The Real Price of Palm Oil Expansion in Indonesia: What a Cost-Benefit Analysis Tells Us
An economic analysis examines the potential benefits and trade-offs of limiting palm oil plantation expansion in Indonesia through 2035.
In October 2026, forest and peatland fires across Indonesia have brought renewed attention to the country's land-use practices. Smoke has spread beyond national borders, affecting air quality in neighboring countries, while images of communities struggling with the haze and wildlife displaced by fires have circulated widely. Although the causes of these fires are complex, the crisis raises broader questions about how Indonesia manages its forests and agricultural land.
At the center of this broader conversation is palm oil, one of Indonesia's most important agricultural commodities. As the world's largest producer, Indonesia relies on the industry for export earnings, investment, and millions of livelihoods. Yet its continued expansion raises an important economic question: How much does Indonesia actually gain from expanding palm oil plantations, and what costs might be missing from that calculation?
Forest conversion can affect biodiversity, carbon emissions, water regulation, and public health. Many of these impacts carry economic consequences, even when they do not appear in the market price of palm oil.
To explore this trade-off, we conducted a cost-benefit analysis that examines the economic implications of limiting Indonesia's harvested palm oil area over the next decade.
What happens if Indonesia stops expanding palm oil plantations?
The study compares two possible pathways between 2026 and 2035.
Under the business-as-usual scenario, Indonesia's harvested palm oil area continues expanding at its historical annual growth rate of 3.12%.
Under the land-area cap scenario, harvested area remains at approximately 14 million hectares, its modeled 2025 level.
Rather than evaluating the industry's profitability alone, the study considers a broader range of economic, environmental, and social impacts. These include forgone production revenue, employment and investment effects, avoided greenhouse gas emissions, biodiversity protection, and reduced fire and flood damages.
Using a 10% discount rate to express future costs and benefits in present-day values, the analysis estimates that limiting further expansion could generate approximately US$88.19 billion in benefits against US$5.81 billion in costs, producing a net present value of US$82.38 billion over ten years.
These figures represent modeled economic values under specific assumptions, not guaranteed savings or additional government revenue.
The largest economic benefit isn't what you might expect
While palm oil is frequently discussed in relation to carbon emissions, the study identifies biodiversity and ecosystem preservation as the largest sources of potential economic benefits. Under the base-case assumptions, biodiversity protection contributes approximately US$72.64 billion, representing more than 80% of total estimated benefits.
Why is this significant?
Forests provide services that support economic activity and human well-being, from regulating water flows to maintaining habitats and sustaining ecological systems. These services have measurable economic value, yet many are not directly priced in commercial land-use decisions.
Reduced flood-related damages account for another estimated US$13.47 billion. Avoided greenhouse gas emissions contribute approximately US$1.02 billion using the study's assumed domestic carbon price of US$4 per tonne.
Together, these findings suggest that evaluating land-use decisions through production revenue alone may overlook substantial environmental benefits.
However, these estimates depend on how ecosystem services are valued and the extent to which avoided plantation expansion translates into actual forest protection.
What could Indonesia lose by limiting expansion?
The analysis also recognizes the economic importance of palm oil, particularly for communities whose livelihoods depend on plantation activity.
Limiting land expansion could reduce opportunities for new plantation employment, constrain future investment, and affect production revenue.
The study estimates approximately US$5.19 billion in forgone labor income under its base-case assumptions.
These impacts may be concentrated in palm oil-producing regions, where plantation employment supports household income and local economic activity.
For smallholder farmers, the question is particularly important. A policy that protects ecosystems but weakens rural livelihoods could create new economic vulnerabilities.
This is why the study emphasizes that any land-area restriction would need to be accompanied by productivity improvements, technical assistance, and targeted support for affected workers and communities.
How certain are the findings?
Cost-benefit analysis helps compare different economic, environmental, and social impacts by estimating their monetary value. However, its conclusions depend on assumptions about future prices, economic growth, environmental benefits, and how policies are carried out.
To test how reliable the findings are, the study examined different scenarios, including 10,000 computer simulations. These tests explore what might happen if economic conditions change or if the actual costs and benefits turn out differently than expected.
The results suggest that limiting palm oil expansion could bring substantial economic benefits. However, if protecting forests delivers less economic value than estimated, or if limiting expansion causes greater financial losses, those benefits could become smaller. In some scenarios, the costs could even outweigh the benefits.
The key takeaway? Limiting palm oil expansion could bring long-term economic benefits, but success is not guaranteed. Much depends on future economic conditions and how well Indonesia can protect its ecosystems while supporting the farmers, workers, and businesses that depend on palm oil.
A different pathway for palm oil industry
The study's findings open a broader discussion about how Indonesia's palm oil sector could grow without relying primarily on land expansion.
One potential pathway is improving productivity on existing plantations through replanting, better agricultural practices, and technical support for smallholders. Expanding downstream processing and higher-value products could also create economic opportunities without requiring proportional increases in harvested area.
The analysis identifies four priorities for further consideration: stronger land-use governance, smallholder productivity improvements, transition assistance for affected communities, and financing mechanisms that recognize the value of ecosystem protection.
Ultimately, the research does not suggest that environmental protection and economic development must be opposing objectives. Instead, it raises a question worth examining;
If the economic value of ecosystems is included in the calculation, could Indonesia generate greater long-term benefits by improving what it produces on existing land rather than continually expanding its agricultural footprint?
The answer depends on real-world implementation, the reliability of economic assumptions, and how effectively the benefits of a changing palm oil economy are shared.
This article summarizes the findings of “Economic Rationale for Capping Palm Oil Production: A Cost-Benefit Analysis,” by Annisa Hana Ramadhani, Boondaric Phaocharoen, Felisha Amara Bahwono, and Salma Laiqa at Columbia University (2026). The report has not been peer-reviewed. Its analysis presents modeled scenarios and should not be interpreted as a forecast of guaranteed policy outcomes.
Read the full research report for the complete methodology, assumptions, sensitivity analyses, and policy recommendations.
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