Towards a greener archipelago: strengthening Indonesia’s environmental quality through fiscal transfers

Purpose This study assesses whether Indonesia’s ecological fiscal transfer (EFT) framework improves municipal environmental quality and whether accountability strengthens the impact of intergovernmental transfers on the environmental quality index (IKLH). Design/methodology/approach The study uses quantitative method with national panel of 514 regencies and cities over 2020 to 2024. The empirical strategy applies fixed effects models and dynamic system generalized method of moments (GMM) to address unobserved heterogeneity, persistence in IKLH and potential endogeneity. EFT-related fiscal instruments are proxied by environmental spending through the special allocation fund (DAK), revenue sharing funds (DBH) and village funds (VLF). Findings Earmarked and locally actionable transfers show the most reliable environmental returns. DAK and VLF are consistently associated with higher IKLH across specifications. DBH displays weaker average effects but becomes environmentally productive when interacted with accountability, indicating that governance quality converts fiscal discretion into outcomes. Environmental quality exhibits strong persistence over time, and results are consistent with convergence, with faster improvements among initially lagging regions where accountability is stronger. Economic scale and demographic pressure are linked to weaker environmental outcomes. Practical implications EFT should be treated as a performance regime by embedding verifiable ecological indicators into allocation rules, scaling climate budget tagging and linking multi-year transfers to audited outcomes, supported by digital monitoring and accountability reforms. Originality/value The study provides early nationwide evidence on Indonesia’s EFT architecture and offers a replicable governance conditioned model for decentralized developing economies.