The European Union Deforestation Regulation (EUDR) is fundamentally reshaping global trade by mandating that production of key commodities, including palm oil, coffee, cocoa, rubber, and timber, be verified as deforestation-free. For Indonesia, the stakes are significant, with 25.4% of Indonesia’s total trade value consists of EUDR regulated commodities. While large firms must comply by December 2026, the regulation presents a systemic challenge for Indonesia’s 2.6 million smallholders. These smallholders face risks, including market exclusion due to high compliance costs estimated at IDR 44 million ($2,600) per farmer, which could increase palm oil prices by up to 9% and raise rural poverty by as much as 17%.
Technical and regulatory gaps further complicate the transition, particularly the conflicting understanding of forest and deforestation definition between the EU and Indonesia, including in relation to agroforestry practices that are widely implemented by Indonesian communities across affected commodities. Without clearer alignment, some agroforestry systems risk being interpreted as deforestation under the EUDR despite their role in sustainable land management and rural livelihoods. Furthermore, highly technical requirements, such as six-decimal geolocation precision and polygon mapping, are deemed strenuous and difficult for smallholders to implement. Governance fragmentation also persists, as Indonesia currently lacks an integrated umbrella policy, leading to overlapping mandates across ministries and regulatory uncertainty for businesses. In the longer term, Indonesia may also consider developing a technical regulatory framework under existing laws to define deforestation criteria for international trade purposes, helping bridge definitional differences without requiring revisions to the national forestry legal framework.
Indonesia faces a systemic compliance gap where fewer than 1% of independent smallholders currently meet EUDR traceability and legality requirements. There is a mismatch between the scale of existing project-based support from EU consumers and the system-wide transformation required for compliance. To address this, the government should prioritize scaling financial support through blended financing schemes and targeted fiscal support to cover upfront costs like mapping, certification, and digital traceability. Furthermore, establishing transitional adjustment mechanisms, such as subsidized compliance programs and concessional financing, is necessary to cushion vulnerable smallholders and small medium enterprises (SMEs) from market exclusion and potential income losses.