Biofuel Benefits Go Beyond Environment

Climate change and energy security priorities have created a policy framework that will produce a rapid expansion of the biofuels market, despite marginal economics.

Biofuel currently come in two forms:

-- Ethanol: Ethanol is made using a plant feedstock such as corn, beetroot, sugar beet or sugar cane and fermenting it. It can be used directly in pure ethanol-fired cars or be blended with gasoline at the pump to make "gasohol." Alternatively, ethanol can be combined with isobutylene to create ETBE (ethyl tertio butyl ether). ETBE is less volatile than ethanol and can be blended at the refinery, thereby avoiding the investment needed to allow blending at the pump.

-- Biodiesel: Biodiesel is made by combining raw vegetable oil with methanol to make a vegetable oil methyl ester (VOME). This can be used directly as fuel or blended with petroleum diesel.

The development of the biofuel industry is likely to prove rapid as government incentives drive forward what is still only a marginally economic product. There are three reasons behind this:

-- Security of supply: Increasing demand for oil has increased competition for existing oil resources by reducing global spare capacity, raising prices dramatically. Biofuels in most countries can be grown and processed domestically, providing an almost zero risk source of supply.

-- Climate change targets: Biofuels are cleaner than traditional fuels. In addition, biofuels are renewable and consume carbon dioxide as they are grown, offsetting that produced when burnt as fuel. Views are divided over the complete carbon life cycle of biofuels. Nevertheless, they are favored politically as one of the few means of "greening" the transport sector.

-- Import substitution and new exports: Many countries dependent on refined oil products have stimulated domestic biofuel production as a means of reducing rising oil import bills.

Both developing and developed countries are tightening their fuel specifications. In addition, governments are setting specific targets for biofuel use. Increasingly, these are being made mandatory. Developing economies are also promoting and subsidizing biofuel production. In tropical countries, the economics of biofuel are competitive with imported or locally refined petroleum fuels. However, in other countries they are generally dependent on subsidies and tax incentives.

Despite high oil prices, diesel remains cheaper than the raw material for biodiesel, though the gap has been much reduced. Some refiners argue that biofuels are more expensive than oil products at any conceivable sustained oil price scenario. Biofuels are dependent on fiscal incentives and have to demonstrate their benefits to society in other terms. However, benefits such as greenhouse gas emissions reductions or security of supply are not undisputed.

Biofuels bring energy and agricultural markets into direct competition. While this may serve to keep biofuel production costs high, there are possible policy trade-offs between agricultural subsidies and biofuel incentives.