The current coronavirus (COVID-19) crisis offers governments a critical opportunity to implement response and recovery efforts that address some of the structural weaknesses of our economies and societies and help build back better. Recovery packages that focus on a swift return to business as usual are likely to be environmentally harmful. It is noteworthy that, so far, around 50% of policy support for energy in recovery packages is still directed towards carbon-intensive fossil fuels (Boone, 2020[5]). By contrast, “green” recovery packages focus on aligning fiscal spending during the recovery with climate and environmental objectives. They provide governments with an opportunity to develop a new growth strategy that transforms the economy into one that is resilient, modern, protective of nature, low-carbon, resource-efficient and competitive.

Apart from driving the significant emissions reductions needed to halt climate change, a green recovery can also have a strong economic justification. In the first instance, the economic case relates to strong fiscal multipliers and job creation (Hepburn et al., 2020[3]). In addition, accelerating the transition towards a low-carbon future will also decrease the costs of the transition both for business and society and reduce future risks, including those related to climate change. Recovery packages are not the only mechanism to achieve the transformational change towards a low-carbon economy. But seizing the opportunity to direct recovery packages towards reducing these risks, is a better option than paying the price of more costly mitigation and costly adaptation later.

While there are numerous justifications for greening recovery packages, their design and practical implementation is not necessarily straightforward. The first section of this note provides simple and concrete suggestions for how governments can use the tools of green budgeting to design and implement green recovery packages. Green budgeting tools can support countries in identifying and prioritising stimulus measures that support green objectives. The use of green budgeting tools allows countries to assemble stimulus packages that create jobs and economic demand, but also accelerate progress towards overarching climate and environmental goals. Because tax policy plays a powerful role in steering investment and consumption choices, the second section of this note looks at how well-designed tax policy tools need to complement recovery packages to create a strong enabling environment for decarbonisation during recovery and beyond. In particular, it looks at the role that carbon pricing and related policy instruments play in aligning incentives with decarbonisation objectives and ensuring that stimulus measures move the economy towards a low-carbon transition.

Governments’ budget decisions are key to delivering economic recovery. Green budgeting provides ways of using the tools of budgetary policy-making to help achieve environmental and climate goals. The OECD’s Green Budgeting Framework sets out the building blocks of a comprehensive green budgeting approach, strategic and fiscal planning, budgeting tools for evidence generation and policy coherence, accountability and transparency and an enabling budgetary governance framework (OECD, 2020[6]).

This section looks at how the tools of green budgeting can be used to support a green recovery. Depending on national circumstances, countries may already have some of the building blocks in place, while for others, data, methodologies or institutional set-ups are missing. Regardless of the stage of development, the section aims to provide countries with some simple and universally applicable green budgeting tools that can be developed and put in place in time for stimulus packages. Specifically, it highlights: tools that help identify green priorities and budget options to support them; tools for assessing how different budget measures impact green objectives; tools to help prioritise investments that support a low-carbon recovery; and tools for reporting how stimulus packages help meet green objectives.

A strong strategic framework outlines national green objectives and can help to identify relevant green investments that support their achievement. A “green” strategic framework refers to relevant strategies, policies and plans, which include clear climate and environmental goals for government policy. Experience shows that the strategic framework needs to be specific enough to guide budget allocations, including realistic cost estimates and an operational framework (World Bank, Forthcoming[7]). In this way, the strategic framework can be used to help direct resources towards the strategic priorities of government in the areas of climate and the environment. A well-defined strategic framework can also help guide what budget items are relevant in more ambiguous situations. For example, a combined cycle gas turbine power plant replacing a coal-fired power plant may be considered climate positive relative to the status quo, but also climate negative since natural gas still contributes to global warming. The EU Sustainable Taxonomy (EU Technical Expert Group on Sustainable Finance, 2020[34]) together with the benchmarks developed in the framework of the EU Emissions Trading Scheme (ETS) or the Best Available Techniques developed through the EU Joint Research Centre, also serve as a useful guide for identifying low-carbon technologies. Understanding the extent to which different budget measures align with longer-term climate policy helps in developing a recovery package that will in turn help achieve longer term green and inclusiveness objectives. In Finland, for example, budget measures are framed in accordance to its long-term national strategy for sustainable development, focussing on a carbon neutral and resource-wise Finland, and a non-discriminating, equal and highly skilled Finland.

Tools such as green budget tagging can be useful to help governments identify how budget items align with green objectives set out in a strategic framework. In the context of budget management systems where it can be difficult to track how budget policy impacts cross-cutting goals, green budget tagging allows countries to identify areas of expenditure and revenue that are helpful or harmful to green objectives. The information from tagging builds a useful evidence base that can help governments improve coherence between budget measures and green goals whilst also improving transparency in relation to the government’s budget policy. This, in the context of recovery efforts, can inform allocation decisions and in-year adjustments as well as feed into other budgetary processes, such as spending reviews, where considerations of efficiency and effectiveness are held in relation to their climate and environmental impacts. The example of how green budget tagging supported the design of a green recovery package in France is presented in Box 1.

Tools such as impact assessments can provide information on the environmental impact of individual policies and programmes and help inform budget decision-making. Impact assessments that are conducted ex ante in relation to proposed projects or policies can help to inform budget decisions before a policy is implemented. Ex post impact assessments can also inform decisions about the continuation of specific policies, or adjustments to them. The EU directive on Strategic Environmental Assessment (SEA), for example, requests the assessment of the proposed policy plans or programmes for likely significant effects on the environment.

Preliminary information from a Green Budgeting Survey undertaken by the OECD and the European Commission suggests that only a third of OECD countries were able to integrate a green perspective into recent COVID-19 rescue measures given the expediency with which measures were introduced (OECD/EC, Forthcoming[9]). Five countries reported undertaking ex ante environment or climate impact assessments of individual response measures (Austria, Canada, Denmark, Turkey, the United Kingdom), while Colombia, France and New Zealand reported undertaking an ex ante or climate impact assessment of the recovery package as a whole. However, given the additional lead time to prepare economic recovery packages, more than half of OECD countries plan specific actions to integrate green perspectives into forthcoming economic recovery packages. Indeed, twelve OECD countries already plan to undertake ex ante environmental or climate impact assessments of individual measures in forthcoming recovery packages (Austria, Canada, Denmark, Greece, Ireland, Latvia, Slovak Republic, Slovenia, Spain, Sweden, Turkey and the United Kingdom). In addition, five countries (Colombia, Denmark, Latvia, Portugal and Spain) plan to undertake ex ante environmental or climate impact assessments of the recovery package as a whole (OECD/EC, Forthcoming[12]).

Where information from impact assessments is provided alongside budget proposals, this can help inform stimulus packages that have positive impacts on green objectives. It is usually more feasible to undertake this type of assessment where a strong framework or tradition of ex ante environmental or climate impact assessment already exists. This was seen in relation to gender budgeting where impact assessments have been a useful tool to inform decisions about how COVID-19 response measures impact on gender equality in countries such as Canada and Iceland (see Box 2).

In addition to ex post impact assessments, environmental audits can serve as a valuable tool to conduct ex post reviews of performance, processes and progress that a policy or programme is making towards environmental objectives. Increasingly, Supreme Audit Institutions (SAIs) are using performance audits to provide insights into complex problems and risks that cut across government programmes, levels of government and sectors. Some countries include environmental considerations in their performance audits. Ongoing and future audits of COVID-19 recovery measures can shed light on their impact on climate and environmental objectives and provide a set of considerations for forthcoming recovery packages to improve performance towards these targets. Examples can be seen from the European Union and the United Kingdom in Box 3.

A number of OECD countries will attach green conditionality in relation to support measures to help “green” economic recovery packages. This is one way in which governments can prioritise investments that support the achievement of environmental and climate objectives. For example, the Slovak Government has stated that support measures should not bring significant harm to the environment and the Italian Government is making an additional EUR 50 million available as part of forthcoming support measures provided that it is used for the purchase of low-emission vehicles (OECD/EC, Forthcoming[9]). Furthermore, the European Coronavirus Recovery Fund, worth over EUR 1 trillion over the course of 2021-2027, earmarks 30% specifically for green projects. Even those parts of the package not specifically earmarked for climate spending must “do no harm” to the EU’s goal to become carbon neutral by 2050. Where conditionality is in place, it is important that there are clear criteria for measures that can or cannot be included. For example, the EU Sustainable Taxonomy (EU Technical Expert Group on Sustainable Finance, 2020[34]) together with the benchmarks developed in the framework of the EU ETS or the Best Available Techniques developed through the EU Joint Research Centre, may serve as a useful guide for some countries in classifying low-carbon technologies.

Spending reviews are another useful tool for expenditure prioritisation. Where a spending review includes consideration of the impact of budgetary programme on national environmental and climate goals alongside considerations of efficiency and impact, it can also be a useful tool to help prioritise investments that support a low-carbon recovery. A number of countries are using spending reviews to help them prioritise investments for the next stages of the recovery process. Spending reviews present a strategic opportunity to ensure that budget decisions are closely aligned with the medium-term goals of the government. To help prioritise investments that support environmental goals, spending reviews can include consideration of environmental dimensions alongside considerations of efficiency and effectiveness. This can be done across all scopes of spending review: from narrow (reviews covering 0 to 5% of total government spending), to broad (covering 5-20% of spending) and comprehensive (covering 20 to 100% of spending). An example of how this has been done in the past is provided by the United Kingdom (see Box 4).1

Another way to utilise spending reviews is by conducting targeted reviews of climate or environment-related expenditure. This helps to ensure that these funds are effectively and efficiently utilised to achieve a country’s green goals. Lessons from the OECD suggest these reviews can be targeted to specific institutions (as in the case of Ireland) or a cross-cutting theme (as in the case of the Netherlands, seen Box 5).

Looking beyond immediate recovery packages, the integration of green perspectives into medium and long-term budgetary frameworks is likely to help countries to embed environmental priorities alongside considerations for fiscal sustainability. Fiscal rules and general fiscal stewardship oblige governments to ensure that existing and future public resources are used efficiently, and have maximum impact, as a condition for the allocation of funding for new priorities. This requires well-informed budget decisions to support the management of trade-offs and synergies between different policy goals. By embedding environmental considerations in multi-year budget frameworks (such as Medium Term Expenditure Frameworks), these can be placed alongside considerations of fiscal parameters over the multi-year horizon and improve the effectiveness of spending by harmonising public expenditure with national priorities. Additionally, integrating environmental risk into longer-term fiscal assessments would help governments to identify and, if possible, quantify potential risks as well as opportunities for budget planning by the public sector. Lessons can be found from the United Kingdom and Germany, as described in Box 6.

Reporting alongside the budget, using tools such as green budget statements (GBS), can provide summary information on how recovery measures align with a country’s green objectives. Using information from green budget tagging, impact assessments and other tools, a GBS can support greater transparency, accountability and public engagement on budget policy. These statements may be published as part of a draft budget proposal, serving as one element to contribute to deliberations at the approval phase of the budget cycle. In France, for example, information generated from their green budget tagging process as well as other information, such as information on the economic effect of environmental taxes on households and firms, accompanies its annual budget to contribute to the discourse on budget allocations. For example, a GBS could include information, such as:

  • A general green budget statement: This summarises in broad narrative terms how measures introduced in the budget are intended to support green priorities and goals.

  • A green progress statement: This provides a more detailed explanation of how the budget measures advance the government’s green agenda, by reference to established objectives and indicators. For example, the OECD proposes key indicators for tracking the environmental success of recovery packages over time, alongside economic, employment and other social indicators (OECD, 2020[3]).

  • Distributional impact analysis: This is an assessment of how specific green measures (both revenue and expenditure) affect individuals, households or firms.

Green public spending can support the recovery, but trade-offs exist. Spending on, for example, energy efficiency measures to retrofit existing buildings, or green R&D to unlock novel clean technologies can provide stimulus and help curb carbon emissions. However, it is not realistic for all stimulus money to go directly to green projects, and there can be trade-offs between environmental, economic and social goals (Agrawala, Dussaux and Monti, 2020[14]). Managing trade-offs between competing goals and difficulties in explicitly greening all stimulus spending, suggests a need to employ additional tools.

Carbon pricing and related tax policy tools can ensure that stimulus policies that are not explicitly green can nevertheless be aligned with green objectives. Even recovery packages that have a large green component tend to also include a substantial share of traditional stimulus to address other social and economic priorities. For example, the EUR 100 billion French “Plan de Relance” presented on 3 September 2020 allocates 30% of the stimulus money explicitly to green measures; 70% are targeted towards “rearming industry” and ensuring social and territorial cohesion. With meaningful carbon price trajectories in place, businesses receiving government support without any green conditionality will face additional incentives to invest in cleaner technologies, without the government needing to identify the most promising technologies and spending choices in advance.

In some instances, expenditure policy can be used to help facilitate the introduction of certain green tax policies. For example, spending measures that support energy efficiency programmes and help reduce carbon emissions can make it easier in the longer term to introduce carbon pricing. In the same way, environmental tax revenues can partially be returned to households through spending measures, to help mitigate potential negative distributional impacts, e.g., on low-income households.

Tax measures have the key advantage that they can improve environmental outcomes in a cost effective way, while also raising government revenues (OECD, 2017[16]). For example, in their response to the recession in the early 1990s, Nordic countries showed how increased taxes on fossil fuels can provide an effective way to raise funds for social welfare and economic stimulus. A shift in taxation from labour to fossil fuels ensured the Nordics had enough revenue to maintain high social spending and reduce the impact of higher energy prices on the public (International Institute for Sustainable Development, 2020[17])

Given the important role of tax policy in supporting a green recovery, more than ever, the power of taxes to create clear and strong incentives needs to be harnessed. The following section highlights options for redesigning tax policy in support of decarbonisation objectives. In particular, it looks at the powerful role that carbon pricing can play in contributing to a better alignment of incentives for a post-pandemic green recovery.

One prerequisite and stepping-stone to greening the recovery is to align broader tax policy with decarbonisation objectives. Tax policy can steer investment and consumption choices in favour of low-carbon alternatives. Due to the direct effects of the crisis and to policy action during the crisis, tax revenues are likely to be significantly reduced for a number of years. The best way to boost tax revenue will be to support solid recovery, including through sufficiently strong and sustained stimulus. In addition, tax policy reform can bolster revenue raising capacity, in response to an increased demand for public spending post-pandemic. For example, carbon pricing can contribute strongly to public finances, although its implementation requires a careful balancing act.

This section highlights some of the key elements of a green tax policy framework. Specifically, it looks at the role of carbon pricing as a central tax policy tool to foster decarbonisation, particularly when significant amounts of government resources are spent on green and other stimulus measures. It discusses how specific carbon pricing design features and the mobilisation of the broader tax policy framework can facilitate its implementation and foster decarbonisation.

Carbon pricing is a core tool of a green tax policy framework as it provides a technology-neutral case for low-carbon investment and consumption, reinforcing green stimulus. Pushing decarbonisation with stimulus measures during recovery will be much less effective if carbon emissions continue to be under-priced. Strong carbon pricing in the future increases the benefit of carbon-neutral technologies making them worthwhile even in the absence of explicit green conditionality. Also, defining low-carbon priorities that receive stimulus is challenging. Pricing carbon raises the cost of carbon-intensive assets and helps ensure that investment and consumption incentives in the recovery phase are aligned with decarbonisation objectives.

Carbon pricing is not currently being used to its potential. Carbon prices are too low to incentivise deep decarbonisation for most energy users and other emitters of greenhouse gases (see Box 7). OECD (2019[18]) research shows that 97% of energy-related carbon emissions from advanced and emerging economies are not taxed at a level that is compatible with decarbonisation according to the Paris Agreement, while 70% of emissions are entirely untaxed. The use of emissions trading systems increases the share of priced emissions in some countries, but taking emissions trading into consideration does not reverse this global picture (OECD, 2018[19]). The presence of fossil fuel subsidies sometimes implies that carbon prices are effectively negative.2 Therefore, carbon pricing reform should ideally be considered alongside reforms to fossil-fuel subsidies in order to genuinely boost low-carbon incentives and create more fiscal space for recovery packages.

In countries where support for carbon pricing reform is currently low, committing to increasing carbon pricing gradually over time can help unlock low-carbon investments now. Raising carbon prices may not be straightforward in the current period of economic hardship, but committing now to future price increases once the recovery is underway can create strong incentives, particularly for investments in long-lived assets and infrastructure (see Box 8). Strong political commitment to raising prices and reforming fossil fuel subsidies, as well as general forms of commitment to long-term climate goals, can help unlock low-carbon investments. Opportunities to raise prices will vary by country and pricing instrument. Gradually phasing in higher carbon prices also provides an opportunity to explore options for international co-operation and co-ordination on carbon prices in the meantime.

The credibility of carbon price trajectories is key to enabling long-term investments in low-carbon assets. Statements of intent may not be sufficient to reassure investors. Enshrining a carbon price trajectory into law has greater credibility than government announcements, but potential investors may nevertheless be concerned that future governments will later change these laws. This risk is elevated where support for carbon pricing divides along political party lines and in countries where carbon-intensive assets currently contribute substantially to GDP. In this context, efforts to build a broad based consensus around carbon pricing will be important and can help provide greater credibility for long-term carbon price trajectories.

Using “abatement payments” in recovery packages can provide direct support for decarbonisation until stronger carbon pricing reforms are politically feasible. Abatement payments are price-based instruments that reward businesses and citizens for reducing emissions.3 The payment level could correspond to the difference between current carbon pricing levels and price levels compatible with decarbonisation objectives in the Paris Agreement. To stimulate the economic recovery, abatement payments could initially be financed with public debt. Fiscal costs could be contained by reserving payments for priority projects relating to essential low-carbon technologies, such as ultra-low carbon materials or carbon capture and storage. Providing direct support for abatement efforts, as part of stimulus packages, can help avoid locking in carbon-intensive assets until stronger carbon pricing reforms are politically feasible. This could also facilitate carbon price reform later as it decreases future compliance costs and may reduce political opposition to higher carbon prices.

Paying producers and consumers for abatement can take shape via different policy tools. For example, governments can use carbon contracts to pay producers for emission reductions as long as current carbon price levels are below a previously set carbon strike price. Such an approach can reduce uncertainty about future carbon prices and support specific technology investments (Sartor and Bataille, 2019[26]; DIW, 2019[27]). Feebates reward products if they are less carbon-intensive than a certain, product-specific standard and charge a fee (a tax) for those products that are more carbon-intensive (see Box 9). If stimulus is needed and fiscal space permits, governments could boost the bonus component during the stimulus phase. Governments can complement such instruments with carbon price trajectories that provide guidance to consumers and producers without the need to raise carbon prices immediately when the economy has yet to recover from the crisis. Design challenges vary by instrument and may include agreeing a reasonable strike price, setting a credible baseline against which to measure emissions reductions and defining emission intensity standards for a wide range of products.

Abatement payments are a flexible tool that allow countries to prioritise different policy goals and technologies throughout the recovery phase. Countries that aim for general green stimulus and enhancing the credibility of carbon price trajectories can opt for broad abatement payments that cover all sectors and technologies. Jurisdictions that wish to limit fiscal costs may opt for targeted support for a few promising clean technologies that may achieve significant cost-reductions later.

Supporting innovation efforts through targeted support for promising clean technologies can help to accelerate the transition to a carbon-neutral economy, particularly when combined with commitments to a strong carbon price. The need for low-carbon innovation and the potential for spill-overs justify targeted support in R&D and in technology-transfer towards application, including support through the corporate tax system (for example, corporate tax incentives to reduce or postpone the tax liability of an investor). If well-designed, they can encourage investment in specific technologies (Maffini, Xing and Devereux, 2019[31]). Such incentives can be targeted to specific sectors, technologies or directed towards R&D overall (see Box 10). Targeted technology support that generates low-carbon investment can reduce the cost of complying with carbon pricing in the future, and become a powerful tool in building support for stronger carbon pricing.4 Care must be taken to avoid technological ‘lock-in’ and providing windfall profits to investors for activities they would have undertaken anyway. Governments need to carefully balance their targeted interventions to avoid excessive spending on fragmented support that may be achieved at a lower cost with a well-designed carbon price reform.

Targeted low-carbon innovation support has increasingly become a practicable option given international advances in the classification of clean technologies and standards. Governments are well placed to take on the additional risk from targeted technology support as the choice of picking technologies ex-ante remains challenging. The EU Sustainable Taxonomy (EU Technical Expert Group on Sustainable Finance, 2020[34]), together with the benchmarks developed in the framework of the EU ETS or the Best Available Techniques developed through the EU Joint Research Centre, provide starting points for classifying promising low-carbon technologies. Where standards for clean products and processes exist, they could be used to direct targeted support.

Using a shadow carbon price, or shadow carbon price trajectory, is an additional tool to target sectors or technologies with green recovery packages. Applying a shadow carbon price when deciding which projects merit targeted support would align recovery packages with decarbonisation objectives. A shadow price, or shadow price trajectory, puts a monetary value on the future emissions of an activity (Box 11). This will provide another incentive to target support towards investments or existing assets where emission reduction potential is the greatest.

Ideally, recovery packages should aim to avoid misalignments with climate objectives and create a strong enabling environment for decarbonisation. In addition to tax policy tools with an explicit environmental intent, many aspects of the tax system can create an unintentional bias against clean alternatives (see e.g. Box 12).5 The tools of green budgeting mentioned above provide countries with useful instruments to identify the main misalignments in the broader tax framework.

In particular, the overall corporate tax framework can contribute to the green business environment and can, in some instances, induce a bias against clean alternatives. Currently domestic and international corporate tax systems are going through dynamic reform efforts. While decarbonisation is not at the core of these efforts, opportunities to improve the appeal of cleaner choices may arise and should be identified and pursued. While corporate tax incentives can provide targeted support (refer back to Box 10), misalignments in the system may discriminate against low-carbon assets. Research does, for instance, point to the possibility of unintended technology-bias in corporate income taxation regarding clean technology alternatives as tax provisions for capital cost recovery are not entirely technology-neutral (Dressler, Hanappi and Van Dender, 2018[37]).

Tax policy, including carbon pricing, can contribute to financing the costs of the crisis, but efforts to restore public finances should not come too early. Increased awareness of the need to strengthen resilience has led to calls for increased spending of taxpayer money on public goods, which will in turn require higher tax revenues. Carbon pricing can make a significant contribution to public finances. For example, the additional revenues arising from implementing a carbon price of EUR 30 per tonne of CO2 for all energy-related emissions that are currently priced at lower rates could amount to approximately 1% of GDP (Marten and Van Dender, 2019[40]). In the case of emissions trading systems, reaping the revenue potential requires the auctioning of emission permits.

Where perceived competitiveness issues and the potential for carbon leakage hinder the greening of recovery packages, additional policy tools may be needed. Ex-post evaluations of current carbon pricing systems usually do not identify significant effects on competitiveness and even find that carbon prices improve some competitiveness dimensions, including innovation and productivity (Arlinghaus, 2015[38]; Ellis, Nachtigall and Venmans, 2019[39]). However, as carbon price differentials emerge between jurisdictions, carbon leakage and competitiveness can become a concern in a small number of energy-intensive and trade-exposed industries. If left unaddressed, this may reduce countries’ ambition to align recovery packages with long-term decarbonisation objectives. It is less promising to provide stimulus to specific trade-exposed sectors by freely allocating emission permits, by granting tax exemptions or by compensating business for increased input costs. Alternative tools exist that make a more convincing case by enabling stronger carbon prices throughout the sector (e.g. border carbon adjustments, carbon consumption charges, and the above mentioned abatement payments), but often involve a number of technical, legal and political challenges. The prospect of a tool that addresses potential carbon leakage could strengthen expectations about higher carbon prices in the future.

Poorly timed or communicated reform proposals could generate public resistance and stall efforts to reform carbon prices. It is tempting to argue for carbon pricing now to exploit the relatively low pre-tax energy prices, especially for oil products. Where such reforms are now within reach, they should indeed be pursued. There is a risk, however, that price increases are poorly received by the public or that push-back would come if pre-tax energy prices return to their previous levels. To some degree, this happened in France, Mexico, and Indonesia prior to the COVID-19 pandemic. As the pandemic and resulting crisis has disproportionately affected vulnerable households, distributional concerns over potential price increases merit particular attention by policy makers. Low pre-tax prices may provide only temporary political cover and do not in themselves make it easy to raise taxes.

A gradual and comprehensive approach to tax reform can alleviate affordability and distributional concerns and foster the political acceptability of the reform. Stronger carbon pricing as well as tax reform to cover the extraordinary expenditures linked to the pandemic may affect some households disproportionally. Distributional and affordability concerns linked to tax reform need to be taken seriously from the start of the recovery phase. It is essential that tax reform be accompanied with targeted communication and information campaigns, together with other complementary policy measures. For example, policy measures could focus on promoting the use of low-carbon substitutes or on support measures for those households that are affected particularly strongly by decarbonisation policy in the short run, but that cannot easily adapt to the reform due to financial or other external constraints.

It is essential that purchasing power support in green recovery packages maintains incentives for decarbonisation. Targeted support measures for the poor may be channelled through the social benefits system or as an income-tested payable tax credit. An alternative to targeted support is a lump-sum payment to all households. These are highly visible and may increase support as households benefit across the political spectrum. Lump-sum payments benefit a larger number of households. This implies that when the amount spent by the government is fixed, they distribute less money to the poor than targeted transfers. Support that comes through the general social benefit system, or via income-tested or lump sum benefits, keeps incentives in place to reduce carbon-intensive consumption patterns because carbon price signals are unaffected. In contrast, supporting specific households by providing them with preferential energy tax rates or exemptions weakens their incentive to make cleaner choices. Likewise, providing direct support to households for pre-defined purposes (e.g., via vouchers for energy use) may undermine the incentives necessary to drive decarbonisation (OECD, 2019[41]).


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[10] World Bank (Forthcoming), Climate Change Expenditure Tagging: An overview of current practices.



Scherie NICOL (✉

Andrew PARK (✉

Jonas TEUSCH (✉



← 1. Using a shadow carbon price in the evaluation of public investment is another way to prioritise investments that support a low-carbon recovery. The French and UK approach to shadow prices is further discussed in Box 11.

← 3. Traditionally, abatement payments have been used for incentivising emission abatement in sectors not covered by a carbon price, such as in the agricultural sector. For a discussion of their advantages and drawbacks, see OECD (2019[42]).

← 4. Tax relief is also often provided through the corporate and personal income tax system or the VAT to encourage the take-up of energy-saving appliances, buildings and technologies (Greene and Braathen, 2014[45]).

← 5. Negative environmental impacts can also unintentionally be part of the personal income tax system (Harding, 2014[43]; Roy, 2014[44])


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