Fiscal policies support climate compatible development

Fiscal policies support climate compatible development

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Date: 11th February 2015
Type: Feature
Tags: climate finance, finance, impacts on systems and sectors

Sam Bickersteth, CDKN’s Chief Executive, and Ari Huhtala, Deputy CEO, report from the Annual Conference of the Green Growth Knowledge Platform (GGKP), of which CDKN is a knowledge partner.

CDKN has always advocated that climate change needs to be seen primarily as an economic concern that warrants attention by national ministries of finance and planning and local counterparts. Fiscal policies play an important role in guiding investment decisions towards low emission and climate resilient options.

The Green Growth Knowledge Platform (GGKP) had chosen "Fiscal Policies and the Green Economy Transition: Generating Knowledge – Creating Impact" as the topic of their Annual Conference, held in Venice, Italy, on 29-30 January. We went there to understand how research in their wide ranging expert community can support CDKN’s main partner countries in their efforts towards climate compatible development.

More than 200 academics, policy makers and experts filled the rooms of Ca’ Foscari University to discuss the findings of over 50 peer reviewed papers on topics ranging from generally designing effective green tax reforms to specific issues such as inclusiveness, transport, energy, water and behavioural change. As a striking reminder of the growing impact of climate change, Venice was flooded during the second day of the conference and we had to wade through a foot of water to get to the meeting!   Floods of this type are now occurring ten times more frequently than in the past.

Background and guiding principles for this Conference by the organisers are summarised in a CDKN blog and all papers presented at the event can be accessed at the conference webpage.

Harnessing the power of markets
The conference organisers outline some key, universal messages on their website: “Fiscal policy plays a crucial role in transforming economies to become greener and more inclusive. By reflecting the cost of externalities from natural resource use in the prices of goods and services, fiscal policy sends the right signal to the market. Such signals then stimulate a shift in production, consumption and investment to lower-carbon and socially inclusive options. Moreover, fiscal reforms aimed at removing perverse subsidies to polluting activities and unsustainable use of limited resources can not only create fiscal space for investing in development priorities, but can also generate revenues for nurturing the environment.”

This certainly hold true in most low-income countries where the use of fiscal instruments to meet environmental objectives has been rather limited. In many cases, the approach towards pollution monitoring and control has mostly been in the form of legislation-based command and control measures. The Conference learned of examples on energy policies in Tunisia, Mauritius, India, Ethiopia and technology innovation in Indonesia and Ghana. The research papers presented included the following ones, focused specifically on experience in developing countries:

  • Delivering green economy in Asia
  • Environmental surcharge for heavy polluters in Bangladesh
  • Assessing impacts of fiscal policies on green sectors; and poverty and distributional impacts of energy subsidy reform in Indonesia
  • Fiscal policy towards green growth; and ecological fiscal transfers in Brazil
  • Implication of Vietnam’s environmental law in the green economy transition
  • Determinants of adopting and accessing benefits of micro-irrigation

Malik Amin Aslam Khan from Pakistan and IUCN/Chair Green Growth Initiative welcomed the excellent work on various aspects of reducing greenhouse gas emissions and promoting green jobs, but called for research of fiscal measures to address the needs for adaptation to the impacts of climate change which pose tremendous challenges to the use of national budget in most developing countries.

It's as much about politics as economics
Alice Akinye Kaudia, Enviroment Secretary of the Ministry of Environment and Mineral Resources of Kenya highlighted the importance of support from the political system to new policies and regulation – only processes driven by people and the private sector will have a chance to make fiscal instrument really work in the long run. She also emphasised the need for holistic fiscal policies that take into account the full life cycle of innovations.

Many speakers brought up the fact that designing fiscal policies is often a more political than technical undertaking. The political economy of decision-making should be an inherent part of any research done on this subject and we need to draw out lessons from experience on pathways or drivers towards a green economy.

Several speakers raised the issue of inertia in fiscal and economic systems - few leaders are in a position to achieve comprehensive tax reform and, on top of that, long lived capital and associated vested interests are likely to lock us into significant emissions. The world is in a hurry to decarbonise and fiscal measures can help, but may not have an impact that is fast enough to meet the looming target. Instruments need to be combined. In doing this, we should look carefully how this is done as a subsidy or an incentive in one place may simply shift pollution to areas where there isn’t any. Several speakers talked about the addictive nature of subsidies and the difficulties of getting out of them (please also see ODI’s publication on this topic).

No shortcuts to green growth - many strategies needed
Another important message was the importance of solid green growth, climate and/or energy policies and strategies as a base for the needed transformation. There are no shortcuts. Fiscal instruments help implement such policies and can also address issues of fairness and equity and provide incentives for behavioural change. This needs to be supported by an integrated and consultative approach reflecting good governance principles. In the long run, fiscal policies need popular support and trust. There were calls for sequenced introduction of policies rather than shock therapy which in most cases has not worked unless the hardest hit have been properly compensated.

Green growth strategies are not necessarily focussed on low carbon development and instead may have multiple objectives – economic growth may be the main goal with only modest emissions reduction elements.  This was demonstrated in research presented at the conference which indicated that Korea’s green growth strategy has not delivered short term decarbonisation and instead fiscal expansion and growth have been dominant resulting in increased emissions.

Key challenges ahead
This impressive range of topics helps break the myth that the green growth narrative is all about industrialized countries and about low emission issues. The papers providing evidence on the merits of specific instruments provide a valuable addition to the tools available to developing country policy makers in their attempt to look for alternatives to resource-intensive (including carbon) pathways. At least two major challenges still lay ahead:

  1. How do these important parts of the puzzle contribute to the bigger picture of achieving sustainable development within the limits of the planet, including trade-offs and institutional consequences? And
  2. How do prevent the world from drowning in the ocean of new knowledge by packaging and disseminating the key messages to policy makers in the public and private sectors in a way that resonates with their immediate priorities and needs?

The GGKP will continue to play an important role in generating this evidence base while its knowledge partners (including CDKN) will need to make good use of their synthesising and convening power to make this wealth of knowledge available to and understood by those whose decisions will shape the way developing countries generate the resources they need for sustainable growth.

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