India’s environmental governance framework has entered a new phase with the notification of the Environmental (Protection) Fund Rules, 2026. While the move is officially aimed at strengthening enforcement and remediation, critics warn that the structure of the fund risks creating a perverse incentive system where environmental damage, rather than prevention, becomes the financial backbone of regulation.
Notified by the Union Ministry of Environment, Forest and Climate Change on January 15, 2026, and published in the Gazette of India, the rules operationalise a long-unused provision of the Environment (Protection) Act, 1986. For the first time, penalties collected for environmental violations will flow into a centrally structured fund, with parallel mechanisms at the state level.
On paper, the principle appears straightforward: polluters pay, and the money is used for environmental protection. But a closer reading of the rules suggests a deeper and more troubling shift in how environmental harm is treated within India’s regulatory system.
A fund that grows only when violations continue
At the core of the concern is the source of the fund’s revenue. All penalties imposed under the Environment (Protection) Act, the Air Act and the Water Act are now mandatorily credited to the Environmental Protection Fund. This includes fines imposed on companies as well as personal liability penalties on directors and officers under Section 16 of the Environment (Protection) Act.
As a result, the fund expands only when violations occur. Improved compliance and reduced pollution would shrink its inflows, while persistent or worsening environmental damage would keep the fund financially healthy. Environmental regulation, critics argue, risks becoming structurally dependent on the continuation of pollution rather than its elimination.
This design choice marks a shift away from deterrence as the primary function of penalties. Instead of violations being exceptional events that trigger corrective action, they become routine contributors to the financial sustainability of regulatory systems.
More money for monitoring, less certainty for restoration
The rules also specify how the collected money can be spent. Permitted uses include monitoring and surveillance, research, capacity building of regulatory institutions, administrative expenses, and awareness activities. While these functions are necessary for governance, they do not automatically translate into environmental recovery on the ground.
Only one category of expenditure assessment and remediation of environmental damage directly addresses ecological harm. Even here, the rules do not mandate that restoration must take place at the site where the violation occurred. There is no requirement to link penalties collected from a specific polluter to the rehabilitation of the affected ecosystem.
This weakens the restorative intent of the polluter-pays principle. Instead of repairing damage, penalties risk being absorbed into the broader machinery of environmental administration.
Revenue sharing without accountability for outcomes
Under the notified framework, 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 deposit their share into a dedicated reserve fund within their Public Accounts. All transactions are routed through the Bharatkosh portal and audited by the Comptroller and Auditor General, ensuring financial traceability.
However, the rules focus on accounting for expenditure rather than measuring environmental outcomes. States are not required to demonstrate that funds have led to cleaner air, restored water bodies or rehabilitated ecosystems. The obligation ends with financial reporting, not ecological recovery.
The notification also highlights a structural imbalance in enforcement. While offences by companies under Section 16 of the Environment (Protection) Act are fully operationalised through this fund, there is no comparable mechanism for offences committed by government departments under Section 17. The polluter-pays principle remains robust for private actors but weak when the State itself is responsible for environmental harm.
A system designed to manage pollution, not eliminate it
With the notification of the Environmental Protection Fund Rules, a long-dormant legal provision has become an administrative reality. But the architecture of the fund raises a fundamental question about the direction of India’s environmental governance.
By tying regulatory financing to the persistence of violations, the rules risk creating a self-reinforcing cycle: pollution generates penalties, penalties fund regulators, and regulators manage pollution rather than decisively eliminating it. The environment, in this model, becomes the means through which governance systems are sustained.
The rules do contain some safeguards. Fund money cannot be used for foreign travel, medical expenses, construction of government offices, or the purchase of vehicles and other official assets. This limits the scope for overt misuse.
Even so, the central concern remains unresolved. Is the Environmental Protection Fund structured to restore damaged ecosystems and prevent future harm, or does it risk normalising pollution as a dependable source of revenue for environmental regulation?