Public finance for IGE

Question 1

What are ‘externalities’?

Answer 1

Consequences of industrial / commercial activity which affect other parties

Question 2

Are externalities reflected in market prices? What does this mean?

Answer 2

No

It means that the consumer can have cheap goods and other parties bear the costs elsewhere, e.g. workers on low wages

Question 3

‘Imperfect price signals encourage market actors to engage in economic activities that are environmentally / socially harmful without paying for their full cost’.

How can we correct market failures like this?

Answer 3

With green fiscal policy, which internalises the cost of externalities.

Question 4

There are 3 types of fiscal instrument that can drive green economy. What are they?

Answer 4

1. Revenue collection instruments
2. Expenditure instruments
3. Market-based mechanisms

Question 5

Give 2 examples of revenue collection instruments.

Answer 5

Environmental taxes and user fees

Question 6

How does an environmental tax drive green economy?

Answer 6

It increases the cost of polluting:

This raises the competitiveness of green products / services

Thereby spurring green investment

Question 7

Why does an environmental tax encourage polluters to innovate?

Answer 7

To reduce the tax burden for them / their customers

Question 8

Give an example of an environmental tax success story.

Answer 8

Singapore, 2015

Introduced a ‘feebate’ mechanism: the less a car emits, the larger the tax rebate. This gave drivers an incentive to use public transport / pursue low emissions vehicle choices

Question 9

Give 6 examples of expenditure instruments.

Answer 9

1. Subsidies
2. Grants
3. Low-interest loans
4. Green procurement
5. Feed-in tariffs
6. Public-private partnerships

Question 10

In essence, what are expenditure instruments?

Answer 10

Rewards for those that opt for sustainable production / consumption

Question 11

What is a subsidy?

Answer 11

A sum of money granted by the state or a public body to help an industry / business keep the price of a good / service low

Question 12

What is a feed-in tariff?

Answer 12

A payment made to households / businesses generating their own electricity through green methods, proportional to the amount of power generated

Question 13

Are subsidies always a good thing?

Answer 13

No - there are currently lots of subsidies for fossil fuels

Question 14

List 8 problems with fossil fuel subsidies.

Answer 14

1. They increase GHG emissions / air pollution
2. They are expensive (worth an average of 5.4% global GDP annually)
3. They are a liability: when the price of FFs increases, so do the cost of subsidies
4. They promote inequality: benefit the rich more than the poor (only a small % makes it to the lowest quintile)
5. They are inefficient: the same money could make a bigger impact elsewhere
6. They reduce investment in the energy sector (low prices are not attractive to investors)
7. They slow the adoption of clean tech
8. They are often corrupt, leading to smuggling / illegal diversion of subsidised product

Question 15

Define subsidy reform.

Answer 15

When subsidies are reduced, removed or redirected.

Question 16

List 5 ways in which FF subsidy reform presents an opportunity.

Answer 16

1. Frees up funds for other development opportunities
2. Removes fiscal liability (when FF prices inevitably fluctuate)
3. Spurs investment in the energy sector
4. Reduces opportunities for corruption
5. Benefits the environment

Question 17

Why has total FF subsidy reform not happened?

Answer 17

Because its hard; FFs and electricity generated from them are a major economic input.

Reform can affect prices, households and businesses throughout the economy.

Question 18

There are two types of challenge with FF subsidy reform?

Answer 18

1. Technical challenge: it must be well-planned to minimise unforeseen consequences
2. Political challenge: getting people to accept change

Question 19

What are the 3 steps of FF subsidy reform?

Answer 19

1. Decide how to target fuels / subsidies, i.e. define prices
2. Manage impacts of the reform
3. Build support in a political space to enable change

Question 20

When reforming FF subsidies (or anything really), we must start early. Why?

Answer 20

To facilitate gradual change, as starting in advance gives stakeholders time to prepare / implement new processes

Question 21

How do market-based mechanisms facilitate transition to IGE?

Answer 21

They incentivise transactions between market actors under a legal framework provided by the government

Question 22

Give an example of a market-based mechanism.

Answer 22

Offsetting

Question 23

What are offsets?

Answer 23

Credits given to activities that lead to a quantifiable reduction in pollution

Question 24

How does offsetting work? Give 3 steps.

Answer 24

1. Accredited firms generate offsets by reducing pollution units
2. The offsets are verified by independent agencies
3. Offsets are then bought by market actors that have a pollution reduction target

The overall effect is a reduction in pollution, plus revenue generated for those producing the offset

Question 25

Give an example of an offsetting scheme.

Answer 25

CERs (certified emissions reductions units) earned under the CDM (Clean Development Mechanism).

Question 26

Another way to redirect investment flow towards IGE is through the creation of Green Funds. Give an example of a Green Fund initiative.

Answer 26

In South Africa, the Green Fund was established in 2011.

It provides grants / loans to both public and private sector actors for green initiatives.

It has been very successful and by 2017 (?) it had already funded 19 projects.

Question 27

Give 6 examples of concealed costs in a low consumer price point. Use food as an example product.

Answer 27

1. Low wages for workers
2. Deforestation for cropland
3. High pesticide use
4. Dangerous working conditions
5. Low-cost packaging (plastic)
6. Food miles