3.4        Economic Implications

The major barrier for getting a wider acceptance of the new technology of biofuel production is the cost. Although there is a wide variety of biomass-derived transportation fuels, which can be used to reduce our dependence upon petrol, all of the traditionally derived biofuels are uneconomic at present. However, it is promising that many of them are projected to be cost-competitive with gasoline in the near future. For example substantial cost reductions are being made for sugar cane-derived ethanol, while advanced biofuels that are derived from low-cost woody biomass could offer higher energy yields at lower cost and with lower environmental impacts than most traditional biofuels.

The high production cost of biofuels can be partially explained – apart from the technology - by two fundamental issues that make economic estimation complicated:

·         price determination of raw materials

·         indirect and external factors (land use, infrastructure, transportation, employability, environmental impacts).

For example feedstock costs account for a large percent of direct biodiesel production costs, including capital cost and return. Fats and greases cost less and produce less expensive biodiesel, while the quality of the fuel is similar to soy biodiesel fuel.

Great caution should be exercised when assessing the viability of biofuels produced from agricultural feedstocks.  Usually these will have been produced by applying chemical fertiliser, which is obtained from oil based energy.  There may also be processes which require energy input (such as distillation of alcohol), which may currently be oil based.  As long as the price of oil is low, such biofuels may appear to be competitive, but they are not truly sustainable.  As the oil price rises, they will become less rather than more competitive.

In the case of producer gas, which is of low calorific value, transportation costs are an important factor. As a result, its main use is as industrial fuel produced close to where it is needed. At the present time, gasoline produced from wood is significantly more expensive than that produced from petrol. However as world supplies of petrol become scarcer in the next 50 years, gasoline from wood may become more attractive.

In order to overcome these financial problems, there is a need to further develop cost-effective solutions, but at the same time all possible political steps must be taken to start internalising the environmental costs in all fuel prices.

3.5        Political Implications

Increasing political pressures driven by international concerns for the environment force governments to seek new and advanced technologies to reduce global CO₂ emissions caused by the combustion of fossil fuels. One way to meet this commitment is to enhance the use of biofuels, which do not load the environment with an extra burden of CO₂.

In addition to the environmental benefits, the production of biofuels diminishes dependence on imported crude oil and increases the security of national energy supply. Biofuels help insulate countries from sudden interruptions or sudden price fluctuations. The use of domestically produced biofuels can also improve the self-sufficiency of those countries that have net energy imports and can reduce the economic burden of importing crude oil.

Biofuels also contribute to the establishment of sustainable energy systems and help capture the many external benefits of renewable fuels. Experts estimate that – with political support - biofuels can readily provide a long-term market share of 15% or more of the transportation market over the next few years. Ongoing research and development efforts are being conducted by governments and industries around the world to encourage the use of these fuels. In the shorter term, these efforts help establish markets and an effective infrastructure of biofuels. In the longer term, these efforts are expected to result in lower-cost fuels that are economically competitive in the marketplace.

A very important and unique feature of biofuels is that they can be produced locally with local resources and technology. Municipalities and industries pay to dispose or treat the organic wastes they generate, but since these can be converted to biogas, it is possible to reduce costs or make income from the production of biofuels. The drawback is that biofuel prices cannot compete with petrol prices unless a more efficient technology is used and/or changes are made to government policies, taxes and tariffs in order to favour the production and use of biofuels.