This report, Fiscal Policies for Development and Climate Action, a World Bank report developed in collaboration with UNIDO, informs the dialogue on the evolving role of macro-fiscal management in the context of a changing climate and warming world. The report also aims to better equip finance ministries in developing countries with the tools to understand, appraise, and implement Environmental Tax Reform (ETR) policies and climate change adaptation and risk-management strategies.
This report responds to a growing demand from client countries for insights into how fiscal policy can advance development objectives in areas outside of the World Bank’s traditional scope. The report is designed to build the capacity of client countries and World Bank staff to use fiscal instruments to mitigate and adapt to climate change. It does so by filling knowledge gaps on the economic, well-being, distributional, and competitiveness implications of ETR in developing countries, alongside the use of fiscal policy to manage increasing economic risks of climate change. Crucially, the report provides actionable advice on how to design and implement fiscal policies for both development and climate action.
The report is organized into four chapters. The first chapter, “Benefits Beyond Climate: Environmental Tax Reform,” argues that well-designed environmental taxation is especially valuable in developing countries, where it can reduce emissions, increase domestic revenues, and generate positive welfare effects. The second chapter, “Staying Competitive: Productivity Effects of Environmental Taxes,” discusses the potential impacts of environmental taxation on competitiveness in emerging economies. It analyzes new empirical evidence from Indonesia and Mexico regarding the relationship between productivity and changes in energy prices, which are used as a proxy for changes in environmental taxation. The third and fourth chapters, “Increasing Resilience: Fiscal Policy for Climate Adaptation” and “Managing the Fiscal Risks Associated with Natural Disasters,” discuss the role of fiscal policy in strengthening resilience to climate change.