Indonesia has some of the richest biodiversity on the planet, whether it is tropical forests or the expansive marine ecosystems. These natural assets provide a lot of invaluable ecosystem services that benefit not only local communities but also regional and global populations as well. However, managing and also conserving these assets presents some highly significant fiscal challenges for Indonesia’s provincial governments, who often had to bear the brunt of conservation costs with limited financial compensation. This fiscal imbalance puts conservation activities in most ecologically diverse areas in the country at risk.

One very innovative and highly promising solution gaining attention is the concept of Ecological Fiscal Transfers (EFT). EFT is a fiscal policy tool that reallocates funds from the central government to its subnational governments according to ecological criteria, especially the extent of protected areas that are within their administrative jurisdictions. By including ecological indicators into the formula for grant distribution, EFT aims to compensate provinces for their conservation responsibilities while at the same time recognizing the positive environmental ripple effects that they provide to other regions as well as society at large.

Indonesia’s Decentralization and Fiscal Transfers Policy Context

Indonesia is a democratic and unitary state, having three layers of government and these include national, provincial, and local governments. Since 2001, decentralization reforms have granted more responsibility as well as fiscal autonomy to provinces and districts. However, this autonomy has also brought the challenge of uneven fiscal capacity, demand and need, as the provinces differ so much in economic strength and ecological endowment.

To address this, Indonesia’s intergovernmental fiscal transfer system includes:

• General-purpose transfers (Dana Alokasi Umum, DAU): These are designed to reduce fiscal disparities across regions, distributed based on population, economic indicators, human development, and area.
• Specific-purpose transfers (Dana Alokasi Khusus, DAK): These are allocated for designated programs such as education, health, and environmental initiatives.
• Revenue-sharing schemes (Dana Bagi Hasil, DBH): These are derived from taxes and resource royalties, including forest resource revenues.

Though environmental considerations are also incorporated to some degree, such as through the inclusion of area coverage in DAU calculations, these do not explicitly or sufficiently cover ecological services as well as conservation expenses incurred in provinces having extensive protected areas.

The Case for Protected Areas as an Ecological Indicator

Protected areas such as national parks, reserves, and conservation zones are the frontline when it comes to biodiversity preservation and also the provision of ecosystem services. They impose real costs on provincial governments in management, enforcement, as well as lost opportunities that are incurred from restricted land use that could have otherwise generate economic rent.

As opposed to general area measures, which are not ecologically specific, the protected area extent is a tangible proxy of the conservation responsibility and ecological public functions. Such an indicator depicts both the direct fiscal need for ecological management as well as the spatial distribution of positive ripple effects, such as water regulation and carbon sequestration benefiting neighbouring provinces and beyond.

Plugging protected area indicators into fiscal transfers can therefore be oriented towards compensating those provinces with disproportionate conservation expenses to create incentives of conservation maintenance and expansion. The approach taken by Brazil through its innovative ecological ICMS state tax (Ruggiero et al., 2002) and Portugal through the local finance law has followed the same concept, linking transfers to the quantity as well as the quality of protected areas, ensuring ecological responsibilities are financially recognized (Grieg-Gran, 2000).

Designing Ecological Fiscal Transfers: General Versus Specific Purpose

Fiscal transfers may be classified into two broad categories, general-purpose or specific-purpose grants. Whereas the specific transfers fund defined activities on the basis of accountability they might fail to cover complex ecological externalities, which are hard to delimit and measure in monetary value. Ecological systems are interdependent, and ripple effects traverse administrative boundaries in all aspects, both spatially and temporally.

Thus, the general-purpose transfers, which are based on fiscal capability and need , including ecological indicators, provide more freedom and independence to subnational governments to adopt specific conservation policies.  They are able to contribute to a wider scope of ecological public functions that are very far beyond narrowly defined projects, improving efficiency and institutional compatibility.

The current DAU formula in Indonesia lends itself to ecological integration by extending its area component to explicitly include protected areas, without compromising operational simplicity and at the same time exploiting already known mechanisms that strongly allow provincial discretion

Simulating the Impact of Ecological Fiscal Transfers in Indonesia

Research by Mumbunan et al. (2012) has simulated scenarios for integrating protected area indicators into Indonesia’s fiscal need formula. Using 2007 fiscal data, results indicate:

• Roughly one-third of provinces with high protected area coverage, like Papua, West Papua, and South Kalimantan, benefit from increased transfers, compensating their conservation costs.
• Conversely, about two-thirds of provinces, many with limited protected areas but higher economic activity, experience transfer reductions, reflecting a move away from untargeted area-based allocations.
• The simulation suggests enhanced fiscal equalization: transfers more closely match ecological responsibilities, promoting distributive equity by recognizing the fiscal burden of conservation.
• Province’s rich in natural resources but low in protected areas, such as East Kalimantan, may see declines in transfers, underscoring the importance of balancing ecological and economic indicators.

The proposed tiered scenarios, gradually increasing the protected area weighting over years provides a very good and politically feasible transition to EFT without a lot of abrupt fiscal shocks.

Challenges and Future Directions

Implementing EFT effectively in Indonesia requires overcoming several obstacles:

• Data and monitoring: Comprehensive, and very reliable protected area data, including from local and community-managed forests are very essential in order to ensure fairness and accuracy.
• Political support: Provinces facing reduced transfers might be opposed to reforms; consultation, dialogue, transparency, openness as well as phased implementation can strongly help to build consensus.
• Balancing simplicity and ecological integrity: Although a protected area coverage is a very convenient and practical starting point, future EFT models might consider additional ecological quality indicators.
• Integration with broader environmental policies: EFT should complement and also be highly supportive of national biodiversity strategies, broader climate commitments, as well as local governance reforms.

Civil society coalitions and international organizations like The Asia Foundation and UNDP have been very active and engaged in trying to drive a lot of meaningful dialogues that are strongly centred on EFT in Indonesia, with emerging pilot programs in regions such as Central Java, indicating promising momentum (PATTIRO, 2021).

Conclusion

Ecological Fiscal Transfers represent a highly promising fiscal innovation for Indonesia, enabling provinces rich in biodiversity to receive a fair compensation for the very critical  work they carry out in conservation efforts. Through the integration of ecological indicators such as protected areas into general-purpose fiscal transfers, Indonesia can promote more equitable governance of the natural resources with the benefits of conservation being sustainably funded and distributed. These kinds of reforms can help provincial governments to fund ecological public goods and also help in aligning Indonesia's fiscal decentralization with its environmental and developmental goals, a very good model that can be worth emulating across the Global South.