Preliminary Result on the inclusion of new criteria for the Ecological ICMS distribution in the State of Mato Grosso. 1

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1 Preliminary Result on the inclusion of new criteria for the Ecological ICMS distribution in the State of Mato Grosso. 1 In Mato Grosso, the Ecological ICMS is an economic instrument of environmental policy, which plays an essentially compensatory role in the form of compensation for municipalities that have protected areas in their territories (instituted in December Complementary Law No. 73/2000). Unlike the Green ICMS of the State of Pará, the existing normative framework does not contemplate compensatory criteria for the increase in the performance regarding municipal environmental management and reduction of existing deforestation and forest degradation. Additionally, it is understood that for municipalities, ICMS is a relevant source of resources, and the expansion of the Ecological Criteria stimulates the increase of its potential to deal with other challenges in the area of conservation and environmental management (urban and rural). In 2016, IPAM s team promoted a visit of the representatives from Mato Grosso Sustainable Municipalities Program (PMS), Eduardo Moura and his team to Green Municipalities Program (PMV) in Pará. Mato Grosso s team had the opportunity to participate in a meeting of PMV Steering Committee (COGES). In this occasion, they had the opportunity to know how PMV works and understand the green ICMS mechanism. After this visit, Moura has declared his intention to promote a discussion on the Eco-ICMS in Mato Grosso, considering the adoption of new criteria, such CAR, deforestation targets, and other. In November 2016, a meeting was carried out between IPAM s team and the Secretary of Environment of the state of Mato Grosso, André Torres Baby. The IPAM s team stressed the importance of extending the criteria for transferring the financial resources of the Ecological ICMS from the state to the municipalities, just as it is done in the state of Pará. The executive secretary requested IPAM technical support to elaborate a proposal to extend the current criteria and increase the percentage of Ecological ICMS. For this purpose, it also requested support in relation to the juridical changes necessary to enable a new model of transference of financial resources. Therefore, IPAM hired a consultant to initially carry out a legal and technical analysis considering all the criteria cited by the secretary in an ideal scenario: - Reduction of deforestation 1 This study was conducted by the Ecosystem consultancy, and is technically coordinated by Erika Pinto, Ana Carolina Crisostomo and Andrea Azevedo. February 2017.

2 - Forest fires - Sanitation (existing criteria) - Municipal environmental management - Protected Areas and Indigenous Lands (existing criteria) The definition of new criteria for the Ecological ICMS should consider three important factors: (1) the source of the information must come from official bodies and easy reference. (2) The periodicity of publication of information by official sources should be monthly and/or annual; (3) the criterion chosen should have an isomeric character, that is, applicable and achievable for all municipalities or, the largest number of them (in the current criteria, a little more than half - 58% - of the municipalities of Mato Grosso participate in the distribution of the 5% of the financial resource coming from Ecological ICMS). Evaluation of the new criteria Hotspots - this is a variable whose information is accessed through the National Institute for Special Research (INPE) as part of the Forest Fire Monitoring Program, with application throughout the national territory, independent of the biome. The information was accessed from the Database on Forest Fire ( Deforestation reduction - estimates of deforestation by municipality were obtained from the SEMA/MT (Secretariat of Environment of the state of Mato Grosso), which uses images from orbital sensors and Geographic Information Systems (GIS), as well as INPE. The SEMA/MT data consider deforestation in the state of Mato Grosso for the three biomes of the State: Amazon, Cerrado and Pantanal (PRODES/INPE detects deforestation annually only in forest areas belonging to the Amazon biome). In order to calculate the reduction of deforestation, the same method used for the analysis of hotspots was used, that is, considering the annual rates of deforestation between 2010 and 2014, by municipality. The year 2010 was used as reference for being the last one where changes occurred in the legislation of the Ecological ICMS in Mato Grosso. Basic Sanitation - the municipal performance related to the municipal basic sanitation supply was obtained from the National Sanitation Information System (SNIS) database ( within the scope of the Ministry of Cities. General sanitation information was accessed for the year 2015 (the last year available in

3 the database), where the information of interest was the status of each city in terms of piped water supply, sewage treatment and solid waste. The proposal to test the municipal environmental management criterion was not performed because it is not possible to find information about this variable, published in official and reliable data sources of MT. Currently, the proportion of Ecological ICMS defined by the state legislation of the MT is 5%, referring exclusively to the criterion of Protected Areas. One of the goals of this work is to propose some scenarios for the distribution of Ecological ICMS considering the adoption of three new criteria in the existing matrix. Thus, three scenarios were evaluated as shown in the table below. Scenarios of distribution of the Ecological ICMS with new criteria and different percentages of distribution. Scenarios/Criteria Scenario I (%) Scenario II (%) Scenario III (%) Protected Areas Hotspots Basic Sanitation Deforestation reduction ICMS Total 5% 8% 12% Scenario I is based on current legislation (5%), reducing the proportion of the current criterion (Protected Areas) to 2% and adding the new criteria with equal value (1% each). Scenario II increases the participation of the state's Green ICMS to 8%. In this scenario II, we have reduced the Protected Areas criterion to 4%, while increasing to 2% the criteria Hotspots and maintain Sanitation and Deforestation Reduction by 1% each. In scenario III we simulated an equal proportion for all the criteria (3%), reaching a total participation of 12% in relation to Eco- ICMS. The distribution of the Ecological ICMS values by municipalities considering the three scenarios can be seen in Annex V. The value of total Ecological ICMS collected in the three scenarios increased in the same proportion of the index. Among the municipalities, when the participation of the Protected Areas criterion (which covers only 58 municipalities) is reduced, it is possible to equalize the

4 distribution of resources between municipalities that had an acceptable performance in the criterion of hotspots (about 54 municipalities were not classified as eligible for this criterion). The criterion of the provision of basic sanitation services does not apply to only 35 municipalities. Finally, in the deforestation reduction performance, 81 municipalities did not meet the requirements to score. In general, only 3 municipalities did not achieve enough performance in any of the 4 criteria to receive some transfer of financial resources from the Eco-ICMS in Mato Grosso: Bom Jesus do Araguaia, Luciara and Porto Alegre do Norte. It is important to emphasize that the new criteria have the potential of directly influencing municipalities in order to motivate improvements in measures to monitor hotspots (through environmental monitoring and education, for example) and deforestation within their territories. It also has the potential to encourage the creation of new protected areas, especially municipal and private ones, and to increase investments to expand the supply of sanitation services. Ecological ICMS in MT legal evaluation Currently, in order for the municipalities of the State of Mato Grosso to receive the financial resources of the Ecological ICMS, it is necessary that the conservation units in their territories are registered in the State Registry of Conservation Units (CEUC). In addition, municipalities must plan the application of resources received through the Ecological ICMS, which must be prepared and executed through inter-municipal consortia. Although the Federal Constitution does not determine the use of a Complementary Law to establish the distribution of the benefit to the Municipalities, the Constitution of Mato Grosso established, in a restrictive way, the use of this normative instrument to define the economic, social and environmental criteria for this purpose. This makes it more difficult to change any criteria for distributing the Ecological ICMS benefits to the municipalities. Complementary Laws 73/2000 and 157/2004 specify the criteria used to distribute the benefit to Municipalities, so a new complementary law will always be necessary to modify, create or extinguish existing criteria. Possible legal strategies to improve the distribution criteria defined in item II of the single paragraph of art. 157 of the Constitution of the state of Mato Grosso:

5 1. Change the text of the State Constitution to allow the setting of criteria by means of ordinary law, allowing greater flexibility for their creation and modification; 2. Elaboration of a new Complementary Law, more synthetic, that is restricted to define the economic, social and environmental criteria addressed by the State Constitution for the distribution of those 25% of the ICMS provided to the municipalities, allowing regulation by means of a decree of the Executive Body. 3. The maintenance of Complementary Laws 73/00, 157/04 and Decree / 01, with the possibility of modifying the indicatives that will influence the calculation of the values referring to the protected areas, using the prerogative of definition of the parameters that is responsibility of the environmental agencies (Complementary Law 73/00, article 8).