T

he government seems more determined now to push ahead with its campaign, launched in 2006, to increase the use of biodiesel by nearly tripling the price of the subsidy to Rp 4,000 (US 30 cents) per liter, and improving infrastructure for the blending of diesel oil and palm oil-based fatty acid methyl ether for its storage and transportation.

The government and the House of Representatives agreed last week, with the support of major palm oil companies, to secure funding for the biodiesel subsidy through the imposition of export taxes on crude palm oil (CPO) at $50 per ton and olein $30 per ton.

Given the bad experiences with the execution of the biodiesel policy over the past eight years, and taking into account the multiplier impact of a wider use of biodiesel, the government should improve inter-ministerial coordination in enforcing mandatory biodiesel. Another failure will damage market confidence in the renewable energy policy.

Weak implementation of the renewable energy program has made the country dependent mainly on fossil fuels. Even though the country has huge sources of renewable energy such as geothermal, hydropower, biofuel and biogas, the share of renewable energy in the total primary energy mix is only 6 percent.

Indonesia has been the world'€™s largest producer of palm oil, with an estimated output of over 30 million tons annually, but most of it (70 percent) is still exported in the form of low value-added product.

But a wider use of biodiesel and a larger palm oil content (15 percent) in this fuel would reduce fuel oil consumption, thereby decreasing the fuel import bill while increasing the domestic demand for fatty acid (to be blended with diesel oil). As the world'€™s largest supplier of CPO, any significant decrease in Indonesian exports could beef up this commodity'€™s price on the world market.

Certainly, the government should see to it that the CPO fund raised through export taxes are spent entirely on programs related to the development of the palm oil industry, and be independently audited so as to maintain the trust of palm oil companies that contribute to the fund.

The government has estimated that the biodiesel program could increase the domestic use of palm oil by 5 million tons a year and cut the fuel import bill by $2 billion.

In the medium- and long-term, however, the biodiesel policy should also be supported by a favorable fiscal and regulatory framework. Clear-cut directives are needed by new investors who intend to plunge into this infant industry.

Producers of transportation vehicles and farm and mining equipment, which will use bio-diesel, also need to know the roadmap on the future direction of biofuel development because they have to make additional investments to adjust their engines.

As the CPO fund builds up, the government must also consider using a portion of the fund for helping palm oil companies build micro-power generation plants using biogas from palm oil mill effluent, which until now has been discarded.