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[JAKARTA] Indonesia looks set to stimulate domestic consumption of palm oil after an announcement raising biofuel subsidies by over three times to 5,000 rupiah (US$0.40) per litre, from 1,500 rupiah per litre, by the end of May.

The new subsidies aim to boost the production of palm oil, Indonesia's primary source of biofuel, and reduce the economy's fast growing demand for imported petroleum. According to Indonesia’s Ministry of Energy and Mineral Resources, the goal is for biofuel production to reach 3.5 million tonnes by next year, double the 1.7 million tonnes produced in 2014.

“The desire of Indonesia to achieve energy security is understandable, but such a broad brush economic tool can have all sorts of negative consequences,” Will McFarland, a researcher at the climate and energy programme of the London-based independent think tank Overseas Development Institute (ODI), tells SciDev.Net.

McFarland is the co-author of a recently released ODI study (30 March) that domestic biofuel and agricultural subsidies drive forest loss in Brazil and Indonesia. Existing palm oil and biofuel subsidies also dwarfed by 165 times the amount set aside for REDD+ and forest protection.

REDD+ refers to countries’ efforts under the UN-led REDD programme to reduce emissions from deforestation and forest degradation.

“Artificially strengthening the palm oil industry creates incentives for people to produce more palm oil but this ultimately leads to more deforestation,” warns McFarland.

The study notes that Indonesia’s continued push for biofuels would not only destroy more forests but also has implications for food security. Currently, more than 10 million hectares are under palm oil cultivation in the country making it the biggest producer of palm oil in the world with over half of the global output.

McFarland says the subsidy, which is funded by an increase in the palm oil export levy, hopes to achieve 10-15 per cent higher palm oil productivity through improved research and infrastructure. “Indonesia is currently 15-20 per cent below Malaysia in yield,” he says.

Zenzi Suhadi, forest campaigner at the Indonesian Forum for the Environment (WALHI), echoes McFarland’s concern: “Shifting subsidies to biofuel will worsen increasing the expansion of palm oil plantations in Indonesian forests.” According to Krystof Obidzinski, a scientist with the Indonesia-based Center for International Forestry Research, the goal of rapidly expanding biofuels and subsequently, palm oil, is what he finds troubling.

“Oil palm is fine, but it has to be scaled down. It has to be implemented through a more gradual approach, rather than a large-scale investment in a short period of time,” says Obidzinski.

On the other hand, McFarland believes that economics, not energy security, is the main reason behind the government’s latest move. It is notable that other renewable energy sources, such as solar, geothermal, and micro-hydro, are not being promoted with the same fervour.

“Is this really just about energy security? It's not, it is an economic tool for Indonesia,” notes McFarland. “By reducing the impact of external decision-making, and bringing more of the demand domestically, [the policy] will give Indonesia more control over the volume and price of palm oil.”

>Link to full paper of Overseas Development Institute

This article has been produced by SciDev.Net's South-East Asia & Pacific desk.