At the One Planet Summit in December 2017, French President Emanuel Macron cautioned that “we are losing the battle” on climate change and are “nowhere near” being able to contain rising temperatures to between 1.5°C to 2°C. Instead, Macron warned, temperatures could rise by 3.5°C or more by the end of this century.
Altering the trajectory of carbon emissions will require implementing the Nationally Determined Contributions (NDCs), the individual country commitments agreed in Paris. Fiscal policies have a key role to play in this process: about one third of the NDCs include references to specific fiscal incentives -clean-energy subsidies, energy taxes, carbon taxes, or a combination thereof - in their NDCs. However, the effectiveness of finance ministers in incorporating climate action into their work presents mixed results. Although explicit fossil-fuel subsidies have fallen, fiscal policies in most countries continue to favor fossil fuels over renewable energy. Consider these points uncovered by recent studies:
- Few countries tax coal, even though coal accounts for almost half of emissions from 42 countries examined by the OECD;
- 95 percent of carbon emissions from energy uses other than road transportation is untaxed;
- Between 2005 and 2014, taxes on energy use, road transportation, waste production, water use and water pollution, and the production of hazardous chemicals declined to an average of 1.8 percent of GDP. Meanwhile, revenue from environmental taxes shrank to 6.5 percent of total tax revenue, and the G7 average was just 5.3 percent.
- Where taxes do apply on carbon, nearly all are too low to contribute to the fight against global warming.
Why are the NDCs so critical to the fight against climate change? First, they represent a national, bottom-up, well-organized approach to climate action. Integrated into national development strategies, the policies included in the NDCs can trigger meaningful progress toward developing low-carbon economies. Second, the NDCs are public documents, open to scrutiny and peer review, which provide a common framework to measure achievements and a benchmark for future targets. Third, implementing the NDCs requires a strategy to mobilize and access climate finance. This is not trivial. At the Paris conference, developed countries pledged to raise US$100 billion each year to address climate change. While financial flows have not yet met their targets, the preparation of a climate-finance strategy and a pipeline of bankable projects represents a serious effort by national governments to compete to attract climate funding from other governments and the private sector. These advances are helping consolidate the trust of many developing countries in the future of the Paris Climate Accord.
Finance ministers play a critical role in the success of the NDCs. Leveraging fiscal policy to reduce carbon emissions could minimize any adverse impact on the economy and the public finances. For example, eliminating subsidies for fossil fuels could both realign price incentives in favor of renewable energy and create additional fiscal space to invest in low-carbon infrastructure. Complementary tax reforms could further reduce emissions while accelerating growth, expanding employment, and improving public health. Due to their central role in the implementation of the NDCs,