Integrated Approach to Green Fiscal Consolidation for ASEAN (ASEAN Centre for Energy Repost)

Highlights

  • Green fiscal policy plays a critical role in responding to global warming. Green fiscal consolidation includes well-designed tax policies that raise the price of carbon, together with non-tax instruments such as emission trading systems, feebates or regulations.
  • Green fiscal consolidation would need to draw from experience in other nations wisely. Previous episodes show that spending-driven adjustments vis-à-vis revenue-driven ones are more likely to stabilise debts and that large consolidations need multiple instruments and tools to succeed.
  • To ensure the cooperation between central and local governments is effective, an integrated approach is required with the right regulatory framework to extend the fiscal rules towards green consolidation.
  • There is a need to create an ASEAN Green Fiscal Policy Network (AGFPN) and an ASEAN Data Carbon Pricing Platform (ADCPP) for the AMS to meet and discuss through forums and dialogues to exchange and share ideas in green fiscal/ budgetary policy, instruments, tools, models and other issues and challenges that they might face in their efforts to adopt green fiscal consolidation towards a green economy in their respective states and the region.

This Policy Brief was written by Halimah Badioze Zamanaa, Hazleen Arisaa, Nora Yusmaa, Rika Safrinabb, and Silvira Ayu Rosaliab

a Universiti Tenaga Nasional (UNITEN)

b ASEAN Centre for Energy (ACE)

Introduction

The COVID-19 crisis has provided a unique opportunity to support green investments and funding. Fiscal stimulus package initiatives by nations played an important role in ‘greening’ the recovery from the pandemic by promoting innovations and investments in climate and smart green technologies through policy packages with green measures. While carbon pricing and other complimentary non-tax mitigation measures should be at the heart of the strategy, their effectiveness in phasing out carbon-intensive activities will be further enhanced by investments in smart green technologies and infrastructure. Early use of green research and development subsidies can lower the carbon tax rate required to achieve lower emission targets.

Green investments can also ameliorate the negative economic impact of the mitigation measures. An initial green investment push, combined with steadily rising carbon prices, can deliver the goal of net zero emission by 2050 at a
reasonable transitional global output cost [1]. The transition to the green economy, which promotes green sectors, such as renewable energy, green adaptive infrastructure, and electric vehicle production, can boost employment and reduce climate hazards and adaptation costs in the long term. Energy transition as one of climate change mitigations, which refers to the efforts undertaken to reduce greenhouse gas emissions, can be achieved by a well-designed integrated approach to green fiscal consolidation. In any green fiscal consolidation policies, nations would want to ensure that they can reduce their deficits and accumulation of debts

Green Fiscal Consolidation

First, it is necessary to define green fiscal consolidation. In order to determine green fiscal consolidation, one needs first to explain ‘fiscal policy’ and then ‘green fiscal policy’. Fiscal policy, generally, is the use of government spending and taxation to influence the economy [2]. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. On the other hand, green fiscal policy encompasses the efforts to address global challenges and transition from climate change and global warming to an inclusive green economy [3]. This would reflect the need to align government expenditures with environmental goals, raise revenues, create fiscal space for green investment, and broader budgetary reforms and regulatory frameworks such as policies and regulations supporting the Sustainable Development Goals and the Paris Agreement.

Every nation should utilise the health crisis as an opportunity for green recovery to build more sustainable, inclusive and resilient economies and societies [4]. Focusing on environmental sustainability can deliver multiple benefits in terms of job creation and stimulating demand and economic activity. Governments’ responses to the crisis have been large but not sufficiently ‘green’. In order to plan for a green fiscal policy, governments cannot do it alone. Governments need partnerships and collaborations for a successful green budgetary consolidation. The United Nations Environment Programme (UNEP) has created the Green Fiscal Policy Network (GFPN)¹, a joint initiative launched with the International Monetary Fund (IMF) and the German Development Cooperation Agency (GIZ). This entity facilitates knowledge sharing and dialogues on green fiscal reform, working with associated partners and stakeholders, including think tanks, research institutes, and international and intergovernmental organisations. They also reach out to a larger policy community through the Green Growth Knowledge Platform (GGKP)² and the Partnership for Action on Green Economy (PAGE)³ and engage with countries to support their green fiscal policy reforms in the economic transition.

AMS have a different green growth pace, as well as federal and state green fiscal policies [5]. Whilst the reason for green fiscal consolidation is to reduce debt, the other policy objectives cannot be ignored. Governments must examine how green fiscal consolidation can proceed while minimising adverse effects on short-term growth, preserving long-term prosperity, and avoiding exacerbating income. The distinction between short-term and long-term effects of consolidation strategies does not relate to time spans but to adjustment processes. Short-term effects correspond to the direct impact of measures as they are implemented. Long-term effects relate to the consequences when cyclical adjustments have run their course and behaviour has responded fully to the measures – assuming that the general equilibrium impacts have materialised. Apart from the other policy objectives that would have effects on green fiscal consolidation to be adopted, the instruments used as policies would affect the government underlying primary spending and revenues. Examples of instruments of fiscal consolidation (including the green ones) are shown in Table 1.

Expenditure CutRevenue Increase
Public consumption educationPersonal income taxes
Public consumption healthSocial security contribution
Public consumption otherCorporate income taxes
Cash transfers pensionsEnvironmental      taxes      I      pollution      taxes (environmental tax multipliers and labour tax multipliers)
Cash transfers unemployment benefitConsumption taxes (non-environmental)
Cash transfers for sickness and disabilitiesRecurrent taxes on immovable property
Public consumption and cash transferOther property taxes
SubsidiesSales of goods and services (including green goods and services)
Public investmentsGreen Carbon taxes
Sources: Authors’ own elaboration

The examples shown on expenditure breakdown broadly indicate general national accounts classifications with the difference that user charges are not netted out from government consumption. Instead, user charges are included among the nine consolidation instruments considered on the revenue side. Cutting tax expenditures, a potentially large and attractive source of revenue, is nevertheless not included as an instrument because of the lack of sufficiently reliable and international data that would allow us to make assumptions. However, reducing tax expenditures can contribute to green fiscal consolidation with structural reform.

Issues on Green Fiscal Consolidation in ASEAN

AMS face many issues that can hinder their green fiscal policy and consolidation if not tackled strategically. The following are some of the problems.

  • Despite various efforts undertaken, unclear, disparate green finance and regulatory policies and frameworks are making it difficult for governments in most AMS, especially in the less developed ones regarding clean energy investments, to have a sound green fiscal policy or green fiscal consolidation approach.
  • There is no structured support in the form of a network allowing AMS to discuss and consult issues and share information through forums and dialogues on green fiscal policy or green fiscal consolidation. This limited opportunity for them to share information and knowledge means that the middle and low AMS takes much longer to embark on green fiscal policies generally and green fiscal consolidation specifically in their respective states.
  • There is no available data, particularly on carbon pricing, that ASM can share to make the right decision on carbon pricing that can benefit not just individual AMS but also the region. Only Singapore has adopted the Carbon Pricing Act 2019, which can motivate other AMS to regulate carbon pricing to achieve a low-carbon economy, a start to an inclusive green economy [6].
  • Particularly in the less developed AMS regarding clean energy investments, there are no appropriate fiscal policies, budgetary tools and instruments that can lead to an integrated approach for green fiscal consolidation.
  • Currently, it is also difficult for the less developed AMS governments to prepare for a green fiscal consolidation because in order to do this, they will need to integrate a green perspective into their fiscal and budgetary plan, which they have not reached the level either due to financial or lack of political will. If a green budgetary consolidation is implemented, they can find many opportunities that would benefit them.
  • The energy cost is anticipated to continue to grow, which will affect AMS in achieving a green fiscal and budgetary plan. A creative approach needs to be taken. For example, Stock exchanges in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam require listed companies to produce annual sustainability reports, as part of their Environmental, Social and Governance (ESG) initiatives [7].

Several obstacles remain, which relate mostly to limitations in financial and human resources, weak regulatory frameworks, lack of enforcement mechanisms and poor economic infrastructure. The challenge is often to put a green fiscal and budgetary policy in the AMS. This is due to the fact that green fiscal and budgetary/monetary policy can be swayed by politics and placating voters, which can lead to poor decisions that are not informed based on data or sound economic theory. If monetary policy is not coordinated with a fiscal policy enacted by the governments of AMS, it can undermine the efforts for an inclusive green economy.

There is still a great challenge for AMS to adopt a green fiscal policy in their respective states due to the fact that green fiscal policy uses fiscal and budgetary tools to address environmental challenges such as climate change, pollution, congestion, waste, biodiversity protection, overfishing and sustainable forestry and these are areas that they still need to address in tandem. Generally, conducting close collaboration and networking amongst AMS has always been a challenge. Many reports on collaboration efforts between AMS have been produced, but on the ground, there is not enough effort done as solid collaborative efforts to improve the challenges faced by ASEAN member states, including the aspect of an inclusive green economy that would embrace green fiscal and monetary policy towards an integrated green fiscal consolidation for ASEAN.

Way Forward and Recommendation

The challenges mentioned above demand a more structured and holistic approach to be addressed. In order to achieve an inclusive green economy, each AMS government has to look closely at their fiscal and budgetary/monetary policies that can be turned green through the budgetary instruments and tools they create based on their revenue and expenditure. AMS will inevitably need an integrated approach to green fiscal consolidation through a holistic green fiscal policy ecosystem. This can be done by aligning fiscal and budgetary policies of the respective AMS with sustainable green fiscal policies to support the shift to an inclusive green economy, and it can be achieved faster if AMS cooperate through the following example initiatives.

  • ASEAN Green Fiscal Policy Network. AMS need to leverage each other to share information on green fiscal policies by setting up an entity like the GFPN of the UN. ASEAN GFPN (AGFPN) initiative could be set up so that the more advanced AMS can share their experiences with the other AMS. This AGFPN can facilitate knowledge sharing through forums and dialogues on fiscal policies for an inclusive green economy. Through this network, they can discuss possible environmental tax for AMS who have not adopted it or carbon tax reforms for AMS who have adopted such tax, so the instrument could effectively mobilise revenues during fiscal consolidation while reducing distortions and environmental externalities.
  • Data Sharing on Carbon Pricing Platform. ASEAN should begin to look seriously at data exchange or data sharing platforms on carbon pricing to have more precise and improved data and analysis going beyond carbon pricing and to obtain a more comprehensive and complete picture of AMS’ climate mitigation strategies and at the same time able to look at a more structured approach and integrated approach to green fiscal consolidation for ASEAN.

There should also be a sounder integration approach between specific green fiscal and budgetary/monetary policies and regulatory frameworks in AMS to improve revenue and reduce debts and improve the overall well-being of their citizens through better growth of the economy in the respective states of ASEAN, which will, in turn, achieve an inclusive green economy. Therefore, there is a need to produce a guideline in the form of action plans incorporating strategic initiatives through a strategic implementation approach for an integrated approach to green fiscal consolidation in ASEAN.

This policy brief, therefore, makes recommendations in the form of an Action Plan that can be expanded by the individual AMS. The Action Plan is designed through Strategic Initiatives (SI), which involve the ‘what’. Each SI has one or more Implementation Strategies which involve the ‘how’. The recommended SI are suggested below.

  1. Narrow the gap between AMS in terms of the inclusive green economy through an integrated fiscal and budgetary/monetary policy consolidation.
  2. Establish a bi-annual dialogue between AMS to exchange and share ideas on instruments, tools and models for green fiscal and budgetary/monetary policy based on the country’s individual needs.
  3. Establish a solid integration approach of green fiscal and budgetary/monetary consolidation in AMS through cooperation between all stakeholders towards a green fiscal reform, working with associated partners and stakeholders (such as think tanks, research institutes, and international and intergovernmental organisations).
  4. Collaborate closely between AMS by establishing the ASEAN Green Fiscal Policy Network (AGFPN).
  5. Establish the Data Sharing Carbon Pricing platform called the ASEAN Data Sharing Carbon Pricing Platform (ADSCPP).
  6. Create a programme on green fiscal and budgetary/monetary policy – involving instruments, models and tools that can be used to determine the right policies.
  7. Coordinate enabling regulatory frameworks on green fiscal and budgetary/monetary policies in AMS.
  8. Create revenue mobilisation programmes for green fiscal policy initiatives that will include government officials from the appropriate ministries and agencies of AMS in order to develop a serious green fiscal policy consolidation framework.
  9. Strengthen ESG programmes in all government ministries and agencies as well as corporations in AMS for a better and sound integrated development of fiscal and budgetary/monetary policy consolidation.
  10. Strengthen regional and international cooperation in fiscal policy generally and bring in green investments for AMS towards an inclusive green economy.
  11. Promote environmental taxes and charges at the correct price signals and help shift consumer and business behaviour towards more sustainable patterns in the AMS.
  12. Promote budgetary reforms that align government expenditure with environmental goals and enhance the effectiveness of public spending in the AMS.
  13. Provide fiscal incentives (to households and industries) for green financial mechanisms so that they can leverage private financing for green investment.
  14. Embrace fiscal policies that can also raise public revenues, which can be used for green investment, broader fiscal reform or other priorities such as education and health.
  15. Build technical capacity on fiscal policies to support green and inclusive economic development, advancing economic, social and environmental objectives in developing AMS.

In conclusion, the issues and challenges on fiscal policy consolidation in relation to the green economy see that many more efforts need to be put in place to bridge the gap between the AMS. As mentioned earlier, closer cooperation and collaboration between the AMS is crucial. If a sound green fiscal policy does not rapidly pick up in less developed AMS, the region will face a major dividing line, not just in Southeast Asia, but with the rest of the world. More advanced AMS will have to support low AMS so that the latter can align their fiscal and budgetary/monetary policy with sustainable development priorities, where sound green fiscal consolidation policies can support the shift to an inclusive green economy.

Acknowledgement

The development of this policy brief was supported by the Energy Foundation China through the project “Measures and Investments for Clean Energy and Power Sector Resilience in ASEAN”. The views expressed herein are those of the authors and do not necessarily represent the views of Energy Foundation China.

References

[1] Era. Dabla-Norris, J. Daniel, Masahiro. Nozaki, International Monetary Fund. Asia and Pacific Department., and International Monetary Fund. Fiscal Affairs Department., Fiscal policies to address climate change in Asia and the Pacific. International Monetary Fund, 2021.

[2] M. E.-G. A. Horton, “Fiscal Policy: Taking and Giving Away,” IMF. https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Fiscal-Policy (accessed Jul. 17, 2023).

[3] UNEP, “Green Fiscal Policy,” UN Environment Programme. https://www.unep.org/explore-topics/green-economy/w hat-we-do/economic-and-fiscal-policy/green-fiscal-polic y (accessed Jul. 17, 2023).

[4] OECD, “Building Back Better A Sustainable, Resilient Recovery after COVID-19,” 2020.

[5] ACE, “Measures and Investment for Clean Energy and Power Sector Resilience in ASEAN,” Jakarta, Jun. 2023. Accessed: Jul. 17, 2023. [Online]. Available: https://aseanenergy.org/strategic-report-measure-and-in vestments-for-clean-energy-and-power-sector-resilience-in-asean/

[6] NEA, “Carbon Tax,” National Environment Agency of Singapore, 2023. https://www.nea.gov.sg/our-services/climate-change-ene rgy-efficiency/climate-change/carbon-tax (accessed Jul. 17, 2023).

[7] ACE, Impact Analysis and Review on Governance of Renewable Energy Financing Schemes in ASEAN. 2022. Accessed: Jul. 17, 2023. [Online]. Available: https://aseanenergy.org/re-financing-publication/

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