Sonny Mumbunan, Universität Leipzig
Environmental positive externalities from public provision, such as the benefits that public measure of nature conservation yields, are often not internalized. Potential sub-optimal public provision can be expected from such a condition, leading to inefficiency, if positive externality-generating jurisdiction bears the burden of the provision which benefits other parties at a greater territorial scale. Moreover, in developing countries fiscal capacity to perform measures of ecological public functions are often restrained. Meanwhile, their fiscal needs for these functions appear to outweigh their fiscal capacities. The overall aim of this study is to assess the possibilities of ecological fiscal transfers as a set of instrument in public sector to internalize environmental externalities from the perspective of public finance.
Despite an extensive real world application of intergovernmental fiscal transfers for ecological purposes, interestingly research on this subject-matter is still at its infancy. In addition, in the literature of environmental federalism emphasis tends to be put relatively less on the benefits of environmental positive externalities. This study intends to contribute to the extension of the field by applying a specific case of Indonesia as the context, on account of this tropical country’s ecological significance as well as its recent developments during the decentralization process.
This study traces the development of intergovernmental fiscal transfers in Indonesia and proposes a number of policy options for ecological fiscal transfers under the functioning fiscal transfer system and institutions. The incorporation of an explicit ecological indicator into the general purpose transfer is the first option. The second option is derived from revenue sharing arrangement. In this arrangement, two sub-options are proposed: first, shared-revenues from taxes are distributed on the basis of ecological indicator and, second, shared-revenues from natural resources are earmarked for environmental purposes. Finally, the third option suggests an extension of existing specific purpose transfer for environment. The potentials and limits of respective options are discussed. Additionally, a short treatment is given to the discourse on fiscal resource mobilization in the context of tropical deforestation and global climate change.
The research further concentrates on the first option, namely the incorporation of an ecological indicator into the structure of general purpose transfer allocation. In order to substantiate an explicit ecological dimension in the transfer, it extends the present area-based approach by introducing a protected area indicator while maintaining the remaining socio-economic indicators in the fiscal need calculation. Coefficients of area related indicators are adjusted and subject to the proporties of the existing formula. The simulation at the provincial level yields the following results. First, more provinces loose than gain from the introduced ecological fiscal transfer than the level they received in the reference fiscal year. Second, on average the winning provinces obtain a higher level of transfer from the introduction of ecological indicator in the fiscal need calculation. The extent of average decrease of the loosing provinces, however, is lower in comparison to the extent of average gain by their winning counterparts.
Regarding spatial configurations of general purpose transfer with ecological indicator, provinces in Papua would benefit most from the new fiscal regime whereas provinces in Java and Sulawesi, with few exceptions, would suffer a transfer reduction. Provinces in Kalimantan and Sumatera show a mixed pattern. The analysis on the qualization effect of transfer suggests inter alia that in general transfer is equalizing and the introduciton of protected area indicator contributes to the equalizing effect, particularly in the absence of provinces with very high fiscal capacity and when area variable is also controlled.
Since formula-based fiscal transfer distribution is intrinsically zero-sum, the aforementioned configuration of winning and loosing jurisdictions is conceivable. It is the task of further research to explore measures that on the one hand seek to induce the loosing provinces to join their winning counterparts and, on the other hand, are still subject to the requirements of a rational fiscal transfer mechanism.