Fiscal Incentives for Green Private Investment (English)

The Coronavirus disease 2019 (COVID-19) pandemic has caused a major global economic downturn. This has affected some sectors more than others. However, the overall impact of the pandemic has been to slow aggregate demand more than aggregate supply. Many have argued that this is an opportune time to increase green investment, both to help the recovery and to set it on a more sustainable path. Yet action in this direction so far has been limited. For example, to date, only a small fraction of the massive fiscal support packages to cushion the impact of the pandemic is aligned with the objectives of the Paris Agreement on climate change. Many governments are using post-COVID-19 recovery measures to roll back existing environmental regulations and taxes and to increase fossil-fuel intensive infrastructure and electricity. In the light of these circumstances, this note rehearses the argument that the environmental challenge is important and large-scale. It discusses the reasons why specifically green private investment is needed and why environmental policy cannot rely on public investment alone, despite the arguments in favor of public investment where there are difficult-to-correct market failures. The note sketches the economic rationale for using taxes and subsidies to influence the investment choices of the private sector. The advantages and disadvantages of various types of subsidies and tax expenditures is considered. The importance of fiscal authorities helping to set an appropriate macroeconomic and regulatory framework as well as taxes, subsidies, and investment incentives is stressed. Finally, the note summarizes its implications for policy.