WORKING PAPER Biofuels in Malaysia An analysis of the legal and institutional framework Melissa Chin Working Paper 64 Biofuels in Malaysia An analysis of the legal and institutional framework Melissa Chin Working Paper 64 © 2011 Center for International Forestry Research All rights reserved Cover photo © Hartmut Jungius / WWF-Canon Chin, M. 2011 Biofuels in Malaysia: an analysis of the legal and institutional framework. Working Paper 64. CIFOR, Bogor, Indonesia This paper has been produced with the financial assistance of the European Union, under a project titled, ‘Bioenergy, sustainability and trade-offs: Can we avoid deforestation while promoting bioenergy?’ The objective of the project is to contribute to sustainable bioenergy development that benefits local people in developing countries, minimises negative impacts on local environments and rural livelihoods, and contributes to global climate change mitigation. The project will achieve this by producing and communicating policy relevant analyses that can inform government, corporate and civil society decision-making related to bioenergy development and its effects on forests and livelihoods. The project is managed by CIFOR and implemented in collaboration with the Council on Scientific and Industrial Research (South Africa), Joanneum Research (Austria), the Universidad Nacional Autónoma de México and the Stockholm Environment Institute. The views expressed herein can in no way be taken to reflect the official opinion of the European Union. CIFOR Jl. CIFOR, Situ Gede Bogor Barat 16115 Indonesia T +62 (251) 8622-622 F +62 (251) 8622-100 E [email protected] www.cifor.cgiar.org Any views expressed in this publication are those of the authors. They do not necessarily represent the views of CIFOR, the authors’ institutions or the financial sponsors of this publication Table of contents Abbreviations v Foreword vi 1 Introduction 1 2 Evolution of the biofuel sector 2 2.1 Palm oil–based biodiesel in Malaysia 2 2.2 The history of the biodiesel sector in Malaysia 3 3 Institutional and legal framework specific to biofuels 6 3.1 Malaysia’s National Biofuel Policy 6 3.2 The Malaysian Biofuel Industry Act 7 4 Institutional and legal framework relevant to biofuels 9 4.1 Incentives, taxes and levies 9 4.2 Environmental regulations 10 4.3 Certification 13 4.4 Forests, land allocation and native customary rights 14 4.5 Palm oil development and poverty alleviation through land settlement schemes 16 5 The political economy of biofuels in Malaysia 18 5.1 Main stakeholders in the palm oil and biodiesel sector 18 6 Implementation and performance 21 7 Conclusion 23 8 References 24 Annex 1. Legislation regulating the Malaysian palm oil industry 30 List of tables, figures and boxes Tables 1 Chronology of biodiesel development in Malaysia 6 2 Activities licenced under the Malaysian Biofuel Industry Act 2007 9 3 Taxation on the Malaysian oil palm industry 11 Figures 1 Malaysia's National Biofuel Policy 8 2 Land application procedure for oil palm plantation development in Sabah, Malaysia 16 3 Major players in the palm oil supply chain 19 Boxes 1 A brief look at oil palm cultivation in Malaysia 4 2 Excerpts from Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 1987, Appendix 2 12 3 Excerpts from Sabah Environment Protection (Prescribed Activities) Order 2005, Second Schedule 13 4 Excerpts from Sarawak Natural Resources and Environment (Prescribed Activities) Order 1994, First Schedule 13 5 Role of the Malaysian Palm Oil Board 20 6 Malaysian Biodiesel Association members 20 Abbreviations B5 Fuel blend of 5% palm oil methyl ester and 95% petroleum diesel CPO Crude palm oil DOE Department of Environment EU European Union EIA Environmental Impact Assessment EU-RED European Union Renewable Energy Directive FAME Fatty acid methyl esters FELDA Federal Land Development Authority Ha Hectares ISCC International Sustainability and Carbon Certification JAMA Japan Automobile Manufacturers Association MPIC Ministry of Plantation Industries and Commodities MPOA Malaysian Palm Oil Association MPOB Malaysian Palm Oil Board MYR Malaysian ringgit NEM New Economic Model Petronas Petroliam Nasional Bhd POIC Palm oil industrial clusters PME Palm methyl ester RBD Refined, bleached and deodorised palm oil SLDB Sabah Land Development Board SVO Straight vegetable oil Foreword In Malaysia as of 2010, the area of oil palm Malaysian biodiesel exports dropped by 60% in 2010 to plantation was 4.85 million ha covering 14% of 90 000 tonnes, with many producers unable to maintain the total land area in Malaysia. Sabah still has the operations due to the high cost of production (Choo largest area planted with oil palm of any state, 2011). The Malaysian Palm Oil Board reported that accounting for 1.4 million hectares (ha). Sarawak the export of local biodiesel ceased for two months in registered a 9.5% increase in planted area in 2010, December 2010 and January 2011 (Hanim 2011c). the highest in the country, and the state now accounts for 0.9 million ha of oil palm plantation The Malaysian government’s recent decision to subsidise (Choo 2011). the price of biodiesel, coupled with the launch of Neste Oil’s 800 000 tonne-per-annum biodiesel plant in Palm oil prices went above MYR3000 towards Singapore, may breathe new life into the local biodiesel the end of 2010 and remained high in early 2011 industry (Koswanage and Taylor 2011). Many are also (MPOB 2011). Although experts expect the price hoping that the outlook for biodiesel will be more to soften somewhat towards the middle of the year, favourable with the political unrest in the Middle East any decrease in price will still be mitigated by the and North Africa driving crude oil prices above US strength of other major vegetable oils, leading one $100 a barrel (Hanim 2011c). It is anticipated that Neste industry expert to state that palm oil prices are Oil’s Singapore plant could be a substantial source of unlikely to fall below MYR3000 in 2011 (Hanim future feedstock demand for Malaysia (Koswanage and 2011a, 2011b). However, forecasts differ on crude Taylor 2011). However, due to the strength of current palm oil prices for 2011, reflecting the volatility of and projected palm oil prices, the planned government influencing factors, such as crude oil prices and subsidy is unlikely to be sufficient to offset the high cost changes in biodiesel mandates (The Star 2011, of production (Edy 2011). Hanim 2011b). 1. Introduction Amidst concerns over energy security, volatile fuel contributor to the national economy and accounts prices and rising greenhouse gas emissions, many for 8% of gross national income (GNI) per capita countries are turning towards biofuels as a more (PEMANDU 2010). Recognising its competitiveness, environmentally friendly alternative to fossil fuels. Malaysia has attempted to capitalise on the emerging The introduction of legislation mandating the use biofuel market by promoting the production of palm of biofuels in the energy mix, for example in the oil–based biodiesel. The Malaysian government United States and the European Union, has stimulated launched the National Biofuel Policy in 2006 and the demand for vegetable oils, for use as biodiesel. a series of supporting measures to promote sector Although providing new economic opportunities for development. However, since adoption of the policy, producer countries, this development is not without palm oil prices have risen and fossil fuel prices have its controversies. The expansion of agricultural declined, reducing the economic viability of palm land for the cultivation of biofuel feedstocks raises oil–based biodiesel production.1 With the government concerns about deforestation, biodiversity loss, land mandate on the sale of B5 biodiesel blend delayed conflicts, competition with land for food and an for over a year and a lack of direct subsidies, the increase in carbon emissions from land use change. current outlook for the Malaysian biodiesel industry is uncertain. Malaysia is currently the world’s largest exporter and the second largest producer (after Indonesia) of This report traces the development of the Malaysian crude palm oil (CPO) (Hoh 2009). In 2009, Malaysia biodiesel industry, and assesses the effectiveness of produced 17.6 million tonnes of CPO (Basri 2010). national policies, strategies and laws in promoting Malaysia’s palm oil industry is the fourth largest and regulating sector development. 1 The average CPO price has increased since 2006, with extreme fluctuations in 2008. Prices have stabilised since and in the first half of 2010, CPO prices were MYR2400–2700 per tonne (MPOB 2010). 2. Evolution of the biofuel sector This section provides an overview of the state of in late 2006 as ‘Envo Diesel’ (Bernama 2006). Envo biofuel development in Malaysia. As ethanol is Diesel is a mixture of 5% processed palm oil with currently not produced in Malaysia for use as a 95% petroleum diesel. Since Envo Diesel uses refined fuel (Hoh 2009) this report focuses specifically on palm oil instead of palm methyl ester, the production biodiesel, with palm oil as the feedstock of choice. cost is considerably lower (as it does not need to be transesterified), thereby giving it a higher profit margin (Mamat, personal communication). The initial 2.1 Palm oil–based biodiesel in plan was to use Envo Diesel in government vehicles Malaysia before gradually extending its use to industrial and The high global demand for palm oil is driven by transportation sectors in 2010. its wide variety