Fiscal reforms for a Green Recovery

Expert workshop underlined importance of green fiscal policies for a green COVID-19 recovery in Latin America and the Caribbean.

The anchoring of environmental policy goals in fiscal policy has become even more important given the major role of fiscal measures in the current crisis management. The economic reconstruction also represents a window of opportunity for green fiscal policy, insofar as energy and raw material prices are low and public budgets will be coming under pressure to consolidate after the end of the economic stimulus measures. In view of the social upheavals of the crisis, the social design of the green fiscal measures is even more important for their acceptance than it already is. The COVID-19 crisis has made it crucial for developing countries to reform their tax systems in order to generate more resources at the national level. 

These were the broad conclusions of an online technical workshop that was organised by the United Nations Environment Programme (UNEP), the Deutsche Gesellschaft für Internationale Zusammarbeit GmbH  and the International Monetary Fund (IMF) under the auspices of the Freen Fiscal Policy Networtk (GFPN) together with the Economic Comission for Latin America and the Carrabean (UN ECLAC) in October 2020, to explore the role of green fiscal policies for a green recovery of COVID-19 in Latin America and the Caribbean.

Sustainable development must be integrated into recovery plans

The workshop addressed the need to put the approaches of green fiscal policy very specifically in the context of the economic and social challenges posed by the current crisis and the special development challenges of Latin America. The urgent need to integrate climate and nature into public finance processes during the ongoing pandemic brought together approximately 90 experts from governments in the region, international organisations, as well as academia and thinktanks.

As highlighted in the discussions, the extraordinary pandemic situation now requires sustainable development to be at the centre of recovery plan and that current fiscal challenges can be tackled by allocating the resources more efficiently.

Good approaches in Chile, Costa Rica, Colombia and Panama

In the first session Steven Stone, Chief of UNEP’s s Resources & Markets Branch, addressed the current crisis as a “message from nature”, and highlighted UNEP’s work on “Building a Greener Recovery: Lessons From the Great Recession”. José Luis Samaniego, Director of ECLAC’s Sustainable Development and Human Settlements Division, set the scene by making a point on how the region has a current regression in the GDP to levels seen 10 years ago and appealed for a coordinated action including technological, fiscal, financial, and social regulatory policies. He further highlighted green recovery measures currently considered in 4 LAC countries – Chile, Costa Rica, Colombia and Panama. In Chile, almost a third of the planned projects have seen a transition to sustainable development as the compass aligned with the Chilean NDC. Panama is searching for promoting low-carbon technologies and reducing subsidies for carbon energy in addition to integrating climate change in their banking system.

Steven Stone and José Luis Samaniego both emphasized on how green tax and spending policy is important to find a social remedy of the crisis. Brian O’ Callaghan from the University of Oxford’s Smith School of Enterprise and Environment followed by presenting on preliminary evidence from joint work with UNEP on the “greenness” of fiscal stimulus packages announced in response to COVID-19, and outlined some key clean investment opportunities which could support country efforts in building back better – spending on green initiatives like green market creation, investments in new clean public transport and energy infrastructure including electric vehicle incentives.

Fiscal reforms must be fair

In subsequent thematic sessions, participants discussed approaches and country experiences in relation to green budgeting, pollution taxes, reforming environmentally harmful subsidies.

Of interest was the thematic discussion for aligning the public framework for green recovery plans, with the increased focus on ministries of finance and how to integrate and better prioritize budget measures towards environmental and development goals. This session pivoted around increasing public revenues in the form of taxes to encourage the shift to cleaner and more energy-efficient fuels. However ensuring that these taxes must be fair and the revenues should be used to provide initial assistance to the poorest households and support health infrastructures. The discussion also touched on reforms in existing unsustainable agricultural subsidies that will generate consequential tax savings.

Towards the end, the dialogue stressed on the probable impacts of green fiscal reforms that needs to be analysed- costs and benefits, anticipated and indirect effects in the economic and environmental arenas. While the political challenges remain significant, the current situation needs these green reforms to address sensitive political and economic challenges.