Degree of decentralization (fiscal and otherwise): Fiscal decentralization

In Cameroon, forests are valued by the hectare and fees must be paid to the central government. The annual forestry fee decreed in 1998 is CFA Franc 1,500/ha (USD 2.40/ha) for forest concessions and CFA Franc 2,500/ha (USD 4.05) for the exploitationsome countries, despite decentralization attempts, lower levels of sales of standing volume.

Forest revenue redistribution for local development is one of Cameroon’s policy priority areas. In 2012, the Cameroonian government decentralized forest and wildlife revenue to municipal councils and local communities. Take a look at the charts to see how revenues are currently distributed.

However, the 2015 Finance Law proposes that 50% of the annual forestry fee be distributed to the State and 50% for councils. This would cancel the 10% allocated to local communities, taking away some of the financial and political autonomy of local people. This could be seen as tentative recentralization by the continue to be highly dependent on national government.

The European Rural Development Policy (RDP) is an EU-wide progamme that aims to address environmental, social and economic challenges across 27 European Union (EU) member states.

Decentralization has been identified as an effective way of targeting environmental objectives, as decision making moves closer to the local level. This means that policy can be better informed by context. Thus, many EU countries have regionalized their national rural development policy approaches. Scotland’s RDP is developed and implemented nationally, but in 2007-2013, regional decision-making groups were selected to develop rural priorities and deliver policy. Yet, in practice, power failed to transfer from central government to the regional groups, due to a lack of capacity.

In Vietnam, the State Budget Law 2004 requested formally mandated fiscal decentralization, granting local governments, including those at the provincial level, ven more power to make decisions on resource allocation within their provinces (Morgan and Long, 2017). Given the trend toward decentralization, in the future, it might be possible to apply the national Payments for Forest Environmental Services (PFES) benefit-sharing mechanism to REDD+ payment distribution. Under this mechanism, the central PFES Fund—which would include the REDD+ Fund—managed by Ministry of Agriculture and Rural Development would distribute land use funding such as REDD+ to provincial governments, allowing each province to distribute funds to its own environmental service providers (Pham et al, 2021, REDD+ finance)

In Myanmar, the decentralization process has led to some devolution of administrative responsibilities, yet the lower levels of government continue to be highly dependent on national government due to uneven capacities. State and regional governments have a constrained revenue base and continue to rely on transfers from the union level. Myanmar continues to be a centralized country due to the small size and central oversight of budgets, and restrictions on political autonomy (Oo et al. 2020^[1]).

Under the DRC’s Constitution and law, decentralized government units have separate finances to ensure the financial autonomy of decentralized territorial entities. Certain costs previously borne by the central government have been transferred to the provinces, such as the responsibility to ensure revenues from natural resources effectively contribute to provincial development. As a result of this change, the most financially endowed provinces are those that existed under the previous structure of provinces, while newly-created provinces often lack the infrastructure and resources to generate the income needed to support their development. The Maï-Ndomebe REDD+ Jurisdictional Project also highlights why support to the provinces is necessary: provinces need to maintain full ownership over the forest emissions reduction programme for REDD+ to be effective as they will receive some of the payments resulting from emissions reductions made within the provinces.

To address inequalities arising from the development of provinces and decentralized territorial entities, the DRC Constitution stipulates that 40% of national revenue is withheld at source and put into a national equalization fund for redistribution. This national equalization fund could help improve the capacity of subnational governments to generate their own income from various sources, including the exploitation of natural resources, However, the functioning of this fund is unclear, and it is difficult to determine the real contribution it could bring to the development of the new provinces (Kengoum et al. 2020^[2]).

Starting in 1991, the Brazilian state of Paraná collected taxes from the sale of goods, transport and communication services, using the fuunds to protect biodiverse areas. Called the Imposto sobre Circulação de Mercadorias e Serviços – Ecológico (or ICMS-E), this “ecological” value-added tax accounts for over 90% of the fiscal revenues of state governments in Brazil.

Part of the tax proceeds are reallocated back to municipal governments as compensation for revenues lost from protected areas. The ICMS-E is intended both as a compensating mechanism and as an incentive, encouraging not only better management of existing protected areas, but also the designation of new conservation areas.

Some studies have shown a direct correlation between the ecological tax and increase in protected areas: total protected areas in Paraná state have increased by 164% since 1991. However, quality indicators for monitoring environmental effectiveness are lacking.

Brazil’s ecological tax leverages existing state administration and can create political buy-in via a bottom-up approach to forest conservation. But it does require transparency in the distribution of revenues.

Proposals for a Brazil-wide national-to-state environmental fiscal transfers (EFTs) have been introduced to the Brazilian Parliament since 1999, but none have yet passed into law. Between 1992 and 2017, a tax revenue-sharing scheme in Brazil designed to promote the conservation and management of protected areas known as the ICMS Ecologico (ICMS-E) devolved more than USD 8.8 billion to municipal governments. Furthermore, Brazil’s federal system allows different state legislatures to experiment with different revenue allocations across municipalities. For example, the states of Minas Gerais, Paraná, Piauí and Rio de Janeiro introduced qualitative indicators of protected area management. A further level of variation occurs at the level of municipal governments, which allocate ICMS revenues in accordance with their budget priorities, with states also varying in the degree to which their EFTs experienced delays between enactment by a legislature and implementation by a state agency. There is evidence from panel regressions across Brazilian states that EFTs led to a tripling in municipal protected areas (Droste et al. 2017^[3]) and a shorter average time to protected area designation. While there are questions about whether some of these new protected areas are unmanaged “paper parks”; an extreme example is an entire municipality in Minas Gerais that was made into an environmental protection area to benefit from the ICMS-E. Research suggests that EFTs have already incentivized subnational governments to increase protected area coverage in Brazil (Busch et al. 2021^[4]).

In China, the system of intergovernmental fiscal transfers includes three types of environmental fiscal transfers (EFTs), with the most important type being the general-purpose fiscal transfer payments for National Key Ecological Function Areas (NKEFAs), established nationwide in 2010 to compensate county-level governments for their expenditures and to stimulate them to promote nature conservation in areas with vulnerable biodiversity. The central government transferred approximately USD 11.4 billion via the NKEFA scheme in 2020. The EFT distributes around 0.95% of the general transfer from the central government to local governments to those counties that have NKEFAs based on an allocation formula that includes multiple elements related to ecosystem quality (for example, biological richness, vegetation coverage, water network density, land stress, pollution load and environmental restrictions). The transfer scheme also includes bonus payments for local governments that perform well, and fines for local governments that perform poorly, based in part on an ecological index. Several studies have found China’s NKEFA payments to have had a positive effect on some aspects of environmental quality. For example, quasi-experimental studies found that transfer payments reduced pollution-intensive activity in the Yangtze River Basin and improved environmental quality in Guangdong Province 51 while panel regressions across Chinese provinces found that transfer payments reduced pollution and that payments improved water. This suggests that EFTs have improved some aspects of environmental quality in China (Busch et al. 2021^[5]).

India’s Finance Commission is responsible for deciding every five years how much tax revenue is distributed from the national government to state governments and the formula for how this revenue is distributed between states. India’s ecological fiscal transfer programme began in 2015 when the 14th Finance Commission included the areas of high- or moderate-density forest as 7.5% of the distribution formula. This was done to compensate states for the “fiscal disability” of their forgone tax revenue due to maintaining or protecting forest cover, and to recognize forests’ substantial ecological benefits. In the first five years of the EFT, more than USD 37 billion was transferred to states based on forest cover. The introduction of ecological fiscal transfers was concurrent with a substantial increase in transfers to states as the amount of money distributed from the national government to state governments increased from 32% to 42% of tax revenue, boosting confidence in state governments that increases in forest cover could be rewarded with increases in funding (Busch et al. 2021^[6]). This is just one example of how the national government can compensate subnational governments for the revenue lost from protecting forest areas that they would otherwise have received revenue from developing.

Land tax laws have been in place in Cameroon since the mid-1970s. Until recently, there had not been any evaluation of how well they were working.
Researchers from the Center for International Forestry Research have studied five subsidiaries of multinationals operating in Cameroon’s oil palm, rubber, banana and sugarcane sectors. Only an oil palm and a sugarcane corporation had operations on “national” lands. That is, land that was not already privately or publicly owned, and they were thus required to pay land taxes to councils and communities.
Most councils use land rents to meet current needs such as paying salaries rather than investing them in sustainable development. But even those councils that do invest in community projects have not reduced poverty at the household level.
“Revenue from land fees is not used differently than forest royalties,” said Samuel Assembe Mvondo, the study’s principal author. “It is not meaningfully invested in health, electricity, water or education.”
To improve sharing of rents on national land, the study recommends:
— Carrying out a systematic inventory of national lands occupied or granted/leased
— Ensuring all operators pay land rents as required by law
— Launching competitive bids for national lands open to investment
— Ensuring all information related to occupation/use of national lands is published.
Adapted from Results of Cameroon land-fee study hold lessons for REDD+

Starting in 1991, the Brazilian state of Paraná collected taxes from the sale of goods, transport and communication services, using the fuunds to protect biodiverse areas. Called the Imposto sobre Circulação de Mercadorias e Serviços – Ecológico (or ICMS-E), this “ecological” value-added tax accounts for over 90% of the fiscal revenues of state governments in Brazil.

Part of the tax proceeds are reallocated back to municipal governments as compensation for revenues lost from protected areas. The ICMS-E is intended both as a compensating mechanism and as an incentive, encouraging not only better management of existing protected areas, but also the designation of new conservation areas.

Some studies have shown a direct correlation between the ecological tax and increase in protected areas: total protected areas in Paraná state have increased by 164% since 1991. However, quality indicators for monitoring environmental effectiveness are lacking.

Brazil’s ecological tax leverages existing state administration and can create political buy-in via a bottom-up approach to forest conservation. But it does require transparency in the distribution of revenues.

Around the world, taxes are set too low to account for negative environmental externalities. It is estimated that only between 3% and 30% of the potential economic rent from timber is collected by governments globally (Heine et al. 2021^[7]). For example, Indonesia collects around USD 272 million annually in forest sector fees, 70% of which comes from a fee schedule that does not consider market prices and has remained unchanged since 1999 (KPK 2015). Similarly, in 2016, Indonesian authorities only collected 52% of potential timber royalty revenues (Mumbanan 2016^[8]). The issue reinforces itself in that weak governance impedes the collection of revenues, and the lost revenue cannot be reinvested into enforcement and retaining good staff (Verhoeven 2019[9]). Fees from negative environmental externalities must be set higher to effectively deter environmentally damaging behaviour.