The green gold rush: a sustainable future for finance policy
Finance departments have rarely been the loudest champions of environmental sustainability – but at the Government Finance Summit, it was clear that some of their underlying assumptions have shifted: in today’s economic climate, green policies look like the most pragmatic way to revive growth. Matt Ross reports
During the pandemic, the finance leaders of key players such as the United States and the European Union used economic stimulus packages to support green technologies and infrastructure. And as the energy crisis further sharpens nations’ incentives to reduce energy use and expand renewables generation, finance departments will again have a key role to play in reshaping economies for a more sustainable future – rethinking taxation and public spending to encourage behaviour change among both citizens and organisations.
Gathering at the Global Government Finance Summit in Estonia in June, senior leaders from treasuries and finance departments around the world debated how fiscal policies can help governments to realise their net zero goals. “Which kinds of policies are proving to be effective?”, asked Siobhan Benita, the former UK senior civil servant facilitating the discussions. “Could governments do more to change behaviours, using the fiscal levers available to them? And what are the challenges and barriers: what’s stopping you from doing more?”
While the Summit is held in private, allowing finance leaders to openly debate the policy and operational challenges that they face in common, some participants have allowed us to publish their comments. Here we present the key points raised during the fifth and final session.
Nature’s wake-up call
“Nature is pushing us to become more conscious of these issues, because we’ve had these great fires and floods,” commented Raúl Enrique Rigo, the secretary of Argentina’s National General Treasury. “More and more, the general public is becoming aware of the problem.”
To meet this growing public interest in climate change and environmental sustainability, the Argentinian government has been collating information on its green policies and initiatives across government. Its aim is to ensure that environmental issues are considered within every policy field, Rigo explained, rather than the “vertical and more traditional” model of operating a dedicated environment department. Creating a register of relevant policies also means that leaders can “inform the public how much money the government is investing in these crucial issues, and keep a track of these programmes,” he added.
Argentina’s approach may help to counter the tendency for governments to face two ways on green issues – with some departments championing net zero, while others pursue policies that drive up carbon emissions. In most countries, finance departments continue to operate some policies and services that perpetuate the status quo – providing tax breaks for oil firms, for example, or favouring road-building over public transport in investment calculations.
Raoul Lättemäe, head of the fiscal policy department in Estonia’s Ministry of Finance, asked whether finance departments are doing more to hasten progress – or to impede it? “If we add together, on a global level, all the taxes that we collect on cars and the subsidies we provide for them, I’m not sure whether the fiscal input is a negative or a positive,” he commented. “Maybe governments are actually paying to release carbon into the atmosphere.”
Making green affordable
Reforming such policies is difficult: in key fields such as energy and transport, both departments and the sectors they face tend to be deeply invested in traditional, carbon-intensive systems and infrastructure. And the challenge is particularly great for less developed countries, which have contributed little to the climate crisis and experience widespread poverty: export industries and major employers will always have a strong hand when money is tight, noted one participant.
While such countries can use subsidies to promote behaviour change, they have less leeway to place new requirements or costs on businesses. “We have many levers. The first is incentives, and when you offer these everyone is happy,” said Nourredine Bensouda, general treasurer of the Kingdom of Morocco. But while Morocco has moved away from subsidising retail fossil fuel prices towards targeted support for those in need, wider reforms such as introducing a carbon tax would face powerful headwinds.
Developing and middle-income nations’ weaker national infrastructures also hamper moves to decarbonise economic activity, pointed out Rigo. Argentinian governments have promoted renewables generation, for example, but while “the policy was very successful in attracting investments, unfortunately we do not have the infrastructure – nor the money to build the infrastructure – in order to transport that energy and transform it into a national supply.”
So while some regions have built renewables capacity, their potential to promote sustainable growth nationally hasn’t yet been realised. The answers may lie, the Irish Department of Finance’s chief economist John McCarthy suggested, in a “just transition: financing for less developed countries who have created none of the problems and are suffering a lot of the consequences.”
A shrinking space
In the rich world, governments tend to find it easier to introduce new taxes incentivising behaviour change. As McCarthy explained, some years ago Ireland introduced a carbon tax on households and small businesses. This currently raises about €400m per annum, he said, and its enabling laws include a schedule of price increases. This “provides certainty that the price is rising over a medium-term framework that’s backed by legislation, and should give private sector agents the incentive and the time to adjust their behaviour,” he commented.
“Traditionally, finance ministries don’t like hypothecation: we like to have the flexibility to do what we like with tax revenues,” McCarthy added. But in this case, all the monies are ring-fenced to “offset any increase in fuel poverty arising from higher prices”; to support renewables and energy efficiency; and to promote more sustainable farming practices. “The IMF has acknowledged that we’re at the coalface of what is being done,” he added – perhaps deliberately choosing an unsuitable metaphor.
However, the energy crisis is bringing such initiatives under pressure. “In the environment of high inflation that we have now, it’s difficult to raise excise rates or impose new taxes,” commented Evelyn Liivamägi, deputy secretary general for financial and tax policy at Estonia’s Ministry of Finance. Many people support reducing carbon emissions “but don’t want to pay extra, because they don’t have the money. So it’s a difficult time to make green policy.”
By the numbers
Even in these difficult times, though, finance departments can improve their measurement and assessment of carbon emissions and pollution. “It’s important to measure in order to improve; in order to understand what needs to be done, and to take informed decisions,” said Valentina Ion, Microsoft’s director of business strategy for public finance. She called for more work to develop international metrics tracking organisations’ environmental impacts, pointing to “inconsistencies in how different organisations or institutions are doing it.”
Today’s technologies create new opportunities here, said Ion: “We’re living in a world where the ‘Internet of Things’ is a reality.” Sensors embedded into infrastructure, property and tools can accurately measure consumption and outputs, passing emissions data to Cloud-based services for analysis and presentation.
“What is important is to record and report, and then we go into decisions about reduction, replacement and removing pollution sources,” she added.
Markus Sovala, director general of Statistics Finland, also called for action to improve emissions data. In order to shape effective responses to climate change, he said, “we need the data in good shape – and this is not the case yet” – with gaps in areas such as land use emissions and soil absorption rates. Investment is required, he argued, to ensure that decisions with major implications for economies and the public finances are informed by accurate information.
In the black on green issues
To make best use of environmental and emissions information, some finance departments are finding new ways to link it to financial and economic data. The Danish Ministry of Finance, said Estonia’s Lättemäe, is building environmental outcomes into its economic models. “In compiling forecasts or assessing the budgetary impact of different scenarios, they don’t just calculate the economic impact: they try to incorporate the impact on the climate and emissions,” he explained – giving elected leaders better information on the consequences of different policy options.
The European Commission too is making progress on strengthening its sustainability data, commented Jakob Wegner Friis, deputy head of cabinet for its Commissioner for Economy: “We’re running a workstream with treasuries of member states, to exchange views on the best green budgeting practices.” Developing an EU-wide framework for green budgetary data will be a long and complex task, he warned; meanwhile, officials are producing more sustainability data around the commission’s own budget. “There’s more and more demand for information on how European money is spent, and the environmental impact – positive or negative – of those policies,” said Friis.
He added that the commission has pledged to raise 30% of the €800bn required to fund its COVID recovery package, NextGenerationEU, by issuing green bonds. Like incorporating green data into budgets, investing in this young market can – Friis acknowledged – bring a “first mover disadvantage”: the trailblazers in any emerging sector must do the hard work of clearing a path.
Read more: ‘An active role for the state’: can net zero and the green deal kickstart the global economy?
But as the conversation had revealed, there’s an urgent need for both better data connecting financial, economic and environmental matters, and a framework permitting international comparisons. And few are better placed to lead the way than the European Commission; as Friis commented, the EC’s commitment to measuring and investing in green initiatives represents “an attempt to set some standards.”
Over the months and years to come, the quality of data and standards in these fields is set to become ever more important. For while finance departments and elected leaders responded to the pandemic – a health crisis with economic impacts – by pouring investment into decarbonising their economies, we are now wrestling with an energy crisis largely caused by our continuing dependence on fossil fuels.
After decades in which continuing to burn oil and gas has remained the cheap option, gas and petrol prices are spiralling while economies of scale are slashing the cost of renewables. Meanwhile, the Ukraine war has clearly illustrated the importance of energy security. And with the damage caused by extreme weather events continuing to rise, the economics of environmental sustainability look ever more convincing.
Governments will not, of course, respond to high inflation with economic stimulus packages; that would just inject yet more money into their overheated economies. But their responses to the pandemic show that environmental sustainability is no longer seen as a constraint on growth, but instead as a path towards it. And when our over-dependence on fossil fuels is helping to drive the current economic crisis, those arguments become all the stronger.
Just as finance departments helped to carry economies and households through the last crisis, they’ll need to do the same through the current one. And as they do so, those nations that prioritise green growth and sustainable technologies are likely to be best placed to carry us through the next.
This is our fifth and final report on the 2022 Government Finance Summit, which was held in Tallinn, Estonia in June. While the Summit is held in private, some participants have allowed us to publish their comments. The first report covered an analysis of today’s inflationary pressures by John McCarthy, Chief economist of Ireland’s Department of Finance; the second considered finance departments’ responses to the pandemic; the third explored how finance leaders are supporting – and impeding – digital transformation; and the fourth considered finance leaders’ evolving roles in policymaking. For more information on the Summit, visit our dedicated website.
About Matt Ross
Matt is Global Government Forum's Contributing Editor, providing direction and support on topics, products and audience interests across GGF’s editorial, events and research operations. He has been a journalist and editor since 1995, beginning in motoring and travel journalism – and combining the two in a 30-month, 30-country 4x4 expedition funded by magazine photo-journalism. Between 2002 and 2008 he was Features Editor of Haymarket news magazine Regeneration & Renewal, covering urban regeneration, economic growth and community development; and from 2008 to 2014 he was the Editor of UK magazine and website Civil Service World, then Editorial Director for Public Sector – both at political publishing house Dods. He has also worked as Director of Communications at think tank the Institute for Government.
Related Posts
