Financial Mechanisms for Conservation in Brazil
CARLOS EDUARDO FRICKMANN YOUNG
Instituto de Economia, Universidade Federal do Rio de Janeiro, Avenida Pasteur 250, Rio de Janeiro 22290-240,
Rio de Janeiro, Brasil, email [email protected]
Abstract: I reviewed some of the financial mechanisms for biodiversity conservation activities in Brazil.
There is a heavy dependence on the public sector, but macroeconomic policies aimed at reducing government
spending have resulted in reduced budgets dedicated to public conservation measures. The financial constraints for environmental protection have also increased because of a reduction in foreign aid. Positive signs
for the immediate future, however, come from new initiatives that create economic instruments to finance conservation. The most important initiatives include conservation criteria for tax redistribution; environmental
compensation; water charges; royalties for electricity, petroleum, and natural gas; tradable obligations for forest
reserves; and voluntary measures on the part of the business sector. Resources created from these initiatives
have different origins and are managed by different public agencies according to varying laws and policies, so
their efficient implementation will require that the institutions involved in biodiversity conservation in Brazil
establish a minimum set of common priorities and objectives.
Mecanismos Financieros para la Conservación en Brasil
Resumen: Revisé algunos de los mecanismos financieros para actividades de conservación en Brasil. Hay
una fuerte dependencia en el sector público, pero las polı́ticas macroeconómicas orientadas a la reducción del
gasto del gobierno han resultado en menores presupuestos dedicados a medidas de conservación públicas. Las
restricciones financieras para la protección ambiental también han incrementado debido a una reducción en
la asistencia externa. Sin embargo, hay señales positivas para el futuro inmediato que provienen de nuevas
iniciativas que han creado instrumentos económicos para financiar a la conservación. Las iniciativas más
importantes incluyen criterios de conservación para la redistribución de impuestos; compensación ambiental;
cargos por uso de aguas; comisiones por electricidad, petróleo y gas natural; compromisos negociables para
reservas forestales; y medidas voluntarias por parte del sector empresarial. Los recursos creados a partir de
estas iniciativas tienen orı́genes diferentes y son administrados por agencias públicas diferentes de acuerdo
con leyes y polı́ticas diferentes, de manera que su eficiente instrumentación requerirá que las instituciones
involucradas en la conservación de la biodiversidad en Brasil establezcan un conjunto mı́nimo de prioridades
y objetivos comunes.
Macroeconomic Policies and Conservation in Brazil
A lack of financial resources is a significant constraint to
conservation in developing countries, and the situation
is no different in Brazil. I examined the major trends associated with this issue, emphasizing the role of public
policy and new initiatives aimed at developing economic
instruments that promote the conservation of the country’s biodiversity and natural resources.
As in other Latin American countries, most of Brazil’s
conservation funding comes from the public sector (Bárc-
ena et al. 2002). For this reason, Brazil’s environmental
spending is closely connected to its fiscal and overall
macroeconomic situation, and changes in the country’s
fiscal and monetary policy have important consequences
for conservation. At least three major aspects of Brazil’s
macroeconomic policies over the last decade have made
the implementation of environmental policies, including
conservation, more difficult. First, the government’s commitment to generating huge fiscal surpluses, as demanded
by the financial sector and international development
agencies, has led to significant cutbacks in social and
Paper submitted November 29, 2004; revised manuscript accepted January 14, 2005.
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Young
environmental spending. Young and Roncisvalle (2002)
show that federal spending on environmental issues in
Brazil has declined in recent years.
Second, Brazil’s high interest rates, implemented to
control inflation, have led to a bias toward short-term
gains in economic decision making, even when they are
prejudicial in the long term. In present-value terms (the
usual tool for financial analysis), the importance of future benefits and costs is inversely proportional to the
current interest rate. (Present value is a standard procedure in project analysis, in which the stream of expected
future benefits and costs are “brought” to the present
through the use of a discount rate.) Consider, for example, a choice between two use options for a plot of native
forest: conversion to farmland (crops or cattle ranching)
or an activity more compatible with forest conservation
(e.g., extractivism, sustainable forestry, or agroforestry).
Usually, the financial returns from agriculture are higher
in the short term, and the long-term negative externalities
they cause are neglected in economic calculation. In this
sort of calculation, high interest rates make short-term
gains even more important—the very opposite of the sustainable development principle, which requires that both
the future and present consequences of decisions be considered equally. Additionally, the competitiveness of extractive processes declines as market demand expands
because plantations tend to reduce marginal production
costs. The classic example is the decline in the Amazonian
rubber industry, based on extractivism, after plantations
were introduced in Southeast Asia. Young (2002) examines the same problem for nontimber products from the
Atlantic Forest.
Third, following mainstream economic theory, developing countries should exploit their existing competitive
advantages in the international trade, including cheap and
abundant natural resources. Over the long term, however, the prices of these resources tend to fall relative to
industrialized goods, putting pressure on the balance of
payments. One possible policy response to this is to encourage exports that are linked to the depletion of the natural resource base. This is a complex issue that has been
discussed widely in the literature on trade and the environment, but there is little doubt that, in Brazil, forested
land is under great pressure for conversion to agriculture.
The best example is the expansion of soybean cultivation
(a major export crop) at the expense of the native cerrado
vegetation.
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Table 1. Public spending on environmental protection, Brazil,
1996–1998 (R$1,000; 2001 prices).∗
Expenditures
1996
1997
1998
Environmental protection
1,914,694 1,702,336 2,780,600
Federal spending
887,670 731,176 1,018,071
State spending
864,979 809,637 1,562,009
Municipal spending
162,045 161,523 200,521
Total public spending (%)
0.4
0.4
0.5
Total federal spending (%)
0.3
0.3
0.3
Total state spending (%)
0.6
0.5
1.0
Total municipal spending (%)
0.4
0.4
0.4
∗ Source:
Young and Roncisvalle 2002, based on IBGE 2001.
1996–1998. Spending on environmental protection (excluding sanitation) represents a tiny portion of total public spending (Table 1).
Young and Roncisvalle (2002) provided an analysis of
a longer time series on environmental public spending
(1993–2000), although restricted largely to that of the
federal government. They showed that federal environmental spending did not increase significantly during that
time, but instead oscillated between 0.3% and 0.5% of
the total budget. The amount directed to conservation in
2000 was R$159 million, or only 22% of the total spending of the Brazilian Ministry of the Environment (MMA).
These figures are not strictly comparable to IBGE (IBGE
2001) because of methodological differences, the most
important being that these figures also account for spending on sanitation and administrative and pension-related
expenses. Moreover, 2000 is not properly comparable to
previous years because, beginning in that year, spending
on water management was classified as part of the sanitation budget. Most significant, the funding for the federal
conservation protection agency—the Brazilian Institute
for the Environment (IBAMA)—declined in 1999–2000
when compared with the average during 1995–1998 (Table 2).
Another problem is that more money is being directed
to administrative and financial expenses, whereas resources dedicated to personnel and to conservation investments have fallen. For example, IBAMA’s personnel
expenses in 2000 were only 72% in real terms of its spending on personnel in 1995. On the other hand, the proportion of resources destined for pensions, interests, and
debt repayment increased considerably. This shows how
the financial problems of the federal government have
negatively affected the application of resources to conservation.
Environmental Spending in Brazil
There are no systematic data on environmental spending in Brazil. The most comprehensive study is that of
the Brazilian Institute for Geography and Statistics (IBGE
2001) on public environmental spending at the three administrative levels (federal, state, and municipal governments). This study, however, was restricted to the years
External Funding
External funding is another major source of support for
environmental projects (Table 3). External resources,
which oscillated between 6% and 17% of total expenditures, declined after 1994, with the exceptions of 1996
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Table 2. Environmental spending, Brazilian federal government, 1993–2001 (R$1,000; 2001 prices).a
Year
Direct
administration
IBAMAb
FNMAc
Total—MMAd,e
Other
ministries
Total f
Federal
spending (%)
1993
1994
1995
1996
1997
1998
1999
2000
38,410
132,137
113,254
311,180
372,430
492,516
356,283
247,926
414,858
360,942
516,420
474,489
469,212
478,521
430,652
459,122
9,671
10,022
12,272
12,884
9,791
4,799
5,595
13,671
462,939
503,100
641,946
798,553
851,433
975,836
792,529
720,719
29,549
42,241
60,658
29,652
42,764
577,971
671,494
840,795
912,091
1,005,488
835,293
1,298,690
0.3
0.4
0.4
0.4
0.3
0.5
a Source:
Young & Roncisvalle 2002.
Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis.
c Fundo Nacional do Meio Ambiente.
d Ministério do Meio Ambiente.
e Columns 2 + 3 + 4.
f Columns 5 + 6.
b Instituto
and 1998. Moreover, most external resources come from
credit operations (loans), meaning that they represent an
additional source of pressure on the budget in the long
term. Donations reached a high of R$30 million in 1996
but declined to less than half of this value (R$14 million)
in 2000. The proportion of international donations to total expenditures in 2000 thus fell to the lowest level in the
series (2%), indicating a declining trend of international
support for environmental projects in Brazil.
Despite this decline, environmental projects continue
to be some of the most attractive for international support. A good example is the Pilot Program to Conserve
the Brazilian Rain Forest (PP-G7), the most important program in terms of external funding for biodiversity conservation in the Amazon and, to a lesser extent, the Atlantic
Forest.
Funding from foreign development and cooperation
agencies also affects conservation because, in many instances, it includes a requirement that environmental criteria be met in the high-impact projects it funds, such as
the expansion of road networks or road improvement in
Table 3. Environmental spending according to the origin of the funds,
Ministry of the Environment (MMA) 1993–2000 (R$1,000; 2001
prices).a
Year
Total
1993
1994
1995
1996
1997
1998
1999
2000
462,939
513,011
641,946
798,553
851,433
975,836
792,529
720,634
a Source:
Domestic External Foreign
resources resourcesb credit Donations
392,041
425,553
577,582
713,645
801,626
884,612
723,328
673,557
70,898
87,459
64,363
84,909
49,807
91,224
69,201
47,077
NA
NA
51,000
54,650
27,241
69,034
38,116
32,371
Young & Roncisvalle 2002; NA, not applicable.
5 + 6.
b Columns
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NA
NA
13,363
30,258
22,566
22,190
31,085
14,706
primary forest areas. This has reinforced the pressures for
the Brazilian counterparts to minimize, mitigate, or otherwise avoid environmental damage through development
projects.
One problem associated with external resources is a
bias toward priorities established abroad, which do not
necessarily coincide or are not congruous with those of
the Brazilian government or domestic counterparts. For
instance, most external funding goes to the Amazon region, whereas many fewer resources are dedicated to environmental challenges in other threatened biomes, such
as the Atlantic Forest, the Cerrado, and the Caatinga. A
highly pertinent question is whether the current allocation of resources among biomes could be improved if
issues such as extinction avoidance or social benefits to
the Brazilian population were introduced to the process
of resource distribution.
Economic Instruments for Conservation
The many innovative economic instruments for financing conservation established in Brazil recently are offsetting problems in conventional public funding. The best
known is the imposition by certain states of environmental criteria for tax redistribution among municipalities
(“green ICMS” or ICMS ecológico). The tax on the circulation of goods and services (ICMS) is a value-added tax
(VAT) collected by state governments, and part of these
revenues must be redistributed among the municipalities.
Three quarters of this redistribution is defined by the federal constitution, but the remaining 25% is allocated according to each state’s legislation. This scheme was first
introduced in the state of Paraná in 1992 to reward municipalities for protected areas and watershed reserves
within their boundaries. The extent of compensation is
linked to the proportion of the municipality designated
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to reserved areas of this sort. This has been very effective
in encouraging the creation of new protected areas, and
many other Brazilian states have already introduced similar laws for the allocation of ICMS resources, including
São Paulo (1993), Minas Gerais (1995), Rondônia (1996),
Amapá (1996), Rio Grande do Sul (1998), Mato Grosso
(2001), Mato Grosso do Sul (2001), Pernambuco (2001),
and Tocantins (2002).
An innovation that has had even more impact is the “environmental compensation” scheme, established in 2002
as part of the National Protected Areas System (Sistema
Nacional de Unidades de Conservação [SNUC]), a law governing the National Protected Areas System (Federal Law
14247/2002). Based on the “polluter-pays” principle, this
law states that every project (public or private) of significant environmental impact must pay no less than 0.5%
of the total value of the project as compensation for the
project’s residual, unavoidable damages (the exact sum
is fixed according to degree of the impact; so far the values have been around 2.0–3.5% of the project value). This
compensation must be used by environmental protection
agencies to create and maintain strictly protected areas
(including national and state parks, biological reserves,
and ecological stations). The public agency (federal or
state) responsible for granting the environmental license
for the project is responsible for determining the destination and subsequent use of the compensation.
Protected areas that allow for economic activities
within their boundaries are eligible for receiving the resources only if they are directly affected by the project.
No other measures or mechanisms for environmental protection are eligible for this compensation. If the project
causes air and water pollution, noise, waste generation,
excessive traffic, or other common problems in urban areas, the compensation is calculated as part of the social
costs inflicted on the local population. The “compensation payments,” reserved as they are for use in supporting
protected areas as defined by the federal or state environmental protection agency involved, cannot be used to
offset these damages.
The federal government has already netted US$60 million during the period from 2002 to 2004, but Geluda and
Young (2004) estimated that, even with very conservative projections, future funds generated by environmental compensation will at least double from current values.
Serious problems may arise in connection with this compensation, however, indicating that its institutionalization
is still far from established or satisfactory. First, urban
populations—often among the nation’s poorest groups—
suffer the environmental costs of large projects but do not
benefit directly from the compensation. Even worse, as
total environmental resources increase, the conventional
environmental protection budgets benefiting urban populations may decline further, resulting in increased total funding for conservation but diminished resources for
other environmental activities.
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In addition, the SNUC law does not clearly define “significant environmental impact” or any aspect of possible
methodologies for its assessment. Moreover, a conflict of
interest is generated by the fact that the environmental
agency defining the value of the compensation is the same
agency that receives and administers it. Finally, the compensation should not be depended on as a regular source
of funding, based as it is on the very environmental degradation that should be avoided. Most important, it cannot
be merely budgeted as, in effect, a payoff from those benefiting from the project, allowing them to do exactly as
they please without due regard for all possible means of
minimizing impacts or of making true assessments of the
costs and benefits of the project itself. Biodiversity offsets
should never be implemented as a “license to trash” for
developers (ten Kate et al. 2004).
A similar compensation scheme is being established
for infrastructure or utilities that are already installed in
the protected areas. Examples include radio and television antennas, pipelines, electricity transmission lines,
and dams that have already been installed or constructed
without due respect to the environmental legislation but
which cannot be removed without incurring exorbitant
expense. IBAMA is preparing a methodology for assessing
the economic value of the damage.
New legislation regulations regulating water resources
(Federal Law 9433/1997) have established a fee for water use and discharge. Funds raised by the fee must be
destined for watershed protection, with the most obvious measures being reforestation and forest conservation. A reforestation program funded through water-use
fees has been set up in the Rio Piracicaba in the state of
São Paulo. For hydroelectric, oil, and natural gas projects,
the policy requires that a portion of revenues be paid as
natural resource “royalties” to federal and state environmental protection agencies. These funds can be spent on
biodiversity protection, combating water and air pollution, waste management, or other pollution control and
abatement projects. Unfortunately, the legal obligation to
earmark the funds for environmental activities has not
been respected, especially by state governments, which
lack clear criteria for defining environmental priorities
(Gusmão 2000). Moreover, increased pressure on states
to balance their budgets and forego dependence on federal bailouts has driven states to meet their fiscal goals by
erecting complex and obscure processes that delay expenditures of compensation funds and complicate their
use.
Similarly, “royalties” from the revenues of public utilities (oil, electricity, water) are earmarked for science and
technology. The most important is the Oil and Gas Sectoral Fund, which has already allocated considerable resources to the study of ecosystems affected by energy
industries. The fund’s administrators, however, do not
coordinate with environmental policy makers in selecting projects.
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Brazilian Financial Mechanisms for Conservation
In the forestry sector, a forest reposition fee is assessed
on native timber exploitation and used to fund forest conservation. Because the fee is small and because of generalized tax evasion, corruption, and lack of political will
in its enforcement, however, the fee’s impact on conservation has been minor. Improved governance in the
forestry sector, particularly with the expansion of green
certification, may make conditions more favorable to its
application.
A significant achievement for conservation in the 1990s
was the exemption of forested land from the Rural Land
Tax (ITR). Before then, forests were considered an “unproductive” use of land and subject to higher taxes than
agriculture and ranching. Today this distortion has been
corrected and private protected areas—“private natural
heritage reserves” (Reservas Particulares do Patrimônio
Natural [RPPNs]) created by formal registration with
IBAMA—are exempt from this tax. The impact of this
incentive, however, has been limited because of tax evasion.
Tradable rights as an economic instrument for conservation have been little used in Brazil. The most important
so far has been the trade in forest set asides. Under the
Forest Code (Law 4771/1965), a minimum percentage of
rural properties larger than 50 ha are required to be set
aside as forest reserves. In the Atlantic Forest biome, the
minimum is 20%, in the Cerrado it is 50%, and in the Amazon it is 80%. In two states (Paraná and Mato Grosso),
local legislation allows offset operations in which one
property can fulfill this requirement registering “surplus”
(above the minimum) forest reserves from other properties within the same “microregion” or “hydrographic
basin.”
Initially, carbon markets were expected to be a major
funding source for conservation because forest conversion for agriculture remains the most important source
of Brazilian greenhouse gas emissions. Projects that avoid
deforestation, however, were deemed ineligible for “certified emissions reduction” in the “clean development
mechanism,” which is the only way developing countries
can obtain resources under the Kyoto Protocol. This rule,
agreed on with no opposition by the Brazilian government, made it impossible for conservation projects to obtain resources under the Kyoto Protocol.
Voluntary conservation measures are becoming more
common in the private sector, mostly in the form of
RPPNs, but also as specific projects for the conservation
of flagship species. Although RPPNs are playing a significant role in many areas—they are often key to the protection of vital sites and in some cases are the only protected
areas for endemic and restricted-range species—the total
area under protection through RPPNs is still very small
when compared with public protected areas. In general,
RPPNs are created based on commendable whim, dedication, and enthusiasm rather than a particular consideration for regional conservation priorities.
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Attempts to incorporate environmental restrictions in
the banking system’s procedures for granting loan concessions have so far failed. In the 1990s, the federal government launched the Green Protocol Initiative with the objective of incorporating environmental targets within the
system of public funding for development projects, but it
was never implemented effectively. Finally, ecolabeling is
becoming a widespread voluntary instrument within the
Brazilian business sector. In particular, the certification of
forest products requires that companies adequately manage their private native forest reserves, an incentive that
has great potential for conservation.
Conclusions
The fiscal crisis within the Brazilian public sector has negatively affected both the quantity and quality of the country’s environmental spending. The situation was worsened by recent reductions in foreign aid, even though conservation remains a major destination for foreign funds.
On the other hand, the possibilities for financing conservation projects have increased because of recent legislation that creates economic instruments for environmental management, such as project compensation funds, tax
incentives, and tradable development rights. These new
funding sources represent a potential overall increase in
financial resources for conservation activities in Brazil.
Because these resources have different origins and are
managed by different public agencies according to different laws and policies, however, their efficient implementation will require that the many institutions involved in
biodiversity conservation in Brazil establish a minimum
set of common priorities and objectives.
Acknowledgments
I am grateful to C. A. Roncisvalle, L. Geluda, and C. de
Miguel for their collaboration in previous studies and for
help in the preparation of this paper. Financial support
for the research on public spending on environmental
issues in Brazil was provided by the Environment Division of the Economic Commission for Latin America and
the Caribbean (ECLAC, Santiago de Chile). This review
has benefited considerably from the comments and suggestions of N. Lindeman (Center for Applied Biodiversity
Science, Conservation International) and an anonymous
referee.
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