Biofuels: Policies and impacts

Abstract

This paper provides a general overview of the technological, social, environmental, economical, and policy considerations related to biofuels. While the biofuel production and consumption exhibited significant increase over the first decade of the new millennium, this and further increases in biofuel production are driven primarily by government policies. Currently available first generation biofuels are not economically viable in the absence of fiscal incentives or high oil prices (with a few exceptional cases, especially in the case of the most developed Brazilian sugarcane production of ethanol). Also the environmental impacts of biofuels as an alternative to fossil fuels are quite ambiguous. The literature review of the most recent economic models dealing with biofuels and their economic impacts provides a distinction between structural and reduced form models. The discussion of structural models centres primarily on computable general equilibrium (CGE) models. The review of reduced models is structured toward the time series analysis approach to the dependencies between prices of biofuels, prices of agricultural commodities used for the biofuel production and prices of the fossil fuels.