Since June this year, Indonesia has collected a maximum $55 levy per tonne on palm oil exports, regardless of the price.
But the new levy collections will hinge on export prices, Coordinating Minister for Economic Affairs Airlangga Hartarto said in an interview on Tuesday.
"So every increase by $25, it will increase the levy by $5," Hartarto said.
Indonesia collects the levy to finance the gap between the production cost of fuel made from palm oil and from the crude oil price.
A historic drop in crude oil price this year has widened the gap and forced the government to changed its levy rules. Prior to June, levies were only collected when the crude palm oil reference price rose above $570 per tonne.
Hartarto said as long as the crude oil price stayed around $40 per barrel, the price gap was "manageable".
The government is currently discussing details of the planned new rules, including the price that would trigger the higher levy, according to another official.
Indonesia currently has a mandatory biodiesel programme known as B30, which has 30% palm oil-based fuel content, and aims to increase the content to 40% next year.
The programme pushed through by President Joko Widodo has a dual target of propping up consumption of the vegetable oil and at the same time slashing expensive imports of fuel into Southeast Asia's biggest economy that has strained the current account deficit.
"I think with this programme, the price of palm oil is stable. So the net (effect) for the farmer is better," Hartarto said.
Farmers however are concerned that the higher levy will erode their income as exporters pass on the costs, said Mansuetus Darto, secretary general of the Oil Palm Farmers Union.
"The $55 levy already reduces the palm fruit price by around 130 rupiah per kilogram at the farmers' level," he said, while also calling for wider distribution of the funds raised from the levy.
Other than to subsidise the biodiesel programme, the fund is also used to finance things such as a programme to replant crops with better quality seeds.
(Reporting by Gayatri Suroyo, Tabita Diela and Ed Davies ; additional reporting by Bernadette Christina Munthe; writing by Fransiska Nangoy; editing by Louise Heavens and Jason Neely)