Cellulosic biofuels are a type of ethanol biofuel derived from lignocellulose, the basic structural material of plants. Compared with widely used biofuels, such as ethanol derived from corn or sugarcane, cellulosic biofuel has a much lower carbon footprint. This is largely down to the grassy crops used – miscanthus and switchgrass, which require little fertilizer to grow, and from which woody "lignin" can be extracted to convert into liquid fuel.

Unfortunately, the cost of producing cellulosic biofuels is still so high that they are yet to enter into commercial production. According to one recent estimate by the US National Research Council, cellulosic biofuels will only be viable by 2022 if the price of crude oil reaches about $200 per barrel. (It is currently just under $100 per barrel.) But, said economist Madhu Khanna at the University of Illinois at Urbana-Champaign, US, this estimate did not take into account a well known phenomenon: that fuel production costs fall as engineers hone the process. As an example, she said, the cost of producing corn and sugarcane ethanol has fallen by 50% since widespread production began.

Khanna, together with colleagues at the University of California, Davis, US, and the Southwestern University of Finance and Economics in Chengdu, China, has now estimated future costs of cellulosic biofuel production while taking into account such "learning by doing". The researchers also considered the effect of various policies that might stimulate production, such as the Renewable Fuel Standard, which mandates the volume of production of biofuels each year.

The team created an economic model of the US agricultural and food sectors that represented supply-and-demand conditions for all major crops and fossil fuels. The model could allow for changes in the supply and demand and different learning rates, which affect the rise of cumulative experience. Khanna and colleagues found that, under the Renewable Fuel Standard, the processing cost of cellulosic biofuels would fall by some 50% between 2015 and 2035. However, the final cost in 2035 would still be very high – about 40% more than petroleum.

Khanna points out that the gloomy economic outlook should not obscure the benefits of cellulosic biofuels, whose production could still be driven by policy. "A comparison of biofuels with fossil fuels simply based on their market price is not appropriate, because biofuels provide external benefits like [reduced] greenhouse-gas emissions [and improved] energy security," she said. "As costs of production come down over time, less stringent policies will be needed to induce their production."

Indeed, the study by Khanna and colleagues can at least help policy makers by showing which policies are likely to have the most beneficial effect. They found, for instance, that "aggressive" policies such as large cellulosic-biofuel subsidies can accelerate the cost reduction, whereas a "carbon tax" of $30 per ton of emissions offers little incentive. "Not all policies that promote biofuels are the same," said Khanna.

The study is published in Environmental Research Letters as part of the ERL Focus on Second Generation Biofuels and Sustainability.

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