UPDATE 1-Indonesia says B40 biodiesel programme unlikely to proceed next year

* Energy ministry official says is a struggle to fund programme

* Indonesia collects levies to finance biodiesel subsidies

* Ministry is still conducting trials on new B40 blend

* Biodiesel promises lower emissions, but deforestation concerns (Recasts, adds comments by official)

JAKARTA, Nov 16 (Reuters) - Indonesia is unlikely to proceed with plans to raise the bio-content of its palm oil-based biodiesel to 40% next year as it struggles to fund the programme, an energy ministry official told parliament on Monday.

Instead, the Southeast Asian country will retain its biodiesel B30 programme which makes it compulsory for diesel in Indonesia to be blended with 30% fatty acid methyl ester (FAME) made out of palm oil next year, Dadan Kusdiana, the director general of the country’s energy ministry, said.

“B40 is not ready,” Dadan said, referring to the biodiesel programme containing 40% bio-content and adding that Indonesia had allocated 9.2 million kilolitres of FAME to be used next year.

“Supporting B30 is now very challenging from the funding side, so we see that B40 will be more difficult,” he added.

Indonesia collects levies to help finance its palm oil programmes, including biodiesel subsidies and replanting programmes for smallholders.

Other than a higher percentage of bio-content, the B40 programme will also be produced using a different formulation, combining 30% FAME and 10% “green diesel” made out of palm oil with conventional diesel.

Dadan said that the ministry is still conducting trials for the new blend.

Although biodiesel promises lower emissions, the use of palm oil as a feedstock raises concern about deforestation in the clearance of land to grow it. The European Union is planning to phase it out as fuel for transport, creating trade friction with Indonesia, the world’s biggest producer of palm oil. (Reporting by Bernadette Christina Munthe; Writing by Fathin Ungku Editing by Ed Davies)