A Brief Tour of Brazilian Payments for Ecosystem Services

Brazil is home to more than four million plant and animal species – and, it seems, nearly as many laws and mechanisms for preserving the environment. That's one reason the next Katoomba Meeting is taking place in the Brazilian state of Mato Grosso – at the heart of South America and the southern edge of the Amazon Rainforest.

Leading up to that event, Ecosystem Marketplace is examining Payments for Ecosystem Services in Latin America.First in a series

What pops to mind when you think of Brazil?

For many of us, it's the country's unending string of soccer virtuosos. For others, it's the four-day Carnaval that fills the streets of Rio and other cities this weekend.

But for ecologists, Brazil is something else altogether. It's the Amazon Rainforest, the Atlantic Forest, the Cerrado Savanna and other amazing biomes that help purify the world's air by extracting greenhouse gasses and other impurities from the atmosphere while supporting countless species of plant and animal.

Unfortunately, for the bulk of us, what comes to mind are not these natural treasures themselves, but their destruction – a direct result of our economy's inability to recognize the value of the ecosystems on which its own existence depends.

Twelve Steps to a Better Biosphere

Ecosystem Marketplace has documented scores of non-governmental organizations (NGOs) and corporate donors who have launched voluntary Payments for Ecosystem Services (PES) schemes designed to incorporate the economic value of ecosystems into our market economy and to Reduce Emissions from Deforestation and Degradation (REDD), but such schemes will only bear enough fruit to make a difference if governments provide the regulatory drivers they need.

Brazilian state and federal governments have also launched a dizzying array of instruments and efforts to funnel private money towards environmental projects, and anyone looking to understand the evolution of PES in Brazil needs to be familiar with twelve of these efforts – even though many of them are not PES schemes in the strict sense of the word.

Most, for example, don't create a direct payment from the beneficiary of an ecosystem service (such as a city that gets clean water from mountain streams) to a provider of that service (such as indigenous farmers who maintain the catchments that provide the water). The principle of "protector receives" isn't always adhered to, but the principle of "polluter pays" is.

Furthermore, not all are created equally: some are little more than proposals, while others are backed by legislation long in force.

This brief overview of these mechanisms is by no means a comprehensive analysis, but rather a summary of the goals, strengths, and weaknesses of each effort. Many of these issues will be explored in more detail in the weeks leading up to the 14th Katoomba Meeting, which takes place April 1-2 in the Brazilian state of Mato Grosso.

ICMS Ecológico: the Ecological Sales Tax

The first mechanism is "ICMS Ecológico" (Imposto sobre Circulação de Mercadorias e Serviços Ecológico, the "ecological sales tax" – although a direct translation is "Ecological Tax on Circulation of Goods and Services. Download the TNC brochure, right). ICMS Ecológico raises funds through a sales tax on all goods and services and then pays the money out to municipalities based on how many "conservation units" (protected areas) they maintain or the level of sanitation infrastructure present in the municipality.

This is not a federal initiative, but rather a common name for initiatives launched by several Brazilian states. The primary aim is to compensate municipal governments for the tax revenue they lose when land is designated a protected areas, but it also has an incentive effect, encouraging the designation of new conservation areas.

The main motivation for the ICMS is the creation of new protected areas, and criteria for improving management of existing reserves only exist in some states. However, we should add here that the money that gets distributed to the municipality is not earmarked for conservation – it is up to the local government to define how to utilize the resources, and in some cases, depending on the state there are quality criteria related to the use of the resources which ends up acting as an incentive to reinvest in protected areas.

The state of Paraná launched the first ICMS Ecológico in 1992, followed by São Paulo one year later. The idea quickly spread to the states of 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).

São Paulo alone has amassed a conservation coffer of 40 million Brazilian Real ($R) since 1993, but critics say the mechanism isn't really delivering new conservation – in part because it simply rewards municipalities that are already fortunate enough to have large swathes of conservation, but also because debate over the best mechanism for distributing the funds is far from resolved.

Compensação Ambiental: Environmental Compensation

Brazil – like the United States and the European Union – has a program to offset the environmental impact of new development by requiring a compensatory payment for the non-avoidable impacts of new development. The program was initiated in 2000, but until recently required the payment of a licensing fee that had nothing to do with a project's environmental impact and everything to do with its budget.

to either the federal Ministério do Meio Ambiente (MMA – Ministry of Environment)

Specifically, developers were required to pay a licensing fee, usually amounting to between 0.5% and 2.0% of the cost of their development. The payment is supposed to bypass public budgets and go straight to a protected area that is impacted by the project, but the law failed to define a method for determining the size of the payment.

As we all know, the debate over how to best value the economic impact of environmental degradation is central to all PES schemes, and simply ignoring that debate in favor of a mechanism based on the cost of the project led to a flurry of lawsuits, culminating in a 2008 Supreme Court decision mandating license fees more closely related to actual impacts.

Now the licensing fee is truly meant to be a "Compensação Ambiental" (Environmental Compensation), which means that licensing agreements should be tied to environmental impacts, and payments are directed towards protected areas (in Brazil, these are protected areas equivalent to the International Union for Conservation of Nature (IUCN)'s Category One (nature reserve, free of development) or Category Two (limited protection) Protected Areas.

It all looks great on paper, right down to prescribing five specific uses for the money (studies for the creation of new reserves, management plan, sorting out land-tenure, purchase of goods and services necessary for managing an area, and management related research). The law creates a direct connection between private money and public action, and the amount of money raised since the initial licensing began is estimated at anywhere from $R237 million to double that amount.

In practice, however, there's still no way to assess environmental impact as mandated by the court ruling – and, as with ICMS Ecológico, no agreement on the best mechanism for executing the funds – or getting them into the protected areas. Now with the Supreme Court ruling everything has come to a halt while we await a new methodology for defining how to calculate costs associated with impacts, and with determining whether past payments needs to be revisited in order to meet the new valuation criteria.

Payment for Watershed Services

In 1997, Brazil passed the Lei da Política Nacional de Recursos, a law that essentially recognizes water as a public "good", whose use must be duly compensated through a financial payment. Furthermore it stipulates that resources generated through this means should be used to protect the resource at its origin. This opens up the possibility for water payments to be directed towards conservation projects, but does not mean that all resources from water usage is directed towards conservation. Part of the payments can go towards maintaining the infrastructure that delivers the water, and the water that we pay for through our utility bill has nothing to do with the charges that are established under this law.

Water payments that relate to the use of resources from a particular watershed are collected by the local water management agency, which charges a usage fee and redistributes a portion of the payment to local watershed management committees.

In an effort to promote local participation, payments are to be assessed and distributed by local committees made up of volunteers, whose job is to assess the charges and then distribute payments to reforestation or environmental conservation projects within their watershed.

Unfortunately, this very effort to involve local communities is also the program's weakness, subject to the same challenges that efforts involving community input face around the world. (Anyone who has ever been involved in a local civic group can attest to the heated battles that rage over what color to paint a fence – let alone the best way to revive a degraded watershed.)

As this is a new initiative, many committees either don't exist or have yet to figure out how to work together, how to develop a plan, or how to conceive a vision that sets priorities and guides what needs to be funded and where and how to control costs. Few of the participants are trained conservationists or engineers.

The challenge is to promote an understanding of organizational structures and technical issues – not to mention good governance. A fundamental problem is water theft: water is often diverted from existing pipelines, which means that funding never really makes its way into the budget. This is a promising law, but one that needs better enforcement and practical guidance for committees to function in order to achieve the program's goals.

Gas and Oil Royalty Payments

As in other parts of Latin America, oil and gas companies in Brazil are forced to pay royalties, either to the federal government or the local government, depending on the jurisdiction.

These payments are earmarked for protection of biodiversity and reduction of air and water pollution – but the priorities aren't clearly defined, and the money is often pooled into larger budgets. This leaves the money it public coffers with no financial mechanisms for channeling it to the economic projects for which it is intended.

Many of these local governance issues flow from the newness of Brazil's democracy, which is just over 20 years old. If these local governance issues are not resolved, authority may be consolidated at a higher level. Other examples where this happens are the compensation payments for hydroelectric dams and for mineral extraction, which include the concept of compensating for environmental impact but are not necessarily directed towards environmental conservation.

Private Nature Reserves

Brazil offers private land-owners an opportunity to avoid paying property taxes by turning their land into a private nature reserve (Reserva Particular do Patrimônio Natural, RPPN).

Again, this can be done either at the state or federal level, and the treatment is different for each.

If registered at the federal level, the land is considered a "sustainable use" reserve, which means that some productive activity is allowed, provided the land becomes part of the national protected area system – following the SNUC law (Sistema Nacional de Unidades de Conservação or the National System of Protected Areas). This law obligates the owner to develop a management and monitoring plan and to earn money from limited extractive activities.

If registered at the state level, the land is considered a "strict protection" area, which means it can only be used for research and eco-tourism.

If incorporated into the national system, RPPNs fall into a category between strict protection and "sustainable use" – largely because the article describing sustainable use was vetted in congress. The result is a category that is often described as sustainable use, but in reality is more restricted.

Either way, the land is incorporated into Brazil's protected area system – and the designation is permanent. Because there is no turning back, most landowners have been reluctant to take advantage of this program.

Furthermore, exemption from the Imposto Territorial Rural (ITR, the Rural Land Tax) has proven to be a weak incentive, because the tax itself is low and often not enforced, and the bureaucracy created to administer the SNUC makes it difficult to create RPPNs.

While for-profit landowners have generally paid little heed to getting RPPN designation, we are seeing interest on the part of environmental NGOs and research organizations.

Mitigation Banking, Brazilian Style

Under the 1965 Código Florestal (Forestry Code), Brazil requires anyone owning more than 50 hectares of rural land to make sure that a certain number of hectares are set aside in a Reserva Legal (Legal Reserve). As in mitigation banking, the Código Florestal makes it possible for landowners to reach their quota either by setting aside their own land or by purchasing tradable certificates from other landowners within the same micro-region or watershed.

The percentage required to be set aside varies from as little as 20% to as much 80%, depending on the biome – and is the focus of a heated battle between the Ministry of Environment and the Ministry of Agriculture.

Not surprisingly, the highest figure for protection is in the Amazon, where the required set-aside was raised from 50% to 80% under the administration of President Fernando Cardoso, who preceded Luiz Inacio "Lula" da Silva.

The deadline for compliance is 2010, and the Ministry of Agriculture and Fisheries – backed by large agriculture interests – wants to not only roll back the ceiling to 50% in the Amazon, but also to allow the trading of certificates across watersheds and allow reforestation with non-native species. The Ministry of Environment wants to keep the ceiling at 80%, focus trading within watersheds, and limit most reforestation to native species.

The Kyoto Protocol's Clean Development Mechanism

China and India have been erecting wind parks and other clean energy projects with funding from the Kyoto Protocol's Clean Development Mechanism (CDM), which allows greenhouse gas emitters in the developed world to offset some of their emissions by funding such projects in the developing world.

Brazil, however, already gets the bulk of its electricity from hydro plants and wind farms, while 75% of its cars run on ethanol. This leaves few options for reducing greenhouse gas emissions from industrial sources under the current Kyoto Protocol.

The bulk of Brazil's CDM income (or "MDL" income, for Mecanismo de Desenvolvimento Limpo) goes to support methane capture projects in landfills, and is not a significant generator of income.

Since the majority of Brazil's emissions come from deforestation, its main contribution for reducing emissions would come from avoiding forest loss. However, avoided deforestation is not eligible to receive carbon credits under the current regulated market. This opens the door for a voluntary market and for new negotiations that will unfold from a post-Kyoto agreement (post 2012).

Amazon Protected Areas Program

The Amazon Protected Areas Program (ARPA) is a federal program designed to protect 37.5 million hectares of Protected Area by 2012 – a size equivalent to all of Spain. It also aims to consolidate another 12.5 million hectares of existing reserves. It is estimated that R$900 million (US$395 million) is needed to meet this objective.

This program is now entering its third and final phase and now funds 60 protected areas covering 23 million hectares. It is overseen by a multistakeholder governing council, funded primarily by Germany's KfW Bank Group (formerly the Kreditanstalt für Wiederaufbau, or Reconstruction Credit Institute), the Global Environment Facility (GEF), and WWF (formerly the Worldwide Fund for Nature), and administered by the Brazilian Biodiversity Fund (FUNBIO).

Ultimately, the hope is to create a R$544 Million (US$240 million) endowment fund to cover recurring costs and support the protected areas. The fund currently has R$50 million (US$22 million).

The program is currently focused only on the Amazon, leaving other protected biomes such as the Caatinga and Atlantic Forest on their own.

Forest Concessions

Brazil also earns money from public lands by leasing them to timber companies, which are obligated to re-plant the forests and pay a tax. The program, however, is unevenly administered, and obligations to replant are often ignored by leasers, who find it easy to simply get away with non-compliance.

As with many of Brazil's environmental laws, this effort will hinge on enforcement, and the development of an effective enforcement mechanism is central to the debate.

Commercial Forestry Certificates

The environmental community is lobbying for a certification program that will go along with forest concessions to improve monitoring and enforcement of these instruments.

Such programs already exist, and the Forest Stewardship Council (FSC) has been active in Brazil, but instead of one nationally-agreed upon standard for certifying that timber has been harvested in a sustainable way, the market has generated a gaggle of varying certificates that mean different things to different people.

Larger users of wood products, including Aracruz Celulose, Brazil's leading paper and pulp company, have expressed an interest in supporting a national standard. Indeed, companies like Aracruz have much to gain on the public relations front, but smaller producers say they can't afford the administrative costs.

Green Tax Deduction

In Brazil, as in most countries, people and companies can write charitable donations off on their income tax – but in Brazil, the only recognized categories of charity are Culture, Education, and Athletics.

A new bill, Imposto de Renda (Income Tax) Ecológico, aims to extend that status to donations in support of environmental projects. It has the backing of major NGOs like WWF, Conservation International, and the Nature Conservancy, as well as support from the Moore Foundation, but has run into stiff resistance from government entities concerned about reduced tax revenues and NGOs active in education, culture, and athletics.

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