Economic impacts of biodiesel policy in Indonesia: a computable general equilibrium approach

Abstract

The Government of Indonesia has been promoting the advancement of the biodiesel sector to fulfill its commitment to support clean energy, energy security, and rural development. This paper examines the economic impact of the biodiesel sector using a computable general equilibrium model. Besides analyzing the impacts on the national macroeconomic conditions, other sectors, and household incomes, our model has also included a regional block to capture the impact of the biodiesel mandate on regional growth. Two simulations were performed: (1) fulfillment of the 30% biodiesel blending target (B30 mandate), and (2) Simulation 1 combined with the European Union's biodiesel trade ban resulting in an export reduction of 5.18%. The results show that the two simulations provide positive impacts on macroeconomic variables, including real gross domestic product and real wages. However, the B30 mandate and the combined effect of the EU trade ban still yield an inflationary effect in the short term. They also potentially reduce the production of several agricultural products—such as sugarcane, fruits, vegetables, and soybeans—leading to an increase in food prices. The policy implications highlight that the current B30 mandate and EU ban cannot automatically improve the fuel trade balance.