Increasing domestic use of palm oil biodiesel is a pressing strategic issue for Indonesia. As the world’s 15th-largest motor vehicle market, Indonesia is well on its way to becoming one of the 10 largest, and national demand for transport fuel is growing rapidly. The government of Indonesia sees this rising oil demand as a problem with implications for both the economy and environment.
Diesel fuel accounts for about 43% of Indonesia’s land transportation energy demand, and almost 40% of Indonesia’s diesel fuel is imported. The need for oil imports to supply the high demand for diesel is a major driver behind government support for palm biodiesel. Indonesia’s palm oil production has shown exponential growth over the past two decades and today the country produces more than half of the global palm oil supply.
Launching a biofuel development program in 2006 was a national strategic decision not only to reduce the country’s dependence on oil imports, but also to support the domestic agricultural economy and to mitigate climate change. Through its Intended Nationally Determined Contribution (INDC), Indonesia commits to reducing greenhouse gas (GHG) emissions by 26% below BAU by 2020 and 29% below BAU by 2030. These climate goals, however, are at odds with Indonesia’s high GHG emissions from the land use associated with palm oil, an important, but problematic feedstock. Indonesia exhibits the highest national rate of primary forest loss globally, with two of the largest sources of emissions in the country being deforestation and peat loss from land-use change and fires, often attributed to palm oil plantation expansion. In addition, there is a large gap between the amount of biofuel that can be produced without causing environmental damage and what would be required under Indonesia's National Energy Plan (RAN-GRK).
Indonesia has acknowledged this issue in its overall biofuels policy, a combination of an aggressive biofuels blending mandate and a series of fiscal incentives. This paper provides a summary of the biofuels policy landscape as a whole and outlines two potential options: to support the establishment of new palm oil plantations on degraded lands only and to support cellulosic biofuels from oil palm residues.