Indonesia’s Biofuels Push

Late last year, Indonesia made waves when it reduced petroleum fuel subsidies. At the end of next month, another major shift will take place as the country implements biofuel subsidies of 4,000 rp/liter (30 cents), paid for by a $50/barrel levy on crude palm oil (CPO) exports.

The biofuels will be chiefly made from palm oil, of which Indonesia is the world’s largest producer and exporter. Currently, 10 million hectares are under cultivation, producing 30 million barrels of CPO a year, destined for China, India and Europe, with just a small percentage used domestically. Under this plan, the incentives for domestic consumption would increase substantially, timed to a moment when global prices are denting palm oil returns.

“Indonesia overplanted [palm oil],” said Dave McLaughlin, Vice President for Agriculture at the World Wildlife Fund. “Supply is greatly outpacing demand, and thus you have prices at a six-year low right now.”

This demand is only likely to fall further, as more and more countries and companies are implementing stricter deforestation and ethical standards for palm oil. Indonesia’s plans to embark on a massive push to promote domestic palm oil consumption through biofuels may more than make up for this potential drop in demand. At the same time, it could also put more of the country’s endangered forests at risk of deforestation, increasing the country’s carbon footprint while making the national economy even more dependent on a single crop.

Doubling Down

Palm oil is not native to Indonesia or to Southeast Asia, having been transported to the archipelago during colonial times from tropical West Africa, where it remains, to this day, a staple in regional cuisine. Its growth began in the 1970s, when the first OPEC oil crisis forced countries to look beyond petroleum for energy sources. Palm was, in fact, initially seen as an environmental boon, a way for the world to wean itself off of dirty fossil fuels.

Until 2000, palm oil was a relatively small player globally. That is when demand for biofuels in Europe, non-hydrogenated oils in the United States, and, especially, cooking oils in China and India drove a rapid proliferation of palm oil plantations, which ate up Indonesia’s (and neighboring Malaysia’s) tropical forests.

Palm oil’s growth was partly influenced by global demand, but it was also heavily promoted by the Indonesian government, who saw this as a large source of cash for a country then reeling from the Asian Financial Crisis.

In fact, next month’s biofuels subsidies are only the latest in what has become a vast system of aid for palm oil. According to a recent report from the London-based Overseas Development Institute (ODI) these subsidies have the effect of distorting the market by making it easier to plant palm oil and destroy forests.

“By trying to strengthen domestic palm oil industry without proper planning and determining where palm oil should be produced or not, this will create incentives for people to produce more palm oil, ultimately leading to deforestation,” said Will McFarlane, a researcher at the climate and energy program at ODI.

According to ODI, subsidies that promote deforestation, chiefly, timber harvesting and palm oil, receive Government assistance that dwarfs forest protection payments, chiefly though the REDD+ program, by a factor of 165.

This is why, today, palm oil is widely regarded as an environmental menace, and campaigns all across the world have forced companies such as Unilever, Kellogg and L’Oreal, to make declarations that their supply chains are free of deforestation. The declaration last week by Singapore-based Musim Mas meant that an astounding 96 percent of major palm oil distributors were under no-deforestation pledges.

“There is increasingly more pressure from environmental groups in sensitive markets, which is pressuring companies,” said Krystof Obidzinski, a palm oil expert with the Indonesia-based Center for International Forestry Research. “Some of these markers are becoming uncertain for CPO.”

Purely Economics

The solution? Increase domestic consumption, which currently only accounts for a small fraction of the 30 million tons of CPO produced yearly, mostly for cooking. Hence, biofuels.

The Ministry of Energy’s plans for biofuels sounds ambitious: 3.5 million tons by next year, double the 1.7 million tons produced in 2014.  But then you have to remember that Indonesia is a country of 240 million citizens, and rapidly growing energy demands. It imported 690,000 of crude oil per day last year, a number that is growing by 6.6 percent per year.

That is why, though the stated reason for the subsidies is energy security, many experts believe that biofuels will do little in the short or medium term to affect Indonesia’s energy consumption.

“No single source of energy is going to solve the problem,” said Obidzinski, who does not see biofuels, even under the most rosy projection scenarios, accounting for a major percentage of Indonesia’s energy mix in the short or medium terms.

Instead, the benefits will be mostly economic. By increasing domestic consumption of palm oil, and keeping more of Indonesia’s CPO in-country, both palm oil producers and companies gain control over the market.

“The policy…aims to protect the industry, and reduce it from external decision making,” said McFarlane. “By bringing more of the demand domestically, this gives Indonesia more control over volume and price.”

Aviva Imhof, with the Sunrise Project, believes that if Indonesia really wants to achieve energy independence, it needs to move towards renewables, which the archipelago, with its numerous sunny islands and volcanic peaks, also has aplenty.

“There is a lot that could be done. There is significant geothermal potential, which needs government support,” said Imhof. “Energy efficiency could be improved, especially in Java. Solar is untouched.” She believes that more investment into these energies could prove incredibly beneficial.

Biofuels, on the other hand, currently provide few environmental benefits, and require massive subsidies. “Even with these subsidies it is going to be very difficult to make biodiesel competitive,” said Obidzinski.

Indonesia petroleum subsidies were often criticized for promoting inefficiency and their removal last year was seen as a sign that President Joko Widodo might shift the national budget towards innovation and economic development. The decision to push forward with biofuels will, instead, just shift government funds from one inefficient industry to another, with no real impact on the country’s energy security.