The Impact of Crude Palm Oil Downstreaming Policies on the Indonesian Palm Oil Industry

¹ Doctorate Program of Agricultural Economics, Faculty of Economics and Management, IPB University, Indonesia
² Department of Agribusiness, Faculty of Agriculture Fisheries and Marine Sciences, Universitas Bangka Belitung, Indonesia
³ Department of Agribusiness, Faculty of Agriculture, Universitas Sumatera Utara, Indonesia
⁴ Study Program of Tropical Marine Economics, Faculty of Economics and Management, IPB University, Indonesia

^* Corresponding author: novyandrabahtera@apps.ipb.ac.id

Abstract

The Indonesian palm oil industry plays a strategic role in the national economy, both as a source of foreign exchange, a major employer, and a driver of regional growth. However, the dominance of crude palm oil (CPO) exports raises concerns about the resilience of domestic value addition and vulnerability to global price fluctuations. To address this, the government is promoting downstreaming policies through mandatory biodiesel use as a means of strengthening the industry's structure. This study aims to analyze the performance of biodiesel policies in supporting CPO downstreaming, identify the factors influencing biodiesel development, and evaluate their impact on the Indonesian palm oil industry. This study employed a simultaneous equation model with nine structural equations estimated using the Two Stage Least Squares (2SLS) method, validated using RMSPE and U-Theil. Time series data from 2000 to 2024 were used to analyze key variables such as oil palm plantation area, domestic CPO prices, biodiesel production, and exports. The analysis results indicated that the B35 and B40 mandatory policies had driven increases in biodiesel prices and exports, but on the other hand, they had reduced CPO exports and crude palm oil production. This signified a shift in the industry's orientation from raw material exports to domestic value-added utilization. These policies had important implications for energy distribution, price stability, and the competitiveness of the national industry. Therefore, further policy support is needed in the form of incentives, infrastructure strengthening, and a balance between energy, food, and environmental needs to achieve sustainable palm oil downstreaming.