Palm oil and its derivative products are strategic commodities that play important role in the economic development in Indonesia which along with Malaysia are the main exporters to the global markets. Global well as national demands on crude palm oil are increasing not only as food but also as raw material for biodiesel. To increase production, the extensification of oil palm plantation in Indonesia is still preferable choice. Since there are limited fertile mineral soils, the marginal lands such as peatlands have become targeted areas to open new plantations. Due to reoccurring fire and haze problems while attempting to restore degraded peatlands, the government has issued By Law No 57 in 2016 to protect and manage Peat Ecosystem (Peat Policy). This peat policy which mainly aims at preventing environmental degradation would to some extent reduce planting areas and give implications to the production stretching to the supply and value chain of palm oil and its derivative products. This study assessed how the peat policy affected the planting areas, production, economic value, growers especially the farmers including to the export quantity and value. Herewith, we applied numerical approaches followed with simulation subjected to set-up scenarios. Compared to 2015 figures, the peat policy would reduce palm oil plantation area 10–18% and production 12–15% with the potential implications to the reduction of: 1) economic values 12–15%, 2) number of farmers 12–15%, 3) exported palm oil 21–24%, 4 export value 22–24% and 4) cost of fresh fruit bunch 6–8%. These reductions are so severe to the economic development of the countries and threatening the welfare of the farmers. Accordingly, the government and practitioners should settle on policy choices conducive toward the sustainable development of oil palm plantation in the peatlands, i.e., on how to improve integrated spatial planning, environmentally sound peatland management, intensification program to increase productivity and environment monitoring system.