Ecological Fiscal Transfer – Getting The Incentives Right

July 13, 2021

A transformative finance solution for supporting state governments to protect and conserve nature.

2021 is an important milestone for multilateral environmental agreements, notably United Nations (UN) Biodiversity Convention Meetings (COP-15) in October and United Nations Climate Conference (COP-26) in November. Both conferences are expecting the nations to take stock of and/or adopt more ambitious biodiversity and climate commitments through the post-2020 global biodiversity framework and updated National Determined Contributions. These commitments of actions are needed to keep global warming to within 1.5 °C of pre-industrial levels, and to address biodiversity loss and its impact on ecosystems, species and people.    

Against the backdrop of a global pandemic and trying to build back better from COVID-19, the announcement of Ringgit Malaysia 70 million in Malaysia’s Budget 2021 as Ecological Fiscal Transfer (EFT) to the States to ensure the sustainability of biodiversity presents an opportunity that holds high transformative potential for the government to realize its long term goal in environmental sustainability. 

Distributing Public Money for Nature Protection

Ecological Fiscal Transfer has been around since early 1990s, countries such as Brazil, Portugal, France, China and India have established and implemented EFT schemes that distribute a share of revenues according to where environment is protected. It is a form of intergovernmental fiscal transfers where revenues are redistributed among levels of government, from national to state government and/or state to local governments according to agreed principles and priorities of all stakeholders. Fiscal transfers to local jurisdictions ⎯ regions, states, provinces or municipalities, serve multiple purposes, as they provide the resources for the delivery of public services and can reduce fiscal and economic imbalances. They can also create incentives and accountability systems.

The volume and direction of these transfers are often based on geographical, social and economic indices (e.g. population, GDP, area of jurisdiction) or formulas determined by the country’s fiscal authority. However, these indices rarely include environmental variables.

Therefore, incorporating ecological or environmental indicators into the fiscal allocation formula is crucial to the establishment of a robust and equitable EFT scheme for it to reach the positive effect of incentivising environmental or conservation actions. For example, expansion of protected areas (national parks, wildlife reserves, etc) or protected forests, conservation of threatened plants and wildlife species (Malayan tiger, Orangutan, Giam Kanching, Rafflesia, etc.) or increase of green spaces in cities.

Dichotomy of Federal and States in Malaysia

States in Malaysia have consistently lamented that fund from the Federal government either by way of as incentives, compensation where applicable, innovative economic instruments, financial burden sharing, or direct fiscal allocation for nature conservation and environmental management have been insufficient sorely lacking. There a numerous reasons for this predicament and amongst it, lies partly in the fact that it is the State that has jurisdiction over land and forests, and a shared jurisdiction with the federal government  over wildlife and national parks by virtue of the Concurrent List under the Federal Constitution. This dichotomy of Federal State jurisdiction, authority and the power to exploit natural resources presents a number of challenges in respect of implementing the environmental agenda in many aspects, including negative impacts  in relation to conservation finance, and to effect change will require a paradigm shift in perspective.

The two announcements in Budget 2019 and Budget 2021 provide tremendous opportunities towards establishing an EFT in Malaysia. It is clearly recognised that there are costs incurred by the States for environmental preservation and that there is a fiscal responsibility despite the decentralisation on environmental matters. This is a milestone perspective.

Kickstarting the dialogue on EFT in Malaysia

Earlier this month, UNDP organized a webinar in partnership with the Ministry of Finance and the Ministry of Energy and Natural Resources aiming to facilitate the discussion about the establishment of the EFT scheme in Malaysia. More than 280 stakeholders across federal and state governments, academia, civil society, legal practitioners and private sector contributed to the dialogue. In summary, there are three key messages drawn from the discussion.

First, EFT can be the game changing solution. The budget announcement in 2019 and 2021 creates strategic opportunity that provide fundamental conditions to incentivize States to perform their mandates in conservation. Neither the State can achieve the environmental SDGs alone. This demands a shared approach in the right mix of fiscal incentives.

Second, for EFT to work effectively in a sustainable manner, it needs to be grounded and institutionalized on strong policy and legal instrument, and a public institution with cross-cutting mandate and functions, and influential power across different levels of governance in the country.

Third, integrated whole of government and stakeholders approaches are critical in the design of the EFT particularly the environmental criteria or parameters that will determine the budget allocation to each State and how should this incentive be utilized for conservation actions on the ground with proper monitoring and evaluation mechanism.

This webinar served as a good start that hopefully will be able to contribute to a transformative change that will level up the scale of positive environmental impacts at the state and local level in Malaysia. 

This article was first published in The Malaysian Reserve on 7 July 2021.