Is the Ecological ICMS good for Brazil?

Responsible researcher: 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 intervention: Brazil

Sample size: Brazilian municipalities

Big theme: Environment, Energy & Climate Change

Type of Intervention: Effects of adopting ecological fiscal transfers

Variable of Main 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 the governments of different countries in the most varied ways, aiming to strike a balance between sustainable development and financial viability.

In Brazil, several authors argue in favor of the use of ecological fiscal transfers, which are tools, used for decades in the country, to redistribute funds from tax collection from higher government levels to lower levels. In this way, states and municipalities that effectively act towards the preservation of areas of environmental interest benefit financially.

Assessment Context

One of the main ecological fiscal transfer policies is characterized by the Ecological ICMS (ICMS-E), an instrument that redistributes part of the resources from the Tax on Circulation of Goods and Services (ICMS) based on environmental preservation factors, such as the existence of areas of environmental protection and conservation of regions rich in water resources.

Popular in several countries around the world, such as Germany, Australia, France, India, Indonesia, Portugal and Switzerland, ecological fiscal transfer programs are used to guarantee the financing of actions aimed at environmental sustainability, so researchers debate the application of this type of tool on a global level, aiming to encourage underdeveloped nations to increase their local actions to preserve the environment.

In Brazil, Paraná was the pioneer state to implement ICMS-E, in 1991, after political pressure from municipalities that were obliged to maintain Environmental Protection Areas (PA) in their territories. Since then, another 16 federative units have adopted similar measures, with emphasis on the legislation created in the states of Ceará and Pernambuco, in the Northeast, which include social parameters in the calculation of ICMS-E (called ICMS Socioambiental) and in the state of Minas Gerais, in which the measure was called 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, ICMS-E 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 in order to benefit the locations that maintained federal, state and municipal areas of PA and relevant water resources.

To help the reader measure such efforts, in 2014, around 18% of the Brazilian territory had some type of environmental protection, so that 8.8% are federal, 8.9% are state and 0.3 % are municipal. Although it may seem small, these proportions are considerable. Representing only 0.3% of the national territory, the area corresponding to municipal PAs, 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:

1. The legislation does not require additional costs for the states and the federation, since it involves the redistribution of resources from tax collection;
2. The law generates a certain decentralization of the decision-making process regarding the preservation of the environment;
3. There is an incentive for environmental preservation and, consequently, an increase in the availability of this public good to society;
4. The sending of financial resources to municipalities with lower purchasing power is enhanced;
5. The law has a low implementation cost.

Assessment Method

In order to measure the effects arising from the implementation of ICMS-E in Brazil, the authors collected data from the National Register of Conservation Units (CNUC), the Ministry of the Environment, the Institute for Applied Economic Research (IPEA) and state secretariats , about information regarding environmental preservation units and environmental, economic and social characteristics of Brazilian municipalities, for the years 1991 to 2009.

Using the database, the authors carry out an econometric analysis called “panel data”, which allows 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 law. In other words, the researchers were interested in determining whether the law effectively causes Brazilian cities to intensify environmental preservation measures.

Results

In general, the study analysis indicates that the implementation of ICMS-E increases the proportion of legally preserved environmental areas. In other words, the legislation effectively improves environmental conservation conditions in Brazil.

A relevant point to be highlighted is the fact that this observed relationship was greater in regions where the Gross Domestic Product (GDP) per capita is higher, which means that environmental preservation has higher levels in richer regions. For the authors, this is an indication that poorer places need to solve other, often more urgent, problems before prioritizing environmental preservation. Therefore, guaranteeing minimum conditions for all regions becomes even more relevant.

With regard to municipalities, the results found are complex. Municipalities with the presence of industries have the highest opportunity cost for the existence of PAs. The presence of agriculture, urban density and GDP per capita tend to present better results in the proportion of preserved areas. A certain competition for federal and municipal conservation areas was also observed, following the implementation of ICMS-E, so that regions with large federally protected areas tend not to present rules for ICMS-E. 

Public Policy Lessons

Due to the costs inherent to environmental preservation and the social benefits resulting from these practices, public policies for ecological fiscal transfers are well regarded in academic literature, so that empirical studies attest to their advantages. In fact, the present study demonstrates that ICMS-E is an efficient tool in the creation and maintenance of areas of environmental interest in Brazilian territory, which has some of the most exuberant and important reserves of natural resources in the world.

In addition to environmental preservation, public policies similar to ICMS-E encourage income redistribution and benefit locations that would have difficulty practicing effective acts of environmental preservation, simultaneously with economic activities. Due to the opportunity cost of maintaining environmental preservation areas, municipalities with few resources benefit and are encouraged 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.