Towards a green economy

measures are already being used by governments to support investments more generally in the economy, but can be targeted specifically and strategically at changing market dynamics for green projects, sectors or investors. Considerable caution is needed, however, in considering such strategies: fiscal resources are scarce and it is not possible or advisable for governments to try to spend their way out of an unsustainable economy. Ultimately, if it is to enable markets, the short-term use of public expenditure should be prudently applied in ways that alter market dynamics in the long-term. Choosing which green investments to support, for example, is not an easy task; governments have a chequered record of choosing specific technologies and goods as winners. Such decisions are particularly difficult in the context of immature technologies. Comprehensive analysis of national conditions and a range of potential interventions can help determine what to support and how – from investing in infrastructural improvements that will enable rural communities to embrace conservation agriculture, to establishing feed-in tariffs that will foster an infant renewable energy industry. Although situations vary, most interventions should:

■ Be aligned with sustainable development priorities, taking into account possible impacts across economic sectors;

■ Be aligned, where possible, with strategies to strengthen a country’s national comparative advantage;

■ Not replicate or support investments that are likely to be made anyway;

■ Be solution-neutral, avoiding designating specific technologies or firms as champions, and allowing market forces to best determine how green outcomes can be achieved;

■ Be strategically targeted to have long-term impacts on market dynamics, that will continue after the funding is withdrawn; and

■ Be designed with mechanisms to control costs.

The following section discusses in more detail some of the ways in which additional public expenditure might be applied, as well as how existing expenditure can be harnessed to stimulate markets through sustainable public procurement.

Public expenditure measures There are a variety of measures that governments can use to promote investment in the green economy. Several of these measures can be considered a subsidy. Subsidies are not just direct financial transfers, but also include advantages such as exemptions from taxes or

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regulations, accelerated depreciation of assets, or below- market access to government-owned resources. A number of the sector chapters in this report recommend that subsidies should be used to help promote innovation, establish green common infrastructure and foster green infant industries (see Box 1).

Government subsidies for innovation may be needed where market barriers dissuade private investments, or where accelerating the development of an innovation is clearly in the public good. Innovation – in its broadest sense, transformational improvements in meeting social needs – includes not only the development and deployment of new technologies, but also the modification of technologies to new contexts and the development of new behaviours. Governments can “push” innovation by providing subsidies to parts of the research and development (R&D) chain, from basic research in universities to applied research in labs and industry, often on a cost-sharing basis. In addition to subsidising R&D, governments are increasingly offering support for the demonstration of projects with costs that are too high to attract private investors. Alternatively, policies can be designed to “pull” innovation, by creating clear demand for, say, a certain technology in the marketplace, such that the private sector has a strong incentive to drive the innovation process.

“Pull” policies overlap with green industrial policy more generally – that is to say, policies dedicated to the creation or fostering of green markets. This might involve the creation of common infrastructure required to green economic activity, such as smart grids, or affordable access to broadband internet connections. It could also involve targeted support to key green industries. Short- term support from governments can give businesses the time they need to achieve competitiveness through a range of factors, such as reducing costs through learning-by-doing and producing at economies of scale, or establishing a customer base through market recognition. Packages of

investment incentives are

also often used to attract foreign direct investment or retain large domestic investors. This can be particularly important for the stimulation of local sourcing and the transfer of skills and technology to domestic businesses.

There are a large number of mechanisms that governments regularly employ to this end. Foregoing government revenue is one such example. Turkey, for instance, offers reduced licence fees for entities applying for licences to construct renewable energy facilities and provides deductions for the rent and right of access and usage of the land during the investment period (Gaupp 2007). Tax incentives are another variant of this type of support. A number of municipalities in India, for instance, have established a rebate in the property tax for users of solar water heaters. In some cases this rebate is 6-10 per