Indonesia’s biodiesel expansion plans stymied by financial, climate concerns

SINGAPORE (ICIS)–Indonesia’s biodiesel expansion plans may be thwarted because the palm oil-based fuel already strains the country’s finances, and increased production of the renewable fuel could unwittingly place Jakarta further from the global climate change agenda.

Biodiesel is costlier to produce and its price gaps with conventional fuels like diesel and gasoil are closed by price support provided by the local government to keep the domestic renewable fuel suppliers in operations.

The price support for biodiesel is primarily funded by the export levy imposed on palm oil products, hence it is a fiscal burden on the country, said Putra Adhiguna, energy economics & policy specialist at the Institute for Energy Economics and Financial Analysis (IEEFA), a non-profit think tank in the US.

The government estimates that additional funding of more than Indonesia Rupiah (IDR) 40 trillions ($2.8bn) will be required this year to implement the country’s 30% biodiesel mandate, Adhiguna told ICIS.

“The market price support is a financial commitment for the government,” he added.

If increased domestic biodiesel production could not be met by domestic palm oil products supplies, including the stocks, it could lead to a reduction in palm oil products export, a key revenue earner for Indonesia, said Ahmad Dermawan, Center for International Forestry Research (CIFOR).

Due to an ongoing moratorium on the issuance of new palm oil plantation permits, palm oil products supply cannot be raised according to demand changes.

Lifting the moratorium may not be the right solution for Indonesia as it risks aggravating deforestation, a key contributor of carbon dioxide emissions, said Dermawan.

“Increasing biodiesel production by improving the productivity of palm oil plantations, instead of expanding the plantations, could actually be a good thing. But given our track record, many would be doubtful,” said Adhiguna.

Indonesia is a signatory to the Paris Agreement, a legally binding international treaty on climate change, with the goal to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.

($1 = IDR14,468)

Analysis by Chow Bee Lin