Modeling the impacts of Indonesia s REDD+ Initiatives to the Biodiesel Targets in the Green Economy Framework using System Dynamics

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1 Modeling for an Inclusive Green Economy Workshop Modeling the impacts of Indonesia s REDD+ Initiatives to the Biodiesel Targets in the Green Economy Framework using System Dynamics Akhmad Hidayatno akhmad.hidayatno@ui.ac.id Systems Engineering, Modeling and Simulation Lab Universitas Indonesia systems.ie.ui.ac.id 1

2 Agenda National Development Priorities in Indonesia Challenges in Modeling the Palm Oil Biodiesel Industry within the REDD+ and Green Economy Framework Results and Policy Implications 2

3 Indonesia s economic growth has far surpassed the previous projections Projected GDP per capita - Indonesia Vision ,000 20,000 15,000 10, Lower Middle Income Country Upper Middle Income Country High Income Country GDP per capita reached US$3,005 in ,000 14,900 12,449 22,500 18,000 Economic Projection Indonesia Vision ,000 5,300 3,005 7,231 1,660 3,923 2, Source: Indonesia Forum Foundation (Yayasan Indonesia Forum), team analysis 3

4 The increase of the productive population will fuel stable and rapid economic growth that in turn requires more energy and natural resources from forest lands Expected Population Pyramid ( ) Male Indonesia 2000 Female Male Indonesia 2020 Female Population (in millions) Population (in millions) Total (million) Male (million) Female (million) Productive population (20 55 years old) 99 (48%) 132 (52%) Source: 2008 UNDP World Population Prospects. Indonesian National Economic Committee pag

As an archipelago country, different rate of economic growth zones exist and create a major development challenges such as multi-mode transportation infrastructure On average, Java takes about 60% of

5 As an archipelago country, different rate of economic growth zones exist and create a major development challenges such as multi-mode transportation infrastructure On average, Java takes about 60% of overall Indonesia FDI. In general, west of the country is more developed than east of the country, investors and developers are looking towards east now. However, primary investment are still concentrate in Jakarta area. Source: Indonesia Ministry of Transportation 2006 and

6 Indonesian National Priorities are embedded within MP3EI* plans, with balanced focus on 3 main elements 6 regions economic corridors development, connectivity and human resources *Master Plan of Acceleration and Expansion of Indonesia Economic Development (MP3EI)

7 The economic growth must be sustained with sufficient and diverse mix of energy in a sustainable way, since the government plan to revise the plan to include Green Economy Government Energy Regulations UU 30/2007, Inpres 1/2006, Permen ESDM 32/2008 Master Plan of Acceleration and Expansion of Indonesia Economic Development (MP3EI) Pro-Job, Pro-Poor, Pro-Growth Green Economy Revised Master Plan to include Green Economy (2013) 3 Pros + Pro-Green Economic & Population Growth Energy Demand New Renewable Energy Market Mechanism (Price, Demand, Structure) Energy Supply Sustained Economic Growth Sustained Energy Supply Sustained Balanced Economic Growth Oil Exporter to Net Importer Renewable Energy Potentials 1 st Generation Technology Captured Reducing Emissions from Deforestation and Forest Degradation (REDD+) 7

8 National Energy Policy pushes the use of Renewable Energy in the Primary Energy Mix to 17% in 2025 Target in Less than 1 for energy elasticity 2. Optimized primary energy mix Oil 51.66% Hydro Power, 3.11% Geothermal, 1.32% CURRENT ENERGI MIX (1 million BOE) National (Primary) Energy Mix Natural Gas, 28.57% Coal, 15.34% National (Primary) Energy Mix of 2025 (BaU Scenario) (5 million BOE) National Energy Mix 2025 (3 million BOE) (Presidential Decree No. 5/2006) Power Plant, 1.9% Mini/micro Hydro Power Plant, 0.1% Geothermal, 1.1% Gas, 20.6% Oil, 20% Gas, 30% BIOFUELS, 5% Oil, 41.7% RE,17% Geothermal, 5% Biomass, Nuclear, Hydro Solar Energy, Wind Power, 5% Coal 34.6% Coal, 33% Coal Liquefaction 2% 8

9 Why Palm-oil biodiesel? The industry offers a rich case study since its multidimensional positive and negative impacts Industrial Value Adding No new infrastructure comparing to Gas Economy Market is unattractive for biodiesel investment Employment Development of Rural Areas 1 st Technology has acquired Social Exclusiveness Access to Land Food vs Fuel Better Fuel Emission Improved Carbon Capture Environment Increased CO2 due to reduction of forest Threat to biodiversity Better Energy Mix Renewable Energy Industry Energy Multi-Actors along the production chain 9

Land Ownership of Palm Plantation is dominated by private estate and small holders farmers in the Sumatra region due to better infrastructure Rest of Indonesia (ha) Sulawesi (ha) Kalimantan (ha)

10 Land Ownership of Palm Plantation is dominated by private estate and small holders farmers in the Sumatra region due to better infrastructure Rest of Indonesia (ha) Sulawesi (ha) Kalimantan (ha) Sumatera (ha) - 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 Sumatera (ha) Kalimantan (ha) Sulawesi (ha) Rest of Indonesia (ha) Smallholders 2,548, , ,924 35,143 Government Estate 485,771 71,882 22,096 37,420 Private Estate 2,094,572 1,301,301 88,705 16,128 10

11 Area Thousands In the future the growth will still be dominated with the private sector 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Area (ha) Smallholder Area (ha) Government Estate Area (ha) Private Estate Area (ha) Total 11

12 Indonesia has Committed to Reduce CO2e Emission by Adopting REDD+ Mechanism sustainable land management economic system with sustainable utilization of natural-resources conservationrehabilitation of forest Reduction of CO2e 26% in 2020 (or 41% at best case scenario), with steady economic growth of 7% yearly. *Strategic Programs from Indonesian Draft Strategy of REDD+ (Reduction of Emission through Deforestation and Forest Degradation) 12

13 Agenda National Development Priorities in Indonesia Challenges in Modeling the Palm Oil Biodiesel Industry within the REDD+ and Green Economy Framework Results and Policy Implications 13

14 REDD+, Green Economy and Palm-Oil Biodiesel Industry offers interactive dynamics of trade-offs Can we have sustainable palm-oil biodiesel production that satisfy REDD+? Can the promise of green jobs and green investments from the renewable energy industry be delivered? Can we analyse the competition of Food vs Fuel vs Forest for land area? At What Cost? 14

Renewable Energy Modeling has more challenges 1 Local Limitations 2 Large Scale Documentation 3 Different Characteristics of Industry Unique local conditions will limit the use of generic model.

15 Renewable Energy Modeling has more challenges 1 Local Limitations 2 Large Scale Documentation 3 Different Characteristics of Industry Unique local conditions will limit the use of generic model. For example in this model: - Indonesia as an Archipelago - multi social values, etc. - financial data not easily obtained Very limited open documentation is available on implementing renewable energy in a large (national) scale Renewable Energy Production has different characteristics that the energy production. Deep understanding of nonenergy industry works is needed (forestry, agriculture, manufacturing etc.) *A. Ross and C. Rakos, The limits of modeling. Experiences with bioenergy in practice - could models have predicted this outcome. Biomass and Bioenergy, : p

16 Model Conceptualization of the Model Facilitating Markets INPUT Basic External Economic Factors (Inflation, Exchange Rates, etc) Potential Land Total Area Grants Basic Social (Population Growth Rate, etc) Tariffs Subsidies Allocate Property Rights REDD+ and Energy Policy Alternatives National Sustainability Model Systems Dynamics Model based on T21 water Tax Credits Government Corporations Freeing Markets (Legalize) Quantity Regulations Price Regulations Matching Grants As Input As Constraint and Facilitation As Feedbacks poverty education population labor health government infrastructure land production households emissions energy ROW investment technology OUTPUT Sustainability Output Performance Expected Economic Growth Poverty Level CO2 Emission Reduction Targets CER/VER Biodiesel Volume Target Achieved Green Economy and Sustainability Module Problem Owner: Government Problem Owner Goals: Fulfillment of the short-term and longterm of national biofuel (biodiesel) usage within the REDD+ Initiatives and Green Economy Energy & Resources State Enterprise SME Forestry Agriculture Trade Environment Industry Science and Technology Finance Local Governments Forest Land Use Change Module Palm Plantation CPO Producer Biodiesel Producer Biodiesel Industry Sub-Model Biodiesel Usage Stakeholders (Biodisel Producers, PERTAMINA, Palm Oil Industry, Consumers, NGOs, Donors, Carbon Market) 16

17 Life Expectancy National Sustainable Development Model based on T21 Millennium Group Model With 1 Modules Added (Energy + Biodiesel) and 1 Modules Expanded (Forest) National Sustainable Development Model Sustainability Impact Sustainable Indicators Social Economy Environment Energy Mix Biodiesel Volume GHG Emission Production Agri Serv Ind Relative Prices Prod Environment Module Climate Forest Change Oil Explora tion Economic Module International Trade Inco me National Price Government Exp end Water Balan ce Investment Energy Module Energy Demand Residential Serv Ind Socio- Tech Module Household Income Distribution Population Technology Employment Transp ort Palm Oil Biodiesel 17

Investment, Cost and Revenue Structure Sustainable Indicators Biodiesel Production Chain Model Development Life Cycle Analysis

18 Expanding the Biodiesel Production Chain Sub-models needs a Multi-Methods Approach which includes financial modeling, Life Cycle Analysis and System Dynamics as the final form Production Mapping Stage Production Process Maps Financial Modeling (cost mapping) Investment, Cost and Revenue Structure Sustainable Indicators Biodiesel Production Chain Model Development Life Cycle Analysis Integration to National Development Sustainability Model Employment and CSR Biodiesel Production Financial Indicators Social Indicators Environment Indicators 18

19 Biodiesel industry has 3 types of production chain ownership that must be include in the model for evaluation Structure 1 Differentiation Total Differentiation. No Single Ownership of all Chains. (Code 1) PALM PLANTATION CPO FACTORY BIODIESEL FACTORY CPO MARKET BIODIESEL MARKET Structure 2 Independent Plantation and CPO Factory are single owner, however Biodiesel Factory is independent. (Code 2) This is the typical structure of the industry PALM PLANTATION CPO FACTORY BIODIESEL FACTORY CPO MARKET BIODIESEL MARKET Structure 3 Integrated Conglomeration, total vertical integration. All Chain are owned by single company dedicated to Biodiesel Market This is the most cost efficient structure PALM PLANTATION CPO FACTORY BIODIESEL FACTORY BIODIESEL MARKET 19

20 Therefore the biodiesel structure model must accommodates this 3 types of ownerships 20

21 These different ownership structure will create different behavior in the sustainability indicators shown in the model results Independent Structure Characteristics are similar to manufacturing companies which its sustainability impacts are related to production numbers EBITDA Biodiesel Employment Biodiesel Production Net Emission CO2 Integrated Structure Has initial environmental burden by maintaining lain, however has more profits due to low cost on obtaining the CPO as incoming material -10 EBITDA Biodiesel Biodiesel Production Employment Net Emission CO2 21

Including the cost structure of fragmented ownership,

integrated structure or using domestic market

Cost 6% CPO Feedstock Cost 62% Other Material Cost 15%

where and how the company use or expand its land, such

22 Including the cost structure of fragmented ownership, that concludes that the only feasible structure is the integrated structure or using domestic market obligations Labor Cost 5% Indirect Cost 12% Utility Cost 6% CPO Feedstock Cost 62% Other Material Cost 15% The integrated structure also allow a better control on where and how the company use or expand its land, such as degraded land and not using slash-and-burn land opening methods 22

23 Land Productivity (Ton FFB/ha/year) There is also land productivity, that has its own cycle depending on the quality of the allocated land % 5.00% % -5.00% % Class1 Class 2 Class 3 Class Class I Class II Class III Class IV Year 23

24 Biodiesel Producer (Yearly) Biodiesel Producer (Acumulated) This cycle will create time unreasonable peaks in the number of biodiesel companies needed to supply the target SOE (Accum.) DMO (Accum.) SOE (Yearly) DMO (Accum.) The time-span target instead of yearly target would require a more consistent approach in developing the industry, instead of frantic decisions when nearing the target million kl million kl million kl 5% 15% 20% 24

25 Juta Ton CPO In the long run, biodiesel would consume much of the CPO production, which could trigger food vs fuel debate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Konsumsi CPO non Energi Kebutuhan CPO - BD Kebutuhan CPO - BD Konsumsi CPO non Energi 25

The Land Use and Green Economy Modules must recognize different types of forest stated by Indonesia s Ministry of Forestry and the basis for green economy calculation Green Economy Indicators Green

26 The Land Use and Green Economy Modules must recognize different types of forest stated by Indonesia s Ministry of Forestry and the basis for green economy calculation Green Economy Indicators Green GDP GDP Carbon Value Carbon Stock Forest Area Land Allocation Scenario Production Forest Conservation Forest Forest Module Limited Production Forest Land Demand Conversion Forest Protection Forest Peat Land Area Land Allocation 26

27 Green Economy Framework for Analysis Indicators Gini Coefficient Poverty Level* Green Jobs in Rural Areas* Socially Inclusive Green Economy Low Carbon GHG Emissions CO2e Emission Biodiesel and Renewable Energy Mix Green GDP Forest Land Carbon Stock Value Resource Efficiency 27

Temporary Scenario for the model with 2 basic conditions: (1) revoke subsidies for Diesel fuel and (2) Domestic Market Obligation for CPO producer to biodiesel production Variable 1.

28 Temporary Scenario for the model with 2 basic conditions: (1) revoke subsidies for Diesel fuel and (2) Domestic Market Obligation for CPO producer to biodiesel production Variable 1. Business As Usual (BAU) 2. BAU with Biodiesel Industry 3. REDD+ Sustainable Palm Oil 4. REDD+ No Palm Oil Expansion Biodiesel Industry Not Developed Developed Developed Developed Land Opening Method Land Productivity Class Fresh Fruit Bunch- CPO Extraction Rate Renewable Energy Mix Achievement Slash And Burn Slash And Burn Slash and Mulch Not Allowed to Expand Mostly High Mostly High Lowest Class Due to Degraded Land Not Allowed to Expand 23,5% 23,5% 25% 25% Off Target Off Target On Target On Target Reforestation Low Low Moderate High Moratorium Not Applicable Not Applicable Effective Effective Forest Fire and Illegal Logging High High Decreasing due to Law Enforcement Decreasing due to Law Enforcement 28

29 Agenda National Development Priorities in Indonesia Challenges in Modeling the Palm Oil Biodiesel Industry within the REDD+ and Green Economy Framework Results and Policy Implications 29

30 Billions Green GDP and Brown GDP Renewable energy pushes the Green GDP in proportional with the growth of Brown GDP. However in REDD+ sustainable palm oil scenario, the Green GDP is higher than BAU 710 USD 700 USD 690 USD 680 USD 670 USD 660 USD Green GDP Brown GDP 650 USD 640 USD 630 USD 620 USD Business As Usual Business As Usual with Biodiesel Industry REDD+ Sustainable Palm Oil REDD+ No Palm Oil Expansion 30

31 Thousands Green Jobs Sustainable Palm Oil Practice requires more workforce to maintain degraded land, therefore Green Jobs are better 2500 Person/yr 2000 Person/yr 1500 Person/yr 1000 Person/yr 500 Person/yr 0 Person/yr Business As Usual Business As Usual with Biodiesel Industry REDD+ Sustainable Palm Oil REDD+ No Palm Oil Expansion 31

32 Thousands Forest Land Covers REDD+ with Sustainable Palm oil could maintain the forest cover, however in the long run the demand is too high comparing to re-forestation efforts 1400 km² 1350 km² 1300 km² 1250 km² 1200 km² 1150 km² 1100 km² Business As Usual REDD+ Sustainable Palm Oil Business As Usual with Biodiesel Industry REDD+ No Palm Oil Expansion 32

Millions Emissions from Energy and Forest REDD+ reduces emissions from forest in 2030 with no palm oil expansion, which unlikely, so sustainable palm oil is better 4000 ton/yr 3500 ton/yr 3000 ton/yr

33 Millions Emissions from Energy and Forest REDD+ reduces emissions from forest in 2030 with no palm oil expansion, which unlikely, so sustainable palm oil is better 4000 ton/yr 3500 ton/yr 3000 ton/yr Emission from Other Sector Emission from Energy Sector Emission from Forestry Sector 2500 ton/yr 2000 ton/yr 1500 ton/yr 1000 ton/yr 500 ton/yr 0 ton/yr Business As Usual Business As Usual with Biodiesel Industry REDD+ Sustainable Palm Oil REDD+ No Palm Oil Expansion 33

34 Policy Implications based on the model REDD+ policy, including moratorium, if delivered consistently within long run, would force the use of sustainable palm production and better production technology (better extraction rate and land productivity FFB/ha) Understanding the micro conditions of biodiesel production chain would shows that biodiesel from palm oil with private sector involvement will be difficult due to conflicting interest (profit vs sustainability). Certain macro conditions that must exist to boost the industry are politically hard: release the fuel subsidy, domestic market obligation, increasing export tax, etc. Government policy to support increased investment in renewable energy needs to be carefully designed in an integrated manner and there is no one-size-fits-all approach (UNEP). Biodiesel from palm oil might be a temporary solutions for transportation energy, however in the long run it would spark the food vs fuel debate. 34

35 Policy Implications for Managing Green Economy..which also makes modeling the green economy is much more easier Switching to green economy would require new data and new definitions with accepted measurements and indicators. New national regulations and initiatives to gather these data is needed Recognizing the multi actors conditions, A new category of land-use: renewable energy production might be needed, with special considerations that are different than ordinary forest or agricultural land. A new category of industry: renewable industry with specific incentives could also be established Part of these policy implications are presented in the 2 nd International Workshop on Systems Modeling and Simulation for Policy Development : Modeling the Green Economy, Jakarta, Indonesia in front of the relevant government, NGOs, and other stakeholders. 35

36 Modeling for an Inclusive Green Economy Workshop Modeling the impacts of Indonesia s REDD+ Initiatives to the Biodiesel Targets in the Green Economy Framework using System Dynamics SEMS Lab Sustainable Development Modeler Team Akhmad Hidayatno Aziiz Sutrisno Rakhmat Satriawan 36

Potency of Palm and Jatropha for Biofuel in Indonesia

Potency of Palm and Jatropha for Biofuel in Indonesia Andi Novianto presented at: International Conference on the Commercialization of Bio-fuels Seoul, September 17, 2007 Energy Policy 2 Current Energy