Assessing the potential for biofuel production within a conventional fuel system

This paper develops a multi-tiered fuel supply chain model to assess the feasibility of integrating biofuels into a conventional fuel system. Using a Nash-type bargaining framework that captures both economic and environmental goals, we model negotiations between upstream and midstream actors over fuel allocations. The model, framed as a variational inequality within a multicriteria decision-making structure, incorporates key policy tools such as subsidies for biofuels and carbon taxes on fossil fuels. Numerical simulations, implemented via a hybrid optimization–neural network algorithm, show that moderate public incentives and balanced bargaining power can support a partial but meaningful shift toward biofuels. Under realistic conditions, up to 45% of total fuel output may be reallocated to biofuels, yielding substantial but incomplete decarbonization. This transition raises fuel prices and reduces production volumes, highlighting trade-offs from internalizing environmental externalities. Sensitivity analyses indicate that modest policies can affect the fuel mix, though deeper change likely demands stronger interventions. Overall, the study shows how negotiation-driven strategies, combined with fiscal incentives, can promote biofuel adoption, while emphasizing the limits of incremental approaches to large-scale decarbonization.