Interest in algae biofuels has increased in recent years due to government funding, industry investment, environmental pressures and renewable fuels policy. Although some analysis has been done to examine the potential environmental concerns associated with algae biofuel production, little information is available on what those impacts would be for an industry at commercial scale. This assessment addresses that issue by modeling two large-scale cultivation systems to quantify the impacts to ecology, estimate mitigation costs, and determine the influence of existing policies. The assessment finds high water use for algae cultivation, limited greenhouse gas benefits over corn ethanol, and potential for considerable amounts of waste. Policy recommendations for mitigating these risks include: require site-specific risk assessments; implement water recycling and other strategies to reduce water consumption; provide incentives to co-locate facilities to decrease impacts from inputs; and ensure that public subsidies include environmental safeguards. In conclusion, algae biofuel production remains in its infancy and so continuing research is needed to define which strains and cultivation techniques will be most environmentally benign. Subsidies for scaling algae biofuel production to commercial levels are premature without adequate environmental risk mitigation mechanisms in place.