The energy sector is an important source of harmful air pollution and GHG emissions. Green fiscal policies such as fossil fuel subsidy reform, carbon-energy taxation, emissions trading, air pollution taxes and green subsidies can play a critical role in limiting energy-related negative impacts on human health, air quality and the climate by pricing harmful emissions and driving the transition to clean and low-carbon energy sources and increasing demand for renewable energy technologies.

Electricity and heat production are responsible for around 25% of global GHG emissions (IPCC 2014). These emissions also have a serious impact on human health: the World Health Organisation has estimated that air pollution – much of it attributable to fossil fuel combustion for power generation, heating, and cooking – kills around 7 million people worldwide every year. At the same time, around 1 billion people do not have access to energy in their homes. To tackle such problems and achieve achieve a green and inclusive transition, it is necessary to increase energy access while reducing the negative health, climate and environmental impacts of the energy sector attributable to market failures.

Increasing taxes on fossil fuel energy can encourage energy savings and energy efficiency, as well as investment in renewables. Carbon taxes in particular can create a level playing field on energy markets and, if well designed and credible, can foster a stable investment climate for renewable energy. Green public expenditure on research and development into renewable energy sources can support innovation and the market penetration of new technologies. In this way, green fiscal policies measures can deliver multiple benefits by incentivizing climate action and GHG mitigation, while at also reducing local air pollution and negative human health impacts.