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: What is IndoTERM model? Analysis of palm-oil land moratorium using IndoTERM model

A large system of non-linear equation solved by specialized software IndoTERM Each region is modeled as a separate economy, prices are different across regions. Recursively run for every year toward 2030 through capital accumulation and other dynamic mechanism Regions are connected through inter-regional trade of commodities and factors is a dynamic inter-regional, bottom-up, computable general equilibrium (CGE) model of the Indonesian economy Multi markets 175 COM 33 REG 175 IND 9 LAB 1 CAP 1 LND A large system of non-linear equation solved by specialized software Cover the whole national economy, generating standard macroeconomic variables

IndoTERM is a mathematical model which contains … 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 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

IndoTERM Database structure Source: Input-Output Table, Inter-regional input-output table, regional data of production, Social Accounting Matrix, Spatial data 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

IndoTERM can be used for variety of purposes Analyzing regional impact of national or international shock/policies International 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 IndoTERM We estimate the carbon intensity per ha for each region and each land-using sector, including natural forest area 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 Northern Sulawesi: North Sulawesi, Gorontalo, South East Sulawesi South Sulawesi: South Sulawesi, West Sulawesi, SulTra Eastern Sumatera: Riau, Kepri, Jambi, South Sumatera, Babel Bali North Western Java: DKI, West Java, Banten Nusa Tenggara: West Nusa Tenggara, East Nusa Tenggara Eastern Java: Central Java, DIY, East Java Maluku: Maluku, North Maluku Western Kalimantan: West Kalimantan, Central Kalimantan Papua: West Papua, Papua Eastern Kalimantan: South Kalimantan, East Kalimantan

Palm Oil Production and Export of Edible Oil (S1, 2005=100) Palm oil output Export of edible oil

GDP, Consumption, and GNE (% deviation from baseline) Note: GDP = C + I + G + X – M GNE = C + I + G

Household consumption by region in 2030 (% deviation from baseline)

Household consumption by provinces in 2030 (% deviation from baseline)

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?

Thank You! But some models are useful. All models are wrong! William Deming Thank You! www.ceds.fe.unpad.ac.id