The Economics of Biofuels

Fossil fuels are considered to be the biggest environmental hazards of our time. The biggest objective of several global organizations is to reduce the use of these fossil fuels and replace them with something more organic. This is where biofuels can help. Governments all over the world are giving subsidies to biofuels. Many government agencies procure biofuels from vendors. They are used to meet the needs of sectors like railways which have high energy requirements. In this article, we will look at the positive and negative impacts of using these biofuels.

  • Lower Emissions: Firstly, biofuels emit considerably lower amounts of greenhouse gases in the environment. In the short run, the comparison between first-generation biofuels and fossil fuels shows no difference. However, comparisons done over a thirty year period show that biofuels emit less than 50% of greenhouse gases as compared with fossil fuels. Also, there are many second generation biofuels which drastically cut emissions from day one. This is not only good from an environmental point of view but also from an economic standpoint. Higher emission levels mean the government has to spend more money trying to control pollution. The usage of biofuels, therefore, provides financial advantages.

  • Lower Import Bills: Another huge benefit of using biofuels is that the reliance on oil exporting countries is reduced. The oil market is like a global cartel. Oil producing nations collude to jack up the prices of oil. As a result, importing countries have to pay a lot more. Rising oil prices have had a severe economic impact on the current account position of many nations. If they import too much oil, they often have to cut the import of other essential commodities. This is because they do not have the foreign exchange to pay for all of the imports! Lower import bills would provide a wide range of benefits to these governments. They will not be under undue pressure from oil producing nations. Governments experience a lot of flexibility and freedom in decision making after breaking the shackles of fossil fuel consumption.

  • Terrorism Financing: The proceeds from the sale of fossil fuels are the number one source of financing for terrorist organizations. ISIS derives a large portion of its revenue from selling its oil in the black market. Radical elements in the governments of Saudi Arabia and Iran also send oil money to terrorist sympathizers. If the world were to embrace the use of biofuels, the dependence on fossil fuels would be reduced considerably. This would severely curtail the flow of money to terrorist organizations. Several conflicts in the Middle East would be resolved only if oil became strategically less important!

  • Sustainable Model: Last but not the least biofuels are a sustainable way to meet the energy needs of the planet. Production of biofuels does not take thousands of years. Hence, the production of biofuels can be made faster than its consumption. This would create a sustainable business model. The world will no longer have to live with the fear that the energy sources are going to be depleted. This will lead to stability in the price of these fuels. Biofuels are unlikely to be as volatile as fossil fuels. This will help the economy since it will make production planning a lot easier.

Disadvantages of Biofuels

There are some disadvantages to the use of biofuels as well. They have been listed below.

  • Higher Food Prices: Biofuels are produced from food particles. Sugar crops are the raw material which is used to produce first generation biofuels. On the other hand, second generation biofuels are produced from cellulose. Hence, an increase in the production of biofuels would mean an increase in the production of these crops. If the production of these crops has to be increased considerably, more and more land will have to be brought under agricultural usage. However, the world is already facing a shortage of land. Hence, it would be difficult to bring more land under cultivation. The end result will be the diversion of fertile land to the production of biofuels. This will be an economically and environmentally beneficial solution if only the energy needs are considered.

    Even though the energy needs might be met in a better way, the production of crops will decrease once biofuels become the main stream. This reduced production will cause higher food prices.

    These higher food prices are a concern in low-income countries. However, these are also the countries where maximum fossil fuel-related pollution happens. Hence biofuel is not really a viable alternative in such countries.

  • Land Pollution: The production of biofuels requires the use of chemical fertilizers. This is done to improve the yield of the cultivable land. However, in the long run, these fertilizers produce negative economic consequences. Overuse of these fertilizers makes the land uncultivable in the long run. Also, the chemicals tend to seep into the soil and create a wide variety of health hazards. Hence, an increase in the production of biofuels would directly lead to a rise in the land pollution as well.

The bottom line is that technology related to biofuels still needs to be developed even more. There are many benefits to using biofuels. However, some of the disadvantages need to be mitigated before biofuels completely replace fossil fuels.

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Managerial Economics