Although the private sector plays a vital role in the development and diffusion of new technologies, short-term financial planning practices create market failures that can hinder the expansion of green industries. Governments can use fiscal instruments to facilitate innovation, stimulate green markets, and help phase out environmentally or socially harmful activities.

The use of public spending, including green subsidies and carbon pricing, to leverage private investment can help to create the enabling conditions for a green economy. Meanwhile, fiscal incentives targeted at consumers can encourage them to shift their consumption patterns towards greener goods and services. Reforming or phasing out environmentally harmful subsidies can also play an important role in the transition to a green economy. For instance, phasing out fossil fuel subsidies will discourage over-consumption and encourage higher energy efficiency while levelling the playing field for renewable energy investments.

The Green Fiscal Policy Network, a partnership between the IMF, GIZ and UNEP, provides useful resources, country profiles and case studies focusing on fiscal instruments in the context of green growth.

Relevance to the SDGs

Sustainable Development Goal (SDG) 12 on sustainable production and consumption calls for phasing out and restructuring environmentally-harmful subsidies in the fossil fuel industry.

SDG 12.c
Phasing out Subsidies