Brazil’s fiscal federalism determines that part of the revenue the State collects from the State sales tax (in Portuguese Imposto de Circulação de Mercadorias e Serviços (ICMS)) must be distributed to its municipalities as most of it is given based on an equal proportion to the amount generated in each county. This favors the more developed cities, more capable of generating tax revenue, and penalizes those with environmental conservation areas, water reservoirs and other legal restrictions that reduce the capability of economic production. This system fails to reduce inequality between the municipalities and does not consider positive externalities. As a solution, some States started implementing environmental conditions for the distribution of a part of the ICMS revenue creating the Green ICMS. The study aims to present this tax instrument, exposing its merits, achievements and problems.