Yes but it looks like this wasn't possible. C64 multicolor sprites have 4 colors and it looks like one frame of the dragon is already using 4 colors.

Also, having two separate ditherings of each sprite would use twice the memory per sprite, and that dragon looks to be composed of multiple sprites and possibly multiple frames of animation per sprite. Most games were memory limited, which means the devs had to make several compromises just to get the game to fit at all.