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Recent Developments in Renewable Technologies: R&D Investment in Advanced Biofuels


Deepak Rajagopal,1 Steve Sexton,2 Gal Hochman,2 and David Zilberman2*
1 Energy and Resources Group, University of California, Berkeley, California 94720; email: deepak@berkeley.edu 2 Department of Agricultural and Resource Economics, University of California, Berkeley, California 94720; email: zilber@are.berkeley.edu

Annu. Rev. Resour. Econ. 2009. 1:1.11.24 The Annual Review of Resource Economics is online at resource.annualreviews.org This articles doi: 10.1146/annurev.resource.050708.144259 Copyright 2009 by Annual Reviews. All rights reserved 1941-1340/09/1010-0000$20.00 *Corresponding author

Key Words
energy, transportation, innovation, adoption, policy

Abstract
Investment in renewable energy, both in research and development and in commercial production, has risen significantly during the current decade. Although a variety of different renewable sources have been targeted for expansion, biomass technologies, especially those for converting biomass to liquid biofuels for transportation, have cornered a large share of the new investments. Cutting-edge knowledge in genomics and biotechnology, process chemistry, and engineering are being applied to produce new types of energy feedstock and process them into novel biofuels. If these investments bear fruit, liquid biofuels have the potential to displace a substantial amount of oil over the next few decades, with limited negative impact on food supply and the natural habitat. Energy-security and food-security constraints and environmental considerations will determine which technologies emerge as winners. The search for new transportation fuels is also giving rise to the development of new paradigms in innovation, commercialization, and regulation.

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1. INTRODUCTION
Investment in renewable energy, both in research and development (R&D) and in production capacity, has grown as a sum of public and private investment during the current decade (International Energy Agency 2008b). The world has witnessed a similar rise in demand for renewable energy before, most notably in the aftermath of the 1973 OPEC oil embargo. As spectacular as the rise in investments was then, the following decade witnessed a steep fall in oil prices and a fall in demand for renewable energy. Consequently, R&D spending on renewable energy also declined (Margolis & Kammen 1999, Rausser & Papineau 2008). However, post-9/11 geopolitics of oil, economic growth in non-OECD countries, peak oil concerns, and consensus on mitigating climate change suggest that current interest is likely to be sustained (Himmel et al. 2007, The Economist 2008, Royal Society 2008). Investments in R&D are risky because of technological uncertainty. Private investments tend to be less forthcoming because of innovation spillovers, the insufficiency of patent regimes for internalizing the benefits of R&D, and credit constraints (Arrow 1962, Alston & Pardey 1996, Jacobsson & Bergek 2004, Jaffe et al. 2005, Kobos et al. 2006). Investments in production capacity or consumption infrastructure are also susceptible to market uncertainties from, for example, fluctuations in energy prices. This creates a disincentive for irreversible capital expenditures and can cause a decline in production capacity as firms go bankrupt (Hochman et al. 2008). These problems are further magnified in the case of clean technologies because of incomplete markets for environmental goods or energy security. Government policies have played an important role in stimulating demand and supply of alternative energy. Subsidies for production, consumption, and R&D have provided incentives for investment, whereas mandates for renewable fuels have guaranteed a market for those investments (Fischer & Newell 2008, Rajagopal & Zilberman 2008). The government stimulus in response to the economic crisis of 2008 is seen as an opportunity to increase spending on renewable energy projects, which can reduce dependence on imported oil and generate domestic jobs (The Economist 2008, Seib 2008). Global renewable energy initiatives can also draw inspiration from the Brazilian sugarcane ethanol program, PROALCOOL, which began in the 1970s and continues today. As a result of this program, domestic sugarcane ethanol composes 50% of current transportation fuel consumption in Brazil (Weidenmier et al. 2008).1 Several different renewable resources such as biomass, solar, wind, geothermal, and hydropower are currently in the R&D stage (Carr 2008). On the basis of the form of use, a majority of these can be grouped under either electric power generation or transportation.2 A closer look reveals an increase in emphasis on technologies for transportation. One possible explanation is that, although both electric power generation and transportation are reliant on fossil fuels, transportation is much less diversified (approximately 99% dependent on crude oil) and depends on imports from regions that are unstable and hostile to the major oil-consuming nations. Several technologies are in the running as alternatives to oil. Biofuels, hybrids, plug-in electrics, compressed natural gas, or hydrogen-fueled
1 During the same time, Brazil also reduced its share of imported oil from 70% to only 10%; this was achieved in part by increasing domestic oil production. 2 Another form of use is heat (e.g., solar thermal and improved cook stoves), but investment in renewable technologies for heating is small compared with that of electricity and transportation.

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Rajagopal et al.

vehicles can each become a significant player under the right economic and policy conditions. However, because of simplicity and cost advantages, liquid biofuels appear to have a head start in this race. This paper is a review of recent trends in the liquid biofuel industry. The rest of the paper is organized as follows: Section 2 is an overview of the energy outlook and R&D investment in biofuels. Section 3 is a brief review of the technology spectrum for advanced biofuels. Section 4 is a review of the economics of biofuels from a private-sector perspective. Section 5 deals with issues of intellectual property arising from the public-private model of innovation and entrepreneurship. Section 6 deals with the market failure in renewable energy and reviews common mechanisms used to support renewable fuels, their effectiveness in achieving policy objectives, and their economic efficiency. Section 7 concludes this review.
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2. OUTLOOK FOR OIL AND R&D IN BIOFUELS


In nearly every country with the exception of Brazil, oil accounts for more than 98% of energy used in transportation (International Energy Agency 2004). The International Energy Agency predicts that global demand for oil will reach 106 million barrels per day by the year 2030 (excluding biofuels) compared with 85 million barrels per day in 2008 (International Energy Agency 2007). The potential to increase production of conventional oil is predominantly in the OPEC regions (International Energy Agency 2007). Large investments are being made by OPEC and non-OPEC nations in costly and increasingly polluting sources of oil such as deep-sea drilling, enhanced oil recovery, oil sands, coal liquefaction, and gas liquefaction (Energy Information Administration 2008). According to New Energy Finance, approximately 98% of the overall energy R&D by private companies is for conventional fuels (http://www.climatechangecorp.com/content.asp? ContentID=5209). But given the environmental risk of increased reliance on fossil fuels, there is significant government support for clean nonfossil technologies to address the energy challenge. Nonfossil fuel resources include nuclear energy, energy efficiency, renewable energy, hydrogen and fuel cell technologies, and energy storage (International Energy Agency 2008b). One of the many channels of government support is R&D funding. Total spending on energy R&D by International Energy Agency members has been increasing since 2000. Nuclear energy receives the lions share of the total R&D budget, whereas fossil fuels have received the bulk of the increase in budget since 2000. As of 2006, funding for renewable energy R&D has also increased from $0.8 billion to $1.18 billion (all amounts noted are in U.S. dollars) (International Energy Agency 2008b). In 2004, renewable energy accounted for 13.1% of the global primary energy supply. Biomass accounted for 79.4% of global renewable energy (International Energy Agency 2008a). More than 98% of the biomass was consumed for heat and electricity, whereas liquid biofuels (ethanol and biodiesel) accounted just 1.4% of biomass energy. Furthermore, liquid biofuels currently supply less than 1% of energy used in transportation worldwide (Energy Information Administration 2008). However, liquid biofuels are considered to have the potential to displace a substantial amount of oil over the next few decades (International Energy Agency 2004). The U.S. Department of Energy believes it is possible to replace 30% of current U.S. gasoline consumption with biofuels by 2030 (Perlack et al. 2005, Energy Efficiency Renewal Energy Program 2007). Several other
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R&D Investment in Advanced Biofuels

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countries have also adopted ambitious targets and policies for liquid biofuels (International Energy Agency 2004, Renewable Energy Network 2008, Rajagopal & Zilberman 2008). In the United States between 2002 and 2007, the combined budge of the U.S. Department of Energy and U.S. Department of Agriculture for biomass research increased from $97 million to $140 million (2002 dollars). During the same time, total spending on solar, wind, geothermal, and hydrogen technologies declined (Rausser & Papineau 2008). The U.S. federal biomass policy as outlined in the Energy Independence and Security Act of 2007 allocates several million dollars for R&D and demonstration projects for advanced biofuels, especially those that achieve the greatest reductions in greenhouse gases (GHG) (Energy Efficiency Renewal Energy Program 2007). Increase in public sector support for bioenergy has been complemented by private sector investment in R&D, which also places a large emphasis on liquid biofuels. Several biotech companies have received funding to develop technologies that break down lignocellulose and help turn it into fuel (Schubert 2006). Between 2002 and 2007, venture-capital funding in the United States for biofuels increased from $2.5 million to $298 million (nominal dollars), second only to solar technologies (Rausser & Papineau 2008). Major oil companies have entered into partnerships worth hundreds of millions of dollars with universities and agribusiness companies to develop new biofuel technologies (Sheridan 2007). Cutting-edge developments in the fields of genetic engineering, biology, and chemistry are being applied to engineer new varieties of crops and aquatic biomass optimized for energy production as well as new types of microbes for degrading lignocellulose into sugars and for synthesizing novel biofuels and biobased substitutes to petrochemicals (Ragauskas et al. 2006, The Economist 2007, Moose 2008, Schaffer 2008). The emergence of biomass as a potentially major source of future energy is in some ways a return to the past. Prior to the industrial revolution, wood and charcoal supplied energy for heating and cooking in homes, while domesticated animals supplied energy for agriculture and transport. The replacement of animal power with machine power is claimed to have freed up 80 million acres of U.S. landland that had been used to grow grass and other feed for the millions of animals used by humans (http://bioenergy.ornl. gov/papers/misc/switgrs.html). With the advent of coal and petroleum in the mid- and late-nineteenth century, respectively, the world began a rapid transition away from biomass to fossil fuels. Similarly, during the beginning of the twentieth century, many industrial materials such as dyes, solvents, and synthetic fibers were made from trees and agricultural crops, which were replaced by petrochemicals by the late 1960s (Ragauskas et al. 2006). This time, however, the biomass renaissance is relying on cutting-edge science.

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3. TECHNOLOGY SPECTRUM
The energy supply chain comprises four main stages: (a) extraction or production of raw material, (b) processing into fuel or electricity, (c) distribution and retail, and (d) end use. In the case of energy from biomass, the first stage is cultivation and harvesting of feedstock (or, simply, the collection of wastes). After collection, the feedstock is transported to a biorefinery where it is processed to produce electricity, fuels for transportation, or other industrial chemicals and materials, which substitute petrochemicals (Perlack et al. 2005). We review some of the major technologies undergoing R&D.
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3.1. Feedstock
Table 1 lists the major types of crops that can be used as feedstock for biofuels. Ethanol can be produced from any feedstock that is sugar, starch, or cellulose based. Approximately 90% of the global production of ethanol comes from Brazilian sugarcane and U.S. corn (Worldwatch Institute 2006). Biodiesel is produced from oils, which can be extracted from a variety of sources such as oil seeds, palm, algae, and waste oil. Currently, more than 90% of the global biodiesel production is from rapeseed and soy. Furthermore, between 2000 and 2005, global production of ethanol doubled while that of biodiesel quadrupled (Martinot 2005), with biodiesel compring approximately one tenth of total liquid biofuel. Current biofuels are produced entirely by using parts of plants that provide food for humans. Therefore, appropriation of edible plant matter for biofuel production has an adverse impact on the food situation, which is facing major challenges even without biofuels (Runge & Senauer 2007, Sexton et al. 2009). This is somewhat mitigated if coproducts of biofuel can replace the displaced food. Furthermore, edible plant matter makes up a small portion of the total photosynthetic output, the bulk of which is nonedible cellulosic matter. More than half of all harvested dry matter is in cereal and legume straws; in tops, stalks, leaves, and shoots of tuber, oil, sugar, and vegetable crops; and in prunings and litter of fruit and nut trees that are not fit for human consumption (Smil 1999). Calculations suggest that using first-generation biofuel technologies for the entire global harvest of sugarcane, maize, wheat, sorghum, sugar beet, and cassava can supply approximately 85% of global gasoline consumption. Cellulosic feedstock may be able to supply the same fuel using less than half the amount of land required by food crops (Rajagopal & Zilberman 2008). Other calculations suggest the United States, Canada, and the European Union would require between 30% and 70% of their respective current crop area if they replaced just 10% of their transport fuel consumption with biofuels (OECD 2006). The high productivity of lingocellulosic biomass explains the emphasis of current R&D.
Table 1 Biofuel feedstocks
Crops/waste Stalk Root Starch Cereals Root crops Lignocellulose Energy crops Forestry residue Sugarcane, sweet sorghum Sugar beets Corn, wheat, barely, rye, sorghum Potatoes, cassava Switchgrass, Miscanthus, poplar, willows Wood thinnings Example(s)

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Feedstock Sugar

Agricultural waste Rice straw, wheat straw, corn stover, sugarcane residue Solid waste Lipids Municipal solid waste, paper waste, dung

Oil seeds and nuts Rapeseed, soybean, oil palm, coconut, sunflower, peanut, jatropha curcas Algae Waste oil Microalgae Used vegetable oil, animal fat

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Cellulosic biomass under investigation includes a variety of materials: Examples are agricultural wastes, including those resulting from conventional ethanol production such as corn stover and sugarcane bagasse; forestry residues such as wood wastes, municipal solid wastes, and wastes from pulp/paper processing; dedicated crops such as fast-growing woody trees (poplars), shrubs (willows); and grasses such as switchgrass and Miscanthus (Perlack et al. 2005, Somerville 2006). The cellulosic components of these materials range between 30% and 70%. The goal of biofuel research is to optimize plants for producing biomass for biofuels. To increase biomass production from plants, many avenues are being explored: for example, manipulation of photosynthesis to increase the capture of light energy; manipulation of genes involved in nitrogen metabolism; delaying or prevention of flowering, which allows for the transfer of more photosynthetic energy to cellulose-rich parts of the plant; development of regulators for delaying the dormancy in winter; and ways to increase the growth phase (Ragauskas et al. 2006). Biofuel prospects will receive a major boost if the feedstock can be grown on marginal lands, as these are more abundant than fertile lands, are not used for food production, and tend to be low in biodiversity and carbon stocks. However, marginal lands have poor soil and high levels of biotic and abiotic stressors. Therefore, research is aimed at developing new crop varieties that can grow at elevated rates under conditions of drought, extreme temperature, high pest pressure, salinity, etc. (Vinocur & Altman 2005). Biofuel production from cellulosic feedstock requires pretreatment processes that disrupt the lignocellulose and remove the lignin, thereby allowing the access of microbial enzymes to break down cellulose into fermentable sugars. Both the pretreatments and the production of enzymes in microbial tanks are expensive. Therefore, plant genetic engineering is being applied to develop new crop varieties with less lignin, crops that self-produce enzymes for cellulose and lignin degradation, or plants that have increased cellulose or an overall biomass yield (McLaren 2005, Sticklen 2006, Moose 2008). Plants optimized for cellulose production are likely to require significantly less nitrogen and other nutrients and thus reduce contribution to GHG (Khanna et al. 2009, Moose 2008). Harvesting crop residues for biofuel production can have a negative impact on soil fertility, which depends on regional yield, climatic conditions, and cultural practices. Developing a tool for optimizing removal rates that ensure sustained soil productivity is an agronomic challenge (Wilhelm et al. 2004, Khanna et al. 2008). A handful of investors and researchers have their eye set on algae, an aquatic feedstock for biofuel production. Algae reproduce faster than any terrestrial plant, and it is claimed that they can yield up to 20,000 gallons per acre of fuel per year, which is 50 times as much fuel produced from an acre of corn. Depending on how they are processed, algae could yield biodiesel, ethanol, hydrogen, as well as other products (Schubert 2006).

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3.2. Processing
For any given combination of feedstock and end fuel, there are several alternative conversion processes (see Figure 1). Technologies for processing of sugar, starch, or oil seeds are commercially mature today. Ethanol is produced using yeast-based fermentation of sugars and starch, whereas biodiesel is produced by transesterification of vegetable oil. For further details on these technologies, refer to Faaij et al. (1997), Demirbas (2001),
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Feedstock
Sugar and Starch

Processing
Fermentation

End product
Ethanol Butanol Synthetic gasoline/diesel

Pretreatment Lignocellulose
Crops Agricultural residues Forestry waste Municipal waste

Electricity Gasification Catalysis Pyrolysis Hydrocarbons

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Plant oils

Transesterification

Biodiesel

Algae
Legend:
Mature technology Technology in R&D stage

Hydrogen

Figure 1 Major biofuel pathways.

Tijmensen et al. (2002), Schubert (2006), Farrell & Gopal (2008), and Rajagopal & Zilberman (2008). The success of cellulosic biofuels hinges on achieving breakthroughs in processing lignocellulose into simple sugars at low cost (Somerville 2006). Lignocellulose has a complex interlinked structure that is recalcitrant to simple processes that are used for depolymerizing (i.e., breaking down) sugar and starch-based feedstock (Lynd 1996, McLaren 2005, Himmel et al. 2007, Wyman 2008, Sexton et al. 2009). Several biotech companies and government laboratories are being funded to engineer enzymes and microorganisms to optimize lignocellulose degradation and help turn it into fuel (Schubert 2006). Lignocellulose first requires chemical pretreatment, which can open up the biomass to further action by microbial enzymes that break it down into simpler sugars and eventually into ethanol or butanol. Pretreatment can be done using different chemical catalysts, but these are currently uneconomical. Pretreatment designs have to balance cost of capital, chemicals, and the recovery of fuel and catalysts (Eggeman & Elander 2005). Subsequent to chemical pretreatment, the biomass is subjected to biological breakdown into simple sugars. The focus of R&D is in low-cost synthesis of enzymes that break down cellulose into sugars and of microbes that can ferment sugars into fuels (Ragauskas et al. 2006, Schubert 2006, Somerville 2006, The Economist 2007, Himmel et al. 2007, Stephanopoulos 2007). Consolidated bioprocessing, which features enyzme production, hydrolysis, and fermentation in one step, is another promising approach (Lynd et al. 2005). It exploits enzyme-microbe synergy to lower the cost and increase efficiency in conversion compared with sequential processes. If leap-forward technology advances are made in pretreatment, the biological conversion steps of enzyme production, enzymatic hydrolysis, and fermentation cost can be as low as approximately $0.60/gal (Wyman 2008).
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Once broken down into simple sugars, the sugars can be fermented to produce ethanol or butanol or can be used as building blocks to produce bigger hydrocarbons such as diesel or other industrial chemicals. One line of research aims to exploit genetically engineered microorganisms (such as Escherichia coli infused with genes from other microbes) that can convert sugar into novel biofuels such as synthetic gasoline, diesel, and jet fuel (The Economist 2007, Sheridan 2007, Schaffer 2008). Employing the synthetic biologic approach, some biochemists and microbiologists are dissecting the gut of wood-chewing termites and the intestine of grass-chewing ruminants to gain a better understanding of the mechanism of cellulose breakdown in nature (Schubert 2006, Schaffer 2008). This approach aims to engineer/synthesize new complex, biologically based (or inspired) systems, which display functions that do not exist in nature. Another possibility is pure chemical conversion of carbohydrates into higher-chain hydrocarbons using new catalysts (Kunkes et al. 2008). The advantage of all these methods is they can utilize carbohydrates produced from a variety of sources including sugar, starch, and cellulose and deliver fuels that are similar to existing transportation fuels. The economic implication is that future biorefineries can respond to market conditions by switching between inputs or by adjusting the optimal mix of various outputs they produce. As an alternative to the above chemical/biological processing, lignocellulose can be converted using thermochemical processes into a variety of liquids such as ethanol, methanol, methyl-tertiary butyl ether, gasoline, and diesel (Bain 2003). This relies on the same technologies that turn coal into liquid fuel from syngas (Department of Trade and Industry 2007, Rudloff 2007). In this case, biomass undergoes gasification to produce an intermediate product syngas, which is then converted to gasoline or diesel using chemical catalysis (termed the Fischer-Tropsch process). Although this process was used to convert coal into liquid fuels during World War II, its application to biomass presents additional technical challenges (Schubert 2006). Another thermochemical pathway is pyrolysis (i.e., the conversion of biomass in an oxygen-deficient environment). In this process, biomass is converted into bio-oils, which can be used as biofuels. Although several commercial pyrolysis technologies exist, bio-oils have significant drawbacks such as low volatility, high viscosity, coking, and corrosiveness. Furthermore, bio-oils are a mixture of different compounds and require costly processes to isolate useful biofuels (Farrell & Gopal 2008). Production of cellulosic ethanol is slowly moving into production. A few pilot plants are in operation, the largest one is operated by Iogen, a biotech company based in Ottawa, Canada. This facility produces approximately 260,000 gallons of ethanol from wheat straw. The technology employed is pretreatment using high temperatures and acid hydrolysis, followed by enzymatic conversion to sugar, which is then followed by fermentation into ethanol using yeast (Schubert 2006). Beyond biofuels, biomass conversion technologies are being developed to extract a wide range of materialssuch as solvents, lubricants, and plastics, which are currently produced from petroleumas well as high-value chemicals such as fragrances, flavoring agents, and other chemicals that can be used in food and health supplements. For instance, starch can be processed into either polylactide to make a biodegradable bioplastic or 1,3propanediol to make an improved polyester-type product. The major impediment to the use of biomass is the development of methods to separate, refine, and transform it into chemicals and fuels (Ragauskas et al. 2006).
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3.3. Distribution and End Use


Different biofuels impose varying requirements for distribution and end-use infrastructure. Although technical challenges also exist, these are less daunting compared with those at the feedstock production and processing stages. The challenges for distribution relate to building infrastructure (for example, new pipelines for transportation of biofuel) and to increasing the fleet of flexible-fuel vehicles, which are economic rather than technological in nature (see Section 4 for more detail).

3.4. Technology Summary


A variety of biofuel technologies exist at each stage of development, each of which is at a different level of technological maturity. In the case of first-generation biofuels based on sugar, starch, and oil-seed crops, the technologies for all four stages are mature. But despite the initial optimism about first-generation biofuels, the future of biofuels lies in the second generation (Khanna et al. 2009, Royal Society 2008, Woordburn 2008). This involves new feedstock (cellulosic energy crops, wastes, and algae) and new conversion technologies that use microbiological processes to convert feedstock directly into synthetic gasoline/diesel or into butanol, all of which are in the R&D stage. Compared with ethanol or biodiesel, the final products produced by these technologies are expected to be more easily compatible with existing infrastructure for distribution and end use (The Economist 2007). There is disagreement about when lignocellulosic conversion will begin to operate on an industrial scaleanywhere between 2015 and 2030 is projected. However, it is certain that bringing down the costs is key and this requires technological breakthroughs, which in turn require sustained investment and public support. The long-term outlook for oil and the emerging regulatory environment indicate the possibility of this outcome.

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4. PROFITABILITY OF BIOFUEL INVESTMENTS


Energy producers are facing a market characterized by a widening gap between demand and supply of cheap oil. The price of oil is expected to average $100 per barrel between 2008 and 2015 (in real-year 2007 dollars) and rise to $120 by the year 2030 (International Energy Agency 2007). Ethanol and biodiesel are economical at this price range (given assumptions on feedstock cost), whereas technological breakthrough in conversion technologies can deliver cost reductions making second-generation biofuels profitable at these oil prices. Producers are also expecting a regulatory environment that in the future will be hostile to carbon-intensive fuels and also encourage domestic sources. But while environmental benefits are important, technologies that are low cost will be more profitable and hence more likely to succeed in the marketplace (Rausser & Papineau 2008).

4.1. Production Cost


The cost of production of biofuel depends on the cost of feedstock and cost of conversion. For first-generation technologies, the cost of feedstock composes the bulk of the final cost of producing biofuel, and this varies across feedstock and locations (International Energy Agency 2004, OECD 2006). Depending on the type used, feedstock accounts for 50%80% of the final cost and has a huge effect on producer returns (Khanna et al. 2009).
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For every dollar increase in price per bushel of corn, the cost of producing ethanol increases by $0.35 per gallon ($0.52 in energy equivalent terms to a gallon of gasoline (Caesar et al. 2007, Tyner & Thaeripour 2007). Thus, a tripling of corn price from $2.00 per bushel to $6.00 per bushel requires a $2.00 increase in the price of ethanol for producers to retain their margins. Events in 2008 were trying for biofuel producers: The relative price of corn increased more than that of gasoline, and when corn prices declined, gasoline prices fell even more in relative terms (http://www.cattlenetwork.com/Content.asp?ContentID=272026). The net impact has been that several biofuel producers including VeraSun Energy (the largest publicly traded ethanol maker in the United States), Greater Ohio Ethanol, Gateway Ethanol, and Beatrice Biodiesel have all filed for bankruptcy protection, while Pacific Ethanol (the largest manufacturer on the West Coast) posted $55-million loss during the third quarter of 2008 despite a 56% increase in sales over 2007 (http://www. ethanolproducer.com/article.jsp?article_id=4925&q=bankrupt&category_id=41). In the long term, by mandating more than doubling the current corn-ethanol consumption, the U.S. Energy Independence and Security Act of 2007 lowers crop prices. As a result, slower expansion of capacity may revive margins of more ethanol producers. However, second-generation biofuels produced using wastes from agriculture, forestry, municipal sources, as well as purpose-grown grasses and woody crops have lower feedstock cost than do current biofuels (Wyman & Goodman 1993, Lynd 1996). In addition, researchers believe that the first cellulosic feedstock to be used will come from wastes rather than dedicated energy crops because of cost advantages. Estimates suggest that approximately 142.5 million tons of wastes can be procured at a cost $45 per delivered dry ton and approximately 186.5 million tons of wastes at a cost $56 per delivered dry ton (both amounts are in 1994 dollars) (Lynd 1996). At a technical conversion efficiency of 100 gallons per dry ton of waste, this implies production of approximately 15.3 and 20 billion gallons of ethanol, respectively. However, among waste-based feedstock, only municipal solid wastes have the advantage of being able to utilize an existing collection and transportation infrastructure from the source to the biorefinery (Perlack et al. 2005). Although second-generation technologies are likely to impose lower feedstock cost, they are projected to impose a higher cost for conversion. Table 2 compares the projected cost of producing ethanol using corn and three other cellulosic feedstocks in the United States. The share of nonfeedstock costs is much higher for stover and switchgrass, whereas the cost for Miscanthus is lower because of considerably higher yield per hectare. Although not yet commercial, algal biofuels are promising because they may yield 100 times more oil per acre than soybean and 50 times more fuel per acre than corn (Schubert 2006). Conservative economic estimates from a pilot facility put the final cost of producing synthetic gasoline or diesel in large volumes by using current microalgae technology at more than $8.00 per gallon. However, with coordinated R&D to improve our understanding of basic algal biology and to process algal biofuel, these costs are likely to decline (http://www1.eere.energy.gov/biomass/pdfs/algalbiofuels.pdf). Butanol is a biofuel that unlike ethanol can be shipped in gasoline pipes and used in gasoline internal combustion engines without modification. Butanol currently costs more to produce than grain-based ethanol (approximately $4.00 per gallon), but it is also more energy dense, containing 30% more energy per gallon than ethanol. With technological breakthroughs, it may become cost competitive with cellulosic ethanol (Bullis 2008).
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Table 2

Cost of production of biofuels from alternative feedstocks (in $/gallon)a


Opportunity cost Feedstock costb High Low cost 1.82 1.03 0.89 0.65 of land High cost 0.70 1.44 0.59 Low cost 0.74 1.52 0.63 0.78 1.46 1.46 1.46 Nonfeed-stock cost Coproduct credit 0.48 0.12 0.12 0.12 Total cost per gallon of ethanol High cost 2.12 3.26 3.96 2.95 Low cost 2.12 3.11 3.71 2.61 Feedstock cost at farm gatec High cost 1.82 1.71 2.41 1.40 Low cost 1.82 1.56 2.20 1.06

Feedstock Corn Corn stover Switch grass

cost 1.82 1.21 1.18

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Miscanthus 1.01
a

Owing to space limitations, costs of biofuel from corn stover in the high-yield scenario are not reported. These costs are as follows: feedstock cost, $0.55/gal; opportunity cost of land, $0.53/gal; total cost, $2.42/gal; and feedstock cost at farm gate, $0.87/gal. b Includes transportation cost, but excludes opportunity cost of land. c Excludes transportation cost, but includes opportunity cost of land.

4.2. Coproducts from Biorefining


In addition to feedstock and oil prices, coproduct revenues, conversion efficiency, and coal and natural gas prices can significantly affect net margins for biofuel plants (Tiffany et al. 2003). Revenues from coproducts such as distiller grains remaining from corn ethanol and oil cake from biodiesel production can be used as animal feed or as organic fertilizer. Likewise, bagasse from sugarcane or lignin from cellulose processing can be used to produce steam and electricity generation. Similar to a modern oil refinery, which handles multiple varieties of crude oil and produces different fuels such as gasoline, diesel, jet fuel, heating oil, and petrochemicals, biorefineries of the future would process a variety of feedstock and produce a range of products. In addition to biofuels, high-value chemicals such as pharmaceuticals and polymers will result as coproducts and thereby lead to higher competitiveness of biofuels (Hayes et al. 2005, Corma et al. 2007). Although synergies between the production of fuels and chemicals from biomass are high, one complicating factor is the size of markets for organic chemicals, which tends to be relatively small compared with that for liquid fuels. Thus, identifying chemical coproducts for biorefinery production so as not to exceed the market demand will be a challenge, as large quantities of liquid fuels are produced at these facilities (Worldwatch Institute 2006). Locating biorefineries near areas of high demand for both products and coproducts will also enhance profitability.

4.3. Distribution and End Use


A low cost of production is not sufficient to ensure adoption of a biofuel. The cost of delivered energy depends on the cost of distribution and end-use consumption. If the existing shipping infrastructure for feedstock is leveraged for biofuel and finished fuel, then the cost of biofuels is lowered. For example, a major advantage of corn or sugarcane ethanol is the fact that harvesting, storing, and shipping the crops and the final fuel require minimal new infrastructure. However, ethanol is not amenable to shipping in gasoline
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pipeline because of its hygroscopic properties; thus, it is transported through rail-, road-, and waterways. Demand for ethanol has not achieved a scale sufficient to justify investments in a dedicated pipeline infrastructure, which is the cheapest form of transportation. However, the first movement of ethanol via pipeline began to occur near the end of 2008 (Khanna et al. 2009). From an end-use standpoint, ethanol or biodiesel can be used in existing automobile engines with no engine modifications at low levels of blending such as 5%10%. However, higher blending levels require flexible-fuel vehicles, which are marginally costlier. Synthetic gasoline and diesel are compatible with the current fleet of automobiles, whereas butanol requires modifications to current internal combustion engines at levels higher than those required for ethanol (Bullis 2008). Compatibility with the existing distribution and end-use infrastructure is a significant roadblock faced by vehicles using alternative technologies that are competing with liquid biofuels, for example electric, compressed natural gas, and hydrogen vehicles. The lower incremental vehicle and refueling costs associated with biofuels provide them with a distinct advantage (International Energy Agency 2004).

4.4. Issues of Adoption


Although point estimates of average profitability provide some indication of which technologies may succeed, in reality there could be low levels of adoption. The rich literature on technology adoption describes several factors that influence the decision of a producer or consumer to invest in a technology. Whereas the earliest models explained adoption simply as a process of imitation, the newer models recognize heterogeneity among potential adopters and the role of risk and uncertainty in an integrated framework (Feder et al. 1985, Katz & Shapiro 1986, Besley & Case 1993, Sunding & Zilberman 2001, Hall & Khan 2003). But with biofuels, the reality is more complex because successful deployment requires coordinated adoption across several stages of production. For instance, a farmers decision to adopt a new crop such as Miscanthus will depend on whether he has a contract with a cellulosic biorefinery, and a cellulosic biorefinery will be built if supply of feedstock from nearby farms is assured and a distribution infrastructure is in place. New distribution infrastructure, in turn, will be provided if there is sufficient retail demand for the product, and this demand depends on the availability of a fleet of flexible-fuel cars, which are costlier than regular cars. Yet, only with sufficient demand will automobile manufacturers supply costlier flexible-fuel cars (Sexton et al. 2009). This scenario provides an example of the familiar chicken-egg argument that can result in underinvestment. Similar to the high-tech industry, the synthetic biology industry could emerge as one that depends on standardized parts to develop new products. Just as companies develop software programs that run on multiple operating systems or game consoles, synthetic biologists are developing a parts-based agenda in engineering new microbial organisms for commercial use (Henkel & Maurer 2007). At least one company claims dramatic progress in assembling several dozen parts inside yeast and bacteria to synthesize the antimalarial drug artemisinin and is betting on a similar approach for synthesizing novel bioproducts from sugars (Schaffer 2008). The need for compatibility between parts in this approach raises familiar issues such as network effects and the rise of dominant firms (e.g., Microsoft) within the biofuel industry (Henkel & Maurer 2007).
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5. ISSUES OF INNOVATION AND ENTREPRENEURSHIP


The development of renewable energy technologies will be driven by a series of forces that have, in recent years, given rise to the entrepreneurial university and the establishment of an education-industrial complex. In the most dynamic sectors of the economy biotechnology and nanotechnologythere is growing appreciation for the capacity of universities to create commercially valuable innovations. This recognition has led universities to seek to capitalize on their knowledge creation in ways they have not historically done.

5.1. University and Industry Roles in Innovation


An evaluation of the incentives and constraints facing researchers leads to the conclusion that universities have a comparative advantage in basic research, whereas industry is relatively efficient at applied research. Graff et al. (2002) assumed researchers are motivated by fame, fortune, and freedom, where freedom is defined as the ability to control ones research agenda. Universities provide faculty with freedom to satisfy their curiosity through research and opportunities for fame derived from successful research but a small probability of achieving fortune. In contrast, industry provides researchers with a greater likelihood of achieving fortune, but at the expense of freedom and (to some extent) fame (Graff et al. 2002). Industry researchers are directed to develop products and innovations that will enhance firm profitability. Given these incentives, researchers self-select into either of these settings. This selfselection process equips the college campus with a creative faculty motivated by fame and endows industry with a people motivated by fortune. Hence, universities are considered to have a comparative advantage in basic research and industry in applied research (National Science Foundation 1953, 1954; Bush 1960; Rausser & Ameden 2004). The public-good attributes of basic research (Arrow 1962, Griliches 1992, Stiglitz & Wallsten 2000, Salter & Martin 2001) make it an appropriate fit for the university environment. Applied research, with its focus on solving particular problems, can be better motivated by a profit incentive, making it a better fit for industry. The division of research labor between industry and academia, therefore, allows both the university to pursue its traditional mission of providing an intellectual commons and the firm to pursue its profit motive. The search for alternative fuels will rely on basic science much as technological breakthroughs in medicine, agriculture, and information technology have (Somerville 2006, Whitesides & Crabtree 2007, National Renewable Energy Laboratory 2008). Economical cellulosic technologies will be achieved only with improved knowledge of depolymerization (Somerville 2006, Stephanopoulos 2007). The conversion of sugars into novel biofuels with the help of synthetic microbes relies on synthetic biology, an emerging hot field that draws from classical genetic engineering (Ferber 2004, Himmel et al. 2007). Similarly, electric vehicles as well as wind and solar energy all stand to benefit immensely from breakthroughs in the chemistry behind energy storage technologies (Government Accountability Office 2006, Whitesides & Crabtree 2007). However, the private sector is likely to underinvest in basic research. In addition to the problems of an incomplete market for environmental goods and the inability to appropriate fully the benefits from R&D (discussed in Section 6), the long-term horizon of research in alternatives and uncertainty about future oil prices provide an inconsistent incentive for investment by private firms (Gallagher et al. 2006). Public investment in energy research, particularly basic research,
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is therefore needed to approach socially optimal levels of investment. Gallagher et al. (2006) suggest there is considerable capacity to capitalize on comparative advantages in research across sectors, including industry, academia, and national laboratories. The complementarities between university and industry research have been fully appreciated only in recent decades (Peters & Fusfeld 1983, Fairweather 1988, Geisler & Rubenstein 1989, Rausser & Ameden 2004). In line with their mission of maintaining intellectual commons, universities have historically placed innovations in the public domain (Hofstadter 1996). Administrators now recognize, however, that they can increase the benefit to society and enhance university prestige and revenue if they license knowledge to firms that, by virtue of having rights to technologies, will invest in their development and deployment (Etzkowitz et al. 2000). Firms have little incentive to commercialize a technology in the public domain because competing firms can freely capitalize on R&D investments by others (Graff et al. 2002).
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5.2. Models of Intellectual Property Rights Management


Four principal models of intellectual property rights management by the university have emerged (Graff et al. 2002). The open-source model is the dominant paradigm, as publication of knowledge is deemed the objective of university research and necessary for ensuring the quality and progress of research (Merton 1973, Nelkin 1984). The collaboration model, which has been popular in parts of Europe, confers rights to the researcher, who is free to enter into contracts with industry to share knowledge. In the licensing model, the university claims property rights to innovations and negotiates the transfer of rights to interested industry partners through offices of technology transfer, which are a new development particularly prevalent in the United States as a consequence of the 1980 Bayh-Dole Act (Argyres & Liebeskind 1998, Mowery & Sampat 2005). In the ventureformation model, university professors provide expertise to start-ups or actively participate in business operations and derive the bulk of their research support outside the university. Although such arrangements can be complicated, they offer the university and its researchers opportunities for profits, encourage local economic growth, and foster an entrepreneurial spirit (Audretsch & Feldman 1996, Zucker et al. 1998, Zucker et al. 2000). For examples of alternative energy ventures, see Woordburn (2008). The foregoing models assume a one-way relationship between basic research by public institutions and applied research by private firms. Industry in these models is a consumer of knowledge produced by the academe. In reality, however, collaboration has become a two-way relationship with industry seeking to influence research agendas and secure intellectual property rights ex ante (Rausser & Ameden 2004, Bercovitz & Feldman 2007). The rise of an interactive educational-industrial complex is a response to declining (at least in relative terms) public funding for research, growing importance of innovation in an increasingly knowledge-driven economy, and increasing numbers of innovations with applications to industry (i.e., biotechnology) (Etzkowitz et al. 1998, Henderson et al. 1998, Etzkowitz et al. 2000).

5.3. The Education-Industrial Complex


The drive to find sustainable energy has brought a renaissance in the education-industrial complex. A number of major research universities have received in excess of $10 million
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from companies, among them are University of California, Davis; University of California, Berkeley: University of Illinois; Georgia Institute of Technology; Texas A&M University; Iowa State University at Ames; and Stanford University for biofuel and renewable energy research (Sheridan 2007). By 2008, dozens of other firms researching technology for nextgeneration biofuels, including agricultural companies, enzyme and catalyst developers, and feedstock producers, had invested in in-house R&D and funded research at universities and national laboratories (Schubert 2006, Woordburn 2008). Although collaborative partnerships between industry and public research institutions can offer considerable benefits (Department of Energy 1995, Stiglitz & Wallsten 2000), they also present risks to both parties. The incentives of industry and the academe are partly aligned, at best (Geisler & Rubenstein 1989, Slaughter & Leslie 1997). University administrators should be concerned about erosion of research autonomy, control over universitys education mission, and the impact of intellectual property rights agreements on the intellectual commons (Argyres & Liebeskind 1998). The entrepreneurial university is viewed as a threat to the integrity of academic research (Krimsky et al. 1991, Pelikan 1992, Brooks 1993). Industry executives should be concerned that academic researchers do not share the firms profit motives. Early industry-university collaborations were criticized for these reasons (Rausser & Ameden 2004, Rudy et al. 2007). The imbroglio over the University of California, Berkeley/Novartis agreement is a case in point (Rausser & Ameden 2004). By far the most ambitious collaboration to date, the $500-million, 10-year agreement of University of California, Berkeley, with British Petroleum and partner institutions Lawrence Berkeley National Laboratory and University of Illinois, Urbana-Champaign, to form the Energy Biosciences Institute has attracted similar criticism (Delvicchio 2007a,b). Though little empirical evidence exists to confirm the worries of those skeptical of university-industry partnerships, debate continues as to whether they threaten the intellectual commons, disinterestedness in research, academic freedom, and basic research (Kenney 1986; Slaughter 1988; Brooks 1993; Delvicchio 2007a,b). To the extent that interactive university-industry collaboration alters the research agenda in favor of applied research over basic research, the benefits of existing technologies may not be fully realized, and future scientific progress may be hindered (Kenney 1986, Feller 1997, Herdt 1999, Rausser et al. 2008). Herdt (1999) suggested that, despite gains in biotechnology, plant biologists remain functional illiterates in need of additional knowledge to unlock the potential of biotechnology. He contends that such knowledge will not be acquired with the focus on applications of existing technologies. Profit-driven innovation may also ignore areas of research that may greatly improve the human condition yet provide little benefit to corporations, such as technologies to benefit poor populations with little purchasing power (Herdt 1999, Serageldin 1999, Pingali & Traxler 2002). A research alliance that leverages the complementarities and potential synergies between public research institutions and private companies can help developing countries in particular to narrow the gap between themselves and the developed world in cutting-edge research (Rausser et al. 2000).

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5.4. Emerging Industrial Alliances


The energy industry will become increasingly science based with the shift away from traditional fossil fuels. Firms will face new organizational imperatives that may lead to
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vertical and horizontal integration. Their capacity to innovate will rely on access to basic science and critical technologies (Etzkowitz et al. 1998). In the new energy landscape, traditional methods of knowledge acquisition (such as licensing) are insufficient for firm innovation. Rather, firms will rely on access to basic science and key technologies to remain competitive in the transition to renewable energy sources (Etzkowitz et al. 1998). The aggressive investment by large oil companies in renewable energy research and life sciences is consistent with the strategies of major chemical companies in the 1990s that sought to capitalize on biotechnology. Dow, DuPont, and Monsanto acquired the major seed companies in North America, as well as small biotechnology start-ups, in an unprecedented industry consolidation (Graff et al. 2003). In the field of biofuels, industry restructuring is already evident with agricultural commodities companies such as Cargill and Archer Daniel Midland constituting the largest producers of crop-based liquid fuels. R&D on genetic screening, modification, and creation of new germplasms for cellulosic crops and enzymes as well as engineering of microbes for depolymerization of lignocellulose are being undertaken by smaller biotech firms such as Mendel, LS9, Amyris, OPX Biotechnologies, Genencor, and Synthetic Genomics (Schubert 2006, Woordburn 2008). These start-up biotechnology firms may be acquired by large, horizontally integrated firms, much as their predecessors were a decade ago, or they may persist as did diffuse research enterprises in the pharmaceutical and semiconductor industries (Graff et al. 2003). Because profitable biofuel production requires coordination among feedstock producers, livestock producers, and gasoline processors and retailers, as well as access to technology, we can expect the integration of big oil with big agribusiness. Partnerships such as British Petroleum with DuPont, ConocoPhillips with Archer Daniel Midland, Shell PLC with Iogen, and Chevron with Weyerhauser to produce biofuels are indicators of such a future. These partnerships and the focus in university research parallel developments in agriculture and the life sciences 10 years ago with the emergence of biotechnology. They foreshadow consolidation in renewable fuels and driven by oil producers.

6. POLICY
Clean-energy technologies are disadvantaged by various imperfections in energy markets. The lack of a price on pollution and on energy security, knowledge spillovers from investment in R&D, imperfect competition and information, poorly functioning capital markets, principal-agent problems, and investor myopia are some well-known sources of failure that afflict energy markets. Market uncertainty can also lead to underinvestment because of risk aversion and irreversibility. Energy producers are susceptible to periods of boom and bust as oil prices fluctuate. Long periods of low oil prices make renewable fuels uncompetitive. They create a disincentive for irreversible capital expenditures (Hochman et al. 2008). Yet another source of failure is the infant-industry argument, which states there is a need for special incentives given learning-by-doing effects (on the supply side) and learning-by-using effects (on the demand side) (Jaffe et al. 2005). Some technologies also need coordinated investment at multiple stages from production to end-use infrastructure. In such cases, coordination costs and network effects may discourage investment. Given these conditions, the supply of clean energy in a free market is likely to be less than socially optimal.
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These obstacles, in conjunction with political-economic considerations, have led governments to pursue a range of policies to stimulate investment in clean energy. Approximately 60 countries had adopted renewable-fuel support programs by 2007, including 23 developing countries (Rajagopal & Zilberman 2008, Renewable Energy Network 2008). These policies are not equally efficient and are associated with varying magnitudes of excess burden (Fischer & Newell 2008). Roughly speaking, the various government policies affecting alternative energy technologies can be grouped under two categories: adoption-inducing policies and innovation policies.

6.1. Adoption-Inducing Policies


Adoption-inducing policies tend to stimulate demand and supply of new technologies that either are already technically mature or are likely to become mature in the near future. Mandates for biofuels, excise tax credits for blending ethanol with gasoline or biodiesel with diesel, tax credits on purchase of flexible-fuel vehicles, low-interest loans, and guarantees on construction of biorefineries are some of the ways by which governments have stimulated production and consumption of biofuels. However, adoptioninducing policies carry the risk of technological lock-in. A particular technology may become so entrenched in the marketplace that it stifles the development of other superior technologies (Jaffe et al. 2005). Thus investments in first-generation biofuels may hinder adoption of second-generation or investments in biofuels may hinder development of better alternatives to biofuels. In the absence of appropriate safeguards, policies such as mandates for biofuel can lead to deforestation and, hence, prove counterproductive (Royal Society 2008). de Gorter & Just (2007a,b) argued that, contrary to the belief that ethanol policies mitigate the harmful effects of farm subsidies, they increase the deadweight-loss cost of corn production subsidies. Hence, policymakers ought to exercise caution when pursuing policies that increase diffusion of certain technologies over others. We must highlight another common inefficiency of all policies that do not directly tax pollution but instead subsidize cleaner alternatives: They do not provide incentives to reduce the use of polluting technologies, to improve efficiency, or to conserve energy. Policies that mandate fuel efficiency standards could also, by reducing the cost of travel, lead to more travel and higher net emissions in the worst-case scenario (Austin & Dinan 2005).

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6.2. Innovation Policies


Innovation policies target the issue of low investment levels in energy R&D. In addition to the knowledge externality argument, financial-market reasons may also lead to underinvestment in innovation. There is evidence that small and innovative firms experience higher cost of capital, which is mitigated only partially by the existence of venture-capital firms (Hall 2002). Patent incentives apart, the two major policies governments pursue are public provision of R&D through grants to both public and private institutions and the provision of tax incentives for investment in R&D by private firms. The aim of R&D policies is to increase expenditure on research and lower the future cost of renewables. R&D policies, however, do not provide incentives for demand-side improvements in the form of energy efficiency and energy conservation or for shifting from dirtier to cleaner fossil fuels (Fischer & Newell 2008).
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Even though the public-good nature of R&D presents a clear rationale for intervention, it is ex ante unclear what the optimal level of R&D in energy ought to be. One interesting line of research comparing historical data on investments in public and private R&D to that suggested by theory showed that a several-fold increase in energy R&D investment is both warranted and feasible (Nemet & Kammen 2007). Given a budget for energy R&D, the optimal allocation of this budget across different competing technologies must be determined. Because the outcome of any scientific research project is uncertain, it is generally in societys interest to fund a diverse set of technological initiatives that target the problem at hand (Dasgupta & Maskin 1987). This is a problem of ex ante portfolio analysis under risk and uncertainty and is a topic that requires further research (Rausser & Papineau 2008). Other questions future research needs to address should include the following: Who should be funded to pursue this research? What mix of patents and open source incentives is most likely to deliver high innovation at least cost? How ought research personnel be compensated? Both adoption and innovation policies are technology oriented. Environmental policies, in contrast, target a specific type of market failure, namely an environmental externality. Environmental policies that rely on mechanisms such as emission fees and tradable emission permits are technology neutral, whereas performance standards can be either technology neutral or technology specificwhich technologies can be excluded or included depends on how the standard is set. Technology-neutral policies have the potential to induce both adoption and innovation without picking technology winners. Currently in the planning stage, one of the first policies to target reduction of GHG emissions from transportation is the state of Californias Low Carbon Fuel Standard on transportation fuels (http://www.energy.ca.gov/low_carbon_fuel_standard/index.html; http://gov.ca.gov/ index.php?/fact-sheet/5155/).3 In sum, the motivation for biofuel policies extends beyond addressing environment externalities.

7. CONCLUSIONS
The stakes are enormous. Replacing a small share of crude oil brings hundreds of billions of dollars into play. Liquid biofuels is just one in a portfolio of alternatives to oil. However, biofuels today attract a major share of investment in alternative technologies for transportation. This is not entirely without reason. In the near term, biofuels such as ethanol and biodiesel allow producers, consumers, and governments to take advantage of existing domestic infrastructure and respond quickly to oil shocks. In the long term, if technological breakthroughs are achieved, biofuels can supply a much larger share of energy for transportation with limited negative impact on food supply and natural habitat. The R&D investments in biofuels are concentrated around applying cutting-edge knowledge in genomics and biotechnology, process chemistry, and engineering to convert new types of feedstock into novel biofuels and biomaterials. There is an ongoing race to determine the cheapest feedstock, the most efficient conversion technology for feedstock, and finally the most useful products. This race is not occurring in isolation. In addition to
3 The European Unions Emission Trading Scheme, which launched in 2003, is a multisector cap-and-trade program covering emissions from 11 different types of industries, including oil refinery. In contrast, the Low Carbon Fuel Standard is aimed exclusively at transportation fuels.

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technological factors, there are energy security considerations as well as environmental and food-supply constraints that will affect the success of these investments. The search for better biofuels is also leading to the development of new paradigms in innovation, production, and regulation. Some patterns that are arising include the reemergence of an educational-industrial complex as the model for development of new knowledge; the interlinking of food and energy supply; the integration of big oil and agribusiness; the use of standardized parts in biotechnology; and the amalgamation of environmental, agricultural, and energy policy goals. R&D focused on biofuels may have positive spillovers, with some new traits and technologies providing clues for increasing productivity of food crops or improving human health. Despite rapid technological advances, agricultural biotechnology remains confined to a handful of crops such as maize, soy, and cotton, as well as a few traits such as pest resistance and herbicide tolerance. The drive toward next-generation biofuels is set to change this trend. That said, investment in exploration of new fossil fuels dwarfs investment in nonfossil alternative energy. Therefore, fossil fuel technologies may emerge the winners in the race for future energy. The risk from such a scenario is an increase in GHG emissions with its attendant implications for anthropogenic climate change. Policies that compensate for GHG benefits and for fuel security will improve the economics of biofuels. Improvements in production efficiency of biofuel and agriculture will reduce competition to land and other resources and improve the outlook for biofuels. Developments in other alternative technologies will also affect the expansion of biofuels. The biological revolution is in its infancy and the future is uncertain, but policies can play an important role in delivering a sustainable biofuel future. The economic principles we laid out will also be relevant in the future.

DISCLOSURE STATEMENT
The authors are not aware of any affiliations, memberships, funding, or financial holdings that might be perceived as affecting the objectivity of this review.

ACKNOWLEDGMENT
We thank the Energy Biosciences Institute for financial support.

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