The financial crisis has developed into a debt and budget crisis, particularly acute in several European countries. The Working Group on Environment and Economy (MEG) under the Nordic Council of Ministers has released a new publication that adds insight into the potential contribution to fiscal consolidation from environmental tax and subsidy reforms, i.e. strengthening public budgets while at the same time improving economic efficiency and the environment.
There is considerable international attention to the potential and the need for reducing environmentally harmful subsidies, particularly related to consumption and production of fossil fuels.From the environmental side it has long been emphasized that while policy in the first phase required and led to stimulation measures, fiscal consolidation efforts in this phase should focus on increased tax revenue through new and increased environmental taxes and charges, and on expenditure cuts achieved by reducing environmentally harmful subsidies.
The potential in getting the prices right is particularly high for greenhouse gas emissions. The report concludes that, within reasonable prices, the revenue potentials in green fiscal consolidation are substantial in a system with taxes and/or auctioned emission permits covering all greenhouse gases. Despite these potentials, there are no clear signs that the financial crisis has led to general increases in environmental taxes, fees or tradable quota prices so far.
Still, the single country studies reveal implementation of new revenue generating environmental instruments after 2007, such as carbon taxes and increased pollution charges. Given the multiple benefits of environmental efficiency and fiscal improvements, the authors recommend the use of environmental taxation and removal of environmentally harmful subsidies as part of the solution to the financial crisis.
The report may be downloaded for free here: The financial crisis and fiscal consolidation in green budgets
Frøydis Johannessen
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frjo@norden.org