Environmental Fines: A Possible Funding Source?

It has been argued that an efficient and effective legal environmental system can become an important instrument for generating resources for environmental projects and preventing further environmental degradation (López, 1994). Effectively enforced legislation that establishes large financial penalties for violators and requires full financial compensation for past environmental damage may have a potential for raising significant resources that could be used to finance new sustainability programs. However, as the U.S. experience with Superfund has shown, there are serious constraints to a system under which a government agency tries to raise resources for its own use through the court system. The Environmental Protection Agency (EPA) has spent seven dollars in overhead for every dollar spent on clean-up (López, 1994).

Are fines for environmental crimes really a potential source of revenues for environmental projects? In Brazil, it is estimated that the Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) collected between US$10 million and US$12 million a year during 1996 and 1997 from environmental fines (IDB, 1998). Under the new Brazilian Law on Environmental Crimes, which came into force on March 30, 1998, a portion of the fines collected for environmental infractions should now be transferred to the National Environmental Fund (FNMA). So long as the amount of fines collected remains at the 1996-1997 level, this earmarking of environmental fines can clearly contribute to the long-term financial sustainability of the FNMA and thus help to finance environmental improvements. FNMA is the first and oldest environmental fund established in Brazil and has financed projects primarily in environmental control, protected areas, and environmental education. Over 70 percent of the projects are executed by NGOs, community groups, and small municipalities. It should be noted, however, that President Cardoso has suspended several provisions of the new law.

Yet one should probably not be overoptimistic about the revenue generation potential of environmental fines. In Colombia’s Financial Strategy for Sustaining Environmental Investment for the Period 1998-2007, it is stated that revenues from environmental fines (as levied under Article 85 of the Environmental Law No. 99) have not been significant so far, although they may have the potential to increase when the implementation of the law becomes more developed. Under Law No. 99, the environmental authorities can impose daily fines up to 300 days’ minimum wage (in Mexico, sanctions up to 20,000 times the minimum wage are allowed; IER, 1994). However, even in the most optimistic scenario, the Financial Strategy estimates that the revenues from environmental fines would be limited to US$6.4 million over the ten-year period covered by the strategy, probably because it is reasonable to expect that a successful program would result in increased compliance and thus fewer fines (although it is suggested that this be partly offset by making the fine amounts inversely proportionate to the level of overall compliance).

The Financial Strategy does show that within a context of developing a broader spectrum of financial instruments, environmental fines can play a significant role. In many countries of Latin America and the Caribbean, however, there is reluctance to allow them to be earmarked for environmental investments. In general, penalties can either be earmarked for environmental improvement or put into the general treasury. Traditional economic theory suggests a preference for the latter; earmarking is seen as unnecessarily restricting the possibilities of spending the money in the most efficient way. If that way happens to be for environmental improvement, then general treasury money can be used for the purpose. But if other projects were to offer much higher rates of return, revenues designated for a particular purpose would miss them (Tietenberg, 1996). Earmarking may not only result in suboptimal allocation of resources but also provide incentives to environmental authorities to pursue fines even if they are not in the social interest of the country.