This paper evaluates an innovative tax revenue-sharing scheme in Brazil, designed to promote the conservation and management of protected areas. Known as the 'ICMS Ecológico', the scheme was introduced by the state of Paraná in Brazil and subsequently by several other states. The scheme aims to compensate municipal governments for the loss of potential tax revenue from the designation of protected areas (mainly by the state and federal government). It is also intended to have an incentive effect, encouraging both better management of existing protected areas as well as the designation of new conservation areas. The paper examines the experience with the ICMS Ecológico in the states of Minas Gerais and Rondônia, two states which present a marked contrast in terms of land use, population density and forest resources. It considers the extent to which the compensation and incentive objectives have been achieved in the two states. The distributional impact of the ICMS Ecológico is also examined through an analysis of the characteristics of the counties which are winners or losers under the scheme.