Towards a green economy

schemes, including cap-and-trade systems, first establish an overall level of pollution allowed and then let the open market determine the price. Tradable permit schemes were first introduced by countries several decades ago and have gained renewed attention more recently given their application for addressing climate change. For instance, the Kyoto Protocol provides countries with the ability of trading greenhouse gas emissions reduction credits. In total, the Protocol resulted in 8.7 billion tonnes of carbon traded in 2009 with a value of US$ 144 billion (World Bank 2010).

Likewise, markets establishing payments for providing ecosystem services such as carbon sequestration, watershed protection, biodiversity benefits and landscape beauty, have gained considerable attention over the last several years. Payments for ecosystem services (PES) schemes aim to influence land use decisions by enabling landholders to capture more of the value of these environmental services than they would have done in the absence of the scheme (Barbier 2010a). The evidence on the effectiveness of PES schemes in reducing deforestation has been mixed. A number of studies looking at national PES schemes in Costa Rica and Mexico found that much of the land being put under payments was not at risk of being converted because of its low opportunity costs (Muñoz-Piña et al. 2008; Sanchez-Azofeifa et al. 2007; Robalino et al. 2008).

As the contribution of deforestation and forest

degradation to greenhouse gas emissions has become better understood, the potential to create an international PES scheme related to forests and carbon has become a key focus of international climate negotiations. The scheme, coined REDD (Reducing Emissions from Deforestation and Forest Degradation) and more recently as REDD+, which adds conservation, sustainable management of forests and enhancement of forest carbon stocks to the list of eligible activities, represents a multilayer PES scheme with transfers of finance between industrialised countries and developing countries in exchange for emission reductions.

The sums of money being estimated for full implementation of REDD+ are in the tens of billions of US dollars worldwide. The amounts committed for preparation activities and bilateral programmes greatly exceed what has been provided so far in PES, providing grounds for optimism that this new mechanism can capture and transfer important new resources for ecosystem services provided by forests. Although PES will not be the only strategy used by governments to achieve forest-based emission reductions, it is likely to be important.

Ensuring effective use of environmentally related taxes The sector chapters in this report identify many promising applications for environmentally related taxes and

560

In reality, it is not always possible to meet these objectives rigorously. Setting taxes at the correct level, for example, requires regular monitoring of externalities and undertaking

studies to estimate

their cost. Where tax rates are set higher than the amount strictly needed for internalization of the externalities, the end result can be a socially sub-optimal resource allocation in which value-generation that involves sustainable levels of pollution or resource extraction is foregone. Likewise, it is not always possible to directly tax the externality in question. In some cases, proxies are used, such as a road tax as a proxy for a CO2

market-based instruments to internalise environmental externalities such as the cost of greenhouse gases, industrial pollutants, impacts of fertiliser and pesticide use, waste, and the over-exploitation of common resources such as fisheries, forests and water.

Environmentally related taxation on some level has been used successfully by countries around the world since the 1970s and 1980s, including China, Malaysia, Columbia, Thailand, the Philippines and Tanzania (Bluffstone 2003). China, for example, developed an extensive system of charges since the late 1970s, which raised over US$ 2 billion in revenues by 1994 (OECD 2005). Likewise, levies on natural resource extraction are common practice and many developing countries are highly dependent on revenues from resource extractive industries (UNEP 2010b).

There are some key issues to bear in mind when considering the use of environmentally related taxation instruments. For one, their applicability is often limited to unsustainable economic activity that governments would like to reduce or better manage, not to those activities they want to eliminate entirely. In cases where the activity should be prohibited, regulatory measures are typically a more appropriate instrument than taxes. It is also well recognised in taxation literature that to be most effective, taxes should be levied at the point where the externality is created, and to the extent possible, set at a rate equal to the cost of the externality (UNEP 2010b; Roy 2009).

emissions tax. However, these taxes may fail to

discriminate between the different amounts of externalities generated by actors engaged in the same activity, such as the aforementioned road tax which is insensitive to more and less efficient car engines.

As with subsidy reform, although the overall aim of a green tax will be to increase welfare, this net gain will almost certainly mask individual winners and losers within an economy. It is widely recognised, for example, that high-carbon industries such as cement or steel manufacturing would find it difficult to compete with international rivals if carbon pricing were only implemented in their country of operation. Similarly, low-income households are sensitive to any price