Environmental fiscal reform (EFR)

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Overview

"The term environmental fiscal reform (EFR) refers to: a range of taxation or pricing instruments that can raise revenue, while simultaneously furthering environmental goals. This is achieved by providing economic incentives to correct market failure in the management of natural resources and the control of pollution.

Broadly speaking, EFR can: 1) mobilise revenue for governments; 2) improve environmental management practices and conserve resources; and 3) reduce poverty. By encouraging more sustainable use of natural resources, and reducing pollution from energy use and industrial activities, EFR can address environmental problems that threaten the livelihoods of the poor. The revenues raised by EFR can also be used to finance poverty reduction measures. EFR can therefore contribute to poverty reduction, and in turn, help achieve the Millennium Development Goals of 'halving absolute poverty by the year 2015' and 'reversing the loss of environmental resources'".1

"By encouraging more sustainable use of natural resources, such as forests and fisheries, and by providing incentives to reduce pollution from energy use and industrial activities, EFR also addresses environmental problems that make a difference to the livelihoods of the poor. Indeed, because of the interdependence of environmental degradation and poverty, a sound environment is crucial to poverty reduction and sustainable growth, particularly in low-income countries.

The revenue generated can also be directed, through programmes of targeted expenditure, to poverty reduction. For example, the revenue could be used to finance poor people’s access to water, sanitation or energy services. Past experience suggests that the potential of EFR to raise revenue is one of the primary reasons why developing country governments and Ministries of Finance in particular, are likely to pursue it.

EFR is therefore concerned with a limited intersection of two large policy areas – fiscal policy and environmental policy. Despite being limited, it is an increasingly significant area of development policy, because of the potential contribution EFR has to make to poverty reduction in developing countries. It is also an area that may not have received enough attention in the past, from both fiscal or environmental experts and their associated institutions."1

"To use market forces to drive green growth, prices need to reflect the full ecological and social costs of production and consumption. This requires the use of fiscal tools, such as taxes and subsidies, in a way that does not affect the poor or reduce competitiveness and is politically acceptable. Properly designed environmental tax reforms and environmental fiscal reforms can be powerful drivers for green growth and achieve the double dividend of higher economic growth and lower environmental impact."2

Instruments

"EFR encompasses a wide range of taxation and pricing instruments, which can be used to address country- and sector-specific environmental and resource use issues, including:

  • Taxes on natural resource use (e.g. forestry and fisheries) - to reduce the inefficient exploitation of publicly owned or controlled natural resources resulting from operators not paying a price that reflects the full value of the resources they extract.
  • User charges or fees and subsidy reform - to improve the provision and quality of basic services such as water and electricity, while providing incentives to reduce any unintentional environmental effects arising from their inefficient use.
  • Environmentally related taxes – to make polluters (industrial activities, motor vehicles, waste generators) pay for the “external costs” of their activities, and encourage them to reduce these activities to a level that is more socially desirable."1

References

  1.  "Environmental fiscal reform - What should be done and how to achieve it"
  2.  "Reforming fiscal policies to close the gap between economic and ecological efficiencies"