01/08/2025 (East Asia Forum) - Launched in early 2025, Indonesia’s ‘B40’ program mandates blending 40 per cent palm oil with diesel fuel. While aimed at boosting domestic biofuel use and supporting local plantation companies, its long-term sustainability remains uncertain. A more flexible and adaptive strategy is needed to safeguard fiscal and economic viability, energy security and environmental protection, as the Indonesian government considers hiking the mandatory rate of blended palm oil to between 50 and 100 per cent.

Indonesian President Prabowo Subianto’s mandatory B40 biodiesel program — requiring the blending of diesel fuel with 40 per cent palm oil — came into effect in early 2025, marking a significant milestone in Indonesia’s green transition. But it also raises serious concerns about economic distortions, long-term sustainability and environmental impacts.

Indonesia’s biofuel program began in 2008 with a modest 2.5 per cent palm oil blend. Since then, it has steadily escalated, with plans for a mandatory 50 per cent blend known as ‘B50’ by 2026 and eventually ‘B100’. This program is expected to benefit Indonesia’s smallholders and plantation companies by diverting large volumes of crude palm oil (CPO) to domestic use, which can tighten global supply and elevate prices.

The government also claims the B40 program will stimulate downstream investment in biodiesel refineries, blending facilities and storage systems. The program may also reduce carbon emissions. Prabowo has stated that raising the mandatory blend rate to 50 per cent would save Indonesia up to US$20 billion annually from reduced diesel imports.

Yet one can argue that the economic rationale behind Indonesia’s aggressive biofuel expansion is flawed. The program’s cost may outweigh its benefit in the long run, particularly if the domestically produced biofuels remain significantly more expensive than imported fossil fuels.

The B40 program requires the Indonesian government to spend 35.5 trillion Indonesian rupiah (approximately US$2.1 billion) on biodiesel subsidies in 2025 alone — a stark increase from US$1.1 billion in 2023. A revenue shortfall due to declining exports or changing levy structures could force government spending cuts or budget reallocations. Subsidy expenditure could soon exceed tax revenue collected — which would compound Indonesia’s fiscal stress.

To support the B40 program, the government operates a Domestic Market Obligation (DMO) requiring producers to sell a portion of their output domestically at a capped price to secure export permits. This can distort domestic allocation decisions, particularly when global prices diverge from the domestic index used to set the price. Under the DMO, market dynamics will also be disrupted from layered interventions by multiple government agencies throughout the fuel production process. When global CPO prices are high, some producers may try to minimise domestic sales or circumvent the DMO, further reducing domestic supply and making the program fiscally vulnerable.

Jakarta’s intention to further increase the blend rate may also trigger domestic supply tensions between energy and non-energy uses of biofuel. Industry projections suggest that fulfilling the B40 mandate could push Indonesia towards a palm oil supply deficit as early as 2026. As a result, competing sectors, particularly the food sector, could face reduced access to raw materials and higher prices, triggering inflation — as seen during past domestic cooking oil shortages.

Over-reliance on relatively volatile biofuels to achieve energy self-sufficiency will undermine the country’s energy security. In 2024, plantation yields were significantly impacted by climatic variations.

The program also raises serious environmental concerns. In 2024, an estimated 11 million tonnes of palm oil were already consumed for biofuels. This is 46 per cent of the total domestic palm oil production, surpassing the food industry’s 44 per cent. The Indonesian Biofuel Producers Association has projected that palm oil consumption for energy will increase sharply to 13.9 million tonnes under the B40 program. Estimates suggest that moving from B40 to B50 requires an additional 2.3 million hectares of land, while upgrading from B50 to B60 requires an additional 3.5 million hectares, significantly straining current land-use capacities.

The government claims the B40 program will not require plantation expansion, relying instead on productivity gains through replanting. But independent studies suggest otherwise. A significant productivity gap exists, with smallholders producing on average 35 per cent less per hectare than private plantations. Importantly, most oil palm trees in Sumatra — Indonesia’s key production area — are over 25 years old, well past their peak productivity. Indonesia’s palm oil production in 2025 is expected to decline by 5.1 per cent due to ageing plantations.

Replanting with high-yielding, disease-resistant varieties could significantly boost yields without further deforestation. Yet many smallholders face funding shortfalls. Technical and financial assistance to smallholders is needed to support land revitalisation.

Biodiesel helps reduce fossil fuel consumption. But the total lifecycle emissions of palm-based biodiesel can match or even exceed those of fossil diesel, particularly when peatlands are destroyed. Monoculture oil palm plantations have led to widespread deforestation and the drainage of peatlands.

A more sustainable approach that reduces market and ecological risks might involve a flexible blending mandate that adjusts the required biodiesel content based on market conditions, fiscal space and feedstock availability. The rate of domestic biofuel adoption could also be slowed to prevent severe damage due to a rapid increase in demand.

Indonesia should implement its biofuel strategy with appropriate caution. A full-scale transition to domestically produced biofuels may not be sustainable in the long run, as it risks exacerbating fiscal burdens, market imbalances and environmental degradation. The government should consider delaying the implementation of B50 and design a responsive mandate that reflects supply-demand dynamics while supporting smallholder productivity gains. Proper energy security lies not in dependence on any one resource, but in building a resilient, diversified and sustainable energy ecosystem.

https://eastasiaforum.org/2025/08/01/indonesias-biofuel-bet-risks-backfiring/