20/01/2009 (The Jakarta Post) - Alternative energy technologies are likely to become a mainstream issue this year. The volatility of oil prices and dwindling reserves adds incentive for the development of renewable energy sources. The abatement of Greenhouse Gasses (GHGs) emissions, however, is the most frequently cited argument for the promotion of biofuels.

The use of biofuels has been given much attention world wide, but particularly in increasingly oil-dependent countries like Indonesia. The government has announced plans to promote the development of the biofuel industry.

However, rather than internalizing external environmental costs, preferential taxation and subsidies may instead result in a highly inefficient industry and, because of the risks involved, the poor management of the country's energy resources. But perhaps more importantly, evidence shows that these schemes will not help, but could actually cause great damaged to the already fragile environment.

The policies designed to promote biodiesel in Indonesia will have limited benefits, especially as they lack plans to replace palm oil (the crop eyed for the industry) with more efficient, less environmentally damaging, non-food fuel sources and sustainability standards.

In 2005, the Indonesian government launched amap" for the development of and projected need for biofuels for the 2005-2025 period as part of itsdiversification" strategy.

The demand for biodiesel is expected to reach 2.41 million kiloliters by 2010, making it the dominant biofuel; 1.48 million kiloliters of bioethanol will be needed. Power generating industries account for more than 70 percent of demand for biofuels, with the transportation sector making up the remainder.

Following the development of the National Energy Policy, the government introduced several legislations to regulate the biofuel industry and assist its continued development. The legislation regulates the mandatory development of biofuels, quality standards and licensing of biofuel-related activities. It covers biofuel exports and imports, as well as the establishment of institutional frameworks for the development of vegetable fuels.

Given the relatively low price of crude palm oil (CPO) when the initial policy was developed, encouraging a domestic biodiesel industry based on the existing palm oil sector appeared to be a feasible way to improve energy security, cut petroleum subsidies and add value to the palm oil sector.

It seems that environmental concerns are not what are driving Indonesia's push towards biofuels.

Moreover, diverting food crops for energy is myopic. The government seems to lack a clear plan on how to minimize welfare losses related to diverting food industry stocks for the production of biofuels.

Both the Indonesia and Malaysian governments have announced that they will each allocate six million tons of their crude palm output for the production of biofuels.

It is estimated that this commitment will account for about 40 percent of each country's CPO production and was done to assure biodiesel investors there would be a sufficient supply of raw material for the industry.

However, this announcement was clarified as only a pledge between the two governments; there are no obligations for either to meet the quota.

In 2008, the government allocated US$1.3 billion and 500,000 hectares of land for the development of biofuels. From this, $1 billion was earmarked for the development of infrastructure, including the construction of irrigation systems and roads to access crop growing areas. The national bank will financially support the venture by granting loans of up to $2 billion.

The government has suggested that the biofuel industry have its own raw material plantations, mainly in the form of oil palm, in order to avoid raw material competition with other industries and to guarantee the biofuel industry's development.

Based on the incentive plan, tax rebates will be given to both raw material producers and fuel producers in the first year of operation. Meanwhile, loan interest subsidies will ensure that investors do not pay interest of more than 10 percent per year. The government has signed 58 agreements worth a total of $12.4 billion from 59 foreign and local investors for the development of oil palm plantation and processing facilities.

Among the foreign investors is the Chinese oil company, CNOOC, which will invest $5.5 billion in Sinar Mas Agro Resources, and Malaysia's Genting Biofuel Asia, which will invest more than $3 billion in the industry.

The Minister of Finance is preparing an incentive package to support the production of 200,000 barrels of biofuel per day in 2010. The planned incentives will consist of tax reductions and the subsidization of loan interest.

Yet there may be important externalities that motivate the preferential treatment of biofuels. Aside from the burden on national budgets and palm-oil consuming industries, preferential taxation and subsidies could prove to be highly inefficient and would prove a poor use energy resources as the viability and environmental benefits of the industry are by no means certain.

Environmental concerns may be a valid reason for tax exemption, but whether the environmental effects would be positive is highly questionable, especially as the transition toward fast-growing sources has not been taken into considerations.

The conversion of natural ecosystems for the production of biofuel is not limited to the establishment of new feedstock farms and plantations. Rising global demand for biofuel production would send a strong market signal to increase production, leading to the clamorous clearing of land for non-feedstock commodities.

Displacement of existing agricultural production, as a result of biofuel demand is accelerating land-use change and, if left unchecked, will reduce biodiversity and may even cause increased GHG emissions.

Indonesian oil-palm plantations are generally located in areas that were once forests but have been logged, or were converted from rubber, coconut or cocoa plantations.

The cleared land may include areas that have regrown into mature natural forests, which were once again ecologically diverse and provided vital functions such as water catchment and carbon storage. An analysis of FAO (2008) data shows that, between 1990 and 2005, more than half of new oil-palm plantations in Indonesia came at the expense of forests.

An estimated 27 percent of new concessions for palm oil plantations in Indonesia and Malaysia are on peatland rainforests. Converting peatland forest for palm production would result in significantly higher GHG emissions, due to the effects stemming from the draining and oxidation of the peat.

Taking into account the offset of the biofuels, the carbon debt in this scenario would take an estimated 420 years to repay. Burning the peat would only accelerate the release of carbon emissions.

In 2008 Oxfam estimated that, by 2020, emissions associated with Indonesian and Malaysian palm oil production, stimulated by EU biofuel policies both for biodiesel and the replacement of domestic edible oils, would total around 4.6 billion tons of CO2.

Forest clearance and peatland conversion accounts for most of this. This level of total emissions is 68 times the savings the EU hopes to make from using biofuels by 2020.

Due to the demand coming from Europe, the viability of non-food biofuels is gaining momentum. Biofuel policies, so it is argued, are ostensibly motivated not by the potential for short-term economic gains but also by a will to act on climate change.

The writer is an economic researcher at Centre for Strategic and International Studies (CSIS), Jakarta and a post-graduate student at Lee Kuan Yew School of Public Policy, NUS.