What does a green economy transition mean for public finance and what can fiscal policy do about it?

10 November 2017

During our time in Bonn, Germany at the COP23, thousands of officials from government, non-government organisations, business and civil society are convening in sessions to discuss and agree a clear plan for finalising the Paris Agreement 'rulebook'.

Alongside the  European Bank for Reconstruction and Development, we’re putting our case forward on why it’s crucial that nations and investors also have a better understanding of the linkages between public finance and the green economy transition.

In our previous blog, we started to look at how fiscal policy and public finance has the potential to be a impacted by a country’s transition to a green economy. And here we’ll outline  how fiscal policy can respond to the impacts previously highlighted.

To start with we need to balance potential fiscal policy responses against the need to address risks and opportunities, but also the need to ensure a certain level of fiscal management while also being used as a tool of economic policy to shape behaviours.

Thinking in these terms leads to three distinct groups of fiscal policy responses, as shown in the diagram.

Green Economy Transition graphic

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Optimisation: Reforming current tax and spending policy to realise revenue gains and/or expenditure savings. For instance, a fall in tax revenue from the oil sector could be offset with tax administration reform to reduce the scale of informal economic activity.
  2. Expansion: Implementing new fiscal policy to take advantage of opportunities emerging from the green economy transition. For instance, lower oil and gas prices could be an opportunity to reduce or phase out fossil fuel subsidies.
  3. Changing behaviours: Using fiscal policy to create incentive (or disincentive) effects to address emerging risks and opportunities. For instance, carbon pricing and taxes can be used to incentivise the uptake of low-carbon technologies. This would be both an opportunity to generate government revenue and address the risks of low uptake of low-carbon technology.

It is also important to recognise the role of budget process as a vehicle for developing and delivering fiscal policy. Even just a cursory glance of these groups of fiscal policy responses will reveal that the objectives are not entirely complementary. Moreover, all of these groups of policy responses sit within a framework of uncertainty, as we do not truly know what path the green economy transition will take. How, then, can a government reconcile the need to protect public finances from uncertain risks with the need to provide subsidies to support particular types of behaviour?

The answer to this is with budget process. Robust and transparent multi-year processes for developing, implementing, monitoring and scrutinising tax and spending policy is essential. This all sounds simple but, of course, it is more complicated in practice. Good budget process relies on supportive institutional and legal frameworks, the right mix of skills and capabilities, adequate resources and systems.

Achieving this requires a great deal of commitment and planning.  However, without good budget process, it may not be possible for governments to develop fiscal policy responses in a coordinated, timely and sustainable way to address the fiscal impacts of the transition to a green economy.

For more information please contact:

Amal Larhlid  - Leader, Global Fiscal Policy Advisory
T: +44 (0) 207 804 0339 | E: amal.larhlid@uk.pwc.com

Andrew Wilson - Global Fiscal Policy Advisory
T: +44 (0) 207 213 4605 | E: andrew.d.x.wilson@pwc.com