Impact of Biodiesel Demand on the Malaysian Palm Oil Industry: A Simultaneous Equations Approach

The European Union (EU) Renewable Energy Directive set a target of 20 % share of energy from the renewable sources and 10% share of renewable energy specifically in the transport sector. This has resulted in some countries looking for bio-based alternative energies which lead to the increase in demand for bio-based feedstocks such as palm and rapeseed oil (for biodiesel) and sugar cane and corn (for ethanol). One of the new elements in the palm oil market is the growing demand for this commodity as a feedstock to biodiesel production. This will also put Malaysia in a better light on the international front for taking the effort to reduce carbon emissions. In line with this, the palm oil sector in Malaysia will be able to match the New Economic Model’s (NEM) major goals of high income, sustainability and inclusiveness. This new development is affecting the dynamics of the market, in particular, the supply and demand sectors of this commodity. This paper seeks to examine the impact of biodiesel demand on the Malaysian palm oil industry. This paper proposes a structural econometric model consisting of nine structural equations and four identities. The model has been estimated by the two stage least squares method using annual data for the period 1976–2010.