EFT Across the Globe

In a time where the world’s economies were put on the back-burner , it’s horrifying to learn that deforestation activities continued despite the ongoing COVID-19 pandemic. Just last year, Malaysia recorded the loss of 122kha of its natural forests, which is the equivalent of approximately 300 football fields. This is further proof that we need to ensure our government is committed to conserving our native flora and fauna, which can be done more easily if the nation implements ecological fiscal transfers (EFT).

What is EFT you may ask? In layman terms, EFT is the redistribution of existing public funds among different public sectors for the protection of nature. By applying this, government bodies are provided with more incentive to establish crucial preservation activities that determine the livelihoods of everyone in and around the area. Its effects can be felt socially, economically, and environmentally. For example, the conservation of natural lands would mean more greenery for our health, the earth’s ozone, and lesser rehabilitation expenditure on preventable disasters. In other words, it is public money for public welfare.

So, the bigger question is this – how can we pair this with our national REDD+ strategy for maximum effectiveness? The only way to answer that is to look at how other countries have implemented EFT and learn from their successes and failures.

Since the early 90’s, numerous states in Brazil have practiced EFTs in an effort to conserve the lands’ picturesque nature. This is done by utilising the federal goods and services tax (ICMS-E) imposed onto the people and allocating these revenues to decentralised governments for conservation projects. As with most other countries, Brazil’s intergovernmental fiscal transfers are based on lump sum payments which provides the receiving government with more leniency as to how the funds will be used. This lump sum payment is based on general quantitative indicators, such as population size and area. The role of EFT is to include additional indicators that are in favour of the environment. States that observe these policies will receive higher payments from the federal administration.

However, the EFT index used is entirely dependent on the lower-tier government’s decision, leading to variations across the country. For example, Paraná and Minas Gerais included qualitative EFT indicators, such as the quality of planning, implementation, and maintenance of protected areas (PA). As a result of this, they were given more funds than other Brazilian states for natural parks, reserves, and research-intended PAs. An example of successful usage of quantitative EFT indicators is Mato Grosso, where PAs acted as a greater source of ICMS-E revenues than traditional livestock and logging. Besides that, the spillover effects of EFT in Mato Grosso includes the distribution of extra funds to non-municipal stakeholders with lands within municipal boundaries, such as indigenous tribes.

Regarding quantitative versus qualitative EFT index, research shows that they should be coupled together for better results. This is because qualitative indicators help to stimulate and improve efforts on local biodiversity protection and management. In terms of funding, Paraná has shown that qualitative indicators will not increase costs when it is attached with supplementary resources transferred. Besides that, Paraná’s experience with EFTs not only raised awareness of its environmental conservation to everyday problems, it also positively changed the community’s behaviour towards it. Therefore, Malaysia would do well to also emphasise on qualitative indicators to ensure successful results as those seen in Paraná, where it’s increased the interests of local politicians to engage in environmental questions and improve their management.

Additionally, Portugal has been implementing EFT since 2007 through its Local Finance Law that is dedicated for local sustainability. Its main goal is to reimburse municipalities for land-use constraints by providing monetary incentives to the local government. Yet, despite over 10 years of experience with EFTs, its effects are unclear due to improper measurements that disregard the quality or status of protection of different PAs. The attributes were either (i) the EFT was introduced together with other FTs causing negligence in fund allocations or (ii) inadequacy of ecological components to neutralize other effects and provide sufficient incentive. Nevertheless, a steady growth in the declaration of new Portuguese PAs was recorded.

Similarly, France started implementing small-scale EFT schemes in the same year as Portugal, where reimbursements via an “ecological allocation” is given to municipalities with PAs. It focuses more on increasing district conservation efforts without simultaneously increasing interdistrict inequalities, which is acknowledged in the division of funds (85% general purpose, 15% fiscal disparities equaliser). The French EFT also encourages municipalities to participate in conservation activities through its tax relief systems which provide exemptions and monetary compensations. Nonetheless, the case is similar to that of Portugal which placed more importance on policy than results by overlooking necessary effectiveness assessment tools. Henceforth recognising the threats and vulnerabilities of EFT is crucial for Malaysia to successfully execute EFT.

What Malaysia can learn from the weaknesses in Portugal and France’s EFT implementation is how our attention should be directed at securing a structured and reliable monitoring system that will safeguard the success of our national REDD+ strategy. One solution to this would be employing more native people with superior knowledge of the lands and funding indigenous tribes through the spillover EFTs, which greatly benefits their livelihoods (as seen in Brazil). Besides that, we could also learn from the French system’s strengths which demonstrated how tax reliefs can be used to sustain nature-friendly practices. On top of the previously mentioned qualitative index, another key takeaway from Brazil is the consideration of some states to include results-based payments for ICSM-E revenues. Not only does this guarantee effective conservation practices, it also avoids municipalities from misusing the allocated funds.

In summary, despite the small vulnerabilities of EFT shown in some countries, it does not overshadow the advantages that EFT will bring in biodiversity conservation efforts in Malaysia. Together with the ongoing REDD+ strategy that Malaysia is implementing, EFT can be a great financial foundation for incentivising REDD+ policies and actions. This is because EFT provides a ready functioning financial foundation that stimulates REDD+ at the sub-national level. Both of these implementations will work hand in hand making positive environmental impacts without the need for an additional budget. With thorough planning and management, we could achieve a brighter and greener future, alleviating the current code red of our climate condition.

Written by Sarah Sabrina and Puteri Aida Sakeena