When pollution funds its police, how will environment be protected?

Imagine a hospital that can run only if more people fall sick. The healthier the city becomes, the poorer the hospital gets. That uncomfortable logic now echoes through India’s environmental governance with the notification of the Environmental (Protection) Fund Rules, 2026. Notified by the Union Ministry of Environment, Forest and Climate Change on January 15, 2026 and published in the Gazette of India, the rules have brought into force a long-dormant provision of the Environment (Protection) Act, 1986, creating a fully operational Environmental Protection Fund.

Issued under Sections 6 and 25 of the Act, after consultation with the Comptroller and Auditor General of India, the rules operationalise Section 16, which mandates the creation of the Fund in the Public Account of India. With this notification, environmental penalties across the country are now legally required to flow into a single, structured financial mechanism at the Centre and state levels.

At first glance, the idea sounds sensible: Polluters pay, and the money is used for environmental work. But a closer reading of the rules reveals a troubling shift, from rectifying environmental harm to institutionalising pollution as a revenue stream.

When violations keep system running

The design choice at the heart of the Fund is its source of money. All penalties imposed under the Air Act, the Water Act and the Environment (Protection) Act must now be credited to the Environmental Protection Fund. In addition, all fines recovered from companies for environmental violations, including personal liability of directors and officers under Section 16(2) of the Environment (Protection) Act, are routed into the same pool.

This means the Fund grows only when violations occur. Penalties, instead of primarily deterring pollution or repairing damage, become a regular source of funding for the environmental regulatory system itself. Better compliance would weaken the Fund’s inflows; persistent pollution would strengthen them. Environmental protection including monitoring, research, capacity building of regulators, in effect, risks becoming dependent on environmental failure.

Spending on systems, not necessarily on pollution mitigation

The notification does more than create a fund; it tightly defines how the money can be used. The permitted expenditures cover a wide range of activities, most of which relate to monitoring, research, capacity building and administration. While these are important for governance, they do not automatically translate into cleaner air, safer water or restored ecosystems.

The notification makes it clear that only one category, assessment and remediation of environmental damage, directly addresses ecological harm, and even this is not mandatory or linked to the specific site of violation. The rest of the expenditure heads primarily support the regulatory machinery that manages pollution.

25:75 split & broken link to damage

The notified rules also formalise how penalty money will be shared. Once collected, 75 per cent of the penalty amount is transferred to the concerned state or Union territory, while 25 per cent is retained by the Centre. States are required to place their share in a dedicated reserve fund under their Public Accounts.

However, the notification does not require states to demonstrate that the money is spent where the damage occurred or that restoration outcomes were achieved. The legal obligation is to account for expenditure, not for environmental recovery. All payments are routed through the Bharatkosh portal, ensuring traceable transactions and audit by the Comptroller and Auditor General. It is a great step for strengthening financial discipline and transparency if the data made public.

The rules also reflect a deeper asymmetry embedded in the parent law. While Section 16 of the Environment (Protection) Act, dealing with offences by companies, is fully operationalised through this Fund, Section 17, which addresses offences by government departments, finds no comparable expression in the notification. The polluter-pays principle is firmly institutionalised for private actors, but remains weak when the violator is the State itself.

Vicious cycle by design

With its notification, the Environmental Protection Fund has moved from legal abstraction to administrative reality. But the structure it creates risks embedding a vicious cycle: Environmental violations generate penalties; penalties finance regulatory systems; regulatory systems manage violations rather than eliminate them. 

There is, however, one limited but noteworthy positive in the notified rules. They explicitly prohibit the use of Fund money for foreign travel, medical expenses, construction of government offices, or purchase of vehicles and similar items. At the very least, environmental penalties will not be diverted to overseas trips or official luxuries.

Still, as the rules stand today, the central question raised by their notification remains unresolved: Is the Environmental Protection Fund designed to restore the environment or to ensure that pollution regulators continue to be funded as long as pollution persists?