#1Ecological Fiscal Transfers in Brazil Incentivizing or refinancing conservation? Third Annual Conference of the Green Growth Knowledge Platform (GGKP) Fiscal Policies and the Green Economy Transition: Generating Knowledge - Creating Impact 29-30 January 2015, Venice - Nils Droste, Guilherme R. Lima, Peter H. May, Irene Ring MARTIN-LUTHER-UNIVERSITÄT HALLE-WITTENBERG UFRRJ UNIVERSIDADE FEDERAL RURAL DO RIO DE JANEIRO HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ UFRJ#2Structure 1. Introduction - why ecological fiscal transfers? 2. The case of the Brazilian ICMS-Ecológico - institutional rules theoretical functioning empirical approach 3. Preliminary results 4. Discussion 5. Conclusion HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#31) Introduction - fiscal transfers general purpose of intergovernmental fiscal transfers intergovernmental fiscal transfers redistribute tax revenue among government levels to ensure sufficient fiscal capacity to fulfill public functions - and can be used to internalize external effects of public policies government levels taxes revenue fiscal transfers incentives for land users, incentives for jurisdictions households, and businesses i.e. for local governments fiscal transfers are often a substantial share of income HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#41) Introduction: why ecological fiscal transfers? spatial spillovers of ecosystem services from protected areas Landscope & amenity values Cultural values and inspirational services Ecotourism & recreation Genetic/species diversity maintenance Diseose regulation of human health Pollination Biological control Natural hazards control ten Brink et al. 2011, after Gantioler et al. 2010 Food Erosion control Air quality regulation Fibre/materials Fuel Ornamental resources Natural medicines Biochemicals & pharmaceuticals Water quantity Climate/dimate change regulation Water regulation Water purification & waste monogement Local National Global#52) The case of the Brazilian ICMS-Ecológico Study object: The Brazilian value added tax revenue is redistributed among municipalities according to constitutionally defined shares and state law criteria ... ...for some states it includes indicators for nature conservation: Imposto Sobre Circulação de Mercadorias e Serviços - Ecológico (ICMS-E) Research question: Does the implementation of ICMS-E create an incentive to designate additional protected areas among Brazilian states? HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#62) ICMS-E - institutional rules (1) Redistribution of Value Added Tax (VAT) defined by Brazilian constitution 75% go to states where VAT was generated - —- 25% go to municipalities, of which ... STATE (75%) MUNICIPALITIES (25%) Added Value 75% of 25% (18,75%) State Criterion 25% of 25% (6,25%) source: http://www.icmsecologico.org.br/#72) ICMS-E - institutional rules (2) 34 go to municipalities where it was generated 1/4 goes to municipalities according to state law criteria (see hypothetical example) PERCENTUAL FIXO 2% ÁREA 2% PROPRIEDADES RURAIS 2% VALOR ADICIONADO 75% ICMS ECOLÓGICO 5% POPULAÇÃO 6% PROD. AGROPECUÁRIA 8% source: http://www.icmsecologico.org.br/#82) ICMS-E - theoretical functioning - a simplification to generate hypothesis Y Y₂ Y3 Y₁ A B local governments' spending behavior under budget constraints Hypothesis an increase in municipal budget leads to increased spending on nature conservation and other public goods or services especially, if protected areas become a source of income via EFT - an increase is to be expected U BC1 BC₂ BC3 0 X X₂ X₁ authors' model based on Boadway / Shah 2009 HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#92) ICMS-E - empirical approach we analyze the effect of the introduction of ICMS-E among Brazilian states on protected area coverage with panel data from 1991 to 2009 controlling for socio-economic, biophysical, time-invariant individual, time-varying differences, and interactions of variables. → Does the introduction of ICMS-E increase the share of protected areas? formally (see appendix for definition of variables): it 0 1 it 2 it 3 it 6 it 7 it 8 it 9 ji 10 4 it it 5 it i tit HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#102) ICMS-E - empirical approach: data (1) implementation of ICMS-E over time HELMHOLTZ CENTRE FOR 1990 ENVIRONMENTAL ICMS-E RESEARCH - UFZ source: http://www.icmsecologico.org.br/ (animated by authors)#112) ICMS-E - empirical approach: data (2) designation of protected areas over time 2006 120 86 18 16 14 per cent of total area 20 1933 1937 protected area designation in Brazil time analyzed 0.33 % of Brazil ~ size of Belgium 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 authors' calculation based on http://www.mma.gov.br/areas-protegidas/cadastro-nacional-de-ucs Government level protected areas ―federal -state municipal -total HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#123) Preliminary results (1) - ICMS-E and municipal protected areas (PA) Dependent variable: In of municipal protected area share in percent of total area (mun 2) 2.904*** (0.556) 0.502*** -15.064 (13.988) 0.585*** (mun 3) (0.187) -1.200*** (0.391) (0.184) -1.317*** (0.343) model: variables (mun 1) icms_e 1.079*** (0.245) 0.677*** agr (0.202) -0.910* ind (0.466) 1.416 0.658 0.078 ser (1.160) (1.003) (0.948) 2.233*** 1.848** 1.779*** pop (0.552) (0.765) (0.632) 3.138*** 1.166** 1.242** inc (0.477) (0.553) 0.431 1.047*** arpa (0.337) (0.370) 0.522*** fed (0.110) overall, there is a positive significant correlation of ICMS-E with PA there are on average higher PA shares with ICMS-E than without 0.151 sta (0.041) -1.432*** fed*icms_e (0.228) (0.486) -0.181 -0.611* sta imcs_e (0.145) (0.320) -0.458 agr*icms_e ind*icms_e ser*icms_e pop*icms_e inc*icms_e (1.289) intercept biome D effects -23.472*** (5.100) yes -13.411*** (4.596) yes -10.925*** (3.891) yes individual re adj. R² 0.31 individual re 0.39 individual re 0.41 (0.616) 1.086*** (0.320) 0.547*** (0.119) 0.075 (0.111) -1.808*** (0.319) 1.299 (1.325) 2.799 (1.942) -1.599*** (0.502) 3.464*** GDP per capita correlates positively and significantly with PA → on average, richer states have higher PA shares the interaction of ICMS-E with GDP per capita is positive ... HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ The panel data sample is balanced with n=27, T=19, N=513. Robust standard errors are reported in parenthesis below the estimated coefficients. Individual coefficients are indicated with *10%, **5% or ***1% significance levels. Biome D, represent dummy variables for the different biomes. A individual random effects (re) model is employed.#133) Preliminary results (2) - ICMS-E and municipal protected areas (PA) for Y = Bo+B₁D+ B₂X+B4DX PA intercept =B0 slope= B₂+B4 Y = (B₁+B₁)+ (B₂+B4)*X with ICMS-E (D=1) slope B₂ Y = B₁+ B₁₂*X without ICMS-E (D=0) the interaction of ICMS-E with GDP/cap is positive → on average, richer states with ICMS-E have a significantly higher PA share than states without but poorer states don't intercept = B₁ + B₁ 0 GDP per capita HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#144) Discussion potential interpretation - ICMS-E refinances other public functions for municipalities in poorer states but creates an incentive for municipal protected area designation in richer states issues remain that have to be solved - statistically: corner solution required, both cross- sectional dependence and auto-correlation, and a potential spatial correlation HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#155) Concluding remarks • ecological fiscal transfers are a promising instrument because they require no additional budget ecological fiscal transfers provide local governments with income for hosting protected areas preliminary results from Brazil indicate several effects of the introduction of ICMS-E, e.g., a positive correlation with higher protected area shares (~ incentive effect) hence, ICMS-E is likely increasing the provision of undersupplied ecosystem services from protected areas, and increase welfare results may inform design and decisions on ecological fiscal transfers in Portugal, France, Germany, Switzerland, Indonesia, Poland, ... (World Bank, OECD, GIZ, etc.) HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#16further reading Boadway, R. & Shah, A., 2009. Fiscal Federalism: Principles and Practices of Multiorder Governance, Cambridge: Cambridge University Press. Brambor, T., 2005. Understanding Interaction Models: Improving Empirical Analyses. Political Analysis, 14(1), pp.63–82. Gantioler, S., Rayment, M., Bassi, S., Kettunen, M., McConville, A., Landgrebe, R., Gerdes, H., ten Brink, P. (2010). Costs and socio- economic benefits associated with the Natura 2000 network. Final report to the European Commission, DG Environment on Contract ENV.B.2/SER/2008/0038. Brussels, Institute for European Environmental Policy / GHK / Ecologic May, P.H. et al., 2002. Using Fiscal Instruments to Encourage Conservation: Municipal Responses to the "Ecological" Value-added Tax in Paraná and Minas Gerais, Brazil. In S. Pagiola, J. Bishop, & N. Landell-Mills, eds. Selling Forest Environmental Services. Market-based Mechanisms for Conservation and Development. London: Earthscan, pp. 173–199. Oates, W.E., 1972. Fiscal Federalism, New York: Harcourt Brace Jovanovich. Olson, M., 1969. The principle of "fiscal equivalence": the division of responsibilities among different levels of government. The American economic review, 59(2), pp. 479–487. Ring, I., 2008a. Compensating Municipalities for Protected Areas. Gaia, 17(S1), pp. 143–151. Ring, I., 2008b. Integrating local ecological services into intergovernmental fiscal transfers: The case of the ecological ICMS in Brazil. Land Use Policy, 25(4), pp.485–497. Santos, R. et al., 2012. Fiscal transfers for biodiversity conservation: The Portuguese Local Finances Law. Land Use Policy, 29(2), pp.261-273. Sauquet, A., Marchand, S. & Féres, J., 2014. Protected areas, local governments, and strategic interactions: The case of the ICMS- Ecológico in the Brazilian state of Paraná. Ecological Economics, 107, pp. 249-258. Schröter-Schlaack, C. et al., 2014. Intergovernmental fiscal transfers to support local conservation action in Europe. Zeitschrift für Wirtschaftsgeographie, 58, pp.98–114. ten Brink, P., Bassi, S., Badura, T., Gantioler, S., Kettunen, M., Mazza, L., Hart, K., Rayment, M., Pieterse, M., Daly, E., Gerdes, H., Lago, M., Lang, S., Markandya, A., Nunes, P., Ding, H., Tinch, R., Dickie, I. (2011). The Economic benefits of the Natura 2000 Network. Synthesis Report. Brussels: EU. The Nature Conservancy, 2014. ICMS Ecológico. Available at: http://www.icmsecologico.org.br/index.php?option=com_content&view=article&id=61&Itemid=74 [Accessed December 1, 2014]. HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ#17Appendix - Variables and Indexes Variables: PA: protected area share of state territory in % icms_e: dummy variable for ICMS-E: 1 if ecological fiscal transfers in force in state i year t, 0 if otherwise agr. share of valued added by agriculture of valued added by economic activity (agr+ind+ser) in % (constant prices R$2000) in thousands ind: share of valued added by industry of valued added by economic activity (agr+ind+ser) in % (constant prices R$2000) in thousands ser. share of valued added by service of valued added by economic activity (agr+ind+ser) in % (constant prices R$2000) in thousands pop: population density cap/km² inc: GDP per capita in constant prices R$2010 in thousands arpa: dummy variable for a policy on protected areas in the amazon 1 if in force in state i year t, 0 if otherwise OPA: other government level protected areas (e.g. state level PAs sta and federal level PAs fed when regressing on municipal PAs mun) biome: set of dummy variables for the biomes in Brazil: ama: amazon biome 1 if major share of state i territory cer: cerrado biome 1 if major share of state i territory caa: caatinga biome 1 if major share of state i territory mat: mata atlantica biome 1 if major share of state i territory pan: pantanal biome 1 if major share of state i territory pam: pampa biome 1 if major share of state i territory int: set of interaction variables of icms_e with agr, ind, ser, pop, and inc, respectively Indexes: ¡ indexes the 26 federal states and the federal district t indexes years from 1991-2009 HELMHOLTZ CENTRE FOR ENVIRONMENTAL RESEARCH - UFZ