Ecological Fiscal Transfer: A Tool for Combating Climate Change

Photo by Deva Darshan on Unsplash

Written by Dineshwara Naidu

Edited by Natasha Zulaikha, Aqilah Awg Abdul Rahman and Sheikh Syaqil Suhaimi

The discussion surrounding climate change has always played a significant role in policymaking and advocacy in every country. This is more so in recent times, as the pandemic highlighted the extent of action needed to combat climate change. It is evident that complacency coupled with ignorance not only exacerbates its effects of climate change, but also brings forth a broad-based disruption of the global economy unparalleled by any other event. For example, a recent Stanford study  has shown that a failure to reach climate goals globally would cost the world US$ 20 trillion, due to the rising temperatures that will have a detrimental effect on the environment, and  the economy. The effects appear to be more apparent in globally south countries such as Bangladesh, as opposed to the north due to complex topography, limited capital resources and inefficient planning. 

Thus, it is pivotal for Malaysians to develop contingencies allowing us to be better prepared for the unforeseeable future. Ecological policies and structures need to be implemented with  a comprehensive and sustainable system to mitigate the consequences of climate change. Therefore, this article will address two key questions: i) What environmental policies are viable in our current system? ii) What are the challenges present in applying these environmental policies? 

Currently, deforestation is posed as a threat to our biologically diverse environment because it reduces our natural carbon sinks and to the livelihood of indigenous communities as their main economic activities will be disrupted. Private companies can ravage through a vast amount of land to feed into its timber businesses, plantations, and development purposes. We constantly see this happening in places like Kelantan and Selangor. In an economic sense, it increases the state’s utility – one of the reasons why State governments have allowed this to happen for so long. The State government benefits on monetary gains such as tax and royalties through taxation of land development. Prolonging this archaic economic system is not sustainable in the long run, but state governments need an alternative source of income should they decide to stop land openings. Hence, a mechanism needs to be introduced in order to compensate for lost revenue from land development.  

This is where Ecological Fiscal Transfer (EFT) comes in the picture. It is an Economic instrument for intergovernmental fiscal transfers under which tax revenue is divided amongst various levels of government according to ecological parameters, such as the Protected Areas (PA) and is also focused on policy results. For example, The Federal government would redistribute income to State governments and state governments would allocate that to a set fund to local governments as well for forest conservation efforts. In terms of conservation results, EFT is promising because i) they do not inherently need new funding as such, but can be focused on improvements to existing allocation schemes and ii) they can be used to promote the development of PA. Our state governments will have an official channel with the EFT in place to put in the critical financial capital to discuss the effect of losing a large portion of their financial income due to the conservation efforts undertaken.

The implementation of EFT has long been a solid eco-policy in countries like Brazil and Portugal as it provides monetary incentives to encourage state or local governments to pursue conservation efforts. Additionally, Indonesia experienced similar success in enhancing decentralisation efforts through EFT as it provided a fiscal balance between governments.   

By implementing the EFT it will also incentivise all levels of government to carry out Reducing Emissions from Deforestation and forest Degradation (REDD+) initiatives. The REDD+ was put into place by the United Nations Framework Convention on Climate Change (UNFCCC) in order for developing nations to: i) reduce emissions from deforestation; ii) reduce forest degradation; iii) conservation of forest carbon stocks and; iv) pursuance of sustainable management of forests and enhancement of forest carbon stock. Malaysia has put in place a national policy called The National REDD Plus Strategy (NRS) which adds to the existing climate policies with the aim of ensuring  forest resources and their ecosystem services are protected and  all stakeholders share the benefits equally and equitably. This is done by distinguishing the forest as natural capital. 

What are the challenges that are present in fully realising EFT in Malaysia? The first (and biggest) challenge is the lack of transparency between the Federal and state governments, along with a system of accountability. In Malaysia’s 2020 budget a total of RM48 Million in funds were allocated for the protection of biodiversity but why is it that state governments still resort to private companies wanting to teardown forests for development? Clearly, it shows that: i) the funding is not enough and; ii) there is a weak system of accountability.

Moving forward, clear communication needs to be established between both parties in terms of transparency of financial data and ecological data. There needs to be a system of check and balance in place to hold every stakeholder accountable. Furthermore, having a select committee in Parliament would be the most efficient way in terms of building a solid foundation of accountability and transparency. Funds allocated also need to include the sovereign development of indigenous people of Malaysia as we need to recognise that they are constantly under threat by logging contractors destroying their livelihood. 

EFT is important to implement so it closes the important gap in policy mix for sustainable development by establishing a financial incentive by paying municipalities to host protected areas. This will assist public authorities in protecting nature and indigenous land rights and will be beneficial in the long run. Ultimately, we believe public authorities will take pride in protecting nature alongside preserving indigenous land rights for the benefits in the long run through establishing the EFT.

Dineshwara Naidu is a political science graduate with a passion of advocating for human rights and climate change and he also enjoys reviewing films in his free time.