Biofuels - liquid transport fuels derived from biomass - attract substantial interest in many countries. Growth in biofuel production and demand has been stimulated by high levels of government support in many countries, as well as by recent surges in international oil prices. Processing costs to produce biofuels have declined markedly with increased experience and improved technologies, which together with the higher prices for fossil fuels have helped to improve the competitiveness relative to conventional fuels. Given that feedstock prices have increased as well, however, further reductions in costs will be needed for biofuels in most countries to be able to compete effectively with gasoline and diesel without subsidy. Land availability and food needs will also limit the growth in conventional biofuels production based on sugar, cereals and seed crops. New biofuels technologies being developed today, notably enzymatic hydrolysis and gasification of ligno-cellulosic feedstock, could allow biofuels to play a much bigger role in the long term, with potentially less land-use and environmental impact. Whether they can be viable in all but niche markets without subsidies is less clear.

To analyse the implications of support policies for biofuel supply and demand, as well as for agricultural commodity markets and land use, the OECD medium-term simulation model for world agricultural markets Aglink has been employed, complemented by the FAO-developed Cosimo model to cover a large set of developing countries. Aglink-Cosimo is a partial equilibrium model of domestic and international markets for major temperate-zone agricultural commodities, with detailed mapping of policies affecting these markets. In preparation of this analysis, the combined model has been extended to include the markets for sugar and other sweeteners. Furthermore, a specific module representing biofuel markets in major producing and consuming regions has been developed. At the same time, the FAO has developed biofuel modules for 13 developing countries.

The preceding chapter presented and discussed the results of model-based analyses. Existing and new biofuel support policies were in the centre of the set of scenarios that were calculated using a large-scale economic modelling system Aglink-Cosimo, complemented by a stylised model on environmental implications of the policy changes, SAPIM. As for the results of any modelling system, those discussed above are subject to a certain degree of uncertainty, related to parameters and structures in the represented markets.

Production and use of biofuels – mainly ethanol based on cereals and sugar crops, and biodiesel based on vegetable oils such as rapeseed or canola oil – have grown rapidly over the past few years and are expected to further double in the decade to come. The United States and Brazil remain the largest ethanol producers while biodiesel production is particularly relevant in the European Union, but a large number of other countries have begun or are considering promoting biofuel production and use.