GLOBAL SUBSIDIES INITIATIVE

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Biofuel Subsidies in Malaysia

Download: Biofuels at What Cost? Government Support for Biodiesel in Malaysia (PDF - 1.56 MB)

GENEVA, Switzerland, September 2008 - For Malaysia, a country that exports 90 per cent of its palm oil, representing 57 per cent of global trade in this commodity, the worldwide push for biofuels held the promise of an export bonanza. The appetite for biofuels created what the head of the Malaysian Palm Oil Council called “a potentially unlimited need for palm oil”. The Malaysian Federal Government consequently developed ambitious biofuel policies in 2005 to expand the market for palm oil,improve energy security, create a new export industry and replace petroleum imports with a cheap indigenous fuel to satisfy domestic needs.

Yet, in just a few years, Malaysia has seen its vision of sustainable development through biofuel production fade. The very efforts of governments worldwide to encourage the production and use of biofuels have undermined the economic viability of the industry as a whole. In 2007, millions of tonnes of vegetable oils, tallow, grains and sugar cane were converted worldwide to produce approximately 70 million litres of biofuels. A sizeable portion of this production occurred in OECD countries, heavily supported by government incentives that are estimated to have totalled over US$ 15 billion that year alone. The result, over the past two years, has been an unprecedented surge in demand for agricultural commodities causing dramatic rises in prices, including that of palm oil. Today, high feedstock prices put biofuels largely beyond the reach of any but the wealthiest nations that can afford to maintain subsidies.

A new report, "BIOFUELS – AT WHAT COST? Government support for biodiesel in Malaysia", published today by the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD), highlights a number of risks inherent in subsidising fuel: subsidies increase consumption, discourage more efficient use of resources and absorb national budgets that could be spent on social services, such as health and education.

The report constitutes a cautionary tale of a bubble that might have grown and burst but deflated instead. A policy to mandate the replacement of five per cent of domestic diesel consumption with palm-based biofuel (B5) was never implemented. And, while 92 biodiesel projects had been approved in Malaysia during 2006-2007, a survey in September 2008 revealed that there were only 14 functional biodiesel plants, only eight of which had produced biodiesel this year. The remainder had cancelled plans or suspended operations due to high feedstock prices and a further four had closed.
 
As for international export opportunities, prospects have diminished since the early euphoria. European Union and U.S. subsidy policies may currently be improving the viability of Malaysian biodiesel exports, but policy changes in the future could limit access for Malaysian biodiesel to U.S. and EU subsidies and lock out all but certified sustainable biodiesel and feedstocks. Meanwhile, the mainly export-driven expansion of the palm oil industry in Malaysia has been associated with deforestation, release of carbon from vegetation and soil, forest fires, soil erosion, water pollution and biodiversity loss.

In light of the limited economic, social and environmental benefits of promoting biodiesel in Malaysia, the GSI report recommends that the government refrain from intervening in the market for biofuels, through such measures as offering direct price support or imposing mandatory blending. Rather, the biofuel industry should be allowed to function in response to market signals—consistent with environmental and social standards—so that the industry establishes itself on a sustainable rather than a government-dependent basis. The government has correctly surmised that biodiesel can only, at most, complement other energy sources. It cannot significantly augment the nation’s energy supplies.

For more information, contact:

Tara Laan
Global Subsidies Initiative (GSI)
Geneva, Switzerland
Phone: +41 22 917-8856 
Email: tlaan [at] iisd [dot] org

Gregore Pio Lopez
East Asian Bureau of Economic Research (EABER)
Canberra, Australia
Phone: +61 4 225 63792
Email: lopez.mier [at] gmail [dot] com