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The central thesis of the energy ladder model is a unidirectional transition from primitive to advance fuel with increased affluence of households. Although now largely discredited, this assumption remains a foundation of laissez-faire policies that anticipate energy transition resulting spontaneous forest recovery with economic development. Our results suggest that such policies can undermine broader policy objectives and actually worsen forest conditions in rural Indonesia. Based on a case study of forest margin communities in eastern Indonesia, we demonstrate that fuel subsidy reform did little to reduce rural household demand for fuelwood, while dramatically increasing fuelwood demand for processing agricultural products. Our results show how household decisions related to fuel sources are affected by non-economic considerations and external factors, such as opportunities to sell fuelwood. We argue that policy interventions that encourage energy transition of households do not necessarily improve forest conditions, as household fuelwood use may be a symptom, rather than a driver of deforestation and forest degradation. Thus policies to improve forest conditions should focus more on addressing the market environment of forest-margin communities, providing energy alternatives to small industries that are often the larger consumers of fuelwood.