Fiscal Policy and Environmentally Friendly
Market Mechanism
Chalongphob Sussangkarn Distinguished Fellow
Thailand Development Research Institute
Bali Climate Change Conference
• Meeting of Finance Ministers in December 2007 on the sideline of Bali Climate Change Conference at initiative of Minister Sri Mulyani was a very important initiative.
Apparently, first time ever that this was held.
• Apart from introducing the climate change issue to Finance Ministers, it was even more important in getting policy
officials at Ministry of Finances (MOF) involved in
environmental and climate change issues. This is an area where most finance officials have not been directly
Need to Involve Ministry of Finance
• Many key policy instruments are under the jurisdiction of the Ministry of Finance; most of the market based
instruments such as taxes.
• Without understanding and support of Ministry of Finance, whether at ministerial or bureaucratic level, it would be
Example of Policy Process in Thailand
• The institutional set up in which policy is shaped and implemented is multi-dimensional and very complex with many actors involved, although this will of course vary by country.
• Numerous politicians, ministries/departments,
bureaucrats and law makers are usually involved in any important policy decision.
• In Thailand, most important policy will need a cabinet resolution (and usually more, e.g. a new law or
regulation) and before a cabinet decision, the proposed policy will be circulated to relevant ministries for
comments. Central agencies such as Finance, Budget (in Thailand Budget Bureau is under Prime Minister’s
• Environmental Ministry need to get support from Finance Ministry to introduce cabinet agenda involving tax
instruments. Otherwise, PM will send back the proposal to clear with MOF first.
• Without understanding of environmental issues, MOF officials will tend to attach less weight to environmental concerns compared to say issues of growth or revenue generation.
• Similarly, Budget Bureau officials also need to understand the importance of environmental problems.
• This is also true for some relevant line ministries, such as industry and agriculture.
• Eco-car Project in Thailand.
• Objective not driven mainly by environmental
considerations (though involve new environmental
standards). Rather to establish a new product niche. High and rising fuel prices help make economic sense of project and will have significant environmental benefits.
• Eco-car. 1) > 20 km./litre fuel efficiency, 2) Euro-4
environmental standards, and 3) increased safety standard. • Project has been under consideration for 4-5 years, but
issued of how much incentive to give and possible impacts on existing auto industry unresolved.
• After consultation with all stakeholders, finally decided on reduction of excise tax from 30% to 17% and limit on
engine size. Also production capacity conditions.
• Thought this may attract 2-3 auto companies at first.
However, turned out the 7 auto companies have applied for the project. Eco-cars should be in the market next year. • Another example, is tax incentives for cars that can use
E-20 gasohol (gasoline with E-20% ethanol).
• Excise tax rate reduced by 5% (e.g. from 30% to 25%) starting January 1, 2008. Because excise tax on gasohol much lower than for equivalent gasoline, large incentive for consumers to switch. So, most major manufacturers quickly introduced E-20 models at the beginning of 2008 (phasing out equivalent non E-20 models). This also
boosted auto sales.
• Similar incentives possible to encourage greater energy efficiency in products where current excise tax rates are still fairly high, such as air-conditioner. However, not many other products left.
• More difficult to raise taxes for energy inefficient products. Seen to negatively affect the industry and growth.
• In the medium term, can target greater fuel efficiency of transport sector. Mass transit systems, particularly rail systems including freight transport, would increase
transport fuel efficiency and be more friendly to the environment. Many rail mass transit systems are in process of being build in Bangkok. However, need to
make sure that they are well designed and integrated as an efficient system, otherwise may waste money and end up not being very effective and may even increase fuel
inefficiency.
• In a country like Thailand, if environmental concerns have to compete with growth concerns, growth usually wins the day.
• Difficult to increase taxes for environmental reasons. • Recent reduction (almost elimination) of excise tax on
gasohol and diesel in Thailand to ease burden of high oil prices is another case in point. Those consuming the most (big gas guzzlers) will benefit the most.
• Nevertheless, fiscal authorities appear to be more
interested in environmental issues and incentives. For
example, recent organization of carbon trading seminar by the Fiscal Policy Office. This should lead to greater
dialogues and cooperation between the fiscal and environmental authorities in the future.
