As aircraft are bound to a liquid fuel (it has the most energy content per weight) alternative resources need to be converted into liquid fuels. The industry needs to consider which source is the best for biofuel, it needs to be relatively easy to 'harvest' compared to fossil fuel, with no impact on human food or water supply whatsoever and must be environmentally friendly.
Aircraft engines still cannot run on water but, indirectly, this water can be and is a source of algae. And these algae have a high yield compared to other biomass sources which makes them very interesting to the energy industry. A big advantage of many biofuels over 'normal' fuel types is that they are biodegradable, and if spilled, are totally harmless to the environment.
Like any user of petroleum based fuel, the aviation community is aware of the results of using fuel on the environment. To date aviation is responsible for about 2 % of man made CO2 in the atmosphere and a number of studies and industry efforts are active to reduce fuel consumption even further and search for alternative and cleaner fuel options.
Our atmosphere is a layer of gases surrounding our planet and it is kept there solely by gravity caused by the Earths magnetic field. It contains Nitrogen, Oxygen, Argon, Carbon Dioxide (CO2) and minute amounts of other gases and a variable amount (on average between 0 - 4 %) of water vapor (resulting in clouds and rain). This complete mixture is known to us as air.
Off all the CO2 emitted in the atmosphere (0,04 %) only 3 % is of human origin (0,0012 %). What is the source of the other 97 % (nature itself!) and do we really think that reducing our 3 % to 2,5 % will make any difference at all? There are other processes at work in our ever changing climate.
Worldwide emissions by airplanes causes only 3 % of all man made CO2 in the atmosphere (0,0000351 %). Taxing fuel will not help, carbon emission trading is flawed to the bone plus people and the economy will always keep moving.
We must not forget that aviation is one of the most (if not the most) economic method of transportation. There are no real alternatives as of yet. Cleaner fuels are being developed right now and this will increase the advantage this industry has over other forms of transportation.
The aviation industry is working hard at reducing fuel consumption, mainly by better engine design, newer cleaner fuels and better aerodynamics and aircraft design.
On this planet energy can be found in all kinds of forms: in direct sunlight, plants, animal waste, forest residue, algae and a lot more. Basically everything is energy in one form or another. The main source of this is the sun, but as current solar cells do not have high enough yield, we need to tap into an already converted and concentrated form of solar energy.
Crude oil is still a relatively easy to find form of energy, but it seems that it is not readily renewable. So we need another form that is renewable, cheap, has comparable energy content, is easy to obtain and friendly to the environment.
The only source that will not compete with food supply and other energy sources are human inedible plants and algae. Do not forget that CO2 is still produced during processing of these second generation biofuels derived from Jatropha or Camelina.
Algae fuel, commonly known as algal fuel is a third generation biofuel made from algae, aka pond scum. Compared with second and even first generation biofuels (made from food sources, which is a no no), algae are high yield (30 times more energy per acre than terrestrial crops) feed stocks to produce biofuels but at a slightly higher cost.
Algae love CO2! It is food for them and they thrive on it. It is therefore not necessary to store this gas underground to keep it out of the atmosphere (which is a stupid plan after all). Algae farms can use it to accelerate production and using fuel based on this is then neutral for the climate (with regard to the CO2 balance).
EADS runs a project where a Diamond DA-42 NG runs on biofuel derived from algae sources, more info here.
Defense Advanced Research Projects Agency (DARPA) scientists claim that they are able to produce algae based jet fuel at normal prices by 2011. Production volume is expected to rise to 50 million USG per year in 2011.
Update MAY2012: After several years of development it seems that biofuels get axed due to skyrocketing cost compared to plain good old petroleum fuels and the planned use of shale oil. AVWEB has the story, click here.
In 2014 it became know that the IPCC made a complete u-turn on biofuels and stated that the scientific concensus was wrong. (source: WUWT, WattsUpWithThat, click here: IPCC backpedals on Biofuels)