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Taxing ‘bads’ not ‘goods’

Changing the invisible structure of the economy: uses and applications of Green Tax and Subsidy Reform.

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Taxing ‘bads’ not ‘goods’

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  1. Changing the invisible structure of the economy: uses and applications of Green Tax and Subsidy Reform

  2. The shift towards green growth requires a fundamental system change. This entails closing time and price gaps without damaging the economy and affecting the poor; exploring new policy options which would change the price structure, including environmental tax reforms (ETRs) and environmental fiscal (EFRs) and restructuring both the visible as well as the invisible structures of the economy reforms .

  3. Revenue Neutrality Double Dividend • Keeping the overall tax burden on the economy unchanged • Reducing environmental impacts, increasing economic activity & employment while reducing poverty Environmental Tax Reform (ETR) “Reform of the national tax system where there is a shift of the burden of taxes from conventional taxes, such as those on labor, to environmentally damaging activities, such as resource use or pollution” Taxing ‘bads’ not ‘goods’ Shifting the tax burden from things that should be increased, like labor, to things like pollution. Closes the ‘price gap’ between the market price of resources and economic costs

  4. Shifting the tax base from “goods” to “bads” based on revenue neutrality

  5. Environmental Tax Reform: Types of Environmental Taxes • Natural Resources • Energy • Pollutants • Transport

  6. Environmental Fiscal Reform: Removing harmful subsidies Some countries in the region spend the equivalent of more than 20% of GDP on fossil fuel subsidies In Asia-Pacific, fossil-fuel subsidies in 2010 were $235 Bn, more than half the global total Global Fossil Fuel Subsidies amounted to $409 Billion USD in 2010. This has increased from $300 Billion USD in 2009 “a range of taxation and pricing measures that raise fiscal revenues in pursuit if environmental goals. This covers tax revenue spending, as well as phasing out subsidies on harmful activities and redirecting them to beneficial ones” Environmental Fiscal Reform

  7. Fossil Fuel Subsidy Reform in Indonesia The Problem What was done • Indonesia launched the subsidy reform. • Fuel prices were raised and the budget savings were recycled back to the poor in a cash transfer programme (BantuanLangsungTunai) for19 million poor households, given $10 per month for 6 months. • The reforms saved US$4.5 billion in 2005 and US$10 in 2006, enabling more to be spent on the social system, schools and healthcare. • The government continues to phase out the subsidies.

  8. Environmental Fiscal Reform: Removing harmful subsidies Remove harmful subsidies EFR: spending revenue • Env. Tax • Revenue Neutrality • Subsidy Reform • GG Driver • Poverty Reduction Green Growth ETR: raising revenue Recycle the revenue

  9. Benefits of ETR and EFR

  10. Korea implemented the Green New Deal in 2008, initially a stimulus package to with emphasis on greening the economy, that was expanded into a five-year development plan, with a committed budget of 2 per cent of the annual GDP Vietnam Lawmakers in Viet Nam adopted the Environmental Protection Tax Law in 2010, targeting fossil fuels along with other polluting items such as plastic bags and some chemicals. Revenues will be directed towards environmental programmes. India in 2010 imposed a carbon tax on both domestically mined and imported coal at the rate of 50 rupees (around US$1) per ton of CO2. Revenues generated from the tax go into a National Clean Energy Fund.

  11. Economic modeling of the double dividend • potential in Asia-Pacific Impact of Environmental Tax Reform in selected Asia-Pacific countries CPR = corporate taxation, LAB =labour, CON = consumption, Values range from worst case scenario to best case scenario (except for CO2 emissions reductions where the inverse is presented), based on how the revenues from the tax are used

  12. EFR Design Issues to Consider

  13. Institutional arrangements • ETR requires full support of the finance ministry • Independent monitoring and evaluation mechanism of revenue neutrality that involves private and public actors • Complementary policies in a package to enhance effectiveness and feasibility • Country-specific approach is needed

  14. Reminder: Policy Intervention and Double Dividend • ETR and EFR alone cannot automatically generate double dividend • Need a coordinated policy intervention by the government to make it happen • Government must have a policy framework to support it • How to make it happen = focus of the roadmap

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