As Indonesia scores a palm oil ‘win’ over EU, what next for its big biofuel gamble?
25/01/2025 (South China Morning Post) - Indonesia is doubling down on its palm-oil biofuel ambitions, framing a recent World Trade Organization ruling as a “win” in its battle against European Union restrictions.
While the WTO decision, announced on January 10, upheld the EU’s classification of palm oil-based biofuel as “high risk” due to its links to deforestation, it also criticised the bloc’s procedures, giving Jakarta a sliver of vindication in a dispute that has escalated into a clash over climate policy, trade and market access.
The WTO panel faulted the EU for inadequate transparency and insufficiently reviewing data to justify its “high risk” designation for palm oil-based biofuel. The panel also found that the EU had treated Indonesian products less favourably than similar biofuels from within the bloc – a point Jakarta seized upon to claim a partial triumph.
“This victory proves that Indonesia can fight and win against discriminatory practices,” said Indonesia’s chief economic affairs minister, Airlangga Hartarto, at a media briefing in Jakarta on January 17. He argued that the ruling validated the place of palm oil alongside other biofuels such as rapeseed and soybean.
The ruling stemmed from a 2019 complaint Indonesia filed against the EU, accusing the bloc of using environmental concerns as a pretext for protectionism.
As the world’s largest producer of palm oil, Indonesia sought to challenge the EU’s 2018 Renewable Energy Directive (RED II), which restricts crop-based biofuels such as palm oil from contributing to renewable energy targets and mandates their complete phase-out by 2030. Malaysia, the second-largest palm oil producer, launched a similar challenge at the WTO in 2021.
Khor Yu Leng, a political economist at Singapore-based Segi Enam Advisors, noted that the ruling echoed Malaysia’s earlier dispute with the EU. “The EU broad policy was upheld, again, but its procedures were faulted,” she said, describing it as “deja vu”.
In March last year, the WTO sided with the EU’s classification of biofuels linked to deforestation as non-renewable but acknowledged Malaysia’s claims of discriminatory implementation. At the time, the country’s plantation and commodities minister Johari Ghani said Malaysia had won “several elements” in the dispute, adding that the ruling “demonstrates that Malaysia’s claims of discrimination are indeed justified”.
Similarly, Indonesia’s partial victory lies in the WTO’s acknowledgement of procedural flaws and unequal treatment – a diplomatic win that Jakarta is leveraging to bolster its biofuel agenda.
Eddy Martono, chairman of the Indonesian Palm Oil Association, said that his organisation welcomed the ruling as evidence of “fair trade” for strategic commodities being implemented and realised in global markets.
“I also appreciate the Indonesian government’s consistent fight to protect palm oil from discrimination in the framework of trade and non-trade barriers,” he told This Week in Asia.
‘Ink and political capital’
The EU has since pledged to revise its biofuel policies that disproportionately affect Indonesia, saying in a January 10 statement from its Directorate General of Trade that “the shortcomings identified by the panel will be adjusted under EU law”.
Yet the broader dispute between the EU and the Southeast Asian palm oil giants continues to strain ties. In a May analysis for the Centre for Strategic and International Studies, researcher Lauren Mai said the EU’s ban on products linked to deforestation in June 2023 had hurt both countries’ relations with the bloc.
To mitigate tensions, Mai said the EU should look to restructuring dialogues with Indonesia and Malaysia and “finding solutions that encourage sustainable palm oil production”.
Both nations have since pivoted to alternative markets. Malaysia, for instance, signed a deal with China to double palm oil exports, while Indonesia has doubled down on expanding its biodiesel programme.
Indonesia and Malaysia together produce more than 85 per cent of the world’s palm oil and have been at the forefront of the push for palm oil-based biofuel. Both have sought to leverage their palm oil reserves as a renewable energy source by blending the commodity with ordinary fossil-fuel diesel.
But palm oil biofuel faces an uphill battle. Despite ambitious targets – Indonesia plans to increase its biodiesel blend to 40 per cent this year and up to 50 per cent by 2029 – the global market for palm oil-based biodiesel remains thin, Khor said.
“For a thinly traded palm product, there has been a surprising amount of ink and political capital spent on it,” she said, noting that even neighbouring Southeast Asian countries are prioritising electrification over biodiesel.
“Despite giddy hopes over 10 years ago, there’s just not much trade in this product. Both Malaysia and Indonesia cannot even get neighbouring countries to provide policy support for this.”
Biodiesel accounted for just 0.96 per cent of Malaysia’s total biodiesel exports last year, according to the Malaysian Palm Oil Board, down from 1.2 per cent in 2022.
Activists and environmentalists have long criticised Indonesia’s push for biofuels, pointing to the devastating ecological toll of palm oil cultivation. According to Global Forest Watch, more than 74 million hectares (183 million acres) of rainforest in Indonesia have been lost since 1950, driven by palm oil, paper and rubber industries. Data from deforestation tracker TheTreeMap shows that 30,000 hectares (74,000 acres) of forest were converted to palm oil plantations in 2024 alone.
Prabowo Subianto, Indonesia’s new president, is standing firm on palm oil, calling it a “strategic material” and urging the expansion of plantations. “They really need our palm oil,” he said in December during a national development meeting. “Many countries are afraid of not getting palm oil.”
Prabowo has also dismissed concerns about deforestation, calling for tighter security around plantations and encouraging farmers to ramp up production – a stance that has alarmed environmental groups.
Kiki Taufik, head of Greenpeace Indonesia’s global forest campaign, warned that Indonesia’s aggressive biofuel expansion could exacerbate deforestation, biodiversity loss, and carbon emissions. “We simply can’t afford to burn food for fuel, whether it is palm oil, rapeseed, or sugar cane,” he said.
As the world moves towards electrification and tighter environmental regulations, one overarching question remains: can palm oil biofuel help to secure a sustainable future – or will its cost to the planet ultimately prove too high?