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Task 2: Use fiscal policy to correct externalities

Governments can internalise environmental and social costs in economic activities through fiscal policy, benefitting sustainable business models.

Novel fiscal policies are required to ensure that the true costs of environmental and social externalities are borne by the economy rather than being offloaded on society. Examples of externalities include carbon emissions, various forms of pollution and waste, resource depletion, ecosystem loss and a wide range of social inequalities. This task could be tackled, for example, by differentially taxing business activities according to their environmental and social impacts – and rewarding positive performance. An example of this approach would be the use of revenues raised from carbon pricing to enable private financing of low carbon, climate resilient infrastructure.

Another powerful way to reflect and manage true costs is to remove or redirect subsidies that otherwise make unsustainable economic activity cheaper, for example in relation to fossil fuels, soil damage, biodiversity loss or the perpetuation of poverty. Governments should consider whether their current approach to subsidies may in fact be encouraging economic activities that run counter to sustainable development goals. 

Are governments using fiscal policy to correct market failures that prevent business from delivering socially useful goods and services? Are governments setting a carbon price that reflects the full economic risks posed by climate change?

Governments should consider whether their current approach to subsidies may in fact be encouraging economic activities that run counter to sustainable development goals.


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