Principal investigator: Angelo Cruz do Nascimento Varella
Article title: MUNICIPAL RESPONSES TO ECOLOGICAL FISCAL TRANSFERS IN BRAZIL: A MICROECONOMETRIC PANEL DATA APPROACH
Article authors: Nils Droste, Guilherme Rodrigues Lima, Peter Herman May and Irene Ring
Location of the intervention: Brazil
Sample size: Brazilian municipalities
Main theme: Environment, Energy & Climate Change
Type of Intervention: Effects of adopting green tax transfers
Main Variable of Interest: Proportion of Environmental Preservation Areas
Evaluation method: Experimental Evaluation (RCT)
Policy Problem
Environmental sustainability is a global challenge that affects all sectors of society. The search for solutions and public policies that ensure the preservation of the environment faces economic, political, and social obstacles, which are addressed by governments of various countries in a variety of ways, aiming for a balance between sustainable development and financial viability.
In Brazil, several authors argue in favor of using ecological fiscal transfers, which are tools, used for decades in the country, to redistribute funds from tax collection from higher to lower levels of government. In this way, states and municipalities that effectively act to preserve areas of environmental interest are financially rewarded.
Assessment Context
One of the main policies for ecological tax transfers is characterized by the Ecological ICMS (ICMS-E), an instrument that redistributes part of the resources from the Tax on the Circulation of Goods and Services (ICMS) based on environmental preservation factors, such as the existence of environmental protection areas and the conservation of regions rich in water resources.
Popular in several countries around the world, such as Germany, Australia, France, India, Indonesia, Portugal, and Switzerland, green tax transfer programs are used to secure funding for actions aimed at environmental sustainability. Researchers are debating the application of this type of tool on a global level, aiming to encourage underdeveloped nations to increase their local environmental preservation efforts.
In Brazil, Paraná was the pioneering state to implement the ICMS-E (Tax on Circulation of Goods and Services - Elective) in 1991, following political pressure from municipalities that were required to maintain Environmental Protection Areas (PA) within their territories. Since then, 16 other federative units have adopted similar measures, notably the legislation created in the states of Ceará and Pernambuco, in the Northeast, which include social parameters in the calculation of the ICMS-E (called Socio-environmental ICMS), and in the state of Minas Gerais, where the measure was dubbed the "Robin Hood Law," since the main purpose of the legislation is to redistribute financial resources to the poorest municipalities in the region.
Policy Details
In general, the ICMS-E (Tax on Circulation of Goods and Services - Electronic) uses environmental conservation parameters through a calculation that takes into account the proportion of protected environmental areas in a municipality, compared to other municipalities in the state. Thus, based on this proportion, which varies for each federative unit, state ICMS resources are redistributed to benefit localities that have maintained federal, state, and municipal protected areas and relevant water resources.
To help the reader put these efforts into perspective, in 2014, approximately 18% of Brazilian territory had some type of environmental protection, of which 8,8% were federal, 8,9% were state, and 0,3% were municipal. Although this may seem small, these proportions are considerable. Representing only 0,3% of the national territory, the area corresponding to municipal protected areas, for example, is equivalent to the area of Belgium.
The implementation of ICMS-E has several interesting characteristics. In the text, the authors highlight five main points:
- The legislation does not require additional costs to the states and the federal government, since it involves the redistribution of resources derived from tax collection;
- The law leads to a certain decentralization of the decision-making process regarding environmental preservation;
- This constitutes an incentive for environmental preservation and, consequently, for increasing the availability of this public good to society;
- This increases the likelihood of sending financial resources to municipalities with lower purchasing power;
- The law has a low implementation cost.
Assessment Method
In order to measure the effects of implementing the ICMS-E (Tax on Circulation of Goods and Services - Electronic) in Brazil, the authors collected data from the National Registry of Conservation Units (CNUC), the Ministry of the Environment, the Institute for Applied Economic Research (IPEA), and state secretariats, regarding information on environmental preservation units and the environmental, economic, and social characteristics of Brazilian municipalities, for the years 1991 to 2009.
Based on the database, the authors conduct an econometric analysis called "panel data," which allows for the monitoring of changes in municipalities over time. The objective is to measure whether the existence of ICMS-E legislation encourages the implementation and maintenance of environmental protection areas supported by the law. In other words, the researchers were interested in determining whether the law effectively causes Brazilian cities to intensify measures to preserve the environment.
Results
Overall, the study's analysis indicates that the implementation of ICMS-E increases the proportion of legally protected environmental areas. In other words, the legislation effectively improves environmental conservation conditions in Brazil.
One important point to highlight is that this observed relationship was stronger in regions with higher per capita Gross Domestic Product (GDP), meaning that environmental preservation is at a higher level in wealthier regions. According to the authors, this indicates that poorer areas need to address other, often more urgent, problems before prioritizing environmental preservation. Therefore, guaranteeing minimum conditions for all regions becomes even more crucial.
Regarding municipalities, the results are complex. Municipalities with a presence of industries present the highest opportunity cost for the existence of protected areas. Conversely, the presence of agriculture, urban density, and GDP per capita tend to show better results in terms of the proportion of preserved areas. A certain competition for federal and municipal conservation areas was also observed following the implementation of the ICMS-E (Tax on Circulation of Goods and Services - State), such that regions with large federally protected areas tend not to have rules applicable to the ICMS-E.
Lessons in Public Policy
Given the costs inherent in environmental preservation and the social benefits arising from these practices, public policies involving ecological tax transfers are well regarded in academic literature, and empirical studies attest to their advantages. In fact, this study demonstrates that the ICMS-E (Tax on Circulation of Goods and Services - Ecological) is an efficient tool in the creation and maintenance of areas of environmental interest in Brazilian territory, which possesses some of the most exuberant and important reserves of natural resources in the world.
In addition to environmental preservation, public policies similar to the ICMS-E (Tax on Circulation of Goods and Services - Electronic) encourage income redistribution and benefit localities that would have difficulty in carrying out effective environmental preservation actions simultaneously with economic activities. Due to the opportunity cost of maintaining environmental preservation areas, municipalities with few resources are benefited and incentivized by this type of legislation, generating added environmental and social value for Brazil.
Reference
DROSTE, Nils et al. Municipal responses to ecological fiscal transfers in Brazil: a microeconometric panel data approach. Environmental Policy and Governance, vol. 27, no. 4, p. 378-393, 2017.
