Biofuels (such as bioethanol and biodiesel) are touted as eco-friendly alternative energies helping to solve a host of problems clouding the oil industry, including greenhouse gas (GHG) emissions contributing to climate change, over-dependence on oil importation, rising prices, and peak oil. While biofuels will clearly play an important role in addressing these problems, they may not represent a panacea--yet.

Basel-based Bank Sarasin recently conducted a study to assess the actual sustainability of biofuels, identifying both their strengths and their potential social, environmental, and economic limitations.

The report, entitled Biofuels--Transporting Us to a Fossil-Free Future?, identifies six convincing arguments in favor of biofuels from a sustainability perspective. Biofuels reduce dependence on fossil fuels, produce far less carbon dioxide and other GHGs than oil, reduce other forms of air pollution (such as carbon monoxide and sulfur dioxide), are high-quality fuels, are immediately usable within current infrastructure, and support local agriculture development.

Perhaps the most important of these is the climate-mitigating factor, as environmental audits of the entire life-cycle of biofuels show them to be not only carbon-neutral (since plants absorb carbon dioxide while growing) but also carbon-reducing by anywhere from 20 to 100 percent. However, report author Matthias Fawer also identifies six countervailing risks associated with biofuels. These include environmental impacts of monocultures, increased rainforest clearance in developing countries for growing biofuel stock, negative impacts on food prices, higher costs than other forms of carbon reductions, harsh agricultural labor conditions, and increased use of genetically engineered crops.

"Because of the risks described, biofuels cannot automatically be classed as sustainable, despite their 'bio' label," states Dr. Fawer, the energy, food, and paper analyst in Sarasin's sustainability research department. "We therefore think there are certain criteria and developments that are essential if biofuels are still to be classed as renewable energies in future, and ones that stand up to thorough sustainability analysis."

Sarasin also examines the market for biofuels, and finds constraints potentially outweighing prospects and thus remains somewhat lukewarm in its investment recommendations. "It is clear from the sharp rise in the share prices of biofuel companies that stock markets expect high growth rates to continue in future," states Dr. Fawer.

"We advise a more cautious approach, as growth could quickly come up against natural barriers in the short term at least. "This is mainly due to the limited availability of raw materials (arable land, competition for use by the food & beverage industry), but also due to the limited saleability of by-products," he continues.

"[I]t is actually unclear how much land is available for growing energy crops without having a negative impact on the needs of the food industry, animal feed industry, fallow land, soil quality and biodiversity."

Fortunately, Sarasin does not just leave readers hanging but instead posits its criteria for sustainable investment in the biofuels industry. From a raw materials perspective, Sarasin prefers the use of local stock, but if procurement from developing countries is necessary, companies must apply social and environmental criteria addressing how the crops are cultivated. Furthermore, Sarasin supports a full life-cycle analysis of biofuel production.

The report also favors bioethanol over biodiesel because it can be made from a wider range of raw materials and generates a higher yield and better carbon reductions. It also notes the development of second-generation technologies for making bioethanol with better eco-efficiency that create GHG emissions reductions of about 90 percent, as compared to the more standard 30 to 50 percent with existing technologies.

"Until new technological advances enable biomass to be exploited more efficiently so that not just the 'edible' part of the plants are burnt in our car engines, we place the present limit for the environmentally and socially responsible use of biofuels at roughly 5 percent of current petrol and diesel consumption in the EU and US," states Dr. Fawer in the report.

"It should also be noted that all initiatives to replace conventional fuels only make sense when combined with further measures to improve efficiency in the manufacture of engines and vehicles." Finally, the report performs a sustainability analysis on 16 companies in the biofuels industry, and rates only 10 of them as qualifying for Sarasin's sustainable investment universe. Pure-play companies that make the grade include US-based Pacific Ethanol (ticker: PEIX) and Xethanol (XNL) and UK-based Biofuels Corp. (BFC.L) and Renova Energy (RVA.L).

Companies with biofuel niche businesses that qualify include Denmark-based Novozymes (NVZMF.PK) and Canada-based Sunopta (STKL). One of the largest players in the field, US-based Archer Daniels Midland (ADM), does not qualify because it lacks sustainability criteria.

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