Instrument Overview

Consists of a transfer of public revenue between governments based on ecological indicators. Ecological fiscal transfers (EFT) can compensate subnational governments for the costs of conserving ecosystems and, in principle, can incentivize greater environmental conservation.

Why it matters for cities

The environmental benefits of conserving ecosystems accrue at all scales from local to global, while many economic costs of conserving ecosystems are borne locally. As a result, local public resources to address large-scale environmental challenges such as climate change and biodiversity loss are often underfinanced. One mechanism for overcoming the scale mismatch between the environmental benefits and the economic costs of ecosystem conservation is EFTs.

Key features

• The ideal size of an EFT, in terms of the amount of funding or percentage of intergovernmental fiscal transfer, depends on its rationale.
  If the primary rationale is allocating sufficient financial resources for the provision of ecological public goods and services, then estimates of required resources for the relevant ecological public functions (considering current underfinancing) are a starting point. If the primary goal is incentivizing conservation, then the size of the transfer would need to be comparable to or greater than opportunity costs.
• The effect of EFT on the revenues of jurisdictional recipients will vary by the origin or type of funds to be allocated, as well as on the allocation formula.
• EFT can have other effects beyond environmental and revenue outcomes. Such effects can be intended or unintended.
• EFT are just one instrument in the wider conservation policy mix. They cannot be expected to accomplish all policy goals.

How It Works

EFT may transfer revenue ‘vertically’ from higher-level to lower-level governments or ‘horizontally’ between governments at the same level. EFT may be ‘general-purpose’ transfers to subnational government budgets that can be spent on any priority of recipient jurisdictions, whether ecological or non-ecological. Or they may be ‘specific-purpose’ transfers earmarked for a particular ecological use, for example, reforestation or water treatment.

Benefits & Challenges for Cities

Benefits

• Flexible but robust way of improving accountability regarding the use of finance for ecological objectives.
• Relatively simple means to transfer existing funds to local governments to support the protection and restoration of nature through the reformulation of existing revenues.
• By implementing the EFT it will also incentivise all levels of government to carry out Reducing Emissions from Deforestation and forest Degradation (REDD+) initiatives.

Challenges

• A lack of transparency between federal and state governments (or central and local governments) and a flawed accountability system are usually the greatest challenges.

Use Cases

Compensation for conservation and the origin of the EFT in Brazil

The use of the ETF was created in Brazil during the 1990s. It was designed as a mechanism to compensate local governments for their opportunity costs linked to protected areas for biodiversity conservation and watershed protection. Such compensation is mainly addressing the cuts in revenues that would have been generated from agricultural activities.

The amount of the transfer is calculated based on the conservation factor of all municipalities (the more protected area coverage, the more state conservation factor), which has led to an incentive to faster increase the protected area coverage in those municipalities who received EFT schemes.

When to Use It

EFT may be introduced to compensate local governments for their costs in providing ecological public goods and services, or for the lost tax revenue they might otherwise have received from land uses that produce greater revenue streams and thus a larger tax base. EFT is also more likely to emerge when there is already an established mechanism for redistribution of public funds between different levels of government.

References

• https://interactbio.iclei.org/wp-content/uploads/Biodiversity-Finance-Guide_final.pdf
• https://citiesclimatefinance.org/financial-instruments/instruments/ecological_fiscal_transfers_eft
• https://www.idos-research.de/externe-publikationen/article/a-global-review-of-ecological-fiscal-transfers/

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