INDONESIA'S MORATORIUM ON PALM OIL EXPANSION FROM NATURAL FOREST:

ECONOMY-WIDE IMPACT AND THE ROLE OF INTERNATIONAL TRANSFER

MARK HORRIDGE*, ARIEF A. YUSUF**, LOUISE ROOSE*,

*) COPS, VICTORIA UNIVERSITY, **) UNIVERSITAS PADJADJARAN

Stopping Deforestation in Agricultural Supply Chains in Indonesia: A Modeling Workshop December 11, 2014, Jakarta

Environmental Defense Funds – World Resource Institute

THIS PRESENTATION IS ABOUT:

1. What is IndoTERM model?

2. Analysis of palm-oil land moratorium using IndoTERM model

INDOTERM

is a dynamic inter-regional, bottom-up,

computable general equilibrium (CGE)

model of the Indonesian economyMulti markets

175 COM33 REG175 IND9 LAB1 CAP1 LND

A large system of non-linear equation

solved by specialized software

Cover the whole national

economy, generating standard

macroeconomic variables

Each region is modeled as a

separate economy, prices are different across

regions.

Regions are connected through

inter-regional trade of

commodities and factors

Recursively run for every year toward

2030 through capital

accumulation and other dynamic

mechanism

many equations (a system of non-linear equations with n equations, n endogenous variables, and many exogenous variables)

that determines prices and quantities of commodities (many of them) and inputs (including primary and intermediates) characterized by optimizing rational economic agents (e.g.

producers and consumers) who interact in a competitive market economy such that all the markets are in equilibrium.

IndoTERM is a mathematical model which contains …

INDOTERM• A family of Australian TERM The Enermous Regional Model

Developed by CoPS (Centre of Policy Studies), Victoria University (formerly: Monash University)

• Applied in:

• Australia, Brazil, Finland, China, South Africa, Indonesia

• In Indonesia

• Emerald (Pambudi)

• IndoTERM v.1 (CEDS UNPAD, CoPS, 2006)

• IndoTERM v.2 (ADB, CoPS, CEDS UNPAD, 2012)

• IndoTERM v.3 - Dynamic (CoPS, CEDS UNPAD, BAPPENAS, AusAID, 2013-2014)

• A result of years of collaboration among these institutions:

CoPS

Index Set Description c COM Commodities s SRC Domestic or imported (ROW) sources m MAR Margin commodities r ORG Regions of origin d DST Regions of use (destination) p PRD Regions of margin production f FINDEM Final demanders(HOU, INV,GOV, EXP) i IND Industries u USR Users = IND + FINDEM o OCC Skills h HOU Households

USER x DST DST ORG x DST

COMx

SRC

IND

USE(c,s,u,d)Delivered value:

basic + margins (ex-tax)quantity: xint(c,s,i,d)

price: puse(c,s,d)

FINDEM(HOU,INV,GOV, EXP)quantities:xhou(c,s,d)xinv(c,s,d)xgov(c,s,d)xexp(c,s,d)

price:puse(c,s,d)

=

USE_U(c,s,d)=

DELIVRD_R(c,s,d)price:

pdelivrd_r(c,s,d)quantity:

xtrad_r(c,s,d)

=CES

DELIVRD (c,s,r,d)= TRADE(c,s,r,d)+ sum{m,MAR,

TRADMAR(c,s,m,r,d)}

price: pdelivrd (c,s,r,d)quantity: xtrad(c,s,r,d)

+ = {Leontief)

COMx

SRC

TAX (c,s,u,d)Commodity taxes

TRADE (c,s,r,d)good c,s from r to d

at basic pricesquantity: xtrad(c,s,r,d)

price: pbasic(c,s,r)

IMPORT(c,r)

+ +FACTORS

LAB(i,o,d) wagesCAP(i,d) capital rentalsLND(i,d) land rentals

PRODTAX(i,d) prod tax

MAKE_I(c,r)=

TRADE_D(c,"dom",r)

TRADMAR(c,s,m,r,d)margin m on good c,s

from r to dquantity: xtradmar(c,s,m,r,d)

price: psuppmar_p(m,r,d)

= sum over COM and SRCINDUSTRY OUTPUT:

VTOT(i,d) TRADMAR_CS(m,r,d)

= =INVENTORIES:

STOCKS(i,d)SUPPMAR_P(m,r,d)

+ CES sum over p in REGPRD

COM

MAKE(c,i,d)

output of good cby industry I in d

update:xmake(c,i,d)*pmake(c,i,d)

sum over i in IND

=

MAKE_I(c,d)

domesticcommodity

supplies

SUPPMAR(m,r,d,p)Margins supplied by p ongoods passing from r to d

update:xsuppmar(m,r,d,p)*pdom(m,p)

MAKE_I(m,p) =SUPPMAR_RD(m,p)

+ TRADE_D (m,"dom",p)IND x DST DST ORG x DST

INVEST(c,i,d)purch. value of good c used for

investment in industry i in dprice: pinvest(c,d)

quantity: xinvi(c,i,d)

HOUPUR(c,h,d)purch. value of good c used by

household h in dprice: phou(c,d)

quantity: xhouh_s(c,h,d)

file data

addups

IndoTERM Database structure

Source:Input-Output Table, Inter-

regional input-output table, regional data of

production, Social Accounting Matrix, Spatial

data

INDOTERM CAN BE USED FOR VARIETY OF PURPOSES

Analyzing regional

impact of national or

international shock/policiesInternational

oil price shocks

Import Tariff

Nation-wide indirect taxes

Analyzing nation-wide impact of

region-specific shocks

Regional policies

(regional taxes)

Regional specific

productivity shocks

(draught)

Analyzing impact of improving

connectivity

Efficiency in transport services

Specific source-

destination transport efficiency

Other areas

RESEARCH QUESTIONS

• What is the implication of Indonesian Moratorium on Palm Oil Expansion from natural forest?

• To what extent international transfer can mitigate its negative economic impact?

SCENARIOS AND ASSUMPTIONS

• In the baseline, palm oil land grow by 3-8% per year toward 2030

• ½ of the land expansion come from natural forest, another ½ from production forest.

• In scenario 1 (S1), expansion of palm oil land from natural forest is stopped in 2015 onward.

• In scenario 2 (S2), expansion of palm oil land from natural forest is stopped in 2015 onward and Indonesia receives international transfers amount to $10x[CO2 emissions avoided]

• Transfers is given directly to household in each region (in proportion to the region’s avoided emissions) to be spent on consumption.

INCORPORATING CARBON EMISSIONS FROM LAND USE CHANGE IN INDOTERM1. We estimate the carbon

intensity per ha for each region and each land-using sector, including natural forest area

2. We added carbon emissions equation, and international transfers equation for avoided emissions.

REGIONAL AGGREGATION FOR THIS ANALYSIS

Western Sumatera: NAD, North Sumatera, West Sumatera, Bengkulu, Lampung Eastern Sumatera: Riau, Kepri, Jambi, South Sumatera, Babel North Western Java: DKI, West Java, Banten Eastern Java: Central Java, DIY, East JavaWestern Kalimantan: West Kalimantan, Central Kalimantan Eastern Kalimantan: South Kalimantan, East KalimantanNorthern Sulawesi: North Sulawesi, Gorontalo, South East

Sulawesi South Sulawesi: South Sulawesi, West Sulawesi, SulTra BaliNusa Tenggara: West Nusa Tenggara, East Nusa Tenggara Maluku: Maluku, North Maluku Papua: West Papua, Papua

PALM OIL PRODUCTION AND EXPORT OF EDIBLE OIL (S1, 2005=100)

Palm oil output

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

0

200

400

600

800

1000

1200

Palm Oil (Baseline)Palm Oil (Scenario 1)

Export of edible oil

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

0200400600800

10001200140016001800

Basline S1

GDP, CONSUMPTION, AND GNE (% DEVIATION FROM BASELINE)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

GDP (S1) CONS (S1) GNE (S1) GDP (S2) CONS (S2) GNE (S2)

Note: GDP = C + I + G + X – MGNE = C + I + G

HOUSEHOLD CONSUMPTION BY REGION IN 2030 (% DEVIATION FROM BASELINE)

We

stS

um

atr

a

Ea

stS

um

atr

a

Nth

We

stJa

va

Ea

stJa

va

WK

alim

an

tan

EK

alim

an

tan

Nth

Su

law

esi

Sth

Su

law

esi

Ba

li

Nu

saT

en

g

Ma

luku

Pa

pu

a

Na

tio

na

l-5

0

5

10

15

20

S1 S2

HOUSEHOLD CONSUMPTION BY PROVINCES IN 2030 (% DEVIATION FROM BASELINE)

NAD

Sum

Bar

KepR

i

Sum

Sel

Bengk

ulu

DKI

Bante

nDIY

KalB

ar

KalS

el

SulU

t

SulT

eng

SulB

ar Bali

NTT

Mal

Ut

Papu

aPro

v-5

0

5

10

15

20

S1 S2

HIGHLIGHTS• Impact on Indonesian GDP is negative but small

• International transfers does not offset the impact on national GDP

• Yet, international transfers (nationally) still make Indonesian on average better-off if consumption or national expenditure is a measure of welfare. This is the nature of international financing.

• The effect varies widely across regions

• Sumatera, and Western Kalimantan (West Kalimantan & Central Kalimantan) are the most heavily affected with moratorium without transfers.

• Western Kalimantan benefit the most from international transfers.

• International transfers does not offset the loss welfare of Sumatera.

• Policy implication: Should there be any mechanism of equalization of the benefit of international transfers, if something like this happen?

ALL MODELS ARE WRONG!

THANK YOU!

But some models are useful.

www.ceds.fe.unpad.ac.id

William Deming