The Economic Impact of European Union (EU) on Indonesian Palm Oil Smallholders: Quantitative Approach

Abstract

The aim of this study is to investigate the impact of the EUDR on Indonesian palm oil smallholders from an economic perspective. Several quantitative approaches were utilized in this study, namely the 2SLS regression using data from the period 2002 to 2022, and a simulation of statistical data on palm oil production values and production expenditures. The results reveal that the implementation of the EUDR could potentially reduce smallholder welfare by lowering FFB prices by -1.62% to 9%. Furthermore, the simulation predicts that poverty in some provinces involved in the European Union supply chain could increase by 1.15% to 17.20%. This indicates that the number of poor people could rise if the EUDR is not anticipated with measures to ensure an increase in the selling price of TBS. To mitigate these effects, policymakers should consider premium pricing mechanisms to offset the increased costs of compliance, while ensuring transparency, accountability, and proper dissemination of EUDR regulations to help farmers understand the associated benefits and challenges. Additionally, the regulation should initially apply only to products from vertically integrated palm oil operations, where compliance can be more effectively monitored and enforced.