ENVIRONMENTAL Fiscal Reform

ENVIRONMENTAL fiscal reform

What Should Be Done and How to Achieve It ENVIRONMENTAL fiscal reform

What Should Be Done and How to Achieve It

This publication is a joint product of staff from DFID, DGIS, GTZ, IMF, and OECD, and while consultations have been considerable, the judgments herein do not necessarily reflect the views of their respective governing bodies, or when applicable, the countries there represented.

Cover photo: Indonesian fisherperson. C. Carnemark, 1993. Foreword

ore than one billion people — generate environmental benefits and support two thirds of them women — live poverty reduction efforts. EFR has the potential to in abject poverty, surviving on less free-up economic resources and generate M than US$1 per day. Millions of revenues that can help finance poverty reduction children do not receive even a basic education. measures, for example infrastructure that improves Similar numbers of mothers suffer injury during or access of the poor to water, sanitation and do not survive childbirth, and millions of energy services. By encouraging more sustainable households do not have access to basic sanitation use of natural resources (such as forests or or water supplies. In response to the plight of the fisheries), reducing pollution from energy use and world’s poor, the international community industrial activities, and stimulating the use of committed itself to the Millennium Development innovative “clean” technologies, EFR can also Goals (MDGs), including the overarching goal of improve management of the environment. In halving extreme poverty by the year 2015. these ways, EFR can directly and indirectly address environmental problems that threaten the In recognition of the strong linkages between livelihoods of the poor. However, the challenges poverty and environment issues, one of the of undertaking such reforms are manifold. Millennium Development Goals, MDG 7, seeks to integrate the principles of sustainable EFR encompasses a wide range of taxation and development into country policies and pricing instruments, including taxes on the programmes, and reverse the loss of exploitation of natural resources, taxes and environmental resources. The livelihoods and food charges on water or air pollution, and the reform security of the poor often depend directly on of water or energy subsidies. The suitability of ecosystems, and the diversity of goods and individual instruments to specific countries will services they provide. Moreover, healthy vary according to the country’s level of ecosystems provide a range of “invisible services” development, resource endowments, and that are essential for sustainable development. institutional capacity. Although it may present a challenge to design and implement, EFR to To help achieve the MDGs, developing country encourage sustainable natural resource use will governments need to raise revenues to invest in be particularly relevant to low and middle- schools, healthcare, infrastructure and the income countries, which often rely heavily on environment. As recognised at the Financing for natural resources for their development. A Development Conference in Monterrey, equitable growing number of such countries have and efficient tax systems, as well as improvements embarked on such reforms as part of their in the pattern of domestic public spending are Poverty Reduction Strategies. For rapidly essential to meeting the MDGs. industrialising economies, EFR can play an important role in controlling industrial pollution.

Environmental Fiscal Reform (EFR) can play an In some circumstances EFR has clear fiscal, important role in this regard, helping countries iii raise revenues, while creating incentives that enviro