Introduction to Green Tax and Budget Reform
Green Tax and Budget Reform (GTBR) refers to a wide spectrum of fiscal pricing measures that have the potential to simultaneously increase revenue and foster Green Growth. More specifically, it entails 1) a shifting of the tax burden from traditional areas of taxation, such as income, savings, and capital gains, to environmentally relevant products and activities like fossil fuels and waste; and 2) the redirecting of subsidies from environmentally perverse activities towards activities that promote Green Growth and poverty reduction.The entire reform of the fiscal system is done with the aim of maintaining revenue neutrality: a net-zero increase in the level of taxation on the economy.
GTBR encompasses a broad array of fiscal instruments in areas such as transportation, raw materials, natural resources, waste, and energy.Applying GTBR policies within these areas can create jobs; reduce poverty; and improve resource productivity, international competiveness, and environmental quality. Effectively educating the public and private sectors, as well as a country's citizenry on the benefits of GTBR, has been deemed as crucial for ensuring effective implementation and long-term adoption. In addition to recycling revenue from subsidy reform and green taxation into pro-poor development programmes, the setting of thresholds for taxation is another means for reducing any negative distributive impact on lower income groups.
Green Taxes can be effectively imposed in many areas, for example, transport, energy, products, waste, raw materials, and natural resources. Evidence shows that they are an effective tool of environmental policy and are more cost-efficient to implement and maintain than traditional "command and control" approaches.Revenue from Green Taxes can be used for financing sustainable infrastructure projects that can increase green jobs, monitoring and adjusting the reformed tax system itself, or for other poverty reduction programmes. Considering that Green Taxes have the potential to be regressive, steps such as setting thresholds for taxes to ensure that the poor are not disproportionately adversely affected should be undertaken from the initial design phase. Educating both citizens and public officials alike on the benefits of GTBR is crucial for garnering political support.Border tax adjustments and short-term tax exemptions are measures that can be taken to reduce the impact on international and sectoral competitiveness.
Sequencing of not only various green taxes, but also other complementary policies, such as transportation infrastructure projects or eco-labeling, for instance, must be closely coordinated to ensure policy effectiveness.
Each country will require a unique blend of GTBR instruments. For developing countries in particular, GTBR may be most applicable to the transport sector, commercial scale forestry sector, commercial fisheries sector, energy sector, drinking water, and for industrial pollution control. Applying GTBR to these sectors is an effective means for improving environmental quality, reducing poverty, and fostering Green Growth.
Background
The thematic basis for GTBR is by no means novel.Its origins lie with the concept of environmental tax reform (ETR), which has been adopted by numersous countries since the late 1980s to address issues related to the environment, resource productivity, and economic progress. ETR is essentially a restructuring of the tax system whereby the tax base is shifted from traditional taxes, such as those based around labour, to taxes that have environmental relevance, for example pollution or natural resource extraction. While ETR can greatly assist in the effort to internalize the negative external social and environmental costs not usually reflected in the market price, it does not address the problem of perverse subsidies, which can also distort prices. Recognizing this shortfall, environmental fiscal reform (EFR) has entered the foreground of sustainable development policy dialogues. EFR extends beyond environmental tax reform by also including subsidy reform, which entails redirecting subsidies from environmentally perverse activities and products, such as petroleum, to more environmentally friendly ones, such as renewables.
Green Tax and Budget Reform provides a third stage to the evolution of environmental tax reform. GTBR encompasses all the major principles of EFR, but is unique because it is a direct driver for Green Growth;emphasizes poverty reduction as a key objective and has already garnered political acceptance within the Asia and Pacific region (UNESCAP member countries accepted GTBR as a means for achieving Green Growth in 2005 at the 5th Ministerial Conference on Environment and Development in Republic of Korea).
The chart below provides a few examples of how GTBR can be the main driver for the other paths to Green Growth, as well as the dynamic relationships that exist between each path.
Green Subsidy Reform
Green taxation’s effectiveness can be compromised if perverse subsidies undercut attempts to alter market price signals. Green subsidy reform therefore involves the redirecting of fiscal funds from perverse subsidies to activities, services and products that will foster Green Growth. This type of fiscal reform reinforces the price signal aims of green taxes instead of counteracting them.
A subsidy may constitute direct/indirect grants or payments, as well as pricing, tax or regulatory policies that are preferential to particular economic activities. According to the OECD, a subsidy is a measure that keeps prices for consumers below market levels, or keeps prices for producers above market levels or that reduces costs for both producers and consumers by giving direct or indirect support.”Subsidies can be damaging towards the environment when they cause higher degrees of consumption or production of environmentally harmful products and services than would occur in their absence. Specifically, they can result in the use of fossil fuels and extraction of natural resources at levels that are not sustainable; consequently increasing pollution, harmful emissions and waste. Examples include the subsidization of electricity, fossil fuels, water, waste collection, pesticides, and fertilizers.
While the conventional theory behind and rational for perverse subsidies, for example subsidies to gasoline, are usually intended to be pro-poor, in most cases they tend to be benefit the middle and upper income groups in greater proportion. The resulting extent to which public funds are used inefficiently throughout the world is immense and shocking. It is estimated that US$300 billion, slightly less than 1% of global GDP, in subsidies goes to artificially reduce the financial cost of consuming and producing fossil fuels. Scaling back these perverse subsidies can free up enormous amounts of revenue, a commodity hard to come by, especially in times of economic and liquidity crises.
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