Best Practice Report



Aligning price signals

Aligning price signals with green growth is essential to mobilize investment for green growth. Prices that clearly reinforce green growth policy provide incentives and direction to the market and investors. Many governments still provide significant support to activities that work against green growth such as incentives for deforestation, subsidies for fossil fuels and construction of infrastructure on flood plains. Incentivizing green investment is made harder and more costly if these pricing signals remain. At individual- and firm-levels, the introduction of a price signal through a product tax can change consumer behavior significantly (Convery et al., 2007).

The importance of removing investment signals that are inconsistent with green growth is well-demonstrated in Costa Rica. Reforms to agriculture and land-tenure policy which had been driving deforestation, was crucial to the success of the country’s forest conservation programs (Rodricks, 2013). In addition, the government created a Payment for Ecosystem Services (PES) system which links user tariffs for key environmental resources to a system of payments to farmers for forest conservation.

South Africa has also used a number of taxes and charges to align price signals to support green growth. The national budget collects approximately R45 billion (USD 4.4 billion) in revenue from: an emissions tax on new passenger motor vehicles, fuel levy, international air passenger departure tax, electricity levy, tax on incandescent light bulbs, plastic bag levy, water charges, and emission reduction credits from CDM projects. In addition, South Africa is one of the first countries in the world to announce the implementation of a carbon tax to be launched by 2015. California offers a sales tax exemption for clean technology manufacturing equipment and tax credits for the purchase of hybrid cars (Perry et al., 2013). These incentives for investment in clean technology development have helped establish California as a leading region for green energy research and investment (Iwulska, 2012).

Other experiences also present evidence of schemes to align price signals with green growth. For example, the Indonesian subsidy reform that was introduced to gradually increase fuel prices reduced the state budget deficit by USD 4.5 billion in 2005 and USD 10 billion in 2006. To reduce the potential negative impact of the policy on the poor, the Government provided support through a direct cash transfer program (IISD, 2012). In Singapore, water pricing policy has been used since 1997 to integrate the ecological costs of water and streamline the rate based on the amount of water used (UNESCAP, 2012).