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Policy instrument

Ecological Fiscal Transfers

Ecological Fiscal Transfers (EFT) distribute a share of intergovernmental fiscal transfers and revenue sharing schemes according to ecological indicators such as protected areas or watershed management areas. These conservation areas thus become a source of income for the receiving governments. EFT were invented as a compensation scheme for municipalities. Today, EFT are often seen as an instrument that incentivizes decentralized conservation efforts. There are exisisting EFT schemes at subnational level in Brazil and national level in Portugal.

Aim of the resource

The aim of EFT is twofold. On the one hand, EFT compensate municipalities for foregone revenue and other opportunity costs of protected areas and thus help the acceptability of nature conservation. On the other hand, protected areas become a source of income and thus create an incentive for decentralized conservation efforts.

Requirements for using the resource NEW
  • Political will
  • A law or a decree that specifies the functioning of EFT
  • Municipal conservation competencies (if the incentive for decentralized conservation efforts are to have an effect)
Potential benefits from using the resource
1) helps and incentivizes public conservation efforts
2) does not require any additional finance since it constitutes a change in the distribution of existing tax revenue
3) partly decentralizes the decision of where to protect nature, taking into account local preferences and benefiting from local knowledge
4) transaction costs for implementing such a scheme are considerably low
5) growing body of evidence and simulations of adaptations to other government levels and countries
Potential limitations from using the resource
1) requires sufficient political will and momentum to change the tax revenue distributive mechanism
2) needs some cross-departmental cooperation, e.g. fiscal administration and conservation officials
3) requires a mix of municipal conservation competencies and fiscal incentive to be effective
4) needs tailor making according to fiscal contitutions if to be adapted elsewhere
Sub/region where used
Scale of application
UN languages in which the resource is available
Other languages in which the resource is available
Portuguese (Brazil)
Development stage
Full, working product
Nils Droste
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Assessment of effectiveness of the tool or instrument

There is a growing body of evidence that the implementation of EFT schemes increases municipal designations of protected areas.

  • May PH, Veiga Neto F, Denardin V, Loureiro W. (2002). Using fiscal instruments to encourage conservation: municipal responses to the
    ‘ecological’ value-added tax in Paraná and Minas Gerais, Brazil. In: Selling Forest Environmental Services: Market-Based Mechanisms for
    Conservation and Development
    , Pagiola S, Bishop J, Landell-Mills N (eds). Earthscan: London; 173–199.

  • Ring I. (2008). Integrating local ecological services into intergovernmental fiscal transfers: the case of the ecological ICMS in Brazil. Land Use
    25: 485–497.

  • Sauquet A, Marchand S, Féres J. (2014) Protected areas, local governments, and strategic interactions: the case of the ICMS-Ecológico in the
    Brazilian state of Paraná. Ecological Economics 107: 249–258. doi: 10.1016/j.ecolecon.2014.09.008

  • Droste N, Lima GR, May PH, Ring I. (2017) Municipal Responses to Ecological Fiscal Transfers in Brazil: A microeconometric panel data approach. Environmental Policy and Governance 27(4): 378–393. doi: 10.1002/eet.1760

  • Droste N, Becker C, Ring I, Santos R. (2017) Decentralization effects in Ecological Fiscal Transfers: A Bayesian Structural Time Series Analysis for Portugal. Forthcoming in Environmental and Resource Economics. doi: 10.1007/s10640-017-0195-7

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