Progressive biodiesel policy in Indonesia: Does the Government's economic proposition hold?

Abstract

Crude palm oil (CPO)-based biodiesel is Indonesia's main product as part of the Government of Indonesia's (GoI) biofuel policy to secure energy, reduce trade balance deficit and subsidy, and lower emissions. Indonesia's biodiesel policy is progressive. In late 2019, biodiesel blending reached 30% of fatty acid methyl ester (FAME) and 70% of diesel, known as B30. The government sees the biodiesel policy as beneficial on the basis of its expected diesel import saving. However, it fails to take into account the potential export loss emerging from the opportunity cost of foreign exchange. Moreover, the macroeconomic impacts of biodiesel policy remain understudied. Using available input and output data, CPO and biodiesel projected balance sheets were constructed for 2020 to 2030 based on four biodiesel blending scenarios. Assessments were then made to reveal each scenario's impact on trade balance, subsidy, and land expansion. The present study found that: (1) while the biodiesel policy lowers diesel imports, the potential CPO export loss outweighs the import savings, (2) the biodiesel policy's impact on subsidy is highly dependent on the subsidy rate of FAME and diesel, and (3) land expansion of 48% to 76% of current productive oil palm plantation area is inevitable to support the ambitious biodiesel policy. Overall, the findings indicate that more progressive policies pose greater macroeconomic and environmental risks. The GoI should develop a clear roadmap for optimal biodiesel blending levels to deliver energy security and desirable economic and environmental impacts.