New Sources of Development Financing: The Case for a Green Tax

Filomeno S. Sta. Ana III is Coordinator of Action for Economic Reforms. This paper was presented in one workshop in an international policy dialogue on New Sources of Development Financing sponsored by the Development Policy Forum of InWent, Capacity Building International, Germany in cooperation with the Federal Minsitry for Economic Cooperation and Development on 24 August 2005 at the Campus Westend, University of Frankfurt, Frankfurt/Main, Germany.

Financing for development is evidently a key issue in the global response to the challenge of meeting the Millennium Development Goals (MDGs).  It is a tough challenge to raise additional revenues to fight global poverty and foster all-sided development. Notwithstanding recent initiatives for significant debt relief for the poorest heavily indebted countries and some trade concessions to developing countries, much still has to be done to generate enough resources for development and anti-poverty spending.

In recognition of this great challenge to mobilize resources, the international community has encouraged the promotion of new, innovative sources of financing.  Multilateral institutions, nation-states, and civil society organizations have all contributed ideas and inputs to give flesh to innovative sources of finance.

One instrument is global environmental taxation.  A green tax, or user charge, makes economic sense not only in collecting additional revenues but also in addressing market failure and negative externality.   At the same time, it is technically defensible and politically feasible.  Numerous studies have been done on the design of different types of green taxes or users charges. Governments in various continents have likewise endorsed, if not introduced, green taxation at the national and supra-national levels.  That said, the more substantive issues relating to a green tax revolves around the following: 1) the framework and objectives, 2) the tax design, and 3) the institutional arrangements.

Framework

As in any policy formulation, the framework and objectives of a tax measure have to be clear and explicit.  Drawing from the basic principles of fiscal policy, a paper from Paul and Wahlberg (2002) elaborates on a framework for a global tax.  The elements comprising the framework include the “policy-steering effects,” the revenue potential and the use of revenues, the redistribution goal, and the efficiency or ease of implementation.

The intended effect, in the case of an environmental tax (say, a carbon tax) is to reduce carbon dioxide emissions.  The reduction of emissions, in turn, slows down the harmful effects of global warming.  Taxing or putting a price to carbon emissions is an appropriate measure to address a worldwide negative externality, which is global warming.  Global warming does not have borders.  The gas emissions from the United States (US) affect not only the American people but all peoples of the world.

It must likewise be clear what the tax’s primary policy objective of is.  If the primary concern is the environment, then the price should reflect the actual cost of reducing emissions. It can be tempting, for instance, to have a lower rate that is misaligned to the actual cost, if the overriding objective is generating revenues.

The revenue potential from global environmental regulation is huge. Stiglitz (2005), for instance, says that “at current carbon prices, the value of carbon sequestration by tropical rainforests likely equals or exceeds the current level of international aid being provided to developing countries.”

The amount to be raised from green taxes or measures can be spent in various ways—e.g., for the environment or for poverty reduction.   It may make more sense to use the revenues from environmental measures to protect the environment.  It does not hurt anti-poverty spending; the revenues from green measures in fact free up resources that can be now allocated for anti-poverty or other development programs.  This is an example of how a green tax results in a double dividend.

Redistribution or progressivity of green taxes has several aspects—say, higher tax rates for the rich countries and lower rates for the poor countries.  Having different rates however requires greater administrative capacity.

Another example is to have a separate redistribution mechanism.  A portion of the revenues can be allocated to supporting the poor, or providing safety nets to poor households and producers (e.g., small farmers) who also have to shoulder part of the tax burden.  A uniform tax rate with a separate distributional system (as against several tax rates based on the income level of the countries) is the most appealing for its relative ease of enforcement.  Read full text (.pdf, 106kb, 6pp.)

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