With increasing CO2 emissions around the globe, tofurning environmental regulations and reductions in cost, biofuels now, for the first time ever, are starting to look like a viable option to compete with traditional fuels. Without going into too many details and doxing myself, I actually worked for a biofuel company out in California and I thought I'd share my perspective on the industry where it's going and what the biggest hurdles are. Don't forget to subscribe so you never miss an upload and let's jump in. Probably the biggest misconception about biofuels I see here on YouTube is that one day we'll be taking the scraps from our plates after dinner and sending those off to some collection facility where they'll get turned into biofuel. Or, better yet, we'll have machines in our homes that can convert the waste to fuel right there in our garage. While that would be amazing for the biofuel industry, it's a crazy pipe dream and nowhere close to reality. Practically all commercial biofuels in the US is produced directly from farming crops like corn, soybeans and sugar cane. Another thing people don't realize is that, at least right now, the biofuel industry is mainly geared towards biodiesel and not biogasoline. That means that in the near term, we'll start seeing trucks, buses and farm equipment making the transition to biofuels. We will have to wait a bit longer before people start putting it in their personal cars. Before we get into the economics of it all, what exactly are biofuels and how do they work? A biofuel is simply any fuel derived from biomass or something that was once alive. Both biofuels and normal fuel produce emissions, mainly CO2, but also other greenhouse gases like hydrocarbons and nox. Since biofuels are made from crops, they take up CO2 as they grow. And when they're burned in an engine, that CO2 is released back into the atmosphere. So there's no net carbon emissions. But normal fuel is made from petroleum, whose carbon has been trapped underground for millions of years. So when petroleum burns, new CO2 is added to the atmosphere. But most commercial biofuel isn't pure biofuel. To best take advantage of current tax incentives, it's usually mixed into traditional fuel. B20 is one of the most common biofuels and it's made from 20% biofuel and 80% normal diesel. And because of some interest in chemistry, adding 20% biofuel actually has an outsized effect, reducing emissions by more than just 20% by making the fuel burn more cleanly. Probably the biggest and most obvious hurdle for the biofuel market is cost. Modern diesel fuel has been around for a little over 100 years. And in that time, the production pipeline has been highly optimized and scaled for profitability. The efficiency and scale of this pipeline are especially important because the fuel industry runs on crazy thin margins. On average, fuel retailers only make 2 cents a profit per gallon of fuel. That means when you fill up your Subaru, they're not even making half a dollar. As a side note, gas stations are like movie theaters. They don't make their money on their main products, but on all the food and treats they sell you. What's worse than the low margins is the crazy high start of cost. In 2013, American fuel company Ineos Bio opened up the first commercial scale advanced biofuel plant in the US. The plant could produce 8 million gallons of fuel a year, at a cost of 130 million dollars and 3.5 years to build. That means on the free market, a biofuel refinery plant would take decades to recruit their initial investment. And this keeps the big dollar investment firms away, especially in the last decade as they focus on fast growing tech companies. The high upfront costs and low margins have made it hard for most biofuel companies to find external financing. On top of that, and in free market, at current scales, biofuel is more expensive to produce than traditional fuel. Luckily for refineries, they don't have to compete in a free market. The US Internal Revenue Code 6426 provides generous tax credits for biofuel producers that help some compete on an even playing field. But this is a fairly new development. Only in the last year or two, with reductions in cost from scaling and more efficient production, an increased profit from subsidies and tax incentives has bio-diesel been able to achieve cost parity with normal diesel. But even with cost parity, many companies are reluctant to swap over their supply chains. This is where biofuel's last advantage comes into play. In recent years, some states, mainly California, have toughened their emissions regulations, requiring fewer emissions and cleaner burning fuel. Starting January first of this year, several public transportation networks were required to maintain a certain percentage of biofuel usage across their fleet. Unsurprisingly, these new laws are why the biofuel industry is focused on California. And the sudden demand for biofuel has created problems for some transportation agencies as they've struggled to find enough suppliers who could produce in large enough quantities for them. So that's where we're at now. But where are we going? Well, we're in a weird place with biofuel. Similar to where renewable energy was a decade ago. Because production is so low compared to traditional diesel, biofuel production won't be profitable for a while without government intervention and tax credits. Especially because the upfront costs for opening these fuel plants can be tens or even hundreds of millions of dollars. But the hope is that, just like with renewable energies, that when the government subsidizes the initial growth, eventually they can reach profitability as they scale. The Department of Energy, an emission to reduce foreign energy dependence has also awarded tens of millions of dollars in research grants to study potentially new biofuels with greater emissions reductions, or that can be made from things that are currently seen as waste products. Rather than being made from crops we would otherwise eat. The company I work for has actually been awarded a few of these grants, studying alternative sourcing for biofuels. One problem, however, is the comparison between public money and private money. Well, it isn't too difficult to get a grant from the government if you have a halfway decent idea, it can be really hard to get any kind of private funding. California, where most of the biofuels economy is, is governed by the investors in Silicon Valley, and they like making a quick buck. With their low margins and high upfront costs, it's pretty hard to secure any of this private funding. This is why you see stories like, is algae the future of biofuels? Because some startup will do some interesting work, showing that algae can make a really good biofuel. But the idea never materializes, because the company can't raise enough capital to go into large-scale production. Also, with increased oil drilling and fracking in the last decade, oil prices have fallen more than a third since their highs in 2012. And as the price of fuel comes down, the margin on biofuels shrinks with it. In fact, even with tax credits, last year many fuel ethanol plants had to shut down or cut production, as the rising cost of coin destroyed their margins, down to multi-year lows of only 3.5 cents per gallon. They meant these factories were barely making a dollar profit for a ton of fuel they made. So yeah, very low margins. Especially with the investment economy, likely set to decrease in the near future, biofuels have a tough road ahead of them. And until other states follow suit and mandate biofuel use, the industry will continue to struggle to get off the ground. I hope you enjoyed getting smarter with us today. This was a bit of a special episode since it's directly related to my background. If you liked the video, consider watching the one tagged in the outro. On six ways we can remove CO2 from the air. And remember, there is always more to learn.