Does redistributing taxes increase reforestation and environmental preservation?

Responsible researcher: Angelo Cruz do Nascimento Varella

Article title: ENCOURAGING STATE GOVERNMENTS TO PROTECT AND RESTORE FORESTS USING ECOLOGICAL FISCAL TRANSFERS: INDIA'S TAX REVENUE DISTRIBUTION REFORM

Article authors: Jonah Busch and Anit Mukherjee

Location of intervention: India

Sample size: Forest coverage data and fiscal transfers between 2011 and 2015

Big theme: Environment, Energy & Climate Change

Type of Intervention Forest preservation

Variable of Main Interest: Area covered by forests

Assessment method: Others

Policy Problem

The preservation of the environment and original ecosystems is a relevant global challenge that faces several and complex obstacles. One of the main obstacles to environmental conservation is the fact that commercial gains from the exploitation of natural resources are local and concentrated, as opposed to the losses resulting from these activities, which are general and decentralized. This creates a problem of economic incentives.

A solution widely used around the world is payments conditional on activities to preserve and restore ecological ecosystems. Thus, financial rewards create new economic incentives and reduce or mitigate actions that are harmful to the environment, combined with other mechanisms such as inspection and penalties for non-compliance with environmental rules.

In the case of forests, it is possible to highlight three types of conditional payments:

1. Payment for Environmental Services (PSA)
2. Reduction of emissions from deforestation and forest degradation, more conservation of forest carbon stocks, sustainable forest management and increase in forest carbon stocks (REDD+)
3. Ecological Fiscal Transfers (TFE)

Assessment Context

Ecological Fiscal Transfers have some advantages over other payment options conditioned on environmental preservation. Firstly, fiscal transfers are common and already operate in several countries and states. The TFEs are easy to implement and allow the bonus or penalty of environmental conservation actions in a decentralized and widespread manner, meaning that the incentive funds are applied to locations economically affected by the choice of preservation. In addition, obviously, it can be used in conjunction with other conditional payment options.

 By 2014, countries such as Germany, Brazil, France, Poland and Portugal had already implemented TFE legislation for environmental preservation areas. There were also implementation initiatives in India, Indonesia and the European Union. However, India was the pioneer country to create a TFE system for forests.

Policy Details

Implemented by the 14th Finance Commission in 2014, the Indian TFE program uses the area covered by forests to determine part of the annual tax redistribution rate from the central government to the country's 29 states. The following graph shows the evolution of the parameters that define this distribution, until the implementation of the TFE rule for forest preservation.

According to the decision of the 14th Financial Commission, between the years 2015 to 2019, 7.5% of the total taxes to be transferred by the central government to Indian states (yellow area in the graph) will be linked to the total area of ​​the territory covered through forests. Data from the Central Government of India estimates that the amount allocated for this purpose will reach between 6.9 and 12 billion dollars annually. In fact, according to the Reserve Bank of India, in 2015, a total of 5.7 billion dollars – the equivalent of 364 billion rupees – were effectively transferred in proportion to the respective forest cover.

It is worth noting that this amount characterizes Indian legislation as the largest TFE tool on the planet. The Indian government's general objective with the measure is to increase the proportion of territory covered by forests from 24%, observed in 2013, to 33% of the country's total area.

Assessment Method

The data used in the present study comes from satellite images that measure the proportion of areas covered by forests and official data from the government of India and its Ministry of Environment, Forests and Climate Change. It is worth noting that this indicator does not distinguish plantations or gardens from forests, which generates some criticism from experts. However, the Indian government claims that the measure is beneficial to the environment and that large forest cover provides immense ecological benefits.

In order to investigate these statements and verify whether the implementation of tax incentives for preservation effectively helps to reduce forest deforestation and increase the areas covered by forests, the researchers used the collected databases to compare the evolution of these variables over time. . It is worth highlighting the fact that this is an incipient analysis, which only covers the first two years of application of the law. The authors themselves emphasize that more time is needed to compare effects on reforestation conditions and changes in behavior on a national scale.    

Results

After the introduction of TFE, the devastation of dense or moderate forests was reduced by 51%, from 1,960 km ² between 2011 and 2013 to 969 km ² between 2013 and 2015. However, the authors highlight that this result is still not enough to implement a complete analysis of the effects resulting from the implementation of new environmental legislation, mainly due to the lack of empirical evidence regarding reforestation rates. The authors state that, due to the short time between the creation of the law and the study, this result cannot yet be confirmed. However, the evidence observed is encouraging.

Public Policy Lessons

The analysis of the results resulting from the implementation of TFE for forest coverage, until the moment this study was carried out, did not present robust results that indicate improvements in the respective state indicators. However, the authors highlight that this analysis is preliminary and present encouraging evidence that points to an optimistic scenario in relation to the objectives proposed by the law.

Firstly, state governments demonstrated interest in tax incentives throughout the analysis period, especially due to the possibility of reviewing legislation for periods after 2019. Secondly, it is natural that adjustments in government planning take time to be effectively put into practice, mainly in relation to land use. Thirdly, while it was possible to observe a certain general impact on reducing deforestation, reforestation indicators are too porous, due to the need for tree growth to meet the appropriate criteria.

The authors' conclusions also take into account potentially negative aspects. Firstly, despite being the largest TFE on the planet so far, the annual transfer represents only 1.8% of states' total revenues and may not be enough to shape political preferences. Secondly, the authors warn of the need to increase punitive measures for those who backtrack on environmental preservation. Finally, the researchers argue that it is necessary to pay attention to the fact that considering plantations as forest cover can generate inadequate incentives and cause states to carry out reforestation procedures without due ecological requirements, generating a negative externality, such as planting commercial nature, instead of practicing the reforestation recommended by experts.

Despite the warnings, the authors indicate the environmental and social beneficial potential that the new legislation has and state that new studies will be able to provide reliable answers.

Reference

BUSCH, Jonah; MUKHERJEE, Anit. Encouraging State Governments to protect and restore forests using ecological fiscal transfers: India's tax revenue distribution reform. Conservation Letters, vol. 11, no. 2, p. e12416, 2018.