The Impact of EU’s Palm Oil Ban on Indonesia

Palm oil banning has been a contentious issue in Europe for several years. Environmentalists and policymakers express concerns about its production and consumption even more vocally. 

In 2026, new regulations banning palm oil usage for biofuels will be enacted in the European Union (EU). The reason behind this decision stems from an increasing recognition of the detrimental environmental effects of the plantations and the imperative to decrease greenhouse gas emissions.

While the move has been welcomed by many, the regulation has also caused concern among the producers. It also raised questions about the potential impact on the global industry. 

This article will explore the rationalities for the EU’s ban, the ramifications for the producers, and the prospective remedies to tackle the issue.

The Controversy Surrounding Palm Oil Banning

The EU has approved new legislation that prohibits the entry of soy and palm oil derivatives associated with deforestation. This measure is part of the EU’s initiatives to address global warming and diminish carbon emissions. 

Palm oil and soy are widely used in various products, from food to cosmetics and biofuels. The new EU law will require companies to demonstrate that their imports of these products are not linked to deforestation, or else they will be banned from the market.

Environmental groups have welcomed the decision, as they have long advocated for measures to tackle deforestation. However, some in the industry have raised concerns about the impact that the ban could have on farmers and producers in developing countries. 

Why is Palm Oil Important to Indonesia?

Palm oil is a significant contributor to the Indonesian economy. It generates substantial export revenue, creates millions of jobs, and supports the livelihoods of countless rural communities. The industry also plays a vital role in Indonesia’s development, fostering infrastructure growth and regional economic activity.

Palm Oil Banned in Europe

If companies cannot demonstrate the sustainability of their products, they will face a ban from the EU market. This new regulation will take effect in 2026 and is intended to help combat the deforestation often associated with producing these goods.

The regulation will apply to all EU member states and territories, meaning that companies that import these goods must comply with the new rules regardless of location. 

This legislation’s scope is comprehensive, encompassing diverse sectors and businesses, such as food manufacturers, cosmetic producers, and biofuel makers.

The countries that are likely to be most impacted by this regulation are major producers of these goods and have a history of deforestation, such as Brazil and Indonesia. 

The Reasons Behind The Palm Oil Banning

Oil palm plantations have led to negative environmental impacts, including deforestation and biodiversity loss, as evidenced by studies conducted in Kalimantan and Sumatra. 

Researchers found that a significant portion of land converted to oil palm plantations was previously forested. As a result, carbon emissions from land conversion were estimated to be at an astronomical rate.

The new law serves as an important reminder to other countries that the EU is serious about taking action to combat deforestation and promote sustainable practices or ESG pratice. 

These countries must guarantee that their production techniques adhere to the sustainability criteria mandated by the EU to maintain access to the EU market.

The Impact of The Ban on Indonesia

Research shows that the ban would have a minimal impact on the Indonesian economy, resulting in a 0.00274% decline in real national GDP. 

Within the sector, there would be a loss of 4.86% of unskilled jobs and 4.82% of skilled jobs, and land use by oil palm would decline by 2.33%. 

The ban would reduce Indonesian economic growth but have environmental benefits in reducing CO2 emissions. 

Indonesia’s New Regulation in the Palm Oil Industry

The Ministry of Trade is pushing for Indonesia’s sustainable palm oil industry. Their plan prioritizes balancing Environmental, Social, and Governance (ESG) aspects. This aligns with the government’s commitment to sustainable development outlined in the National Medium-Term Development Plan (RPJMN) 2020-2024.

To achieve this sustainability goal, the government has enacted regulations focused on good governance in oil palm plantations. A key example is Presidential Instruction No. 6 of 2019, which outlines the National Action Plan for Sustainable Oil Palm Plantations (RAN KSB) for 2019-2024.

Should Indonesia Fear Losing Europe’s Palm Oil Market?

The Indonesian Palm Oil Association (Gapki) stated that Indonesia, as the world’s largest producer, should be reassured about losing the EU market since other growing markets are available. 

Joko Supriyono, Gapki’s chairman, said this industry is vital for food production and bioenergy. Therefore, Indonesia’s priority should be to compete globally to promote it regardless of the market. 

Although Indonesia’s exports to the EU decreased by 14% in the first 11 months of 2022, exports to the US increased by 15% over the same period. 

The US is now the third-largest importer of Indonesian palm oil, mainly due to the trans fats issue and the increased use of biodiesel in several US states. 

Another potential market for Indonesia is Pakistan, and there is an opportunity to set up a hub there to reach the Central Asian market. 

Most Indonesian Palm Oil Companies Can Meet EU Criteria

According to the ambassador, most Indonesian palm oil companies can meet the EU criteria through the country’s certification program, the Indonesian Sustainable Palm Oil (ISPO). 

Many palm oil companies in Indonesia have adopted the ISPO, which serves as a way to ensure sustainable production practices. 

The ambassador emphasized recognizing and promoting the ISPO to meet global sustainability standards. 

By doing so, Indonesian companies can maintain access to EU markets, improve their global reputation, and gain access to other sustainable markets. 

The Importance of Implementing ESG in the Palm Oil Industry

Environmental, Social, and Governance (ESG) principles are becoming increasingly crucial in the palm oil industry. Sustainable practices that minimize deforestation, protect biodiversity and ensure fair labor conditions are essential to meet growing consumer demand and international regulations. Indonesia’s commitment to ESG implementation will solidify its position as a leader in responsible palm oil production.

The Prospects of Indonesia’s Palm Oil Industry for Investors

Indonesia’s palm oil industry presents exciting prospects for foreign investors seeking a stake in a growing and sustainable market. Here’s what makes it attractive:

Strong Growth Potential

The global demand for palm oil is projected to continue rising, driven by its diverse applications. Investing in Indonesian palm oil companies or related infrastructure can offer significant returns.

Focus on Sustainability

Indonesia’s commitment to ESG practices aligns with the growing interest in sustainable commodities. Investors seeking exposure to the palm oil sector with a focus on environmental and social responsibility will find Indonesia a compelling option.

Government Support

The Indonesian government actively encourages investment in the palm oil industry with supportive policies and a streamlined regulatory environment.

Innovation and Diversification

The industry is constantly innovating, exploring new applications for palm oil and developing by-products. Investors can participate in this dynamic sector and its potential for future growth.

How InCorp Indonesia Can Help You

Despite the new law passed by the EU, many figures in the Indonesian Palm Oil market have enormous confidence in the industry and its abilities. 

As Indonesian companies are expected to meet the EU standards and criteria for exports, palm oil companies may benefit from the services provided by InCorp Indonesia (formerly Cekindo) for business licensing and ESG advisory. 

By benefiting from these services, these companies can streamline their export process and ensure a smooth and efficient operation.