During the past decade, production of biofuels has gained momentum largely due to policies and mandates aimed at addressing energy security and climate change. A number of concerns, however, remain the subject of an on-going debate. These include: (1) the effectiveness of first generation biofuels (such as corn ethanol) in addressing climate change, (2) the effect of delays in the announcement of annual biofuel mandates, and (3) whether biofuels continue to provide an attractive option for energy security. But if the right kinds of policies are in place, biofuel-generating facilities will have the opportunity to function profitably in the long run given the variety of co-products they can generate in addition to producing biofuel. Take, for example, biochar. It has the potential to improve agricultural productivity and environmental record by reducing water needs, serving as a carbon storage mechanism, and being an alternative to petroleum-based fertilizers.

A key point here is that the value of certain biofuels goes beyond their use as transportation fuels. Despite the attention given to biofuel policy and performance in the transportation market, far less attention has been given to the economic and environmental benefits of the co-products of biofuels. In fact, the fraction of the input feedstocks (such as parts of a crop or organic wastes) that is not converted to biofuel has economic value. For example, many biofuel facilities often burn the remains of the biomass to co-produce electricity. This not only can significantly contribute to the biofuel plant’s revenue but also increases the renewable mix of the grid thus helping states comply with proposed EPA regulations (e.g. Clean Power Plan, CPP). Moreover, advances in technology have made it possible to achieve significantly higher values for any non-converted remains of the biomass from the conversion process. Today, even more resistant parts of the biomass, such as lignin, can be converted to chemicals essential to various segments of industry, reducing the consumption of petroleum-based products. Similarly, co-products of processing cellulosic feedstocks or even algae can enter the livestock feed market.

In addition, co-products such as biochar and high lignin fermentation productscould also be used to enhance soil properties and increase crop yields. For example, biochar, the co-product of thermal conversion of biomass (pyrolysis), could improve the efficiency of fertilizer (requiring less energy-intensive fertilizer) for crop production by retaining nutrients in soil. It can also increase water retention in soils through its highly porous structure, which is an immense advantage specifically for arid regions. Biochar, which resembles charcoal, is also known for being a carbon storage mechanism. During the conversion process, part of the carbon in the original biomass becomes trapped in biochar. And since biochar has a very long lifetime – decades and even centuries – this reduction in cost and environmental impact of farming is particularly valuable which is also emphasized in the recently announcedUSDA’s building blocks for climate smart agriculture and forestry. Indeed, the examples above underscore that more efforts are needed to include positive externalities of bio-commodities in assessing the costs and benefits of biofuels. If these bio-commodities find their place in the market, they will create a significant additional revenue stream for biorefineries thus improving their bottom line. This in turn could permit the primary biofuel product to stay competitive with petroleum alternatives, and will allow the industry to remain competitive even when market forces drive down the price of oil.

A long-term policy for such an evolving industry should not only consider today’s technical achievements, but also assess potential future technological advancements. A number of facilities that have recently received a permit or broken ground are set to produce second-generation biofuels. Most of these facilities are designed to use feedstocks like wood or non-grain parts of the crops to produce biofuel and therefore minimize the potential negative impacts that grain-based (first-generation) biofuels could generate, such as increasing food prices. However, compared to the relatively easier and mature process of converting sugar or oil to first-generation ethanol or biodiesel, production of the second-generation fuels involves a tougher conversion of cellulosic feedstocks (such as wood or agricultural residues). This contributes to an additional cost of conversion that presents a commercial challenge, particularly when oil prices remain low for an extended period of time. In a high oil price environment, the economic incentives for biofuel production might be clearer. However, in a low oil price environment, policies that reflect the multi-dimensional benefits of biofuels are needed to support bio-commodities in competing with long-established petroleum-derived fuels and products.

Ideally, a more robust climate policy action such as a carbon tax would provide incentives for the development of improved biofuels and curb fossil fuel emissions. Under such policy, co-products of carbon storage processes such as biochar, which is a long-lasting carbon sequestration material, could be traded for carbon credits. Similarly, policies that value carbon stored in soil or motivate efficient water use in agriculture can greatly benefit the market for biofuel co-products and, consequently, for biofuels. Although a carbon tax may be politically unfeasible at this time, efforts to make policies that provide support for biofuel, other bioenergy forms, and bio-commodities are important. This can include extending mandates beyond annual targets orexpanding the renewable blend of the fuel supply. But, efforts aimed at creating a market value for the avoided costs associated with various bio-commodities may be the most palatable approach to enhancing biofuel production. Indeed, if, for example, bio-commodities such as biochar can remediate the problems associated with algal plumes caused by runoff from the commercial-scale application of nitrogenous fertilizers in the Midwest, the Gulf Coast fishing industry would certainly benefit, not to mention the environmental and ecosystem benefits that would emerge. At present, however, there are no market-oriented mechanisms in place to realize such an outcome. Such market mechanisms would go a long way toward reducing uncertainty around commercial viability, which would, in turn, help this infant industry to develop to the point where no external assistance is needed for biofuels to be competitive against conventional petroleum fuels.

All things considered, a policy assessment that takes better account of technology advances and the fullrange of benefits to be gained by integrating bioenergy co-products in the market is necessary to address various energy security and environmental concerns.