Impact of biodiesel blend mandate (B10) on the Malaysian palm oil industry

Abstract

Over the last ten years biofuels production has increased dramatically. One of the main factors is the rise in world oil prices, coupled with heightened interest in the abatement of greenhouse gas emissions and concerns about energy security. The increment in production has been driven by governmental interventions. In the US, the world's largest fuel ethanol producer, strong financial incentives are guaranteed for biofuel manufacturers. While, in the European Union, the worlds largest biodiesel producer, biofuel consumption is mostly driven by blending mandates in both France and Germany. In the case of Malaysia, biodiesel started to be exported since 2006. The policy mandate of B5 blend of palm oil based biodiesel into diesel in all government vehicles was implemented in Februarv 2009. It is expected that the blend of B5 will be increased to B10 in future. This paper seeks to examine the impact of BIO on the Malaysian palm oil market. A structural econometric model consisting of eight structural equations and four identities was proposed in this study. The model has been estimated by two stage least squares method using annual data for the period 1976-2011. The specification of the structural model is based on a series of assumptions about general economic conditions, agricultural policies and technological change. The study indicates that counterfactual simulation of an increase from B5 to B10 predicts a positive increase (23.31 per cent) in palm oil domestic consumption. 109.3 per cent decrease in stock. 0.07 per cent increase in domestic price of palm oil and a marginal (0.05 percent) Increase in production. An increase in domestic demand would make Malaysia more competitive regionally and globally with benefits accruing to all Malaysians.