Public finance for IGE Flashcards
What are ‘externalities’?
Consequences of industrial / commercial activity which affect other parties
Are externalities reflected in market prices? What does this mean?
No
It means that the consumer can have cheap goods and other parties bear the costs elsewhere, e.g. workers on low wages
‘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?
With green fiscal policy, which internalises the cost of externalities.
There are 3 types of fiscal instrument that can drive green economy. What are they?
- Revenue collection instruments
- Expenditure instruments
- Market-based mechanisms
Give 2 examples of revenue collection instruments.
Environmental taxes and user fees
How does an environmental tax drive green economy?
It increases the cost of polluting:
This raises the competitiveness of green products / services
Thereby spurring green investment
Why does an environmental tax encourage polluters to innovate?
To reduce the tax burden for them / their customers
Give an example of an environmental tax success story.
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
Give 6 examples of expenditure instruments.
- Subsidies
- Grants
- Low-interest loans
- Green procurement
- Feed-in tariffs
- Public-private partnerships
In essence, what are expenditure instruments?
Rewards for those that opt for sustainable production / consumption
What is a subsidy?
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
What is a feed-in tariff?
A payment made to households / businesses generating their own electricity through green methods, proportional to the amount of power generated
Are subsidies always a good thing?
No - there are currently lots of subsidies for fossil fuels
List 8 problems with fossil fuel subsidies.
- They increase GHG emissions / air pollution
- They are expensive (worth an average of 5.4% global GDP annually)
- They are a liability: when the price of FFs increases, so do the cost of subsidies
- They promote inequality: benefit the rich more than the poor (only a small % makes it to the lowest quintile)
- They are inefficient: the same money could make a bigger impact elsewhere
- They reduce investment in the energy sector (low prices are not attractive to investors)
- They slow the adoption of clean tech
- They are often corrupt, leading to smuggling / illegal diversion of subsidised product
Define subsidy reform.
When subsidies are reduced, removed or redirected.
List 5 ways in which FF subsidy reform presents an opportunity.
- Frees up funds for other development opportunities
- Removes fiscal liability (when FF prices inevitably fluctuate)
- Spurs investment in the energy sector
- Reduces opportunities for corruption
- Benefits the environment
Why has total FF subsidy reform not happened?
Because its hard; FFs and electricity generated from them are a major economic input.
Reform can affect prices, households and businesses throughout the economy.
There are two types of challenge with FF subsidy reform?
- Technical challenge: it must be well-planned to minimise unforeseen consequences
- Political challenge: getting people to accept change
What are the 3 steps of FF subsidy reform?
- Decide how to target fuels / subsidies, i.e. define prices
- Manage impacts of the reform
- Build support in a political space to enable change
When reforming FF subsidies (or anything really), we must start early. Why?
To facilitate gradual change, as starting in advance gives stakeholders time to prepare / implement new processes
How do market-based mechanisms facilitate transition to IGE?
They incentivise transactions between market actors under a legal framework provided by the government
Give an example of a market-based mechanism.
Offsetting
What are offsets?
Credits given to activities that lead to a quantifiable reduction in pollution
How does offsetting work? Give 3 steps.
- Accredited firms generate offsets by reducing pollution units
- The offsets are verified by independent agencies
- 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
