Fiscal Resilience Strategy for Pará's Low-Carbon Transition

Team Members: Diana Chipak (Manager), Peyton Choo (Deputy Manager), Brendan Chapko, Haejin Kim, Maira de Roussan, Muskaan Khemani, Ana Roxana Spanache, Yanrong Li, Yelena Arkhangelskaya, Yichun Huang

The State of Pará - the second-largest in the Brazilian Amazon - has set ambitious goals of achieving net-zero from “Land Use and Forests emissions by 2036 (PEAA, 2020). As Brazil's leading mining state with a booming sector fueled by heavy fuels consumption, Pará faces a "Fiscal Paradox": greenhouse gas reductions are undermining its primary revenue source. Fossil-fuel linked revenue historically comprised 25% of the state's value-added tax (ICMS) and 10% of its total budget in 2024, but this share is rapidly declining - from 23.1% in 2024 to 10.6% by 2035 [Model] - as the state decarbonizes. This decline, termed an "Efficiency Trap", stems from key sectors like mining shifting to cleaner, more efficient fuel sources such as liquefied natural gas (LNG). LNG delivers up to 37% higher thermal efficiency, which reduces fuel consumption volumes by a third, while cutting GHG emissions by approximately 25%. State incentives Law No. 6,489 that link ICMS tax discounts to carbon reductions further accelerate this transition, inadvertently eroding the taxable fuel base. This report proposes a 10-year fiscal resilience strategy for Para’s State Secretariat of Finance (SEFA-PA) based on three pillars to manage the low-carbon transition: 

• Align the Brazilian Sustainable Taxonomy and institutionalize Green Budgeting to secure National Treasury Guarantees and "Greenium" rates for capital market investment. 
• Establish a State Sovereign Fund, capitalized with a suggested 40% floor from mining royalties (CFEM), projected to reach R$ 50 billion by 2050 [Model], serving as a permanent fiscal buffer against commodity volatility. 
• Unlock the R$ 170 billion potential by 2050 through nature-based climate finance [Model], including jurisdictional carbon markets (REDD+), forest restoration concessions (URTX), and eco-tourism taxation.

By diversifying the tax base from industrial consumption to nature-based outputs. By integrating these mechanisms, Pará can navigate the energy transition not as a revenue vulnerability, but as a catalyst for long-term fiscal resilience and sustained economic growth. While these new revenue streams are vital mitigants, fiscal modeling indicates they serve as supplementary buffers rather than total substitutes for legacy tax revenue, necessitating a broader structural shift toward a value-added bioeconomy