Originally, the new palm oil export levy was set to be implemented in April. However, the government needed some more time to introduce the levy.

The Indonesian government normally generates revenue through the country’s palm oil export tax. However, when the government’s benchmark CPO price (which is calculated using international and local palm oil prices) falls below the USD $750 per metric ton threshold, then a zero export tariff is implemented (to boost global demand and prices). However, amid the sluggish global economy (especially weak demand from China) the government’s benchmark CPO price has been below the USD $750 threshold since September 2014, implying that the government has failed to obtain much-needed revenue from CPO exports as the export tariff has been zero percent since October.

The new levy is therefore a strategy of the government to obtain revenue amid low palm oil prices. The above-mentioned levy kicks in when the CPO export tax becomes zero due to the low CPO price. However, when the price exceeds the USD $750 per ton threshold, then the levy is scrapped meaning that the country’s palm oil exporters will not have to face a double burden in times of higher palm oil prices.

Proceeds from the new levy will be used to fund the government’s biofuel subsidy program. In February 2015 the Indonesian government announced to raise biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in a bid to protect domestic biofuel producers (compensating them for the price differences between regular diesel and biodiesel that have been caused by low global petroleum prices since mid-2014). Besides funding these subsidies, proceeds from the new export levies will be channelled to replanting, research and human resources development in the palm oil industry.

Indonesia’s Biodiesel Program

Near the end of 2013, the Indonesian government raised the mandatory amount of palm oil (fatty acid methyl ester) blended in biodiesel from 7.5 percent to 10 percent. This new policy was designed to curb the amount of costly oil imports (for domestic fuel use) which has been one of the main causes of the country’s ailing trade and current account balances. In April 2015, this mandatory biofuel content in diesel blending was raised from 10 percent to 15 percent. However, the program has been plagued by a number of problems, such as logistical and infrastructure hurdles, as well as sharply falling petroleum prices (making biofuel less attractive).

Biodiesel consumption in Indonesia in 2015 is estimated to be lower than initially targeted as it took a long time before the new regulation was implemented. Domestic consumption is expected to reach 3.5 million kilolitres this year, down from the initial target of 5.3 million. A successful domestic biofuel program would mean that domestic consumption of crude palm oil rises sharply in Indonesia, hence underpinning global palm oil prices.

Indonesia is the world’s largest producer and exporter of palm oil. The commodity is one of the country’s most important foreign exchange earners. However, benchmark palm oil prices have fallen nearly 15 percent in 2014.

Indonesian Palm Oil Production and Export:

    2008   2009   2010   2011   2012   2013   2014   2015¹
(million metric tons)
  19.2   19.4   21.8   23.5   26.5    27.0    31.0    31.5
(million metric tons)
  15.1   17.1   17.1   17.6   18.2    21.2    20.0    19.5
(in USD billion)
  15.6   10.0   16.4   20.2   21.6    19.0    21.0   

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture