Three recent reports by the Global Subsidies Initiative (GSI) survey subsidy policies for biofuels in China, Malaysia and Indonesia.

The reports marks a shift in focus for the GSI’s “Biofuels At What Cost?” series, from biofuel subsidy policies in OECD countries—which account for the lions share of global government support for biofuels—to that of certain developing countries that have stood poised to capitalize on heightened interest in these renewable fuels. 

Indonesia and Malaysia, in particular, contemplated ambitious biofuel policies several years ago, only to find that high commodity prices over much of 2007 and 2008 put biofuels largely beyond the reach of any but the wealthiest nations that can afford to maintain subsidies, explains the GSI.

Nonetheless, Indonesia and Malaysia have spent public funds on promoting biofuels. According to Indonesian government figures, total government allocations for biofuel development between 2006 and June 2008 reached up to IDR 1 500 trillion (US$1.6 billion). However, the GSI notes that it is unlikely that all of these funds were disbursed. In Malaysia, meanwhile, support has been limited to RM 60 million (US$16 million) in low-interest loans in 2004, and RM 12 million (US$3.3 million) in federal grants for demonstration projects in 2006.

Both countries continue to consider expanding their incentives for biofuels, in particular by instituting blending mandates (i.e., mandating that gasoline and diesel be blended with a certain percentage of ethanol or biodiesel). However, the GSI cautions against this policy, on the grounds that the cost could far outweigh the benefits in terms of reduced GHG emissions or improved energy security, the two primary rationales behind biofuel subsidies.

“Indonesia’s experience with petroleum pricing has clearly demonstrated that fuel subsidies can become a major drain on the economy,” writes the GSI. “Letting fuel prices rise to levels prevailing in international markets would reduce consumption and improve efficiency, resulting in improved energy security. Adding an additional layer of subsidies for biofuels to an already distorted system makes little economic sense.”

Similar advice is offered to China. That country had already backtracked on some of its earlier plans for biofuels, once it became clear that an expansion of certain biofuel stocks would weaken food security. Construction of maize-based ethanol plants has been halted, and the Chinese government is promoting the use of non-grain feedstocks grown on marginal land.

Nonetheless, the GSI warns that converting “marginal” lands for feedstock production could disrupt natural ecosystems, as well as hurt vulnerable rural communities. China should proceed carefully “to ensure that biofuels genuinely do not compete with food or undermine the government’s social or environmental objectives,” says the GSI.

Links to all three reports can be found from the GSI website at: http://www.iisd.org/gsi/biofuel-subsidies/biofuels-what-cost