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33 - ESDAL 1 - UAS 2021 - Adnan Yasir - 1906387221
33 - ESDAL 1 - UAS 2021 - Adnan Yasir - 1906387221
I. Problem Setting
The Indonesian archipelago consist of more than 17,000 islands with its diversity
in faiths, cultures, and landscapes. As the third largest tropical forests and the second
longest coastline in the world, making this country abundances of natural resources. Within
its richness and natural beauty store precious resources which has long been utilized by the
nation and people, so they gained benefits. Thus, the economic and environmental factors
play an important role for enhancing welfare and prosperity of society. Human productivity
generates any kind of natural resources to be something with value-added. In this case,
plant can be used as a source of raw material and energy, especially oil palm.
Indonesia is the first palm oil producer in the world and is contributing over half
the global supply (FAO, 2017). Basically, there are two types of oil palm harvest products
namely crude palm oil (CPO) and palm kernel oil (PKO). Palm oil provides a variety of
derivatives that can be used as a biofuel raw material (Pirard et al., 2015). Both CPO and
PKO are used to be an additional raw material either for food or non-food product such as
butter, chocolate, soap, and biodiesel. This kind of oil raw material is relative cheaper than
others such as olive oil, soybean oil, and sunflower oil. That is why global demand for
palm oil is relatively high which makes the production rapidly increase.
As the main commodity, palm oil production in Indonesia has significant impact
on economy sector. Data from Central Bureau of Statistics BPS (2020) shows that in 2019
Indonesia produced 58,1 million tons including of 48,42 million tons CPO and 9,68 million
tons PKO. The largest domestic producer (CPO) came from Riau which produce 9,86
million tones or equals to 20,38% of total product, then following by Central Kalimantan
which produce 7,44 million tones or equals to 15,37% of total product. Most of the total
palm oil production has exported to across countries while the rest distributed to locals.
The 94,08% of total CPO production was exported to India, Malaysia, Spain, Singapore,
and Netherland with average selling price at 601** US$/mt. In other hand, Indonesia also
imported palm oil amount to 93,56 thousand tones in the same year.
BPS (2020) also reported that total area palm oil plantation reached to 14.595.579
ha in 2019. If we separate by the category producers, private estates have the biggest
proportion which occupy 54,4% of total area, following by smallholders (41,35%), and
government estates (4,23%). Also, private estate is the most contribute to palm oil
production up to 62% of total production, while smallholders and government estates
contribute 33,51%, and 4,41 %. Furthermore, Riau which is the largest production have the
widest relative area of palm oil plantation round 2,82 million Ha in 2019.
By the time, the area of oil plantation getting wider as well as the production of
palm oil increase. A research from Alatas (2015) shows average production of palm oil is
559.130 tons per year and potentially continue to increase. According to Bondan
Andriyanu, Head of Sawit Watch Campaign Department, annual average occurs 500
thousand Ha of new palm oil plantations in Indonesia that obtained from agricultural land
conversion. A suitable tropical climate supports the growth and development of oil palm
vegetative (Alatas, 2015). Both production and area of palm oil in Indonesia has steadily
increased over the years, however between 2000 and 2019, the total area expanded by more
than 3 times. (See Figure 1.1).
Figure 1.1 Oil palm area and palm oil production 2000-2019
Some of the costs and benefits in most CBAs occur in the future. We know in
long-term above 5-10 years, a money of $50 now is not equivalent in the future due to
inflation. Thus, the value of $100 in the future will generally not be the same as its
value today. Most economists agree that, in addition to adjusting for inflation, to
compare current and future impacts, more adjustments are required. This adjustment is
known as discounting. For example, a $50 benefit in ten years is not worth as much as
a $50 benefit today, despite the fact that both are expressed in real terms. Conversely,
the $50 benefit in ten years would be worth less than $100 now. So, to determine the
present, or discounted, value of a future benefit or cost, is shown in the formula below:
PV(Xn) = Xn / (1 + r)n
As you can see by the formula above, present value (PV) is the current value of
a stream of future costs or benefits; a discount rate is used to convert future costs or
benefits to present values. (Xn) denote refers to all the costs or benefits in proposed
project. And then (n) refers to the number of years in the future the benefit or cost
occurs. While (r) denote to discount rate which defined as the annual discount rate for
future benefits or costs in comparison to current benefits or costs. It is important to note
that the higher discount rates significantly reduce the relevance of effects that occur in
the next few decades.
Even though this CBA method conducting discount rate and number of years,
we can also find its net as same as net benefit and B/C ratio. It is called net present
value (NPV). NPV can be obtained by PV of total benefits minus PV of total costs.
While B/C ratio obtained by PV of total benefits divided by PV of total costs. Of course,
the higher NPV or B/C ratio represent more efficiency of project or program in the
future. NPV and present value B/C ratio are formulated as below:
In a nutshell, the higher net benefits or B/C ratio of proposed action may be
considered as the best choice among other actions. To simply understand, there are six
steps of a cost-benefit analysis:
1. Make a list of all the costs and benefits associated with a proposed action.
2. Obtain realistic estimates for costs and benefits that are normally measured in
monetary terms by converting to dollar.
3. Nonmarket valuation approaches can be used to estimate costs and benefits that
are not normally measured in monetary units (e.g., human health, ecosystem
impacts, or nonmarket).
4. Consider transferred values or expert opinions if actual nonmarket values
cannot be approximated due to budgetary or other constraints.
5. Calculate all the costs and benefits, preferably using a variety of reasonable
assumptions or situations.
6. Compare total costs to total benefits to obtain which program is better.
Benefits of Empty Fruit Bunch (EFB), shell, and fibers for fertilizer;
Benefit erosion controller; water nutrient cycle regulator; and carbon
absorber; value of palm oil plantation as water regulator;
After that, he calculated the total of the NPV of palm oil plantation’s activity
feasibility. The calculation method based on the insurance value concept and Head-to-
Head Comparative Analysis (HHCA) approach if the forest is converted into palm oil
plantation. He also calculates the total benefit value of the forest ecosystems based on
the insurance value concept and Head-to-Head Comparative Analysis (HHCA)
approach, if only the forest does not become a palm oil plantation. Each net total
benefits are compared to palm oil plantation and forest ecosystem. The CBA results is
then compared to both options (See Table 3.3).
Based on Table 3.3, forest ecosystem protection actions are evaluated more
feasible to undertake than land clearing activities in the cost-benefit analysis for
environmental feasibility aspect. This is indicated by the larger NPV and B/C ratio for
forest ecosystem protection efforts (−254,220,563,585 thousand IDR) and (4.24) than
establishing palm oil plantations (33,830,435,558 thousand IDR) and (0.005). If we
apply one hectare for opening palm oil plantation, we will get negative benefits
interpreted by NPV equals to (−25,422,056 thousand IDR). While if we apply one
hectare for maintaining forest ecosystem, we will get positive benefits interpreted by
NPV equals to (3,383,044 thousand IDR).
Table 3.1.3 Cost-benefit of environmental aspect feasibility for
palm oil plantation and forest ecosystem protection (in thousands IDR*).
Aspect Components Palm oil plantation Forest Ecosystem
So, we have an evidence to argue that forest ecosystem protection is much better
to be applied for more efficient action in the future. Forest ecosystem gives positive
benefits due to its higher total benefits than total cost unlike palm oil plantation. Based
on the forest ecosystem benefits variable (See Table 3.1.2), forest service such as flood
controller, biodiversity source, soil formation, erosion controller, water regulator,
carbon absorber. But the concern is what makes forest ecosystem’s variables so
expensive? How much is it price society to pay for ecosystem services? Of course, we
need to how much economic value for forest ecosystem services as explained in
literature review.
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