This paper analyses the economics of biofuel production and the implications that the accelerating growth in biofuel production in many countries could have on agricultural markets. It shows that production costs of ethanol and biodiesel differ significantly across countries and feedstock crops. These costs often exceed those of fossil fuels. In consequence, the economics of biofuel production depends on public support in most countries. Similarly, land requirements for crops required to enable significant shares of biofuel production in transport fuel consumption are shown to be substantial in many countries given current technologies. An expected growth in biofuel production is, therefore, likely to have a significant increasing impact on world prices for sugar, cereals and oilseeds beyond what is caused by higher crude oil prices alone. The paper points out a number of policy issues that require attention and further analysis to facilitate a fuller discussion of biofuel policies.
