Benefiting from positive impacts of bio-fuel use

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.