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Research Report

Policy and institutional frameworks for the development of palm oil–based biodiesel in Indonesia

Wisnu Caroko
Heru Komarudin
Krystof Obidzinski
Petrus Gunarso
Copyright Date: Jan. 1, 2011
Pages: 40
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Table of Contents

  1. (pp. 1-1)

    Energy plays a central role in the global economy. Changes in energy costs have significant effects on economic growth. Increasing oil prices, rising energy demands and concerns over global warming have encouraged many countries to develop biofuels (FAO 2008, Verchot et al. 2010). In order to support the emergence of the biofuel sector, many countries have introduced incentives, such as consumption targets, tax breaks, production subsidies and reduced border tariffs. This has stimulated the growth of biofuel production and trade globally during 2000–2011.

    Indonesia is seeking to take advantage of this emerging global market for biofuels, as are many...

  2. (pp. 2-5)

    The development of the oil palm sector in southeast Asia dates back to 1848, when four seedlings were transported from Africa to the botanical gardens in Buitenzorg (the present-day Bogor) in Java, Indonesia, which was under Dutch control. The descendants of these four palms were transferred to Deli in Sumatra, where they were initially used for ornamental purposes. The first large-scale Indonesian oil palm plantation was established by Dutch traders in 1911, using the seed from Deli palms. Eventually these plantations grew to cover an area of 200 000 ha. The Dutch colonial plantations were nationalised in 1957 after which...

  3. (pp. 6-7)

    This section describes general policies on energy and specific regulations on production, processing and investment. It also explores the government’s role in supporting farmers and small- and medium-size enterprises in the biofuel industry through various incentives such as taxes, pricing, subsidies, production targets and other fiscal and nonfiscal instruments.

    One of the key policies for the development of biofuels in Indonesia is Presidential Regulation No. 5/2006 concerning the National Energy Policy. The policy provides a biofuel incorporation target of 2% of national energy consumption by 2010, increasing to 5% by 2025. It tasked the Ministry of Energy and Mineral Resources...

  4. (pp. 8-12)

    The palm oil and biofuel industries are also governed by laws and policies beyond the biofuels sector and include such policy areas as investment, land tenure and allocation, business development, environmental protection and decentralisation.

    Investment reforms were introduced in 2006 and cover five policy areas: (i) general investment policies; (ii) customs; (iii) taxation; (iv) the labour market; and (v) small- and medium-size enterprises (Supratikto 2007). The Infrastructure Development Package provides the policy framework for public–private partnerships and risk sharing to enable accelerated development of infrastructure. The Financial Sector Reform Package aims at improving coordination between the government and the...

  5. (pp. 13-16)

    The key stakeholders in biofuel and oil palm development in Indonesia are described in Table 5.

    Following the international food and energy crisis of 2008, the Government of Indonesia initiated the Merauke Integrated Food and Energy Estate in Papua, in 2009, in an effort to secure food and energy resources in Indonesia. The project was initially expected to cover 2 million ha, supported by significant foreign and domestic investment (Damardono 2007). However, following public pressure over possible environmental damage and social conflicts, smaller versions of the project have been discussed: 1.2 million ha, 700 000 ha, or 500 000 ha...

  6. (pp. 17-23)

    In 2007, when Indonesia’s biofuel policies went into effect, investment in the biofuel sector was significant. In addition to private sector actors, banks and government institutions were also involved in supporting growth of the sector (Timnas BBN 2006). However, in late 2007, 17 biodiesel companies were reported by the Indonesian Association of Biofuel Producers (APROBI) to have reduced their production or temporarily suspended operations. In 2008, only five mills continued operating. As a result, the production of biodiesel fell by 60% (Sugiyono 2008). This decline was caused by a drop in oil prices and a spike in the price of...

  7. (pp. 24-25)

    The picture that emerges from this analysis of biofuel development in Indonesia is one of ambitious targets and promotion policies that have failed to be realised. In 2006, Indonesia adopted targets for biofuel production, supported by fuel blending policies and investment incentives. The objective of these measures was to reduce Indonesia’s dependency and expenditure on petroleum-based fuels, which amounts to 30% of the national budget. In addition, biofuels were viewed as an avenue for economic development in rural areas.

    These expectations are yet to be realised. In 2007–2008, due to a global spike in food prices, the government abandoned...