is economically feasible. Researchers have studied both the return on investment for First Generation (1G) biofuels and Second Generation (2G) biofuels. According to a 2010 report published by the World Bank, a major advantage of using agriculture residue, which is used in 2G biofuels, is that they do not require additional land. Therefore, they will have almost no direct impact on food prices. The results from this study are shown below.

This analysis shows that 2G biofuels are more profitable than 1G biofuels, although 2G biofuel revenues per gallon in developing countries are lower than that of 1G biofuels. The study finds that the US and Germany are able to produce both fuels at a positive NPV, however capacity and total land allocation decides the potential of a developed country to produce biofuels.

Biofuel Policy
The biofuel industry is policy-driven, reliant on government support in order to secure a share of the road transport fuel market. This is because the economics of liquid biofuels must start fro the allocation of resources among competing uses in the energy and agriculture sectors. Most recent growth in biofuel production has occurred in the Organisation for Economic Co-operation and Development (OECD) countries, predominantly the United States of America and the European Union (EU) countries. An exception is Brazil, which has pioneered the development of an economically competitive national biosecurity sector based largely on sugar cane.

In the United States, increasing use of biofuels contribute towards four major policy objectives:

1.     Improving air quality by introducing additional oxygenates to the country’s fuel supply;

2.     Lowering GHG emissions;

3.     Improving rural economic viability by increasing demand for agriculture products; and,

4.     Reducing U.S. dependence on foreign oil.

These policy objectives have led to the enactment of several pieces of federal legislation to promote biofuels.

The Energy Policy Act of 2005 in the US used a variety of economic incentives, including grants, income tax credits, subsidies and loans to promote biofuel research and development. It established a Renewable Fuel Standard mandating the blending of 7.5 billion gallons of renewable fuels with gasoline annually by 2012.

The Energy Independence and Security Act of 2000 (EISA) included similar economic incentives. EISA expanded the Renewable Fuel Standard to increase biofuel production to 36 billion gallons by 2022. EISA also provides cash awards, grants, subsidies, and loans for research and development, biorefineries that displace more than 80 per cent of fossil fuels used to operate the refinery.

The elimination of current biofuel policies would have implications for ethanol and biodiesel prices and for agricultural commodity prices and output. It is expected that global ethanol prices would increase by 10 per cent because production in several subsidised countries would decline more than consumption, thereby increasing the demand for exports. Global biodiesel prices, in contrast, would fall slightly as the reduction in consumption would translate into a decline in import demand. Agricultural commodity feedstock prices would also be affected by the elimination of biofuel subsidies.