Biofuels - at what cost? Government support for biodiesel in Malaysia

Focusing on government support policies, this report examines the history and status of the biofuel industry in Malaysia. It forms part of a multi-country effort by the Global Subsidies Initiative (GSI) to characterise and quantify government subsidies and other support for biofuel production, distribution and consumption. <br /><br />Malaysia has seen its vision of sustainable development through biofuel production turn into a mirage. The Malaysian Federal Government developed ambitious biofuel policies in 2005 when it appeared that the country&rsquo;s key agricultural product, palm oil, could be profitably transformed into biodiesel. However, the very striving of governments worldwide to encourage the production and use of biofuels undermined the economic viability of the industry. Expected job opportunities from the biofuels industry did not materialise and, instead many biofuel facilities suspended operations in 2008, stranding public and private investments. <br /><br />While 92 biodiesel projects had been approved in Malaysia during 2006 and 2007, a survey of plants in September 2008 revealed that there were 14 functional biodiesel plants, only eight of which had produced biodiesel in 2008 (approximately 130 000 tonnes - less than ten percent of their potential production capacity). Despite biodiesel being uneconomic, many countries have supported the development of a domestic biodiesel industry for social and environmental reasons. The authors discuss that there is no evidence to suggest a strong social or environmental rationale for promoting biofuels in Malaysia. <br /><br />The document concludes that the Malaysian government still appears to be keeping its options open regarding support for a domestic biofuel industry. The authors also make a few recommendations, which include: <br /> the government should refrain from intervening in the market for biofuels through mechanisms such as direct price support or mandatory blending. 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 rather than promote biodiesel to address fuel demand in the transportation sector, efforts should be directed towards improving the overall energy efficiency at the national level including improving the public transportation system and infrastructure.