First, to protect people’s health, Indonesia is implementing the Euro IV equivalent emission standards for light- and heavy-duty vehicles, which will be applied to all diesel vehicles starting in April 2022 as regulated by an environment and forestry ministerial decree. These standards shall apply stricter limits to emissions of carbon monoxide (CO), hydrocarbons (HC), nitrogen oxide (NOx) and particulates (PM) of new vehicles.

In addition to vehicular emission standards, the new standards also apply to the use of fuel in general, including regulating sulfur content to 50 parts per million (ppm). However, currently, none of Pertamina’s diesel fuel products meet this requirement. The highest quality product, Pertamina Dex diesel fuel, has a sulfur content that meets only Euro III standards (300 ppm), not the higher-level Euro IV standards Indonesia has set. In addition, 90 percent of the market is dominated by diesel fuel of lower quality with a sulfur content of up to 2,500 ppm. In other words, for Indonesia to make the shift to Euro IV, a higher quality fuel than Pertamina Dex must be available at all gas stations to meet the diesel fuel demand for road transportation.

The second objective is related to the country’s need to reduce its dependency on imported refinery products. The 2014 biodiesel blend mandate was implemented with an increased blending rate of 10 percent in 2014, known as B10, to 20 percent (B20) in 2016 and to 30 percent (B30) in December 2019.

At the same time, Energy and Mineral Resources Ministry data shows that diesel fuel imports decreased from 35 percent of total diesel fuel consumption in 2014 to 22 percent in 2018. Coordinating Economics Minister Airlangga Hartarto has explained that Indonesia’s blending rate should reach 40 percent (B40) by mid-2021.

Apart from a plan to use the biodiesel (B100) blend that is conventionally produced in Indonesia by the esterifying of crude palm oil (CPO) fats, State oil and gas company Pertamina also plans to commercialize a new renewable fuel product called green diesel (D100). Green diesel qualifies as a drop-in fuel, meaning that it can be blended with conventional diesel fuel, and it can use the same fuel supply infrastructure. In contrast to biodiesel, green diesel does not require the adaptation of vehicle powertrains or engines, making it more widely adoptable. Green diesel also emits lower emissions and burns more efficiently than traditional biodiesel.

The key question is: Are the two objectives, namely shifting to Euro IV emission standards and achieving a higher blend of biofuels, compatible?

A meta-analysis of results of several studies conducted by the International Council on Clean Transportation (ICCT) in 2016 concluded that usage of biodiesel produced from CPO leads to a decrease in emissions of CO and HC. This biodiesel has virtually no sulfur, but it tends to increase emissions (NOx, PM) when blended with low-sulfur diesel. This means that although CPO-based biodiesel can be used when Indonesia’s diesel fuels still contain high sulfur as in the current situation, it will not support the shift to Euro IV, which requires low sulfur content.

 

A study conducted by the Joint Research Center of the European Commission in 2019 found that green diesel has no issues with regard to current European Union fuel requirements, namely Euro VI standards that are much stricter than those of Euro IV that Indonesia aims to meet.

Synchronizing both objectives means that Indonesia needs a policy road map that is based on the blend mandate of CPO-based biodiesel during the transition period to Euro IV diesel fuel and the blend mandate of green diesel in the Euro IV diesel fuel period and beyond. The road map should be based on three principles. 

First, a gradual shift to Euro IV diesel fuel should be done without any diesel fuel price subsidy. Phasing out the currently dominating 2,500 ppm diesel fuel (not yet a complete shift to Euro IV standards) would trigger more than a 28 percent increase in the average diesel fuel price. Should the government refrain from subsidizing diesel fuel, then the price of CPO-based biodiesel would become lower than the price of diesel fuel.

Looking at historical price data from the Energy and Mineral Resources Ministry, it is unlikely that the future price of CPO-based biodiesel will increase faster than diesel fuel, in which case biodiesel subsidies would no longer be needed. The collected revenues from Indonesia’s CPO export levy can then be fully used to build up the oil palm agroindustry as mandated by Presidential Decree no 61/2015.

The main challenge with this policy would be in helping consumers afford the more expensive Euro IV diesel fuel. To avoid an economic shock, the government must prepare an effective subsidy scheme that avoids a sharp increase in production costs and, therefore, in the inflation rate. In all cases, Indonesia should not create any new diesel fuel subsidies.

Second, the biodiesel blending mandate policy should be maintained during the transition to Euro IV. The existing CPO-based biodiesel blend with high sulfur diesel fuel is good not only in terms of direct emissions — as mentioned previously — but also in terms of decreasing diesel fuel imports.

Once Euro IV diesel fuel is available, high-blended CPO-based biodiesels, possibly as high as a 50 percent blend rate and beyond, can be sold as alternative (nonmandatory) fuels at gas stations. At the same time, flex-fuel vehicles — vehicles that can be powered with low and very high blended biodiesel — will become available in the market.

Lastly, the former energy and mineral resources minister Ignatius Jonan once explained that green diesel should enter the market at the price of Rp 14,000 (US 95 cents) per liter. Economies of scale for green diesel should, therefore, be created as soon as possible to decrease its price by introducing a very low percentage blend mandate. 

A study by the International Energy Agency (IEA) – Bioenergy in 2020 — suggested that feedstock costs can make up to 65 to 80 percent of the production costs. Should CPO prices be controllable following the development of the oil palm agroindustry, there is a chance that green diesel prices could also be reduced so that higher a blend mandate can be reached once Euro IV diesel fuel is fully available.

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The writer is energy economist at Economic Research Institute for ASEAN and East Asia (ERIA). These views are personal.