Ecosystem Services is playing a growing role in Brazilian environmental law.
Note: This post is a translation of the original article in Portuguese by Juliana Lopes with Ana Carolina Addario, which appeared on Ideia Socioambiental. It is posted here with permission.
The environmental legal dictionary has a new entry. The word is incentive, an economic benefit granted by the government, through taxes, to stimulate economic, social, and cultural activities. This practice is not new in traditional economic segments such as the automotive and construction industries. However, incentives to stimulate sustainable development are advancing in Brazilian environmental legislation.
Called active control, this new mechanism differs from the command and control methods traditionally adopted by governments and legislators. “Instead of discouraging certain behaviors, we seek to encourage positive attitudes. The establishment of sanctions only, adds nothing in terms of proactive behavior. It is therefore important to prioritize incentives”, says Judge Consuelo Yatsuda Moromizato, a federal judge with significant experience in environmental law.
Examples of Payments for Environmental Services (PES) in Brazil
Proambiente: Family Production Socio-environmental Development Program (Proambiente), created in 2000 by civil society and incorporated by the Ministry of Environment (MMA) in 2003, awards farmers and ranchers with up to one-third of the minimum wage when they incorporate less destructive production practices, such as not using pesticides or introducing sustainable agroforestry systems(SAF's)
Ecological ICMS: Brazilian states give 25% of the Tax on Circulation of Goods and Services (ICMS) to cities. Some municipalities allocate 5% of these funds for environmental preservation projects
Environmental compensation: companies financially compensate for projects’ unavoidable environmental impacts (for example, testing chemicals at sea for drilling oil). States use these funds to invest in conservation projects
Reforestation: focused on timber companies, it promotes reforestation either through compliance with forest management rules (tree cutting restrictions), or paying for tree replacement, which will fund reforestation in other areas
Tax exemption for Private Reserves of Natural Heritage - RPPNs: exempts RPPN owners from paying the Rural Land Tax (ITR)
In deployment phase: some PES policies are not yet implemented, awaiting approval or regulation. This is the case, for example, of the ecological income tax (IR) scheme, which proposes a tax deduction for expenses on projects with an environmental benefit.
This new logic reflects the evolution of the guiding elements in environmental legislation. "The ‘polluter pays’ principle was initially used as a way to internalize the costs of environmental impacts, which were considered externalities," she explains. Next, came the principle of ‘the user pays,’ which distinguishes between the polluter and the offender. "This concept envisages compensation for the use of natural resources, as occurs with the law of royalties for oil exploration," she says.
These tax and fiscal mechanisms play an important role, especially in the transition to a low carbon economy, by encouraging the adoption of cleaner technologies. "It is essential that governments create policies through subsidized financing that encourage and enable the purchase of equipment. This public sector contribution will help promote a technological change by companies that will advance the transition toward a sustainable economy," says Consuelo.
To Adriano Pires, president of the Center for Infrastructure (CBIE), incentive policies can be important tools for the development of new sources of renewable energy in Brazil. But in his analysis, the government still does not make proper use of these mechanisms. "The country needs policies that define what will be in the energy portfolio of the future. The implementation of these policies requires fiscal and tax mechanisms, which unfortunately are still underutilized. The government has not given any medium nor long-term signals to investors or consumers. Tax policy in relation to energy should be discussed because gasoline, diesel, and other fossil fuels cannot be a priority for the country due to their high environmental costs," he says.
Other countries’ Payment for Environmental Services (PES) Initiatives
Mexico: The government rewards communities and owners of rural properties for preserving their forests and watersheds
Costa Rica: the government created a tax levied on the consumption of water and gasoline. The amount collected is given to forest owners for providing environmental services (about $80USD per hectare per year).
It is true though, that promoting the uptake of incentives will require a paradigm shift. According to Werner Grau Neto, managing partner at Pedro Pinheiro Lawyers, the best example of this transition is the Legal Amazon. Created in 1953 to be a hub of economic development, the region received a series of stimuli, such as preferential loan rates, designed to expand agribusiness. "Today, the paradigm has changed. The Legal Amazon is no longer an area focused purely on economic expansion; it has become an area of sustainable economic development. Instead of just developing, now it undertakes preservation to develop," he said.
Ongoing deforestation in the Amazon is a clear indication that the punitive mechanisms imposed by Brazilian law have not been sufficient to protect the environment. The integration of market instruments and self-regulation into national regulation is imperative, in order to balance long-term economic activity and ecosystem well-being.
This challenge becomes clear when the condition of environmental services is examined. According to the Millennium Ecosystem Assessment (MEA), a scientific inventory led by the United Nations, 15 of the 24 environmental services considered essential to human life are gradually disappearing or losing function. As a result of this trend, fisheries, for example, may be unsustainable by 2040 under current trends.
The pricing of these services has been discussed as an effective way to deter the indiscriminate use of natural resources. Thus, to be effective, it is essential that preservation be more profitable than destruction. Within this logic, the carbon market is one of the pioneering and most successful payment schemes for environmental services. But there are also projects and conservation reserves established on the principle of the non-polluter receiver. "The reasoning is simple: just as those who violate the law receive negative sanctions, those who abide by them should receive economic advantages," says Consuelo.
Werner highlights the experience of the World Bank and the government of Amazonas state in the design of the JUMA Sustainable Development Reserve, in the city Apuí. "By creating a structure for selling forest carbon credits, the initiative provided the necessary resources for maintaining and monitoring the protected area," he points out.
The same concept applies to farmers who maintain conservation reserves on their properties. "The conservation reserve is a cost to the farmer. However, with the pricing of environmental services and the possibility of developing projects to generate carbon credits, it becomes revenue. This is where the new concept of producer-receiver emerges. It establishes a paradigm shift in the principles that guide legal rules and future public policies," he says.
In order to promote this practice, the National Water Agency (ANA), in partnership with The Nature Conservancy (TNC), initiated a program in 2007 called Water and Forest Producers that pays farmers for restoring and maintaining "standing" forests on their properties.
According to Fernando Veiga, Environmental Services Coordinator of TNC, the initiative seeks to enhance environmental stewardship by offering an environmentally friendly alternative to a society that is used to extraction. Paying conservation bonuses to producers is much more efficient, in economic terms, than having to remedy the problems caused by poor maintenance of services. When the forest and its services aren’t functioning well, the producer ends up having to pay to recover them", he points out. In the context of local initiatives, some Brazilian cities have established an ecological Tax on Circulation of Goods and Services (ICMS), whereby 5% of the 25% of tax revenue that states pass to cities will be invested in environmental protection projects. Although laudable, some experts still have reservations about the mechanism.
According to Mauricio Chapinoti, from Pedro Pinheiro Advogados, even working as a promoter, the ecological ICMS has limitations in that it divides already limited amount of government revenues at the risk of being subject to disputes among municipalities. "For investors or consumers, this instrument does not change anything. But from the point of view of cities, it changes a lot because it increases their revenue. However, as the total collected amount does not grow, the other municipalities do not like this kind of decision," he explains.
Also according to Chapinoti, the proposal currently in Congress to create a green income tax (PL-5974/2005) is subject to similar risk, because it will be categorized as a mechanism for tax incentives, like the Rouanet Law (a tax incentives for cultural and educational investments). "This bill proposes to deduct part of the income tax allocation for environmental projects. But, as the rule puts all these tax benefits in the same box, setting an overall 6% deduction limit, the adoption of this mechanism will make environmental projects compete with cultural projects without changing anything in the state tax waiver."
Chapinoti claims that it would be better if each type of project respected a specific limit of deduction, as happens today with the Municipal Fund for Children and Adolescent Rights (FUMCAD).
Tax versus Incentive
Across the country, there are many initiatives in favor of laws promoting environmental preservation. In the "Manifesto in Defense of Environmental Tax Reform," some public defenders and prosecutors endorse tax benefits that reward environmentally sound processes and products, and on the other hand, higher taxation to discourage those who choose activities with high impacts on the environment.
In the same vein, three months ago Congressman Roberto Rocha (PSDB-MA) proposed an amendment to the Constitution (PEC 353/09) that would lay down general guidelines for an "environmental tax reform." The PEC is based on an Environmental Tax Reform (ETR), a mechanism of tax reform for environmental purposes adopted by several European countries in the 90's. According to this notion, the degree of increase or decrease of tax burden levied on a certain business activity must be proportional to the environmental benefits or losses it generates. Ultimately, however, the total tax burden should remain the same.
The proposed Brazilian tax reform brings three major changes to the existing Constitution. It
introduces the principle of environment “extrafiscality” (possibility of using taxes as a mechanism for encouraging or discouraging activities) for the entire set of taxes in the country;
establishes tax immunity in favor of goods and services considered environmentally beneficial; and
distributes tax revenues, among the entities of the Federation, using environmental criteria.
Facing an increasing pressure for cleaner processes and products, many companies have revised their production processes. Knowing how their activities impact and depend on environmental services inspires shifts in current business models.
The task is far from simple, since conventional corporate metrics ignore externalities, such as environmental and social impacts.
Considering this, the World Business Council for Sustainable Development, in partnership with the Meridian Institute and the World Resources Institute (WRI), prepared the Corporate Ecosystem Services Review. The methodology helps companies to assess impacts and dependencies on environmental services to better understand future risks and opportunities.
According to Charles Iceland, Associate at WRI, companies are entering an era of “dual flow” [interdependence with the environment] because they rely on environmental services to produce goods and services, while the health of ecosystems depends on corporations for environmental stewardship. "Knowing the risks that will arise as a result of likely changes in government regulations is important. But knowing which environmental services the company depends on is even more urgent since they can determine business success. Identifying risks and opportunities from ecosystem change should guide every company’s decisions ", says the researcher.