The financial crisis and fiscal consolidation in green budgets

image of The financial crisis and fiscal consolidation in green budgets

This project 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. The report contributes with own calculations for potential revenues from environmental taxes and discusses the financial crisis and environmental tax policy responses in Iceland, Estonia and Ireland as case studies. The analysis has been carried out during the period July 2012 – December 2012 by Vista Analysis AS, Norway, Reykjavik University, Iceland and PRAXIS Center for Policy Studies, Estonia. The project was commissioned by the Nordic Council of Ministers.



The challenge

The financial crisis asks for new solutions to resolve budget deficits and to stimulate the economies towards more sustainable production structures. Environmentally harmful subsidies pose heavy burdens on public budgets around the world. The value of fossil fuel subsidies is roughly estimated to almost 1% of world GDP (IEA et al. 2010), in some countries as much as up to 30% of GDP. These subsidies add to environmental costs and increase global warming. In addition to direct subsidies, lacks of and exemptions from environmental taxes represent other forms of subsidies. Reforms of environmentally harmful subsidies can potentially mitigate the financial crisis. Setting the prices right by lowering direct subsidies and increasing revenues from environmental taxes can contribute to balance the public budgets. Moreover, this helps the economies to achieve climate policy goals in a cost-effective manner. A core problem is that subsidies will benefit significant groups, hence reforms prove to raise significant opposition. It is thus important to reveal what groups benefit from the subsidies, and whether compensation is needed.


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