Many local governments complain that having protected areas in their territory makes them lose revenues they could have obtained by taxing other land uses. Several Brazilian states, including Minas Gerais and Parana, have responded by creating a special fund for municipalities with conservation areas to compensate them for the lost revenue. "The Ecological Value Added Tax: Municipal Responses in Parana and Minas Gerais, Brazil" by Peter May, Fernando Veiga Neto, Valdir Denardin, and Wilson Loureiro looks at their experience.

Ever since 1992, the state government of Parana has divided up 2.5% of all the value added taxes it collects among the state’s municipal governments based on how much conservation area they have and how well protected it is. Minas Gerais has made similar payments since 1996, although just 0.5% of the value added tax goes for this purpose there and the state allocates the money based only on the amount of land conserved, not the quality of protection. Half of all municipalities in Parana and one third of those in Minas Gerais currently receive such payments, which they can use however they want.

As a result of these programs, many local governments now actually want to enlarge the area devoted to conservation. Since the programs started, the conservation area has increased 165% in Parana and 62% in Minas Gerais. The greatest growth was in areas that aren’t fully protected but where certain restrictions apply and in privately owned natural reserves.

The paper also found marked differences between municipalities. Among nine municipalities it examined in greater detail the portion of the budget coming from conservation payments varied from less than one percent to over 17 percent. While some local governments spent even more on conservation than they received from the ecological value added tax payments, others spent nothing at all. There were municipalities that actively sought to increase their conservation area so they could expand their revenue and municipalities that remained uninformed and apathetic. In one municipality large farmers benefited the most, since the local government provided them services in return for establishing private reserves. In another case, the main beneficiaries were poor rural households that managed their forests collectively.

The authors believe the states ought to devote an even larger portion of their value added taxes to these payments and should make the public more aware about them. They say payments are more effective when states take into account qualitative indicators as well as the area of land involved. The states might also consider requiring municipalities to use part of the money they receive for environmental activities.