CoPS/IMPACT Working Paper Number G-276

Title: Indonesia's moratorium on palm oil expansion from natural forest: Economy-wide impact and the role of international transfers

Authors: A.A. Yusuf, E.L. Roos and J.M. Horridge


Palm oil has become increasingly important in Indonesian export. Indonesian economic growth, particularly in forest-rich regions of the country depends on the expansion of palm oil production. On the other hand, the Indonesian government is committed to reduce carbon emissions from land use change to which the conversion from natural forest to palm oil has greatly contributed. Indonesia introduced a moratorium of conversion from natural forest to palm oil land. Using a dynamic, bottom-up inter-regional computable general equilibrium of the Indonesian economy, we assess several scenarios of the moratorium and discuss its impact on the national as well as regional economy. The results suggest that the moratorium reduces Indonesian economic growth, and other macroeconomic indicators, but international transfers ($10/tCO2 emissions avoided) can more than compensate the welfare loss. However, the impact varies across regions. Sumatera which is highly-dependent on oil palm; of which its economy is less broad-based and its carbon stock of its forest is no longer high, receives fewer transfers and suffer a great economic loss. In the meantime, Kalimantan which is relatively less dependent on oil palm than Sumatera and its forest carbon stock is still high, receives more transfers and get greater benefit. This result suggest that additional policy measures anticipating the unbalanced impact of the transfers is required if the trade-off between conservation and reducing inter-regional economic disparity needs to be reconciled.

JEL classification: R10, R11, R13.

Keywords: palm oil, carbon emissions, computable general equilibrium, Indonesia.

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