ProdukHukum BankIndonesia

GREEN FISCAL POLICY TO
COMBAT CLIMATE CHANGE
By Emil Salim
University of Indonesia, Jakarta
emilsalim2002@yahoo.com; esalim@rad.net.id

SUBSIDIZED GROWTH
1. Fossil-fuel energy based economic growth
has polluted global air beyond nature’s
absorptive capacity leading to climate change;
2. Economic growth guided by market prices fails
to capture air pollution and environment costs;
3. Global air as public good has no market price
and no global governance to manage;
4. Fossil fuel is an exhaustible non-renewable
resources that has been subsidized for growth;

DISTORTED ENERGY PRICES
1.Subsidized fossil fuel price promotes small number
passenger carrying private vehicles instead of mass
public transportation, highways rather than railways,

sub-urban development, energy intensive industries,
energy with growth linked policies, low commitments
to global conventions and agreed protocols;
2.Non-renewable energy ignores resource depletion
costs, finite time frame, pollution costs, impacts on
health and sustainability of development;
3.Non subsidized renewable energy looses against nonrenewable energy because of higher costs, while its
non-marketable benefits are not considered;

BURSTING
ENERGY AND FOOD CRISIS
1. Limited fossil fuel supply facing sharp increase
of global demand for growth, give steep price
increase above 2007 level in 2008 and beyond;
2.Substitution to subsidized bio-fuel raises the
opportunity gains from soil-based food
production. Forests conversion increases for
bio-fuel from palm-oil, Jatropha, corn plantation;
3.Bio-fuel exports to developed countries went up
at the expense of increase domestic food prices

due to reduced supply in developing countries;

MARKET FAILURE
1.Market failure is the main cause of eco-system
destruction, climate change, energy-food crisis;
2.At the global level market failure is perpetuated
by the absence of independent global
institutions to develop market corrections;
3.At the national level market failure prevails with
subsidized energy in conventional growth
without any considerations on pollution costs;
4.Market failure has locked conventional market
economy in an unsustainable pattern of
development with no environmental values;

ECO-FRIENDLY GROWTH
1. Development uses nature as resources and
waste sink within network of eco-systems;
2. Eco-systems obey the law of equilibrium,
interdependency and sustainability among

nature’s components in its network;
3. To sustain development, resources are used
within nature’s carrying capacities and waste
created within nature’s absorptive capacities;
4. Government policies are to correct markets to
enable process of development taking place
within the constraints of sustained functions
and laws of eco-systems;

GREEN FISCAL POLICY
The notion of Green Fiscal Policy is to correct
market failures by applying:
1. Pollution tax (Malaysia palm-oil pollution tax);
2. Subsidies to reduce costs & induce growth of
special product (Japan wind-energy subsidy);
3. Marketable permits to pollute below an agreed
threshold (Clean Development Mechanism in
cap-and-trade system of Kyoto Protocol) ;
4. Import tariffs to promote inflow and exporttariffs to reduce outflow (Indonesia palm-oil
export tax);

BASIC NOTIONS OF
GREEN FISCAL POLICY
1. Shifting away levies from items that are valued
highly by society (manual work, intellectual
creativity) to undesirable items (pollution);
2.Tax-subsidies to correct distortions (taxing
private for subsidizing public transportation,
taxing fossil fuel to subsidize wind energy);
3.Environmental service user pays the provider
(down-stream river user pays upstream river
people to prevent sedimentation);
4.Green fiscal policy is focused on getting the
market price of environmental services right

INTEGRATING
DECENTRALIZED POLICY MAKING
1. Provinces & Districts are autonomous to
impose levies on natural resources with
Central Government’s approval.

2. Spatial planning and environmental impact
analysis can integrate subjects for levying
taxes on resource use with a vision of
reaching Millennium Development Goals
through sustainable development;
3. At the global level international institutions
must enable countries to pursue their
competitive advantages in reaching these
goals through sustainable development

THE GLOBAL CONTEXT
1. Climate change as a global issue must be tackled by
developed and developing countries together;
2. Developed countries have the obligation to reduce
internally green-house gas emissions by applying
green fiscal policy to prevent climate change;
3. Developing countries need poverty alleviation
through sustainable development with co-benefits of
reducing GHG emissions assisted by technology
and resource transfer from developed countries;

4. In global context developed countries tax internally
within their own borders mitigating costs of climate
change and subsidize externally developing
countries to reduce GHG emissions through
sustainable development;

REFERENCES
1. Michael Common and Sigrid Stagl, Ecological
Economics, University Press, Cambridge
2005;
2. John Asafu-Adjaye, Environmental Economics
for Non-Economist, World Scientific
Publishing Co., Singapore, 2005;
3. Jennifer Rietbergen-McCracken and Hussein
Abaza, Economic Instruments for
Environmental Management, UNEP, 2000;
4. Worldwatch Institute, State of the World 2008,
Earthscan, UK, 2008;