Such demographic and economic trends will lead to the so-called explosion in the global middle class, a phenomenon that has been taking shape over the last 10 years but whose pace of expansion is likely to pick up much further, reaching a peak in about a decade. International analysts forecast that two billion people could join the middle class—defined as those earning between US$6000 and US$30,000 a year on a purchasing-power parity basis—by 2030 (Wilson and Dragusanu, 2008).

A major correlation of these trends is higher consumption and a demand for processed food and manufactured goods, which adds pressure to the energy supply system. Per capita income of US$6000 has been identified as the entry income-level that causes energy demand to spike, with the boom in consumer demand laying slightly ahead—US$8000–9000 a year is the threshold above which the demand for higher end consumer durables (such as automobiles) kicks in (Wilson and Dragusanu, 2008). While bearing this in mind, we should recall that although nowadays fossil fuels account for over 80.3% of the primary energy consumed in the world (Escobar et al., 2008), their inherent finitude still renders them unreliable resources: it is recognized that currently known reserves may last as little as half a century—depending, of course, on production and consumption rates (Goldemberg et al., 2008). British Petroleum, for instance, issued in 2014 a report in which it stated that oil reserves at current production rates will last 53.3 years.¹ Similarly, according to the Institute of Mechanical Engineers, there are 1.3 trillion barrels of proven oil reserve left in the world's major fields, which at present rates of consumption should last 40 years.² However, the organization also emphasizes that by 2040, production levels may be down to 15 million barrels per day—just 20% of what we currently consume, a scenario that would stretch the expected duration of fossil fuel reserves.

Overarching all these trends is the threat of climate change associated with the rise in greenhouse gas (GHG) emissions and the consequent concerns about long-term environmental sustainability of population and economic growth. A growing awareness to the intrinsic unsustainability of the current economic model has contributed to the emergence of the idea that modern society should move toward a biobased circular economy following an imminent paradigm shift. This new model of an economy will use biomass as the key input for production and will be able to reuse, repair, refurbish, and recycle existing materials and products turning waste into resources.

Research on biofuels is part of this new model, taking into consideration economic, social, environmental, and policy issues that are at stake. In this chapter, we attempt to address this challenging task by trying to understand where do we stand (both from a technological and economic point of view) on the way toward this paradigm shift, and what will drive this shift in the near future. The remainder of the chapter is structured as follows: Section 4.2 provides a theoretical framework for understanding the change, identifying the key variables involved and look at alternative development patterns. Section 4.3 provides an overall assessment on various biofuels, examining the comparative level of innovativeness, sustainability, and readiness of alternative technologies. Section 4.4 reflects upon economic, environmental, and social concerns, while Section 4.5 addresses policy and regulatory issues associated with the change. Section 4.6 presents an overall conclusion of this chapter.

Such a major change entails a socio-technical transition—a transition from an old production paradigm to a new one—involving the coevolution of social and technological relationships. Based on insights from evolutionary economics, scholars have recently developed a heuristic model to study such complex technological changes (van den Bergh et al., 2011). In this model, the innovation process is characterized by the competitive selection pressures exerted by other regimes and by new socio-technical configurations in niches and the adaptive capacity of the dominant system—ie, the incumbent socio-technical regime (Rip, 1992; Smith et al., 2005).

Moving from the assumption that such processes occur in a multidimensional space, this perspective, also known as the multilevel perspective (MLP), analyses the way innovation (re)configures social and technical elements. In a nutshell, the MLP conceives the evolving socio-technical system as structured along three levels of analysis: the landscape (macro-level), the socio-technical regime (meso-level) and the niche (micro-level).

The landscape and the niches are derived concepts as they are defined in relation to the regime (Geels, 2002). In turn, the socio-technical regime is defined as a stable configuration of various elements (including institutions, techniques and artifacts, infrastructures, power relations, as well as rules, policy and competences) that determine the “normal” development and use of technologies. Such technologies are subject to a “lock-in” effect strengthening the stability of the configuration and bracing institutions, social practices and technological infrastructures (Raven et al., 2010). The dominant rules or modes of thinking which guide approaches and actions effectively exclude radically alternative innovations, making the regime path-dependent and evolving mostly through incremental innovations (Kemp et al., 1998).

However, radical, path-breaking innovations can take place in niches, where rules, institutions and motives are different from the regime; these are “protected spaces” where “nurturing and experimentation with the co-evolution of technology, user practices, and regulatory structures” take place (Schot and Geels, 2008, p. 538). In other words, a niche is like an incubation room where new and emerging technologies are temporary protected from competition and pressures that normally take place in the market.

Niches follow an evolutionary process that might ultimately lead them to a full- development status (or maturity, as put by Lopolito et al., 2011). A niche is fully-developed whenever there is a substantial amount of knowledge effectively flowing through it, when relevant and influential actors are attracted to it, and when their expectations for the future development of the niche technology positively converge (Lopolito et al., 2011). Niche maturity is a necessary condition for the change to occur, yet not sufficient. For a transition to occur, also an adequate pressure exerted from the landscape level upon the regime is required. Such pressure destabilizes the capability of a regime configuration to perform well according to evolving norms and rules (Schot and Geels, 2008), hence opening up a window of opportunity for the change.

Building on this MLP, a new strand of literature has focused on sustainability transitions, where the notion of transition is applied to fundamental environmental challenges in several sectors—including transportation and congestion (especially road traffic), air pollution, fossil fuel depletion, and CO₂ emissions, as well as various environmental issues associated with the agricultural and food systems (Geels, 2010, 2011).

The sustainability transitions are made all more challenging by the strong path-dependencies and lock-ins observable in such sectors (Ahman and Nilsson, 2008; OECD/IEA, 2011; Safarzynska and van den Bergh, 2010; Unruh, 2000). As a case in point, when addressing the transition from a fossil fuel economy to a biofuel economy, one should bear in mind that this domain is mostly characterized by the presence of large firms (eg, car manufacturers, electric utilities, oil companies, food and agriculture companies) that own “complementary assets” such as specialized manufacturing capability, experience with large-scale test trials, access to distribution channels, service networks, and complementary technologies (Rothaermel, 2001). This implies that such sustainability transition would entail a deep interaction among technology, policy/power/politics, economics/business/markets, and culture/discourse/public opinion (Geels, 2011).

Moreover, when considering the transition to a biofuel economy (or, more broadly, to a bioeconomy), it should be observed that, although there is a general vision for the emergence of sustainable technologies, their actual occurrence must still face additional barriers, such as the absence of a well-defined technological trajectory, long development times, and crucially, uncertainty about market demand and social and environmental gains.

A great deal of effort has been invested in the scientific research realm in the attempt to reduce such uncertainty, combining technological assessments with economic evaluations and environmental sustainability studies. Also policy and regulation issues have been investigated. In the following sections, we will provide an account of all these studies, in an attempt to assess the development status of biofuels as a fundamental step toward a sustainable transition.

As commonly known, fossil fuels are associated with many sustainability problems. However, biofuels are not entirely exempt from such problems. Hence, when assessing biofuels from an economic and environmental angle, there are a lot of issues that should be taken in due consideration. Moreover, there are overarching social concerns not to be disregarded since most croplands are located in developing countries where local communities are at a serious risk of exploitation.

According to the World Commission on Environment and Development (the so-called Brundtland Commission), development can be defined sustainable when it meets the needs of the present without compromising the ability of future generations to meet their own needs. Reading this definition, we can easily understand why biofuels are not free from sustainability problems. Phenomena such as indirect land use change (ILUC), deforestation, and displacement of agricultural production are only some examples in this regard.

In the United States, for instance, Volumetric Excise Tax Credits for the blending of fuel ethanol and biodiesel are being provided to biofuel producers under the American Jobs Creation Act since 2004. In the European Union, the Energy Taxation Directive permits exemptions or reductions from energy taxation for biofuels (Directive 2003/96/EC). Currently, nearly all EU member states (with the exception of Finland and the Netherlands) provide partial or total tax exemptions or deduction, most aimed at final consumption (European Commission, 2011). Because the tax exemption has an upper bound equal to the actual level of the fossil fuel tax, the instrument has proven to be highly effective in those EU member states with fossil fuel tax levels high enough to compensate for the additional production costs of biofuels (Wiesenthal et al., 2009).

Along with tax exemption, middle-income countries—like Malaysia—subsidize directly the agricultural sector with the aim to increase the employment rate in this sector, boost economic growth, and foster the export of feedstocks. However, such a policy measure may produce an unintended negative consequence as the demand for fossil fuels specific for agricultural purposes, which are usually not taxed, may increase as a consequence of the biofuel demand rise. More generally, most of the policies implemented globally or locally to enhance biofuels competitiveness can be partially neutralized by phenomena such as the Jevons paradox,²¹ the green paradox,²² or the carbon leakage effect²³ and the associated race to the bottom side effect.

Government and public institutions are also investing lot in R&D in order to improve and discover new technological niches linked to biofuels production. Here, it was observed that public R&D investments in biofuel-related technologies are most effective when complemented by other policy instruments, particularly deployment policies that simultaneously enhance demand for such new technologies. Public spending in R&D and deployment policies creates a positive feedback cycle, crowding-in private sector's investments, accelerating learning by inducing private R&D, and in turn further reducing production costs of the new technology (Edenhofer et al., 2012).

The assessment provided in this chapter shows how, from the innovation niche perspective, there are several alternatives and competing technologies that differ in terms of feedstock used, refining method and, most importantly, techno-economic performance and environmental impact. A clear line is drawn between the first- and next-generation biofuels, the latter being more distant from technological maturity but providing possible solutions both to the limited economic competitiveness characterizing the first-generation biofuels, as well as to the possible environmental drawbacks associated with indirect land-use change. In addition, ahead of the horizon lies the integrated biorefinery, a new industrial concept lunched by the international scientific community, to satisfy the growing societal demand for a green chemistry. To this aim, the integrated biorefinery is defined as a scientific and technical platform through which the biomass, designed as waste products, is turned into fuels, energy and chemicals (including basic chemicals, fine chemicals, and specialties of biopolymers and bioplastics), through technologies and processes that produce minimal waste and have limited impact on the environment (Accardi et al., 2013).

From the macro landscape perspective, strong signals are coming from the policy level, where a vision around the need to reduce reliance on fossil fuels switching to alternative energy sources is taking shape. This vision has emerged, however, on two different grounds: while energy independence has mostly directed US policy, environmental concerns and GHG reduction has inspired European policy. Furthermore, broadly speaking, policy actions have mainly involved economic support, development of standards and regulations, and public support to R&D investments.

Currently, more than 60 countries have biofuel policies in place, succeeding in developing a new economic sector and a market. Yet, at the moment, the main challenge for biofuels production is to be competitive even without public support, a most desired fit but still unaccomplished.³⁸ To this aim, investments and public support to R&D oriented to next-generation biofuels and integrated biorefineries development play a major role. Moreover, given the foreseen increasing price of fossil fuels, biofuels might eventually gain momentum and be competitive in an unprotected global market.

Finally, when discussing biofuels policies, a second order of consideration relates to the impact that biofuels have on food security and land competition. As discussed in this chapter, biofuel development has both global and local effects, positive and negative, short and long term. Many of these effects take the form of increased competition for food, for land, and for water. In this framework, a growing concern, when it comes to design biofuel policies, is therefore to limit their potential negative impacts and strengthen their potential positive impacts—combining economic efficiency with environmental and social sustainability. This is an ambitious but necessary path for the change to occur and for the transition to take shape.