Manufacturing

cement industry, although also relatively homogenous and highly concentrated among countries, includes many smaller producers and is less subject to competitiveness issues than aluminum and steel. Emission targets could be defined for a given sector, with emissions allowances being allocated to individual emitters within that sector, and with trading allowed between countries participating in the agreement and/or with countries with economy-wide or other sectoral targets. Even if not introduced at international level, the debate on sector approaches provides important lessons for developing country governments in introducing climate policies with competitive, high impact industries in a step-by-step manner. This is particularly important to industrialising countries that host major emitting industries discussed in this chapter, notably China, India, Brazil, South Africa, Indonesia, Thailand, Chile, Argentina and Venezuela. The analysis

of using market instruments through

sector approaches also shows the flaws of introducing approaches that target only high emitting industries on a sector basis, as opposed to full value chains of supply and demand with these and other industries implied.

Fiscal instruments and incentives Fiscal policy, comprising public expenditure, subsidies and taxation, can provide powerful incentives that alter the basic cost-benefit calculation of producers and consumers, thus driving change in behavior from BAU. Taxes are unrequited in the sense that the benefits provided by government to taxpayers in exchange are not necessarily in proportion to their payments. Tax exemptions can be made for specific products or industry sectors. Tax revenues can be earmarked for a specific purpose, which may or may not relate to the field of activity that was taxed in the first place. An example would be a tax on landfills or plastic bags, the revenues of which is used for waste management infrastructure or other purposes. By 2009, the Government of South Africa was expecting revenue of US$ 2.2 million from its plastic bag levy (Box 2), income that was due, among others, to support development of the local waste management industry. In 2010 the Government of India announced a carbon tax on coal production, from which it was expecting to raise US$ 535 million and planning to use the revenue for investment in clean energy (Pearson 2010).

Historical research by the OECD has found that most of the taxes identified in member countries were levied on a specific tax base related to energy, transport and waste management. In designing different types of taxes, governments need to consider case-by-case the nature of the target industry involved. In its latest survey, the OECD (2010a) noted that taxes levied closer to the actual source of pollution (e.g. taxes on CO2

emissions

versus taxes on motor vehicles) leave a greater range of possibilities for innovation, mindful of complications where sources are dispersed and varied.

By the end of the 1990s, the OECD (1999) noted from a survey of its members an increasing use of environment- related taxes for pollution control, raising revenues of up to 3 per cent of GDP and a growing percentage of overall tax revenues. A decade later, the OECD (2010a) confirmed a growing movement towards environmentally related taxation and tradable permits in OECD economies, underlining the value of green taxes to boost innovation as could be seen in evidence of increased investment in R&D and registration of patents on new, cleaner technologies. In 2010, the OECD also reported that revenue from environmentally-related taxation has been gradually decreasing over the past decade relative to both GDP and total tax revenue. This trend is driven mainly by motor- fuel taxes, which still accounted for the vast majority of environmentally-related tax revenue. In many countries, these have increased fuel prices to sufficiently high levels to have greatly moderated the demand for motor fuels. It did foresee that additional revenue from carbon taxes and from the auctioning of tradable permits may increase the role of environmentally-related taxation in government budgets.

Stimulus packages introduced by governments following the global financial crisis have included new subsidies for greening industry and cleaner technologies. In addition to its total stimulus package of US$ 586 billion, of which an expected 34 per cent was devoted to green investments, China announced solar subsidies to help local manufacturers which face a drop in international demand. The car industry worldwide has benefitted from US$ billions of emergency bail-out loans, scrappage subsidies and consumer subsidies. In China, the world’s largest car market today, the Ministry of Finance announced that it will offer substantial subsidies for the purchase of green cars and financing for the construction, in five cities, of the infrastructure for charging cars with electric power (Waldmeir 2010). It would offer up to Rmb 50,000 (US$ 7,800) in subsidies for the purchase of plug-in hybrid electric vehicles and Rmb 60,000 (US$ 9,400) for pure electric vehicles in cities such as Shanghai. The level of subsidy would be reduced after carmakers sold 50,000 green cars.

The subsidisation of green cars raises questions about its

relative priority, compared with public transport

vehicles and systems. A range of historical subsidies have prevented transformative investments in manufacturing since fuel prices did not reflect the cost of externalities and they resulted in a perverse principle of “the polluter being paid”. Greening industry, therefore, also needs to involve the abolishment of perverse direct and indirect subsidies on resource use that allow favored groups access to free water, free use of the environment for purposes of waste disposal, or cheap electricity and fossil fuels well below regular market prices. It is increasingly important to reflect the full economic and social costs of such use. Where this is politically impossible or otherwise

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