POLICYMIX - Ecological fiscal transfers

It is widely acknowledged that biodiversity is vital for human wellbeing, and that the current trend of declining biodiversity represents a threat to human welfare and to a sustainable living achievement. At present, there is a growing emphasis on finding appropriate economic tools to provide the right incentives to aid conservation efforts and a sustainable use of biodiversity.

Under fiscal transfer schemes, public revenue is redistributed through transfers from national and subnational governments to local governments. Intergovernmental fiscal transfers redistribute public revenue from national and state governments to local governments. The purpose of the schemes is to compensate decentralised governments for expenditure incurred in providing positive externalities to areas beyond their boundaries.  The majority of fiscal transfers are allocated in the form of lump‐sum or general purpose transfers, and the recipient government is free to decide upon their use.

In addition, there are specific‐purpose (earmarked or conditional) transfers that are only allocated for the provision of specific public goods and services. Ecological fiscal transfers (EFT) are allocated on the basis of ecological or conservation‐based indicators, such as protected areas. The use of fiscal transfers for managing conservation policies is still a fairly new practice: although these are recommended in a number of countries for introduction, until 2011, only Brazil and Portugal have implemented fiscal transfers for biodiversity conservation. In developing and transition economies, about 60 % of subnational expenditure is financed by these transfers, in non‐Nordic Europe and Nordic OECD countries, they represent 46 % and 29 %, respectively.

In conclusion, fiscal transfers are seen as an innovative instrument to provide incentives for local governments to support and maintain the quality of water and nature conservation areas within their territories, and can also provide wider ecological benefits beyond municipal boundaries. However, EFT represents one economic instrument amid various relevant policy instruments for biodiversity conservation. These instruments are habitat banking and payments for ecosystems services, for instance. These instruments have all been evaluated within Policymix and studies from the Department of International Environment and Development studies (Noragric in Norway). 


Vatn, Arild, David N. Barton, Henrik Lindhjem, Synne Movik, Irene Ring and Rui Santos: Can markets protect biodiversity? An evaluation of different financial mechanisms. Noragric Report No. 60 (June 2011)