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Resource guide for NDC finance

Selecting effective financial instruments to support action on climate change

This low emission development strategies (LEDS) Finance Resource Guide presents a curated selection of resources on a range of topics around finance for LEDS and Nationally Determined Contributions (NDCs). It is designed to help LEDS practitioners find high-quality resources that meet their specific needs, avoiding time-consuming searches on the internet. It will be useful to individuals working on, or interested in, LEDS and NDC finance in both developed and developing countries.

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5.6 Taxes and tax incentives

Fiscal policy provides a critical set of instruments for building green economies by pricing environmental externalities and redressing social impact. In particular, it can support the shift of investments towards clean and efficient technologies and activities. Environmental taxes have proven to be the most effective tool in not only addressing environmental externalities but also inducing green investment. Many countries employ tax breaks, or tax reliefs, to support renewable energies. Yet such support needs to be well targeted and closely monitored. In some cases, it is difficult to assess their overall impact. In general, taxing ‘bad behavior’ is preferable to subsidizing ‘good behavior,’ but in some cases both might be useful. (Adapted from Fiscal policy: Green economy briefing paper, UNEP, 2013.)

Related resources

Taxes and incentives for renewable energy

Organization(s):KPMG

  • Taxes and tax incentives

This report provides a useful summary of tax and non-tax incentives in use in 31 countries, which may be helpful for developing country policymakers who wish to see which incentive measures are being used in other countries, as a starting point for comparative analysis. For further information on this report see 5.1.

The Mirrlees Review, Volume 1: Dimensions of Tax Design. (Chapter 5. Environmental Taxes)

Organization(s):IFS

  • Taxes and tax incentives

The Mirrlees Review was an extremely comprehensive review of the design of a good tax system. This chapter provides an overview of key economic issues in the use of taxation as environmental policy. Sections 5.2–5.4 discuss the economic principles of environmental taxation, reviewing the arguments for using taxes and other market mechanisms in environmental policy, the efficient design of environmental taxes, and the fiscal value of the revenue contribution from environmental taxes. Sections 5.5–5.8 apply these principles to four specific environmental tax areas—energy, road transport, aviation, and household waste.

Environmental taxation: A guide for policy makers

Organization(s):OECD

  • Taxes and tax incentives

This policy guide introduces the use of taxes to achieve environmental outcomes. It outlines why countries might consider using environmental taxes (rather than, for example, subsidies), and then explores some principles for how to design effective environmental taxes, including defining the target and scope of the tax, and setting the rate. It also briefly covers how the revenues raised can be used, and how to overcome obstacles to implementing environmental taxes.

Providing incentives for investments in renewable energy: Advice for policymakers

Organization(s):World Bank

  • Taxes and tax incentives

This note provides a basic introduction to the use of incentives to support renewable energy investments. It is included here because it considers some general principles of when to use tax and nontax incentives, and outlines the main types of tax incentive (p. 3). The note briefly explores how tax and nontax incentives can be combined, and presents a short case study on how Spain combined tax and nontax incentives for renewable energy.

Fiscal policy: Green economy briefing paper

Organization(s):UNEP

  • Taxes and tax incentives

This short briefing paper provides a basic introduction to the role of fiscal policy in the transition to greener economies, in particular the use of environmental taxes. It also briefly covers energy subsidy reform and introduces some lessons learned from experience of fiscal policy reform so far.

Country case study

Investment incentives for renewable energy in Southeast Asia: Case study of Viet Nam

Organization(s):IISD

  • Taxes and tax incentives

In Vietnam, investment incentives are provided in several ways, including taxation (e.g. favorable income tax rates), low import duties and fees, loss transfer, and accelerated depreciation of assets. This report assesses investment incentives for renewable energy in Vietnam. It focuses on small hydro, wind, solar, biogas, and biomass resources. Section 4.4 of the report provides an overview of the different tax measures in Vietnam’s investment incentive framework that apply to all sectors, and section 4.6.2 presents preferential tax incentives for renewable energy companies in Vietnam. The impact of different incentives is discussed in section 5, and conclusions are presented in section 6.