Brazil’s Green Fiscal Fix: How Smart Policies Can Cut Emissions and Stabilize Debt

Brazil finds itself at a defining moment, confronting a stubbornly high public debt and a rapidly aging population that together threaten long-term fiscal sustainability. Over the last decade, the country’s debt-to-GDP ratio has surged to 76.5 percent, fueled by persistent primary deficits, rising pension obligations, and the rigidity of its public spending framework. Social transfers and public sector wages, many of them indexed to the minimum wage, have become politically entrenched, leaving only a narrow sliver of discretionary spending. While economic growth has picked up post-pandemic, fiscal consolidation remains elusive, and revenue gains have often been matched or exceeded by rising expenditure.

The World Bank estimates Brazil needs a primary fiscal surplus of 2–3 percent of GDP to stabilize debt. Yet with high taxes already burdening consumption and labor, the report underscores the importance of reining in expenditures rather than pursuing new general tax hikes. Among the proposed solutions: delinking pension and social assistance benefits from minimum wage adjustments, reforming military pensions, targeting public sector wage premiums, and rationalizing labor market programs such as unemployment insurance.

Climate Commitments Under Threat from Deforestation and Delay

Alongside these fiscal challenges, Brazil faces mounting environmental threats, most visibly in the Amazon. The country’s net GHG emissions in 2023 stood at 1.65 billion tons, making it the seventh-largest emitter globally. Unlike many industrial economies, most of Brazil’s emissions stem not from fossil fuels, but from land use change, deforestation, and agriculture.

The Brazilian government has laid out ambitious climate goals: a 59–67 percent reduction in emissions by 2035 and net-zero by 2050, as part of its Nationally Determined Contributions (NDCs) under the Paris Agreement. Key measures include ending illegal deforestation by 2030, restoring 12 million hectares of forest, and expanding sustainable farming practices. But the report warns that these targets are at risk without more aggressive policy action and better financial incentives.

The Green Fiscal Arsenal: A New Toolkit for Reform

The World Bank’s central thesis is that green fiscal policy can deliver a “double dividend”, improving the public purse while safeguarding Brazil’s rich ecological assets. A cornerstone of this approach is the recently approved Emissions Trading System (ETS), which creates a cap-and-trade market for emissions in key sectors like industry, energy, and services. Modeling with the World Bank’s OMEGA macroeconomic model shows that the ETS and complementary policies could deliver nearly 50 percent emissions reduction by 2050, while boosting GDP by 5.6 percent and improving the primary fiscal balance by 0.3 percent of GDP between 2026 and 2050.

Other green fiscal measures offer similarly high-impact results. Raising fuel taxes, especially on road transport not covered by the ETS, could yield an additional 0.7 percent of GDP in revenue. In agriculture, phasing out untargeted subsidies and tax expenditures could save another 0.5 percent of GDP, while encouraging climate-smart farming. Meanwhile, reforming Brazil’s rural land tax (ITR), largely ineffective in its current form, would both enhance revenues and deter speculative deforestation.

Power to the States: Greening Brazil’s Fiscal Federalism

A unique feature of the World Bank’s proposal is its call to green Brazil’s intergovernmental fiscal transfers. Currently, most of the 2.5 percent of GDP in federal transfers to states, primarily via the State Participation Fund (FPE), are unconditional. The report proposes linking a portion of these transfers to environmental performance, such as reductions in deforestation and conservation of forest stock. States in the Amazon, where the opportunity cost of preservation is high, would especially benefit.

Municipalities already receive small-scale ecological transfers based on environmental indicators, but the 2023 tax reform mandates these across all states, setting a precedent for expanding similar transfers to the state level. According to the report, rewarding ecosystem service provision through performance-based transfers could unlock collective action on climate across Brazil’s vast and decentralized governance system.

A Path Forward: Aligning Equity, Growth, and Sustainability

The Double Dividend report builds on the World Bank’s earlier A Fair Adjustment (2017), which focused on equitable spending reforms. Now, it extends the principle of fairness to future generations by integrating climate action into fiscal strategy. The authors argue that Brazil’s public finance system can, and must, evolve to meet the twin crises of debt and environmental degradation.

With the groundwork already laid through the ETS, indirect tax reform, and growing interest in green finance, Brazil has an opportunity to lead the way globally in integrated fiscal-environmental policy. But success hinges on bold political will, clear governance frameworks, and a commitment to reinvest savings and revenues in inclusive, sustainable development.

In short, this is more than a budgetary adjustment; it’s an ecological and generational realignment of Brazil’s economic trajectory. As the report eloquently concludes, Brazil needs not choose between balancing its books and saving its forests. With the right policies, it can, and must, do both.