Elsevier

Ecological Economics

Volume 191, January 2022, 107219
Ecological Economics

ANALYSIS
The Brazilian intergovernmental fiscal transfer for conservation: A successful but self-limiting incentive program

https://doi.org/10.1016/j.ecolecon.2021.107219Get rights and content

Highlights

  • The Brazilian Ecological Fiscal transfer (ICMS-E) has, to date, promoted the creation of new protected areas (PAs).

  • The quality of that impact may be lower than expected: new PAs belong mostly to a category that impose low local costs.

  • The quantity of that impact is unlikely to still be high, as the incentive in ICMS-E's formula declines as PA stock rises.

  • State and local governments respond differently to ICMS-E incentive, respectively focused more on impact or revenue.

Abstract

Brazil's ecological intergovernmental fiscal transfer (ICMS-E) is a conservation incentive for protected areas (PAs). It redistributes tax revenues to reward municipalities for hosting PAs. To quantify its impact on the creation of state and municipal PAs, we used panel regressions on a longitudinal municipality dataset that combined information on PA creation and ICMS-E implementation for the 1467 municipalities in 6 Brazilian states in the Atlantic Forest region that never changed borders, from 1987 to 2016. We found that the percent of the municipal area covered with state or municipal PAs increased as a consequence of ICMS-E implementation. However, the magnitude of this effect declined as the ICMS-E revenue is shared more widely due to the expansion of PAs that reduced the gain from new PAs. We also found that ICMS-E policy primarily spurred the creation of PAs with less restrictive rules – similar to IUCN category V reserves – mainly by municipalities. For more restrictive PAs with higher local costs for municipalities, ICMS-E promoted state-proposed PAs but not municipal PAs. Our results suggest that states used ICMS-E to incentivize local implementation of their conservation preferences, including strict conservation, while municipal governments responded mostly with low-cost actions to increase their revenues.

Introduction

Intergovernmental fiscal transfers are public-finance instruments that can be used to support the provision of public goods by assisting in the internalization of spatial externalities (Ring, 2008). Brazil has innovated by using an intergovernmental fiscal transfer mechanism to emphasize environmental externalities in what is now called the Ecological Fiscal Transfer (EFT). EFT offer financial support for ecosystem-service production from locations that benefit from those services to where they are generated, similar to the motivation for payments for ecosystem services (PES) (Farley and Costanza, 2010, Ring, 2008). Higher levels of government transfer money to local administrations in order to compensate for the costs of, for instance, increasing biodiversity conservation (Loureiro, 2002) or more generally improving environmental quality (Gong et al., 2020) or reducing losses of ecosystem services. EFT has been described as a promising mechanism for environmental conservation (Farley and Costanza, 2010) and even has been suggested as the basis for a global mechanism to finance biodiversity conservation (Droste et al., 2019).

Ecological Fiscal Transfers are increasingly being adopted around the globe. Brazil first conceived and adopted an EFT for biodiversity conservation and was followed by Portugal (Santos et al., 2012); France has implemented similar program albeit on different spatial scales (Schröter-Schlaack et al., 2014); India has innovated by basing the revenue redistribution on forest cover and applying the rule to the whole country (Busch and Mukherjee, 2018) and China has identified ecological zones in which EFT was applied to avoid environmental degradation (Gong et al., 2020). EFT mechanisms were also proposed for other European countries such as German and Poland (Schröter-Schlaack et al., 2014) but not yet implemented.

The impacts of EFT, including different program designs, are now beginning to be evaluated. EFT for biodiversity conservation has shown positive effects on the increase of PA share at the state level in Brazil (Droste et al., 2017) and the ratio of municipal and national PAs in Portugal (Droste et al., 2018). India's EFT was expected to function as an incentive mechanism for state governments to raise investments on forestry; however, results were disappointing so far and forestry budgets as a share of total state budgets decreased by 16% after the implementation of the program (Busch et al., 2020). Results in China also enhanced the focus of the EFT as a compensation mechanism. Chinese EFT did not promote environmental improvements but has shown an effect against environmental degradation by reducing the so called “race-to-the-bottom” – i.e., when local governments relax rules for environmental protection in order to raise economic activity and improve their fiscal abilities (Cao et al., 2021).

Brazil's innovative fiscal transfer is mainly focused on raising the quantity of protected areas (PA), and in some cases the quality, by reflecting the area in PAs within the redistribution of tax revenues to local governments (from an added-value tax, the ICMS,1 on the circulation of goods and services collected by states from municipalities, Fig. 1). The Brazilian ICMS-E (‘Ecological ICMS’) program allocates a fraction of ICMS tax revenue according to the municipal area designated as under legal conservation protection and gives higher weight to PA categories that impose higher restrictions (Loureiro, 2002).

In Brazil, PAs are created (‘gazetted’) by multiple levels of government: federal (national PAs), state (state PAs), and local/municipal (local PAs). Each local PA may generate ecosystem services at multiple spatial scales (i.e., local, state, and national levels) but its economic opportunity cost (Venter et al., 2014) typically falls on the municipality where the PA is located. Thus, municipalities may resist efforts by federal or state government to gazette new PAs. Resistance may be less meaningful with respect to federal proposals because the president has greater discretion than does a state's governor (Kopas et al., 2018). Yet municipal resistance may play a crucial role in the fate of state proposals. In this context, the ICMS-E was conceived to work as a compensatory mechanism that municipalities receive for hosting protected areas (Loureiro, 2002, May et al., 2002).

Since municipalities can receive compensatory ICMS-E financial transfers for hosting PAs, state governments can use the ICMS-E as an element in negotiations with municipal governments over state PA proposals. Compensatory revenue is based on the proportion of the municipal area covered by PAs, positively weighted by the restrictiveness of PA protection (Loureiro, 2002, May et al., 2002). Additionally, for most states implementing ICMS-E, municipal PAs also count in the formula's PA area. For such states, the ICMS-E is expected to stimulate local municipal governments to voluntarily set aside areas for conservation (Sauquet et al., 2014, Droste et al., 2017) because they directly benefit from the program's distribution of revenues. Thus, the ICMS-E is expected to increase the area under environmental protection either through reduced resistance to the creation of new state protected areas (compensation) or increased local government initiatives for creating new municipal areas (incentive) (Fig. 1).

However, there are also other efforts to create new PAs in Brazil. The total area of PAs increased enormously from the 30's up to now, and the majority of them were gazetted between 1980 and 2009 (Vieira et al., 2019). Broadly, that rise was driven by multiple factors including the strengthening of environmental institutions and rise in management capacity (Drummond et al., 2011), re-establishment of democracy (Abman, 2018), increased international financial and technical support (MMA, 2010, The World Bank, 2012) and an increasingly engaged civil society (Oliveira, 2005). ICMS-E instruments began in 1991 as a new factor in PA growth, initially in the southern state of Paraná. While ICMS-E may well spur PA creation, given all of these other factors in PA growth it remains unclear whether the ICMS-E instrument per se actually raised PA area (Ferraro, 2009).

To isolate the impact of ICMS-E from other factors in PA growth, we employ a counterfactual approach using econometric tools to estimate changes in PA area without ICMS-E and then compare those with the observed changes with ICMS-E. Counterfactual approaches are common in impact evaluations within health or education policy studies, (Angrist and Pischke, 2008) and are also a best practice for environmental policy evaluations (Baylis et al., 2015, Ferraro, 2009). To our knowledge, only two studies have used a similar approach to explore the efficacy of ICMS-E.2 Silva Júnior et al. (2013) detected no significant effect on the creation of new PAs in a comparison of Pernambuco state (ICMS-E since 2002) with the control group of Bahia, Alagoas and Paraíba states (Silva Júnior et al., 2013). However, the author observed the years of 2003 and 2004 only, which may be too short a time period to detect significant changes in PA creation. Droste et al. (2017), for a larger set of states and a longer time period (1991-2009), link larger numbers of both state and municipal PAs to the implementation of ICMS-E policy. However, their analysis was at the state level, which greatly limits the number of units that can be considered empirically, while also ruling out any exploration of the relative impacts of ICMS-E on municipal-level PA creation, or the differential impacts of ICMS-E on PA creation at different administration levels. Our work seeks to address these gaps.

At the municipality level, we employ a difference-in-differences approach to estimate the impact of ICMS-E on areas under legal protection. Focusing on the Atlantic Forest region in south and southeastern Brazil, we compare changes over time in municipalities from states that have implemented the ICMS-E (treatment group) to changes in comparable control states without the ICMS-E intervention. With a dataset of 1467 municipalities (and an expanded dataset with 2060 units used to check robustness), we explored three main questions: i) on average, does the ICMS-E influence the creation of new PAs?; ii) do the impacts of the ICMS-E program fall as the increase in total PA area over time dilutes its incentive for new PAs?; and iii) do those effects differ according to the level of government that is proposing the new PA as well as the PA type?

Section snippets

Theoretical model and hypothesis

The impact of EFTs depend on the program design and its interaction with the national and sub-national contexts. In the Brazilian case, state and municipal governments are differently positioned in the ICMS-E mechanism. State actors (i) decide to adopt ICMS-E, (ii) manage a larger area, i.e., the whole state (iii) benefit from environmental policy spillovers across municipalities, but (iv) do not receive the financial resources from ICMS-E. Municipalities (i) bear the costs of foregone land use

Data

We consider six states in the Atlantic Forest region that implemented the ICMS-E (Paraná, Minas Gerais, São Paulo and Rio de Janeiro), as well as control states in the same regions (South and Southeast) where ICMS-E was not implemented at any point (Santa Catarina and Espírito Santo). São Paulo was in the control for municipal PAs because it does not include municipal PAs in the calculus of the ICMS-E redistribution. The observed period for all the regressions considering the creation of new

Results

In terms of the general trends for PA creation, we found that both state and municipal governments increased the areal extent of new PAs over time, with more areal gain in unrestricted APAs than other PA categories (Fig. 2).6

Those trends over time in PA creation, however, could well be fully independent of the implementation of ICMS-E. Thus,

Discussion

Our results show that the ICMS-E revenue-redistribution instrument promoted PA creation. That said, its redistribution formula limited the incentives: creating a new PA earns relatively less, approaching zero on the margin, as the stock of existing PAs keeps rising. Our results demonstrate the implications of that: impacts vanish, i.e., the ICMS-E no longer effectively incentives PA creation, when the stock of PAs gets high enough that the gains no longer justify incurring the opportunity cost.

Conclusion

Generally, our results corroborate the idea that a conditional-funds-transfers program (or performance-oriented fiscal transfer as posed by Droste et al. (2018)) such as the ICMS-E promotes new PAs (May et al., 2002, Droste et al., 2017). Yet we also shed new light on both the longevity and quality of the program's influence. Following one of our core hypotheses, the ICMS-E instrument limits its own impact over time because the marginal financial gain from creating new PAs declines as the stock

Data availability

The data that support the findings of this study are available from the corresponding author upon request. The full R-code used to conduct this analysis is available at a personal GitHub repository (https://github.com/pruggiero2/ICMS-E_self_limiting).

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

This study was developed within the ‘Interface Project’, supported by the São Paulo Research Foundation (FAPESP, 2013/23457-6). PR was supported by doctoral fellowships from the Brazilian Ministry of Education (CAPES-DS 1437068 and CAPES-PROEX 1560102), and São Paulo Research Foundation (FAPESP, 2015/16587-6 and 2017/20245-9). JPM was supported by the Brazilian Science Council (CNPq). E.N. was supported by post-doctoral fellowships from the National Science Foundation Grant (1158817) and the

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