increases, energy use being a higher portion of their total incomes, and might be unduly affected by a new tax. Any increase to the overall tax burden will have some negative effect on economic output. For these reasons, comprehensive research is usually needed to estimate how green taxes will affect an economy and to help design complementary policies that can ease transition.
Experience with existing environmentally related taxes shows that these dilemmas are commonly overcome by introducing tax exemptions to certain economic sectors. Although these may be effective political solutions, they risk weakening the incentive effect of the tax. Carbon tax exemptions for high-carbon producers, for example, often carve out exactly those firms that are contributing most powerfully to the problem. The best alternative would be international agreements – globally, regionally or sectorally – to tax externalities at a specific level, thus offsetting competitiveness concerns. An intermediary step towards this end-point might be to agree on minimum levels of taxation of certain externalities; or, via regional agreements, to simply begin by agreeing on lists of externalities to tax, but leaving the rate of taxation up to member countries to determine. Any remaining impacts could be dealt with by recycling tax revenues into aid for industry restructuring. A portion of this might involve support for capacity reduction, including welfare payments for unemployed workers and retraining schemes. Where international agreements cannot be reached, countries with ambitious internalisation policies might alternatively be able to negotiate conditions for the use of a border tax on imports in the World Trade Organization (WTO), thus mitigating any competitiveness impacts.
Similar solutions are often proposed for offsetting any negative social impacts: tax revenues can be re- channelled into social welfare safety nets or other welfare-enhancing programmes, potentially
governments to make the final outcome socially progressive, as opposed to simply neutral. As with subsidy reform, it is vital that social impacts are properly assessed before implementation to ensure that the right flanking measures are in place to deliver socially just outcomes. It is equally important that such complementary policies be well communicated if they are to help overcome political opposition to change. Governance is also a significant issue and public support for green taxation can be increased if governments introduce effective measures to ensure transparency and accountability. It should be noted that the practice of earmarking – committing to recycle revenues for particular purposes, often politically effective at increasing popular support for green taxes – is generally considered to place excessive constraint on public finances, particularly assuming that the share of revenue sourced from environmentally related taxation is to increase substantially (UNEP 2010b).
A green tax shift is another strategy for minimizing or indeed entirely offsetting the economic costs of increased environmentally related taxation. Revenues are re-chanelled by reducing taxes on things that promote economic and social well-being, such as jobs, incomes and profits (Green Fiscal Commission 2009). The goal is a double dividend that decreases losses in environmental capital at the same time as boosting employment. In the 1990s and the early 2000s, modest green tax shifts took place in a number of European countries, with broadly positive outcomes in energy demand, CO2
emissions, employment and GDP.
2.3 Limiting government spending in areas that deplete natural capital
As noted earlier, subsidies are any form of preferential treatment that is provided by governments to producers or consumers. In their most obvious form, they are direct financial transfers that, for example, reduce the price of a good. However, support can be transferred in many other ways, such as tax rebates, exemption from legal obligations or below-market prices for access to government land (GSI 2010). They are a popular policy instrument for many governments because the mechanisms to implement subsidies do not require much administrative capability, and they can be used to win political support by appealing to specific lobby groups or the perceived needs of the general populace.
Environmentally harmful subsidies Although, as noted above, there are legitimate reasons for using subsidies in some cases, they can be environmentally harmful in other cases. Moreover, once they have been created, subsidies are hard to remove, and they entail a high opportunity cost. According to analysis by the World Bank, a large number of countries spend more on fuel subsidies than they do on public health (World Bank n.d.). When spending is linked to product prices or volatile markets, it can increase to levels far beyond those originally intended.
An International Monetary Fund (IMF) survey of 42 developing and emerging market economies showed that rising oil prices in 2007 led to an average increase in explicit subsidies equal to 1.5 per cent of GDP and implicit subsidies equal to 4 per cent of GDP (Mati 2008). Sometimes the cost of subsidies is paid for with the long- term deterioration of important public services. In some countries, utility companies are expected to absorb the cost of subsidizing basic goods like electricity and water, leading to insufficient investment in maintenance and asset renewal (Komives et al. 2005).
Subsidies can also encourage poor environmental and resource management. Artificially lowering the price of