Benefiting from positive impacts of bio-fuel use

Tomohide Sugino, Bogor

In confronting historically high global oil prices, we have observed various projects emerging in Asia to develop alternative fuel resources. China, which has experienced skyrocketing oil consumption due to rapid economic growth, has started selling gasoline mixed with 10 percent ethanol (gasohol) in major cities. Japan, which relies 100 percent on imports for its petroleum needs, is trying to increase the share of ethanol mixed gasoline use to 10 percent of total fuel consumption from the current level of actual 0 percent. Thailand is hoping to triple its ethanol consumption by 2010.

It was quite timely that Oyos Saroso addressed the issue of gasohol use in Indonesia in his special report (The Jakarta Post, July 22, 2005). This particular type of gasohol is a kind of "bio-fuel" made from renewable biomass resources like cassava root and is an environmental friendly energy source. We highly appreciate and fully support the implications of his report that gasohol or bio-ethanol has the potential to mitigate the current fuel crisis in Indonesia and has positive effects on the environment and farmers' welfare. However, we should note that several critical issues still exist on our way to gain the most benefit from the positive impacts of bio-fuel use.

First, the biggest impediment of bio-fuel popularization is its higher price than conventional fuel. Roughly speaking, the production cost of bio-fuel is twice as much as gasoline. The forerunners who have successfully increased bio-fuel consumption have provided tax exemptions or subsidies to their bio-fuel producers.

For example, ethanol production in the U.S. has grown rapidly with support from a federal tax exemption of US$0.54 per gallon and subsidies for ethanol producers. The amount of ethanol fuel consumption in the U.S. reaches more than 2 percent of current gasoline consumption.

In Germany, the price of bio-diesel, another kind of bio-fuel made from vegetable oil, costs less than conventional diesel fuel due to the exemption of the environment tax, which is imposed on petroleum-based fuels to reduce polluting emissions. In Asia's developing countries, India and Thailand have already adopted similar tax exemption schemes to make bio-fuel use and production more attractive.

However, it is quite strange that the Indonesian government is willing to bear the huge cost of its fuel subsidy, but does not support bio-fuel consumption. One of the possible solutions to this problem will be the promotion of foreign investment. The Clean Development Mechanism (CDM) is proposed as a part of the "flexibility mechanisms" of the Kyoto Protocol.

CDM allows industrialized countries to fulfill their commitments to greenhouse gas emission reduction from the reduction in developing countries. Though developing countries have no obligation in the current protocol, if the industrialized countries assist their partners in developing countries in bio- fuel production by their investment and technical support, then successfully reducing carbon dioxide emissions through the substitution of gasoline and diesel by bio-fuel, it can be counted as an achievement by the industrialized countries. We could expect this mechanism would promote investment and technology transfer on bio-fuel and contribute to reducing initial costs of production.

Second, we need to carefully arrange the procurement of raw materials for bio-fuel production to avoid conflict of "food or fuel". The study conducted by the Center for Alleviation of Poverty through Secondary Crop Development in Asia and the Pacific (CAPSA) has shown that farmers need to increase cassava production by 1.2 million tons annually or 6.5 percent of current cassava production in order to offset by 2 percent Indonesia's predictions of premium gasoline usage of 15.17 million kiloliters this year by ethanol.

If we try to meet this increasing demand only by area expansion, the government would need to expand its cassava- growing areas by 82 thousand hectares, assuming no change to the current yield. This figure appears to be quite a challenge since the external area expansion will be difficult due to the rapid conversion of arable land into non-agricultural use.

A more appropriate path would be the effort to improve productivity of cassava farming. The average yield of cassava in Indonesia is 15 tons per hectare; about 12 percent lower than Thailand (17 tons/ha), which has successfully developed its highly integrated cassava industry. If we could increase the yield to the level of our neighbor, farmers would be able to meet the huge demand from the bio-fuel industry and enjoy financial benefits without significant environmental deterioration or a disturbance to food production.

To fulfill this strategy, institutional support by the government is crucial. Since Indonesia's agricultural policy has put more emphasis on rice production, cassava and the other secondary crops (course grains, pulses, root and tuber crops), which are major material for bio-fuel production, have not been given much attention by policy planners. Institutional support such as better market access, credit supply and technology development should be strengthened for secondary crop farmers.

Third, technical innovations could change the situation dramatically. The production of ethanol from starchy crops like cassava is an almost matured technology. It seems to be difficult for us to expect significant reduction in production costs.

However, if cellulose-based products, such as rice straw, wood chips or municipal garbage could be used for ethanol production, the production cost would be dramatically reduced and bio-fuel would achieve price competitiveness with gasoline without any preferable tax schemes. The conversion of raw material from expensive starchy crops to cheaper cellulose-based products is a major focus of current research activities on bio-fuel production.

This may be welcome news from the viewpoint of the bio-fuel promotion. However, if farmers invested their scarce resources into increasing cassava production, and let's say, after 10 years, the material for bio-fuel suddenly changes to cellulose- based products, it would mean a tragedy for farmers. The above mentioned policy support of cassava farmers should be carefully designed with a good perspective of technological developments.

There is no doubt about the positive effects of bio-fuel development on energy security, environmental conservation and the development of agriculture. The achievement of real power of bio-fuel relies on well-designed policies.

The writer is the Project Leader of AGRIDIV Project Center for Alleviation of Poverty through Secondary Crops' Development in Asia and the Pacific (CAPSA), Bogor. He can be reached at agridiv@uncapsa.org.