combination can also be mutually reinforcing, for example, using taxes to reinforce the impact of other instruments such as standards and subsidies. In the field of building and construction (see the Buildings Chapter), tax credits can be used to boost green or energy-efficient development, and the renovation of investment property.
The cases of tax incentives and subsidies show that it is not simply about new incentives, but also about making sure that existing incentives do not support unsustainable activities. Some approaches and reforms are more difficult to implement than others. For example, the creation of green subsidies or removing environmentally harmful subsidies is often technically and politically difficult, especially when public finances are stretched and subsidy removal is thought to have adverse impacts on poor households. Also, the reality of the mainstream financial sector is that it remains wedded to serving the finance, investment and insurance needs of the brown economy and traditional infrastructure needs across heavy industry, power generation and transportation – a classic case of vested interests.
For example, it is estimated that the removal of the US$ 500 billion in subsidies underpinning the fossil fuel sector globally could boost the global economy by around 0.3 per cent (UNEP 2010), a clear mid to long-term benefit for financial service institutions. Yet, in the short to mid- term, removing such subsidies fundamentally changes the risk/reward equation for the entire fossil fuel sector. Thus, their phase-in would need to be gradual and flanking measures put in place targeted on protecting the poor from potentially adverse impacts.
Achieving an optimal configuration of public policy and investment choices in infrastructure that acts to “crowd in” rather than “crowd out” private finance and investment – for example, building a smart electricity grid – will be a requirement to create long-term capital
stock that supports the green economic transition (UNEP 2010). As noted earlier, between 15 to 20 per cent of the US$ 3 trillion global public stimulus packages pledged in response to the financial crisis, upward of US$ 470 billion, was earmarked for green economy spending, including significant amounts for job-creating green infrastructure projects.
These investments are not confined to short-term responses to the financial and economic crisis, however, and new thought is being given beyond the recovery to ensuring a lasting transition. For example, during the 12th five-year plan period starting 2011, the Chinese government will invest US$ 468 billion in green sectors compared to US$ 211 billion over the last five years, with a focus on three sectors: waste recycling and re-utilisation; clean technologies; and renewable energy. With this amount of public investment, China’s environmental protection industry is expected to continue growing at an average of 15 to 20 per cent per year and its industrial output is expected to reach US$ 743 billion during the new five-year period, up from US$ 166 billion in 2010. The multiplier effect of this emerging sector is estimated to be 8 to 10 times larger than other industrial sectors.
In countries where public financing based on tax revenues and governments’
ability to borrow from
capital markets are constrained, reform of subsidies and taxation policies can be used to open fiscal space for green investments. Subsidies in the areas of energy, water, fisheries and agriculture, for example, reduce the prices and encourage excessive use of the related natural capital. At the same time, they impose a recurrent burden on the public budget. Phasing out such subsidies and introducing taxes on the use of energy and natural resources can enhance efficiency while strengthening public finance and freeing up resources for green investments. Removing subsidies in these four sectors alone, for example, would save between 1 to 2 per cent of global GDP every year.