Taxing and spending: Green fiscal and financial systems can stop environmental crises

When it comes to taxing and spending, Dominic Hogg from Eunomia Research & Consulting shares his views on how greening the fiscal and financial systems can help address environmental crises

There is an environmental crisis unfolding. The word ‘crisis’ might sometimes be over-used, but here it really does reflect the scale of the problem confronting us. Alongside a climate crisis, we have plastic and air quality emergencies too: we’re rendering species extinct by our activities and impacting on the health and wellbeing of our own in the process.

It’s pretty obvious that we aren’t taking these ‘green issues’ seriously enough. Nowhere is this more obvious than in the way our economies are organised. The most obvious example of this is the way in which – in the face of a climate emergency – politicians commit to phase out subsidies on the extraction and use of fossil fuels, but then fail to act on their ‘commitment’.

When it comes to public finances, things don’t look much better. Most countries seek to generate revenues through taxation, with the vast majority relying on taxes on income, labour, value-added, or profit to generate the income they need to fund state activities.

None of these are especially deserving of having a tax slapped on them: the same can’t be said for environmental pollutants, or activities that damage the environment, such as deforestation or building houses on a meadow. Surely the activities that generate such a wide range of environmental problems should be the ones that are taxed?

In 2017, total environmental tax revenue in the EU amounted to 2.4 % of EU GDP and 6.1 % of total EU government revenue. Taxes on energy accounted for more than three-quarters of the total revenues from environmental taxes and taxes on transport accounted for most of the balance, with taxes on pollution and resources amounting to 0.2% of all revenue from taxes and social contributions. Bluntly stated, that’s ridiculous.

Now look to the world of finance. A large number of stakeholders worldwide, including banks, policy-makers, academia and NGOs, are engaged in defining what should be considered “green” in finance. The fact that this is only beginning to happen highlights both how slow the world of finance has been to recognise that the things it has been funding are largely destructive and the fact that the vast majority of this continues unimpeded by any corrective policy that seeks to reduce the harm caused.

If you think about how these things fit together – the tax system that lets polluters off the hook and the finance system that is beginning to define a portion of what it does as ‘green’ – then you start to realise why we’re in the fix we are in.

We are seeing a shift.

Some citizens, policy-makers and financial backers are beginning to understand that money can support good projects as well as bad ones and that at its core, the question is: ‘Do you want to support things that worsen an already dreadful situation, or contribute to improving it?’ At the moment, however, we’re still seeing investors framing the choice in terms of replacing things that were unequivocally ‘bad’ with things that are ‘marginally less bad’. And if you are a citizen in the UK, just see what hoops you need to jump through to ensure your pension fund isn’t invested in fossil fuel assets. Even if you, as a citizen, really want to put your money where your green mouth is, you will have a job doing so.

Consequently, the majority of the vast swathe of pension fund assets are still propping up an economy that’s not just ‘not green’: it’s completely colour-blind.

The task of greening the economy, therefore, is a work in progress. The falling cost of generating renewable energy shows what can happen when incentives start to align with the need to act. Carbon pricing helps to drive projects in renewables and to a lesser extent, energy efficiency. The financial models for such projects are also relatively easily replicable and transferable. What we now need is a step change in how we incentivise action in all the other areas where we face crises, thereby, sending signals to the finance community that decent returns on investment are no longer there for projects that harm the environment.

Financial backers, in turn, need to become more creative in their project finance models and in how they value corporations. This will require us to identify and incentivise revenue streams derived not just from the sale of energy, but also, avoided expenditures – on health, or water treatment – associated with all forms of environmental improvement.

Greening the economy requires this simultaneous shift in policy and finance. The two – setting incentives to shift the returns on investment and shifting investment to areas that are genuinely green – need to co-evolve. If they don’t co-evolve swiftly, then we’ll be facing a bleak future. At the same time, we largely understand the types of change we need and indeed, there are inspiring changes taking place across the world. The challenge, now, is to ensure their rapid diffusion and to stem the flow of funds towards those activities which simply worsen the existing crises.

Dominic Hogg

Chairman

Eunomia Research & Consulting
Tel: +44 (0) 17 917 2250
dominic.hogg@eunomia.co.uk
www.eunomia.co.uk
https://twitter.com/@Dom_Hogg