Raising and Spending Public Revenues for Climate Change Adaptation: the Case for Fiscal Policy

Two years ago, the World Bank outlined how FISCAL POLICIES ARE AN UNDERUSED TOOL for aligning financial resources towards achieving the aims of the Paris Agreement. While we see numerous discussions about FOSSIL FUEL SUBSIDIES, CARBON PRICING and CARBON REVENUES where are the discussions on using fiscal policy for climate change adaptation?

The impact of fiscal policy can be considered in three ways. First is their role in raising revenue. Taxes and subsidies are the most common and easily understood fiscal policy tool. They can be used to change prices and alter incentives, thereby affecting spending by individuals. They can encourage the purchase of goods that build resilience to climate change, or discourage those that are MALADAPTIVE. For example, building incentives for construction or service companies that are building resilience. Secondly, fiscal policy includes government spending. This can mean PUBLIC PROCUREMENT, SOCIAL PROTECTION SCHEMES and research for example, all of which can include climate change considerations and work to build the resilience to climate change of companies and individuals. Third, we can also talk of building resilience in public budgets and finances in the face of climate change, when we know some countries and regions will experience more frequent and severe climate related weather events with knock on FISCAL IMPACTS due to rebuilding, increased health spending, calls on sovereign loan guarantees and lower ability to service debt.

In Africa, Caribbean and Pacific countries more adaptation finance is needed. There is a commitment from developed countries to support developing countries in their efforts to mitigate and adapt to climate change. The scale of the challenge of adaptation to climate change, however, indicates a CLEAR NEED TO ENGAGE THE PRIVATE SECTOR – AND MOBILISE PRIVATE FINANCE AND INVESTMENT – IN DELIVERING ADAPTATION. With one of the PARIS AGREEMENT’s three long-term goals being that  finance flows  become consistent with a pathway to low-emission, climate resilient development pathways, a closer look at all finance flows – domestic and international, public and private – will be required if we are to undertake the rapid transformations across all sectors needed to meet climate goals.

What options for fiscal policy for adaptation?

Scattered examples exist across countries. Few have been explicitly linked to climate change, despite their contributions to adaptation and resilience, but are rather considered ‘environmental’ levies that take up broader environmental challenges than climate, and/or are sector related.

In the agriculture sector for example, discussions have started on how the estimated $620 BILLION SPENT ANNUALLY BY GOVERNMENTS AROUND THE WORLD SUBSIDISING AGRICULTURE could be directed better to mitigate climate change and build resilience. Options could involve putting conditionalities on production support for soil-conservation, conservation payments, or weather-risk mitigation, state-backed insurance schemes (FOR EXAMPLE IN GHANA).

In the waste sector, the authorities that are responsible for managing landfill and separating waste can introduce levies. The NATIONAL SOLID WASTE MANAGEMENT AUTHORITY OF ANTIGUA AND BARBUDA has a cruise ship bottle and can levy, while KOREA HAS A VOLUME-BASED FEE SYSTEM FOR MUNICIPAL WASTE, for example. Such levies can either directly shift resource use or their revenues can be used for adaptation. In Namibia the ENVIRONMENTAL INVESTMENT FUND has been able to secure funding from an environmental levy on plastic and batteries, which it can then put to use in its support of activities and projects which promote the sustainable use and efficient management of natural resources.

In the context of disaster risk reduction, tax concessions can be applied. Antigua and Barbuda, for example, WAIVED VAT ON HURRICANE SHUTTERS that greatly support families before hurricanes hit, when they are usually struggling for cash flow (having stocked up on basic necessities).

There are signs, therefore, that examples and models exist. The challenge is how do we scale these up?

Fiscal policy introduction and adjustment isn’t easy

As with carbon taxes and reforming fossil fuel subsidies, implementing fiscal policy for adaptation isn’t easy. There can be opposition from certain interest groups, for example, or large informal economies that might be excluded from revenue raising or subsidy schemes. COVID-19 has underscored the importance of public debt management, but also exacerbated strains on debt servicing that may further narrow the scope for fiscal policies right now. Yet as countries work to implement their Nationally Determined Contributions and NAPs, detailed discussions are needed on costings and financing, including the role of domestic finance and these fiscal policies for adaptation.

The Investment Climate Reform Facility

The Investment Climate Reform (ICR) Facility supports development of these better business environments. It contributes to the implementation of the European Union’s External Investment Plan (“Improving the Investment Climate”) and is set up to support African, Caribbean and Pacific Group of States partner countries and regional institutions to create a more conducive business environment and investment climate. Given that most of ACP countries are highly vulnerable to climate change, the Facility recognises the urgent need to support partner countries in identifying and helping them access investment to build greater resilience to climate change.

To this end, the ICR Facility is delivering a series of knowledge papers and accompanying webinars to explore some of the key issues which are highlighted in this blog post. In particular what fiscal incentives could be used as an effective tool to mobilise public and private capital for climate-smart practices.