Authors：Zhou Jieyu, Cui Ying
English version: Leona Quigley
Fiscal and tax policies are key parts of addressing climate change. The IMF believes that finance ministers around the world can play a central role in tackling climate change, promoting investment in mitigation and adaptation, creating more jobs in these sectors of the economy and promoting high-quality sustainable economic development. At present, countries usually formulate fiscal and tax policies to deal with climate change from the angles of fiscal expenditure and revenue while promoting low-carbon transformation and enhancing the ability to adapt to climate change through a variety of policy means and combinations.
I. Financial Expenditure Policies
The following five financial policy guidelines provide a range of ways to incorporate sustainable thinking into financial policymaking and examples of their implementation:
1. Incorporation of climate spending into existing financial budgets
As early as 2011, the EU decided to allocate 20% of its seven-year budget plan for 2014-2020 to promote climate change mitigation and adaptation in the areas of energy, transport, agriculture and technological innovation, with the funds intended to be tracked and calculated in detail through the methodology published by the European Commission. 100%, 40%, and 0% of contributing and non-contributing expenditures are accounted for as climate expenditure respectively. According to the results published by the European Commission, the EU climate expenditure accounted for 19.7% of the total expenditure from 2014 to 2020, practically reaching the target, but the European Court of Auditors believes that flaws in the European Commission’s methodology could lead to an overestimation of the scale of climate funding by about 42%.
In 2020, the European Commission published a seven-year budget plan for 2021-2027 and the Next Generation EU Fund, aimed at promoting the green recovery of post-pandemic economies and the development of green technologies. It also requires that 30% of the total amount of the two funds be directed towards addressing climate change. Meanwhile, bodies such as the European Parliament and the Court of Auditors are pushing for a more “transparent, comprehensive and meaningful” approach to budget planning.
2. Special low-carbon expenditure planning
Since the outbreak of COVID-19, major economies have put forward large-scale fiscal expenditure plans beyond their original budget plans to promote economic recovery after the pandemic. A total of 74 countries, regions and economies have included measures to address climate change through fiscal means in their post-pandemic economic recovery. These plans, most of which range in size from tens to hundreds of billions of dollars, are dominated by central government spending, but also focus on leveraging social capital, mainly for low carbon R&D and commercialization in energy, transportation and other sectors.
In July 2020, during his election campaign, US President Joe Biden proposed a US $2 trillion climate investment plan for the federal budget over the next 4 years. After he took office formally, the core of the program has evolved to infrastructure, but about US $650 billion was still available to help fight climate change, becoming one of the pillars of the Biden administration’s efforts to achieve net zero emissions by 2050, however the plan is facing stiff resistance from Republicans. Although the Biden administration has made concessions, proposing a reduction to $1.7 trillion. Republicans have proffered only the far lower sum of $568bn. The adoption and implementation of the plan still faces many obstacles.
3. Low-carbon financial subsidies
Increasing subsidies for low-carbon projects and reducing subsidies for fossil fuels can enhance the competitiveness of low-carbon projects. Subsidies for low-carbon projects can be realized through production subsidies and consumption subsidies. In terms of production subsidies, the global total of renewable energy supply-side subsidies is about $166 billion a year (2017), more than half of which comes from the EU, and the most important investment is in the use of biomass energy in renewable energy power generation and transportation. In terms of consumption subsidies, Italy issued the “Restart Act” in May 2020, which provides 110% tax rebate for consumers who carry out energy-saving renovation of buildings. Germany, France and the UK have all significantly increased subsidies for consumers to buy electric vehicles, offering subsidies of 9,000 euros, 7,000 euros and 6,000 pounds respectively.
The process of reducing fossil energy subsidies in the world is relatively slow. At present, direct subsidies to fossil energy in the world are at least $447 billion a year, 2.7 times more than expenditure on the subsidization of new energy. About half of this is spent on petroleum products and more than a third on fossil energy generation. At the same time, the G20 countries, which account for 80% of global emissions, are still not doing enough to reduce fossil fuel subsidies.
Governments are strengthening support for low-carbon emission reduction technologies in the form of subsidies and grants. Canada has provided hundreds of millions of dollars in grants to carbon capture, utilisation and storage (CCUS) for coal power, hydrogen production, oil refining and fertilizer production projects. The EU also provides grant support for innovative technologies such as CCUS, offshore wind power, green hydrogen generation and wave energy, and tidal energy.
4. Climate budgets
Climate budget refers to the inclusion of the carbon emissions limitations that can be increased each year in the annual budget, and adoption of the management methods and process similar to the financial budget. This approach is exemplified by the city of Oslo in Norway.
Oslo officially launched a “climate budget” plan in 2016, which is implemented by the Oslo Finance Department and manages carbon emissions by managing funds. The deputy mayor in charge of finance is responsible for the climate budget, which sets the emission reduction target for each year to determine the emission cap for each budget year, lists the quantified emission reduction measures, the cost of each measure and the government departments responsible for implementing them. At the same time, a feedback system was created to evaluate whether the climate budget is running properly. Following the implementation of the climate budget, Oslo’s carbon emissions have been continuously reduced, reflecting its good emission reduction effect.
5. Promotion of climate-friendly government procurement
At present, a number of countries have instituted government procurement systems to promote their positive impact on climate change. For example, through the Procurement Reform Act of 2014, the Scottish government has created a legislative framework for all public procurement activities to be aligned with its 2045 net zero emissions target, with measures to plan and track management through structured “sustainable procurement tools” and progress feedback through annual reports. New Zealand is considering “zero-carbon legislation” to limit government procurement, including increasing the proportion of electric vehicles amongst public transport vehicles, reducing waste and increasing the proportion of new energy used in electricity supply and heating.
In January 2021, Biden proposed that all federal agencies submit plans on how they would promote climate change mitigation and adaptation in their activities and facilities within 120 days. Each sector is required to assess its climate vulnerability and identify the types of measures it is prepared to take to enhance its ability to respond to climate change. On May 20, Biden issued a new executive order, requiring the Secretary of the Treasury, director of the National Economic Council and other senior officials to report in the coming months on how to reform financial regulation, federal lending and government procurement policies, to encourage more private sector capital flows into clean energy and other climate-friendly investments.
II. Fiscal Revenue Policy
With regard to fiscal revenue, the measures adopted by countries are mainly the following three:
1. Setting a carbon tax
As of November 1, 2020, a total of 32 carbon tax mechanisms were in operation around the world, covering 300 million tons of carbon dioxide emissions, 5.6% of the world’s total. Poland and Finland are the earliest countries in the world to establish carbon tax mechanisms as both introduced charges for carbon emissions in 1990. Sweden, Norway, and Denmark successively established carbon tax systems in 1991-1992 and since 2019, eight new carbon tax systems have been introduced in South Africa, Singapore, Canada, the Mexican state of Baja California, as well as four Canadian provinces.
Carbon tax prices vary widely from country to country, ranging from about $0.08/t in Poland to $133.25/t in Sweden. In Asia, only Japan and Singapore have established carbon tax systems, with the relatively low prices of $2.76/t and $3.66/t respectively.
In terms of coverage, the largest carbon tax mechanism covers 20%-30% of greenhouse gas emissions in the corresponding countries or regions, with the lowest coverage rate being Estonia’s 3%, Spain’s 3%, and Poland’s 4% carbon taxes, and the highest coverage rate being Singapore and South Africa’s carbon tax (80%). From global experience, there is no significant correlation between carbon tax coverage rate and price.
2. Issuance of sovereign green bonds
According to preliminary statistics, 12 countries have issued sovereign green bonds with a cumulative amount of over 61 billion US dollars, with most of the currencies being Euro, followed by US dollar. The maturity of sovereign green bonds is more than 10 years, and some of them can reach 20 or 30 years, with investors mostly being sovereign financial institutions, pension funds, banks etc.
Sovereign green bonds mostly serve the needs of sustainable economic development of the issuing countries. According to the different stages of financial system development, developed countries generally design their own bond issuance frameworks, while developing countries are mostly guided by multilateral development institutions such as the World Bank. The applicable standards for issuance are mostly based on the Green Bond Principles issued by the International Capital Markets Association.
3. Establishing a carbon market revenue fund
The EU has set up two funds, the Innovation Fund and the Modernization Fund, through the proceeds of quota auction in the carbon market. The Innovation Fund, one of the world’s largest low-carbon technology support projects, is expected to provide 10 billion euros over the next decade for the commercial application of various low-carbon technologies, and promote the EU’s goal of being “climate neutral” by 2050 through a market-oriented approach. It is to be funded mainly by revenues from the auction of 450 million tonnes of carbon emission allowances (EUAs-European Union allowances) in the carbon market between 2020-2030.
III. Policy Recommendations
The introduction of fiscal and tax policies to deal with climate change is a key measure to aid China in achieving its “30·60 target”. In addition to the lessons learnt from the experience of other countries, this paper puts forward the following four suggestions:
1. Promote reform of the fiscal system conducive to addressing climate change
The current fiscal policy is not enough to reflect the important position of addressing climate change as one of the national strategic goals, so it is suggested that institutional reforms be pushed forward so as to mainstream it. Targets for climate funding can be set in light of the practice of the European Union so as to promote scientific and technological progress, commercial application and capacity building through the inclusion of climate change considerations in various expenditure items related to climate change, such as agriculture, forestry and water conservancy, energy conservation and environmental protection, transport, science and technology, and education. At the same time, the climate funds should be clearly defined, and the inclusion criteria, quantitative methods and tracking, reporting and feedback mechanisms should be designed to ensure the smooth realization of the objectives.
In addition, it is recommended that China promote the establishment of a government procurement system conducive to promoting the response to climate change, such as the formulation of carbon neutral plans for various government departments and public facilities, and matching government procurement activities with this plan. Specifically, this can be achieved by increasing the proportion of new energy in the energy supply of public facilities, increasing the proportion of electric vehicles in official vehicles, reducing waste generation and promoting recycling, etc., and establishing tracking, reporting and feedback mechanisms to ensure implementation is in place.
2. Reform the low-carbon government subsidy system
Presently, China’s financial subsidies for fossil energy have not been reduced, a major impediment to strengthening the competitiveness of new energy and developing the new energy industry. It is suggested that subsidies for fossil energy be gradually reduced and subsidies for the production and consumption of new energy be increased in the immediate future. Simultaneously, attention should be paid to improving standards, such as constantly boosting the quality of new energy vehicle subsidies, reducing and eliminating subsidy fraud, and promoting the construction of a high-quality new energy industry chain. At the same time, the realization of carbon neutrality will inevitably require continuous innovation and the large-scale application of new energy and negative emission technologies. Hence, the subsidies for new technologies should be increased. Currently, expense presents a barrier to the advance of innovative technologies such as CCUS, green hydrogen, offshore wind power and Marine energy. Innovative green technology projects can be supported through funding and other incentives.
3. Promote rational utilization of carbon market revenue
At present, various systems of the national carbon market have been established or are under development. However, there are no detailed regulations on the paid allocation of quotas, management and use of revenue, which is not favourable to the long-term health of the market and the coordinated promotion of various mechanisms. It is suggested to draw lessons from the practice of the EU carbon market, allocate part of the carbon quota in a paid way, and use the revenue to set up a fund to support the development and application of low-carbon science and technology, and low-carbon construction in underdeveloped areas, so as to accelerate the process of low-carbon development
4. Explore the possibility of establishing a carbon tax system
China’s electricity, finance and other markets are different from those of European and American countries, and the current carbon market mechanism is also quite different from that of the European Union and other carbon markets. The national carbon market alone may not be enough to provide sufficient incentives for the low-carbon transition. The Ministry of Finance could consider working with relevant departments to examine the feasibility of introducing a carbon tax policy or similar mechanism to better incentivise various industries to accelerate their response to climate change through carbon pricing mechanisms. A reasonable carbon tax system should have a scientifically-informed and appropriate carbon price and coverage rate, and the carbon tax revenue should be earmarked for low-carbon technology development and investment in low-carbon development projects .