Indonesia's push for palm oil-based biodiesel

Indonesia, the world's largest producer of palm oil, is once again at the forefront of global discussions on energy and trade. The government has confirmed its plans to move forward with its biodiesel program with mandatory mixing of either B50 (50% palm oil-based biodiesel) or B45 as of 2026, although the final decision is still under review. The move reflects Jakarta's ambition to reduce dependence on imported fossil fuels, enhance local energy security, and support palm oil producers facing an increasingly volatile global market.

Locally, biodiesel plays a dual role: as a tool for energy resilience and as a support for rural livelihoods. Indonesia imports about 1 million barrels of crude oil per day, with a total annual import bill for crude oil, refined fuels, and liquefied petroleum gas amounting to about 500 trillion Indonesian rupees (about 30 billion US dollars). This massive dependence strains the trade balance and makes the economy vulnerable to oil price shocks. Expanding biodiesel use could save billions of dollars in foreign currency while providing a barrier against global volatility. At the same time, palm oil remains the mainstay of the economy, employing more than 16 million people directly and indirectly. Ensuring stable local demand by mixing biodiesel helps protect the sector from global contractions.

As the largest exporter of palm oil, Jakarta's push towards biodiesel has regional and global trade implications.

However, the road ahead is not without challenges. The rapid move towards the B50 risks straining supply chains and causing technical problems for engines that are not equipped with higher blends. Business groups have urged the government to consider B45 as a transitional step. Even in the current B35 program, complaints have arisen about clogged filters and high maintenance costs. Without strong road tests and technological adaptation, the policy may generate a negative response from transport operators and consumers.

The repercussions extend beyond Indonesia's borders. As the largest exporter of palm oil, Jakarta's push towards biodiesel has regional and global trade implications. Converting more crude palm oil (CPO) to domestic energy may tighten supplies in export markets. While the government insists that exports will remain strong, the balance between domestic energy use and foreign demand remains sensitive. Europe, which recently granted Indonesia a quota of up to 1 million tonnes of duty-free crude palm oil imports, will monitor these shifts closely. In India and China — both major buyers of Indonesian palm oil — any drop in exports may raise prices and motivate alternative suppliers such as Malaysia to expand their market share.

Indonesia is following a path where palm oil fuel remains vital for trucks, ships and aviation (Ian Taylor/Unsplash) Indonesia's biodiesel strategy also intersects with ongoing conflicts in the World Trade Organization (WTO). The EU has repeatedly challenged Jakarta's palm oil policies, including export restrictions and sustainability standards, arguing that they distort world trade. By converting more crude palm oil to local biodiesel, Indonesia risks drawing more scrutiny from its trading partners, who may view this policy as protectionist. At the same time, Jakarta has consistently defended its right to manage natural resources to achieve national development and climate goals. This conflict at the World Trade Organization shows how Indonesia's energy transition is not only an economic choice but also a test of how well developing countries can assert their sovereignty in the global trading system.

In parallel, competition intensifies as advanced economies develop alternative vegetable oils for renewable energy. For example, Australia recently invested 12 trillion Indonesian rupees (725 million US dollars) in expanding canola and similar crops to challenge the dominance of palm oil as a raw material for bioenergy. The move highlights that Indonesia's leadership in palm oil will not go unchallenged, as the global race towards renewable fuels accelerates.

Indonesia's biodiesel program isn't just an energy policy — it's a strategic choice at the crossroads of local stability, regional competition, and global climate policies.

Geopolitically, biodiesel is boosting Indonesia's position in the global energy transition. Unlike many developing economies that rely only on imported fuels, Jakarta can take advantage of its huge palm oil base to defend a “southern model” of renewable energy based on local resources. This model also plays a role in climate diplomacy. While palm oil remains controversial due to its environmental footprint, Indonesia has pledged to expand certified sustainable plantations and reduce deforestation. Successfully aligning biodiesel expansion with sustainability goals will allow Jakarta to present itself as a leader in the global South and a responsible global actor.

In Southeast Asia, Indonesia's policy is creating a multiplier effect. Malaysia, the second-largest producer of palm oil, is watching closely as its biodiesel ambitions rely on not losing competitiveness. Thailand, Vietnam and the Philippines - which are net importers of palm oil - must adapt to possible price fluctuations. Outside the region, biodiesel is also interacting with electric vehicle policies. As China's BYD and others flood ASEAN markets with affordable electric cars, Indonesia is pursuing a parallel path where palm oil fuel remains vital for trucks, ships, and aviation.

Ultimately, Indonesia's biodiesel program isn't just an energy policy — it's a strategic choice at the crossroads of local stability, regional competition, and global climate policies. It is a statement that Indonesia refuses to remain dependent on imported fossil fuels and is instead seeking to harness its natural resources to shape a different development path. The policy reflects the government's determination to secure long-term energy independence, stabilize rural livelihoods, and enhance Indonesia's negotiating power in international trade forums where palm oil and sustainability are often contested.

The success of the B45 or B50 depends on how well Jakarta can balance technical feasibility, business commitments and sustainability goals in the coming years. Hasty implementation risks undermining public trust and international credibility, but careful management can turn Indonesia into a regional energy stabilizer and a global leader in biofuel innovation. If implemented effectively, the policy will allow Indonesia to move beyond the image of being just a palm oil superpower to become a true renewable energy leader, able to combine economic growth with environmental responsibility and influence the direction of the global energy transition.

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Source: Lowy Institute