Fiscal Capacity And Environmental Performance In Indonesian Provinces: Does The Flypaper Effect Stick To Green Outcomes

Abstract

This study examines whether regional fiscal capacity measured by Regional Original Income (PAD) and transfer funds influences environmental performance in Indonesian provinces. Using balanced panel data from 34 Indonesian provinces (2020-2023), we employ Fixed Effect Model (FEM) regression to control for unobserved regional heterogeneity. Environmental performance is measured by the Environmental Quality Index (IKLH). Control variables include GRDP per capita, capital expenditure ratio, and economic structure. Partially, neither PAD nor transfer funds show statistically significant individual effects on environmental performance (p>0.05). However, both variables jointly contribute to explaining environmental outcomes when considered with control variables (F-statistic significant at p<0.01). The within-province R2 of 0.94 indicates that the model explains substantial variation in environmental performance over time within provinces. GRDP per capita demonstrates a positive significant effect (p<0.01), suggesting that economic development levels influence environmental quality.:This study provides empirical evidence that fiscal capacity alone is insufficient for environmental improvement; the effectiveness of budget allocation and governance quality are critical mediating factors. The findings challenge assumptions that fiscal decentralization automatically yields environmental benefits.