Indonesia plans a more ambitious biofuel blending policy to B50 by next year, as this year the B40 blending policy has been implemented. (Image: Ministry of Energy and Mineral Resources)
Indonesia is the most ambitious country in developing the biofuel policy, as reflected by the government has introduction of the biofuel into the Energy Mix Policy since 2006 through the Presidential Instruction Number 1/2006. The escalation of energy and economic sovereignty was the primary driver in advancing this policy, foremostly to remove dependence on fossil fuel imports, which burdens states' finances. For instance, the Indonesian Ministry of Energy and Mineral Resources calculates that the amount of state funds saved is around USD 7.9 billion.
However, the development and utilization of biofuels is not merely an energy policy, but also a climate policy. According to the Enhanced NDC document, 18 million KL Fatty Acid Methyl Ester (FAME) in B40 is targeted by 2030 as aligned with both unconditional mitigation action (CM 1) and the conditional mitigation action (CM 2), with palm oil as the main feedstock.
Yet, the government plans a more ambitious biofuel blending policy to B50 by next year, as this year the B40 blending policy has been implemented. Although the ambitious plan has been set, the policy remains uncertain in terms of the timeline and implementation design.
The initial aim of biofuel policy
Although the blending mandate is framed as part of the country’s energy security and decarbonization agenda, its initial purpose was more about stabilizing domestic palm oil prices. Faced with periodic overproduction, the government sought to create an “artificial demand” through the mandatory biofuel blending policy, ensuring that palm oil prices remained stable or even higher due to higher palm oil demand for biofuel production.
For instance, the CPO stock was 51.58 million tonnes, while the total export was 21.1 million tonnes and the total domestic consumption was 17.35 million tonnes in 2020. Hence, the market was not able to absorb the abundance of CPO stocks, resulting in a surplus condition that caused the CPO price to decrease. With these facts, the biofuel policy is implemented to drive demand for CPO stocks that can also enhance the price of palm oil. As stated by the Chairman of the Indonesian Palm Oil Farmers Association (APKASINDO), Gulat ME Manurung, the escalation of the mandatory biofuel policy has increased the CPO price.
Therefore, if the price of palm oil increases, the production of biofuel could be stalled because the production cost of biofuel is largely linked to the price of feedstock and fossil fuel. The palm oil price increase is intertwined with the supply of CPO that production which is currently not available in abundance or is being stagnant in producing.
This sensitivity underscores a broader structural weakness: a progressive biodiesel blending mandate inevitably makes the policy more exposed to volatility in both global CPO markets and CPO domestic stocks. Such exposure complicates the plan of a higher biofuel blending policy that is set by the government.
Reflecting the recent CPO production data that achieved 48.26 million tonnes in 2024, falling short of the previous year’s 50.07 million tonnes, it would hinder Indonesia from immediately clearing B50 policy arrangements. Meanwhile, the needs of CPO for B50 would be around 17.4 million tonnes, and it would achieve 28.4 million tonnes combined with the domestic consumption. Thus, it would risk the decreasing export volume due to stagnation in the production of palm oil, as well as the ambitious plan of B50 policy implementation. It creates a dilemma situation whether Indonesia should accelerate the B50 policy implementation or start prioritizing export needs to bridge the gap in state revenues.
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Oil palm fruits harvested in Kalimantan. (Image: Cooke Vieira/CIFOR)
Fiscal criticism for the biofuel policy
The biofuel production cost is higher than that of fossil fuels, which encourages issuing incentive scenarios for the biofuel price. The main goal is to drive a more affordable biofuel price so it can compete with fossil fuels. At the first implementation, the government issued a subsidy policy for the biodiesel sourced from state funds until 2015. However, the subsidy policy from the state funds is no longer implemented due to the deficit trade balance, and it has been changed from state funds to the palm oil funds, which are gathered from the palm oil export levies.
Yet, the policy got some criticism. In practice, the selling price of biodiesel in Indonesia is heavily influenced by fluctuations in both CPO and diesel prices. Meanwhile, CPO itself is shaped by the global vegetable oil market dynamics, creating a chain of interdependencies that directly affects domestic biodiesel pricing. As a result, Indonesia faces the paradox of potentially losing higher export revenues from CPO while achieving only limited savings from reduced diesel imports. In the long run, a biofuel policy that remains overly dependent on biodiesel risks undermining the trade balance, as the fiscal burden of subsidies/incentives may outweigh the intended economic and energy security benefits.
Another major criticism of Indonesia’s biofuel policy is its excessive dependency on palm oil funds, which significantly reduces the fiscal space available for improving governance in the palm oil sector. Ideally, these funds should have a more balanced allocation across multiple priorities, including strengthening sustainability standards, improving transparency in supply chains, and supporting the welfare of smallholders, who constitute the backbone of Indonesia’s palm oil production.
However, in practice, the overwhelming share of these funds has been directed toward subsidizing biodiesel prices, thereby crowding out resources that could have been invested in upgrading the governance of both upstream activities (such as smallholder replanting, productivity enhancement, and land tenure security) and downstream aspects (such as diversification of palm oil derivatives and certification schemes for sustainable palm oil). Between 2015 and 2023, the fiscal incentive for providing a more affordable biofuel price was allocated around IDR 160.8 trillion (USD 9.9 billion) of the total palm oil fund expenses, accounting for IDR 176.1 trillion (USD 10.8 billion). The fiscal incentive mostly goes to palm oil big companies that also produce biofuel, while smallholders get a piecemeal share.
Risk behind a further blending ambition
Meeting the B50 demand will necessitate the additional land needs of around 2.3 to 3 million hectares for the extended palm oil production. The additional land needs are affected by the lower productivity rate, with the productivity baseline around 2.7 - 3.8 tonnes/hectare, risking new climate challenges such as deforestation practices due to land clearing for converting forests into palm oil plantations.
Recently, the total area of palm oil plantations covered, which is captured by the Geospatial Information Agency (BIG) and the Ministry of Agriculture, is around 17.3 million hectares, or it is equivalent to 1.5 times of Java Island. A recent study on the palm oil carrying capacity estimates that the maximum ecological carrying capacity for oil palm in Indonesia is 18.15 million hectares. The study further warns that any expansion beyond this threshold would result in irreversible ecosystem damage, underscoring the fragile balance between economic expansion and environmental sustainability. This finding implies that Indonesia’s current palm oil coverage is already at, or even slightly exceeding, its ecological limit, leaving virtually no safe margin for further expansion.
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Meeting B50 demand requires 2.3 to 3 million more hectares of palm oil land in Indonesia. (Photo: Nanang Sujana/CIFOR)
The way forward
Advancing the biofuel development in Indonesia is really highly dependent on the feedstocks’ price, so the government can start to look for utilizing various feedstocks as a more affordable option, so it would not rely on the subsidy from the palm oil funds. The constrained policy for exporting more affordable biofuel feedstocks could be an option to be taken for serving more feedstock options.
For instance, the Ministry of Trade Regulation 2/2025 that limits the export of derived palm oil products, which are the alternative of the main biofuel feedstock (CPO), such as UCO (Used Cooking Oil), effectively drives the biofuel producers to pick the alternative biofuel feedstock that has a cheaper price. As a comparison, the UCO has a relatively more affordable price, ranging between USD 0.58–0.77 per kilogram (IDR 9,000–12,000/kg). In comparison, the average price of Crude Palm Oil (CPO) from January to February 7, 2025, stood at around USD 0.89 per kilogram (IDR 13,875/kg).
Beyond affordability, UCO also offers considerable environmental advantages. Life-cycle analysis shows that UCO-based biofuels emit approximately 40% less greenhouse gases than first-generation biofuels derived from palm oil (FAME). In addition, utilizing UCO for biofuel production provides a waste management benefit, as it prevents used oil from being discarded into wastewater systems, which can otherwise cause significant water pollution. The International Council on Clean Transportation (ICCT) study further highlights UCO’s strategic potential: if all available UCO in Indonesia were collected and processed into biodiesel, it could replace 2.4 billion liters of CPO annually, thereby reducing emissions by nearly 12 million tons of CO₂ per year.
Taken together, these findings suggest that incorporating UCO more systematically into Indonesia’s biofuel policy framework could yield a triple dividend: lowering production costs, reducing fiscal dependence on subsidies, and delivering meaningful climate and environmental co-benefits. Thus, Indonesia should start to look at other feedstocks, as Indonesia also has an abundance of biofuel feedstocks that can be utilized to meet the main goal of biofuel policy: balancing climate, economy, and energy security efforts in order to strengthen public welfare.
This column is a collaboration between RECCESSARY and Muhammad Arief Virgy. All rights reserved. Reproduction without permission is strictly prohibited.
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