Task 2: Align incentives to support better outcomes
Governments can use regulation and fiscal policy to pursue environmental and social goals, and support sustainable business models.
Smart regulation can steer business and finance away from activities that will undermine the stable social and environmental context they require to prosper. Fiscal measures can ensure that the true costs of environmental and social impacts of economic activities are borne by the economy rather than being offloaded on society. This task could be tackled, for example, by restricting or banning the use of outdated, environmentally damaging products as alternatives are developed – as is happening with incandescent light bulbs and the internal combustion engine. Regulation should be smart, not heavy-handed. It may be that just ensuring clarity about business and finance impacts through disclosure requirements is sufficient to prompt change.
Another powerful way to reflect and manage true costs is to remove or redirect subsidies that otherwise make unsustainable economic activity cheaper. Governments should consider whether their current approach to tax and subsidies supports their goals or may in fact be encouraging economic activities that run counter to them. Differentially taxing business activities according to their environmental and social impacts, rewarding positive performance while discouraging bad behaviour, can prompt market change.
Are governments using regulation, tax and subsidy to encourage the market to use its innovative power to deliver socially-useful goods and services?