46
EMISSIONS GAP REPORT 2018 – BRIDGING THE GAP: FISCAL REFORMS FOR THE LOW-CARBON TRANSITION
6.3 The political economy of green fi scal reform and carbon taxes: lessons learned
Public support for carbon pricing or the phasing-out of fossil fuel subsidies is often limited, in part because politicians have failed to communicate a clear narrative on how and why this would benefi t consumers and the local economy. Key concerns relate to (i) the distribution of costs between households and fi rms, (ii) limited environmental effectiveness due to leakage of emissions to other jurisdictions and (iii) broader behavioural and political factors. Concerns about reduced competitiveness and relocation of economic activity due to domestic policy can be separated into costs for fi rms, employment effects and emission leakage, and are therefore covered by (i) and (ii). Figure 6.3 gives an overview of the key issues and proposed measures to
address them. As fi scal policies create revenue, they can provide additional space for compensation or other forms of spending to help make carbon pricing more appealing.
6.3.1 Distribution of costs
Carbon taxes and energy subsidies affect prices of production factors, goods and services, so the costs of fi scal policy affect many fi rms and households (Fullerton, 2011). Addressing the economic costs borne by politically powerful groups can encourage support for reform. Equally, compensating vulnerable and highly disadvantaged groups is important for social inclusiveness and fairness (i.e. reducing poverty and inequality). Higher energy and carbon taxes have a particularly negative effect on:
Figure 6.3: Key issues for making fi scal reforms politically viable (upper part) and solutions and measures to address them (lower part). Measures related to fi nancial fl ows are marked with a green mark in the bottom corner. Table 6.1 gives country examples of the political and behavioural factors (listed in the third column) while table 6.2 shows different ways to use revenues (green arrows).
Key issues
Support households and firms
Solutions and
measures
Affected industry support: targeted compensation (firms & workers)
Carbon tariffs and border-carbon adjustment (BCA)
Ensure equitable distribution of costs:
Alleviate effect of unilateral policies:
Tackle carbon leakage
Foster public support:
Political and behavioral enablers to higher energy prices or taxes
Establish trust in governments
Avoid solution aversion
Information and communication about impacts
Investments fostering structural change (energy, infrastructure)
Appropriate timing and sequencing
Affected industry support: trade-exposed industries
Consider wording and framing
Reduce income taxes
Cash transfers for households/consumers
Climate projects, low- carbon investment
Use revenues appropriately
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