Why finance ministers may hold the keys to climate action

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People watch the rescue process in the flooded area on August 17,2018 in Pathanamthitta, Kerala, India. Kerala was badly affected by the floods during the monsoon season. Source: AJP, Shutterstock.

Without urgent action, the impact of climate change could push an additional 100 million people into poverty by 2030.  Meeting global climate goals requires ambitious, transformational and systemic action. Sustainable infrastructure is at the heart of this opportunity and can deliver cities where we can move, breathe and be productive; resilient systems for power, water and housing that withstand increasingly frequent and severe climate extremes; and ecosystems that are more productive and robust. Mobilizing public and private resources is an essential part of generating the trillions of dollars needed for this sustainable infrastructure.

Climate change is not simply an “environmental” problem. Rising temperatures pose potentially catastrophic risks to people, their livelihoods, and entire cities. Climate change puts every aspect of society at risk and has become a serious financial and economic problem.  

Against this stark backdrop, The World Bank Group is engaging finance ministries in conversations around climate action. Because finance ministers can pursue a wide variety of fiscal policy reforms that can reduce emissions in a cost-effective and systemic way, this group of policymakers can become the linchpin of climate action.  A critical step for finance ministries is to get energy prices right.

Our new report, Fiscal Policies for Development and Climate Action, examines how governments can use policies like environmental tax reforms to help cut greenhouse gas emissions and benefit citizens. Governments can reduce very distortive taxes on production inputs, such as labor, or income taxes to offset environmental taxes. The revenue from these new taxes could also be used to increase investments in human capital - such as health, education or social protection - to finance public infrastructure, or to invest in innovative sources of cleaner and more efficient energy. In this way, finance ministers can discourage pollution while achieving substantial benefits for their countries at the same time.

We are already seeing these types of policies working in several places. For example, in 2017, Chile took the pivotal step of implementing a national carbon tax to combat exceedingly poor air quality, particularly in its capital, Santiago. For Chileans, air pollution is responsible for respiratory illnesses, hospital visits, and premature deaths. The carbon tax was introduced as part of a broader package of tax reforms and a pollution control program called Santiago Respira – which banned wood-burning heaters and restricted driving during poor air-quality days, among other things - intended to boost investment in renewables and reduce fossil fuels’ negative impact on health. The results thus far have been encouraging: air quality has improved; Chile has become a top renewable market; and investments in renewables have spurred growth, created jobs, and lowered the government’s own projections of national energy costs.

For longer-term results, we can look to British Columbia, Canada, which implemented North America’s first carbon tax in 2008. British Columbia’s carbon tax covered most types of fuel use and carbon emissions. Initially introduced at a low level - $10 per ton of carbon dioxide – the tax has increased to the current level of $35 per ton. Since the tax has been implemented, emissions in British Columbia have been reduced by between 5 and 15 percent while the province’s GDP has kept pace with or even slightly outperformed the rest of Canada’s. The key to the success for this tax has been the policy of revenue neutrality: by law, the revenues from the tax are given back to the population through equivalent credits and cuts to other taxes.

At the World Bank Group, our focus is on improving livelihoods in developing and emerging economies. We believe that environmental tax reforms have the potential to have even more positive effects in these economies. They must also be complemented by targeted measures to support the incomes of the poorest households as they adapt to higher energy prices.  It is incumbent on governments to communicate the environmental, social, and economic benefits of these kinds of policies while clearly articulating the tradeoffs involved. Implementation also needs to be gradual and predictable, giving firms and individuals time to adapt.

We are committed to working with governments to help them tailor their fiscal policies for climate action and building the evidence base that the long-term cost of climate change is everyone’s business. The fiscal reforms needed to achieve broader development goals are increasingly indistinguishable from reforms needed to mitigate and adapt to climate change.


Marcello Estevão

Senior Advisor, Equitable Growth, Finance and Institutions

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