Global biofuel market challenges

Biofuels first became a significant factor in the transport market when Brazil started producing bioethanol from sugar cane in the 1970s in order to reduce dependence on imported oil and support the agricultural sector. The rate of growth further accelerated when the US government and the EU both increased their support for biofuels with mandates and subsidies in the early 2000s in order to reduce carbon emissions. In the US, there were additional motivations to increase energy independence and support rural economies. By 2011, bioethanol production accounted for 40 percent of US maize production and biodiesel production for around 30 percent of EU rapeseed oil production.

This is largely because US production from corn grain has approached the ceiling imposed by the authorities although it also reflects a downturn in Brazilian production.

As far as the future is concerned, prospects for biofuels which use food crops
as a feedstock are not as bright as they used to be. In recent years the case for biofuels has been questioned on grounds of both food security and environmental impact. They have been blamed for contributing to the high levels of food prices, and in the case of biofuels derived from palmoil in Asia, for leading to loss of biodiversity. The original claims about their carbon footprint have been challenged. They have also faced economic problems as, in the case of corn for example, the crop feedstock accounts for around 70 percent of cost of goods sold (COGS), so when crop prices rise, depending on the relative price of oil, margins can become very thin and even negative.

In turn, these doubts are reflected in a reduction in support for biofuels both in the US, where subsidies and tax-breaks have been reduced, and in the EU, which has reduced its target for the amount of transport fuel provided by renewable energy from 10 percent to 5 percent by 2020. Only in Brazil, where the production economics are more favorable, does the future of biofuel look optimistic. Some forecasters see this driving the sugar cane area from its current level of 6 million hectares to over 9 million by 2015.

Apart from Brazil, significant future growth in bioethanol is predicated on the development of cellulosic bioethanol, derived from crop residues after harvest rather than grain. Progress towards this goal has been slower than originally anticipated as large scale, commercially viable production has yet to be achieved. There are several so-called ‘second generation plants’ under construction due to come on stream in 2013 and 2014, but the amounts they will produce are small and their commercial viability has yet to be proven.