Possibilities of Environmental Fiscal Reform
in Developing Countries
Dr. Stefan Speck
Kommunalkredit Public Consulting, Vienna, Austria
on behalf of GTZ
(Deutsche Gesellschaft für Technische Zusammenarbeit), Germany
Presented at the
Bank Indonesia Annual International Seminar Macroeconomic Impact of Climate Change:
Outline
Concept of Environmental Fiscal Reform
Rationale of Environmental Fiscal Reform
Design of Environmental Fiscal Reform
Experiences with Environmental Fiscal Reform – transfer of knowledge
Concept of EFR
Policy measure in the overlap between environmental and fiscal policy -part of a policy process.
Environmental Fiscal Reforms are a key instrument for raising fiscal
revenues and fighting poverty while furthering environmental goals (GTZ, 2004)
Concept of EFR
Environmental benefit – addressing the key environmental and
resource challenges countries may face (application of the Polluter Pays Principle)
Fiscal benefit – raise revenues to finance government expenditure programmes
Social benefit - EFR can contribute to poverty reduction:
directly - EFR addressing environmental problems that impact on poor members of society, i.e. improving environmental quality
Rationale of EFR
Countries are facing major challenges in different policy fields
Fiscal needs – investments in environmental infrastructure is often lagging (estimates are revealing that between 70 and 90 percent of investment is provided from domestic public sector)
Greater use of economic (incentive-based) instruments (also called market-based instruments) are promoted internationally: Earth Summit in Rio (1992); Financing for Development Conference, Mexico (2001); international
organisation, such as OECD, World Bank, and countries (UK, Malaysia, etc.)
Rationale of EFR
The interplay of EFR – a tool for governments to be implemented along side other policy measures with the aim of achieving multiple objectives simultaneously:
1. improve environmental conditions (environment),
2. mobilise revenues (fiscal), and
3. reduce poverty (social - poverty eradication).
Design of EFR – instruments for raising revenues
Whole range of instruments can be applied in developed and developing countries:
Natural resource pricing measures (taxes on natural resources and fisheries exploitation)
Reform of subsidies and taxes – in particular in the field of energy and emissions
Cost recovery measures - user charges on water supply, wastewater and waste
Design of EFR - revenue
The revenue allocation of an EFR can be carried out in different ways:
Revenues accrue to National Treasury – allocated to priority spending areas;
Revenues are used for reduction in other taxes – tax-shifting exercise; Revenues are earmarked for environmental / pro-poor investment
programmes.
Investment – mitigation and adaptation measures in the context of climate change: scenarios are revealing an increase in required investment
Experience – EFR in developed countries
EFR implemented in several European countries (for example: Denmark, Sweden, Germany and the UK) and Canada (British Columbia)
EFR in Germany:
Reform of energy taxation scheme – environmental objective of reduction in energy consumption and in CO2 emissions is achieved!
Revenues recycled into the economy via reduction of labour taxes but also support for renewable energy – economic objective of reduction in
unemployment!
Experience in developing countries
Energy subsidies – Sri Lanka – environmental subsidies (fertiliser and energy) around 1.4 percent of GDP and 9.5 percent of government revenues in 2005 – as opposed to the budget of the main safety net amounting to about 0.4 percent of GDP
Energy subsidies – Indonesia - removal of energy subsidies would have led to a reduction in energy consumption by 7.1 percent (IEA 1999 as quoted in UNFCC 2007)
Transfer of knowledge between developed – developing countries (north-south) is limited:
Summary and conclusion
EFR is addressing multiple policy objectives (environment, fiscal, poverty reduction)
Synergies between different objectives can be achieved
The potential of trade-offs between objectives must be taken serious and addressed
Environmental benefits vs. mobilising revenues
Removal of subsidies – compensation measures can be implemented
aiming to protect the poor or affected firms from higher prices caused by the removal of subsidies
EFR – “no panacea” but an important part of a development policy tool kit
complementing and strengthening regulatory and other approaches to fiscal and environmental management – not only in developed but also in developing
