COVID-19 has plunged the global economy into crisis. Green fiscal policies (GFP) can play a key role in shaping the recovery. As governments are devising green fiscal stimulus policies, they must look to maximize short-term growth and employment effects, but they have also a lever in hand to steer economies to a green and fair transition. The collapse of the oil price has created a window of opportunity for carbon taxes and fossil fuel subsidy reform to mobilise revenue and drive low-carbon development. Green budgeting can rationalise inefficient expenditures and align spending with sustainability. In developing countries with limited fiscal space, GFP can be part of a sustainable solution.
Climate change will be the single most important global policy challenge of the 2020s. Economist Nicholas Stern labelled climate change “the greatest market failure the world has ever seen”, referring to the widespread failure of governments to price GHG emissions in line with the damage they cause. Green fiscal policies such as carbon taxes, emissions trading and fossil fuel subsidy reform are amongst the most efficient and effective instruments to policymakers to tackle climate change.
Current rates of global biodiversity loss are unprecedented and pose a serious threat to the achievement of the Agenda 2030. Green fiscal policies – reform of harmful incentives and biodiversity-relevant taxes, fees and charges – can address many of the market failures which drive such biodiversity loss by reducing and reforming subsidies and incentives that encourage unsustainable land management practices, high levels of pollution and inefficient resource use.
Land-use change related to agriculture accounts for over 70% of tropical deforestation and roughly 25% of all GHG emissions. Land degradation affects 3.2 billion people and results in economic losses equivalent to 10% of annual global GDP. A major driver of these impacts is the widespread failure on the part of governments to implement green fiscal policies, e.g. reform of harmful subsidies, worth an average of USD 705 billion annually between 2016 and 2018 in the sector (OECD 2019).
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.
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.
Fisheries are a classic example of the tragedy of the commons: property rights tend to be incomplete and access open, with overexploitation the result. Around one third of global fish stocks are fished at biologically unsustainable levels and harmful fisheries subsidies amount to USD 35 billion annually (FAO 2018). Green fiscal reform can address these problems by assigning property rights, putting a price on fisheries access and reforming subsidies that encourage unsustainable practices.
Up to 70% of particulate emissions are attributable to the transport sector, with particularly high levels in developing countries. Transport is the fastest growing source of GHG emissions. Without effective mitigation, GHG emissions from transport are predicted to grow 71% by 2050, threatening to outweigh climate action in many other sectors. These negative impacts are often not reflected in fiscal policy frameworks, resulting in market failures which can be addressed by green fiscal policy.
Waste is an increasingly serious environmental and economic problem. Only 14% of plastics packaging is collected for recycling after use, resulting in economic losses worth USD 80-120 billion annually, and a trend which will see more plastic in the sea by weight than fish by 2050 (Macarthur Foundation 2017). Green fiscal policies can improve resource efficiency and drive the transition to a circular economy, e.g. by implementing plastics taxes to encourage plastics recycling.
Water is at the core of sustainable development. SDG 6 to ensure access to water and sanitation for all is a serious policy challenge: over 2 billion people live in countries experiencing high levels of water stress, while 2.4 billion lack access to basic sanitation services (UN 2020). Economic and market failures often get in the way of improved service provision and encourage inefficient use of a scarce resource. Green fiscal policy can introduce appropriate pricing and address these failures.