A key challenge facing many resource-rich low- and middle-income economies is how to mobilize and effectively use volatile revenues from resource extraction, while addressing the social and environmental externalities of mining activities, such as groundwater contamination, acid mine drainage, and methane leaks from oil and gas operations. Green fiscal policies have the potential to raise revenue from the extractives sector while addressing its negative impacts.

Resource-rich countries often face a range of problems relating to the extractives sector. Many are losing large amounts of revenue from the sector due to illicit financial flows – estimated to be worth around USD 50 billion annually in Africa, or double the official development assistance the continent receives annually (UNECA n.d.). Fossil fuel-rich countries are also exposed to high levels of carbon risk in the face of falling global oil and commodity prices: this problem is often exacerbated by a high level of dependency in highly exposed countries, where resource revenues account for more than 50% of total government revenue (Lange et al. 2018).

Green fiscal policies can put a price on the negative costs of the extractives sector and so support governments in their efforts to abate the environmental impacts of mining on the environment and society. Green public finance and the sustainable management of instruments, such as Sovereign Wealth Funds, can support the development of the economy away from hydrocarbons and encourage diversification towards renewable energy and other low-carbon technologies. Taxes on extractives and the extractives industry can mobilize substantial volumes of domestic resources for policy priorities and sustainable investment to facilitate the transition to an inclusive green economy and enhance resilience. As they are hard to evade, green fiscal policies also have the potential to improve revenue administration and tax systems performance, and so enable governments to harness greater volumes of public finance.