Delivering green economy in Asia: The role of fiscal instruments

Accepted Manuscript Title: Delivering Green Economy in Asia: The Role of Fiscal Instruments Author: Hari Bansha Dulal Rajendra Dulal Pramod Kumar Yadav PII: DOI: Reference:

S0016-3287(15)00101-9 http://dx.doi.org/doi:10.1016/j.futures.2015.08.002 JFTR 2052

To appear in: Received date: Revised date: Accepted date:

17-1-2015 3-8-2015 6-8-2015

Please cite this article as: Hari Bansha Dulal, Rajendra Dulal, Pramod Kumar Yadav, Delivering Green Economy in Asia: The Role of Fiscal Instruments, Futures http://dx.doi.org/10.1016/j.futures.2015.08.002 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

Delivering Green Economy in Asia: The Role of Fiscal Instruments

Hari Bansha Dulal a,* Rajendra Dulal b Pramod Kumar Yadav c a

Abt Associates, Bethesda, Maryland, USA

b

Wayne State University, Detroit, Michigan, USA

c

Indian School of Business, Mohali, Punjab 140306, India

*

Corresponding author. Tel.: +15712881854

Highlights    

We explore the role of fiscal instruments in transition to a green economy Identify countries that have adopted fiscal policy instruments Evaluate effectiveness of adopted fiscal policy instruments Identify opportunities and barriers towards adoption of fiscal instruments

Abstract Asia’s ongoing rapid economic growth is successfully lifting millions of poor out of the vicious cycle of poverty, but that performance comes at a price. The unprecedented growth we witness today is also rapidly driving resource consumption to unsustainable levels. Local production and consumption-led growth is causing a considerable increase in external costs, such as deforestation, and knock-on effects, such as increased emissions including greenhouse gas (GHG); depletion of non-renewable resources; pollution of rivers; desertification; flooding; and long term climate change. Currently, the region accounts for about 40% of GHG emissions, which is expected to rise to almost 50% by 2030 if the business-as-usual trajectory projected for the region is not altered. Countries in the region are taking action when it comes to the transition to a green economy. When compared to other regions, Asia has the highest rate of policy innovations that can help in the transition to a green economy. Even though fiscal instruments in-use are to some extent already altering aggregate demand of resources and economic activities, resource allocation, and distributive capacity of the economy, instrument such as “carbon tax” that has the real potential to contain rising emissions and save economies from getting locked into carbon-intensive pathways are yet to be adopted widely. Tax on natural resources extraction is yet to be implemented in wider scale despite of rampant destruction of natural resources and environments and increase in associated GHG emissions. Sporadic adoption of fiscal instruments is not going to be enough, if Asia as a region, is to

transition to a green economy. In addition, there are substantial implementation barriers that need to be eased for wide-scale adoption and diffusion of green fiscal instruments. Keywords: Asia, green economy, low-carbon growth, fiscal instruments, opportunities, barriers

1. Introduction As a region, Asia is growing at an unprecedented rate, and consumption of resources and associated emissions are following a similar trajectory. With ongoing rapid expansion of economy, population, urbanization, and industrialization, there is a consistent increase in resource consumption and associated emissions. Countries are increasingly getting locked into carbon-intensive infrastructure development pathways. For instance, two large emerging Asian economies, China and India, are expected to grow by 7.7% and 5.9% per annum respectively in 2014-2018. These figures are significantly higher than projected growth in Organisation for Economic Co-operation and Development (OECD) countries (2.5% per annum), the world overall 3.7% per annum), and the United States (3.5% per annum) in 2014-2015 (OECD, 2014). Sustenance needed to meet this growth rate will exacerbate already high resource use and emissions. The total consumption of oils, biofuels, gas-to-liquids and coal-to-liquids (or total liquids consumption) in Asia increased by 92% between 1990 and 2010 and is expected to further increase by 44% between 2010 and 2030. Likewise, between the latter period, the total natural gas and total coal consumption is expected to increase by 114% and 50%, respectively (ADB, 2011). Under the business-as-usual scenario, coal could account for 35–45% of global net growth in electricity generation over the next two decades. Increase in coal-based energy generation is expected to increase coal consumption from its current level by 50-60% in the next two decades. The chances of Asia, as a region, getting locked into carbon-intensive pathways is really high, as nearly all these increases are projected in the fastest-growing regions of Asia where coal could account for 50–70% of new power supply (IEA, 2013). With a growing economy and ongoing rapid urbanization, the rate of motorization and associated energy use in the transport sector will further increase. Rising income, declining vehicle price, and increasing vehicle stock all contribute to the increase in vehicle ownership and use in the region. The total number of vehicles in China is projected to increase from 20.5 million vehicles in 2002 to 390 million by 2030. China will have more vehicles than any other country, with 24% more vehicles than the USA by 2030. The situation will be similar in other rapidly growing economies in the region. From 17.4 and 8.1 million vehicles in 2002, the total number of vehicles in India and Thailand are projected to increase to 156 and 44.6 million by 2030 respectively. Increase in vehicle ownership and use, if not contained, could accelerate GHG emissions to dangerous levels, especially as China and India are already among the top five GHG emitting countries (World Bank, 2014) at 8286.9 and 2008.8 million metric tons, respectively.

The ongoing rapid increase in growth-related externalities witnessed by Asian countries cannot be ignored. With ongoing rapid increase in population, urbanization, and the demand and use of resources, costs associated with economic growth and unplanned economic development will continue to increase. The time has come to think “outside the box” and across boundaries in order to get a grip on the impending environmental crisis, which will have adverse socioeconomic and environmental consequences. The green economy provides an alternative paradigm that will help bring about transformational change—without which, solving Asia’s growing resources use and contain associated externalities related costs is extremely difficult, if not impossible. Even though greening growth entails trade‐offs and upfront costs, it provides a real opportunity to address growing environmental and climate change problems. For rapidly growing economies such as India, China, Indonesia, Thailand, and Vietnam—the main focus countries of this paper—transition towards a green economy provides an opportunity to reduce negative environmental externalities and sustain/better current economic growth without degrading the natural resource base. However, in order for the aforementioned and other Asian countries to truly seize the opportunity to transition to a green economy, they will have to first and foremost identify and adopt effective fiscal instruments that aid in their transition to a green economy. In many Asian countries, there exist substantial implementation barriers, which need to be eased for these instruments to yield desired results. By showcasing the effectiveness of implemented instruments, we try and highlight what works and what does not. Fiscal instruments that have not performed well could do better if existing implementation barriers are eased , as identified in this paper. Easing of these barriers will not only improve the performance of instruments that have not achieved their fullest potential, but also those that perform relatively well in the under the existing implementation barriers.

2. Asia’s transition towards a green economy Countries in the region have begun the transition towards a green economy. The Republic of Korea is at the forefront when it comes to adopting fiscal instruments that facilitate the transition to a green economy. Consistent growth in GHG emissions was one of the factors that led to the adaption and acceptability of fiscal instruments. Between 1990 and 2007, the overall carbon dioxide (CO2) emission in Korea increased by 4.4%. Korea’s initiative for a green economy dates back to August 2008, with President Lee’s commitment to a green growth strategy. A high-level Presidential Committee on Green Growth (PCGG) was formed in 2009, with a main goal to reduce CO2 emissions to 473 million metric tons of carbon dioxide equivalent (MtCO2-e) by 2020, a reduction of 30% from the projected 676 MtCO2-e under a business-as-usual scenario (Mathews, 2012). A stimulus package worth US$30.7 billion was unveiled in 2008 to support the government's efforts to promote renewable energy resources, energy efficient buildings, low carbon vehicles, expansion of railways, and water and waste management (UNEP, 2009). Lately, China has also realized the need to move away from a carbon-based economy. China’s 11th Five-Year Plan for Economic and Social Development (2005-2010) was the key turning point for integrating rapid economic growth with green economy through energy conservation. It invested over US$2.1 billion in main science and technology research programs during its 11 th

five–year plan. China’s current 12th five-year plan (2010-2015) is seen as a “Green Growth Plan” with main focuses on reducing pollution and increasing energy conservation and energy efficiency (TERI, 2014). It is investing US$468 billion into green key sectors during its 12 th fiveyear plan in comparison to US$211 billion in the 11th five-year plan (Wang, 2014). In 2008, China announced the Green Stimulus Package, strengthening its approach toward a green economy. China uses a suite of fiscal instruments to facilitate its transition to a green economy. For example, excise acquisition taxes and small and energy saving vehicle subsidies are some of the fiscal instruments used to contain growing externalities, including CO2 emissions in the transport sector (Hui, 2011). State-owned banks in China provide substantial financial support for renewable energy programs. In 2009, the Chinese government spent US $45 billion to upgrade the electricity grid (Chen, 2009c). Like in China, the government of India has also undertaken policy initiatives that contribute toward its transition to a green economy. In India, the government adopted excise tax and special excise duty to contain CO2 emissions from new passenger vehicles (Hui, 2011). Instead of taxing pollution, the government of India initiated a tax of Indian Rupees (INR) 50 per metric ton of coal in 2010 for both domestic and imported coal, collected as duty of excise, and known as a Clean Energy Cess. Tax revenue is hypothecated toward promoting and financing clean energy through the creation of the National Clean Energy Fund. In the wake of growing financing demand from renewable sector, the Indian government then raised the tax to 100 per metric ton of coal in 2014 to enlarge the fund size (see table 1). Table 1. Fiscal revenue from Clean Energy Cess in India (INR Billion) Actual 20102011 Clean energy tax Number of approved clean projects Total approved financing size

Revised Budget 201120122012 2013

10.66 0

32.49 10

38.6 5

0

5.73

14

Actual 20122013 30.53

Budget Revised Budget 2013201320142014 2014 2015 35.36

35.27 14

68.57

Source: Pandey, Bali, & Mongia (2013); Union Budget, Government of India, 2014-2015 Besides the national level initiatives from the central government, state governments in India have also come forward with plans to boost solar and other renewable energy initiatives. The states of Rajasthan and Gujarat, for example, have power purchasing agreements (market incentive) for solar power plants up to the year 2025. As an incentive for renewable energy, the state of Tamil Nadu provides a maximum amount of INR 12 per kilowatt-hour (KWH) for electricity generated from solar photovoltaic and INR 10 per KWH of electricity generated through solar thermal route (Shekhar et al., 2013). Fiscal incentives, together with state-level institutional supports and regulatory measures, have enhanced penetration of renewable and increased participation from private sector in India (Schmid, 2012; Sawhney & Rahul, 2014). The motivation behind adopting green financial instruments is to transition to a green economy by containing rising emissions, as they pose serious concerns for the welfare of current and

future generations. Whether or not countries in the region will be able to transition to a green economy—which means growing economies in ways that benefit, not sacrifice, social justice and equity as well as the environment—is highly dependent on their ability to adopt policies that can aptly contain growing emissions from the rapid increase in resource extraction and use. For the well-being of future generations, there is a need to achieve sustainable resource management by decoupling natural resource use and environmental impacts from human wellbeing. Achieving sustainable resource management will continue to remain elusive as long as the true costs of resource extraction and use are not assessed. For example, the full cost of cutting down a forest not only includes damage to habitats and biodiversity and loss of the social and cultural value of the forest, but also reduction in carbon-storing tree cover and the inability of future generations to reap these and other benefits from the forest that is lost. The cost-benefit approach fails to take into account the burden that environmental degradation imposes on future generations that currently have no voice and representation (Hubacek and Mauerhofer, 2008). It is a moral agreement between generations, which rejects the implicit idea in cost-benefit analysis that all rights belong to the current generation (Padilla, 2002). Proposing the idea of punctuated reciprocity, Ball (2001) argues that we did nothing to earn the natural resources from our ancestor and we cannot repay them, but we can preserve it and pass it on to coming generations. Sustainability is at the heart of the green economy model, which fiscal instruments aim to promote. For example, tax-based policies specifically aimed at reducing GHG emissions— alongside technology and other policies—have helped to weaken the link between GHG emissions and gross domestic product (GDP) in some countries (IPCC, 2014). The suggested fiscal instruments can create environmentally sustainable economic growth by expanding the green sector, creating incentives to phase out the "brown economy," and changing consumption patterns. Adoption and large-scale diffusion of the suggested instruments will help reinforce the idea that environmentalism and economic growth can go hand in hand, which is necessary to safeguard the rights of future generations to resources and intergenerational equity. The good news is that progress in the transition of Asia to a green economy has already begun. However, most progress is concentrated in rapidly growing economies, with slow progress in least developed countries (see table 1, annex-I). Few countries, especially those relatively well off, are taking the lead in the transition to a green economy and the implementation of fiscal instruments. Least developed countries have yet to adopt instruments beyond those that generate high revenue and are administratively simple to implement. What emerges from table 1 is a broad emphasis on renewable incentives and the provision of concessional financing by the region’s relatively well-off countries. Incentives that reduce cost and increase revenues, such as feed in tariff, accelerated depreciation, and tax breaks, are widely employed by Asian countries. Performance of countries on rationalization and phasing-out of fossil fuel subsidies is at variance. Emission taxes, such as carbon tax, are known to have adverse distributional effects in general and are not widely implemented. Even though the tax on natural resources

extraction is an effective tool to contain natural capital loss, it not yet widely used despite the unprecedented rate of natural resources extraction in the region.

3. Effectiveness of Adopted Fiscal Instruments Public finance theory is a guiding force to determining how finance should be raised to provide public goods or near public goods. In general, public authorities have two financing choice: one, fiscal instruments, such as raising taxes, fees or user charges; and two, public borrowing. The accepted principle is to continue borrowing for public investment while the social rate of return on investment is higher than the cost of arranging funds (Ismihan & Ozkan, 2008). Given the magnitude of finance required to transitioning into green economy, tight fiscal constraints in developed countries, economic structure in emerging economies, and historical budget and fiscal deficits in developing countries, public borrowing alone will not be sufficient to shift the current economic equilibrium to a green pathway. In such cases, public borrowing must be complemented by implementation of fiscal instruments to shape the transition to a green economy. Some Asian countries do employ environmental fiscal instruments in conjunction with concessional financing arrangements, budgetary stimulus, and economic incentives to pursue greener economic pathways (Annex-I). They have also adopted charges, fees, subsidies, and taxes that directly relate to environmental protection (e.g., emission tax, waste water tax, resource taxes, and consumption taxes). Such taxation fundamentally refers to levies on “environmental bads”; with some included in the tax base and others that escape the tax net. There are equity and efficiency considerations associated with such taxation. They demand compensatory incidence structure for broad distributional effects that enhance social welfare (Bowen, 2011). A key challenging policy question, however, is the effectiveness of such instruments to deliver a socially desirable outcome: a green public good. On one side of the effectiveness spectrum is the potential for instruments to mitigate emission and promote clean production; the other side of the spectrum seeks economic or cost effectiveness by “getting prices right” through internalization of negative externalities that should theoretically lead to greater economic efficiency. The price correction effect transmits through relative prices of products and the level of activities. It alters product-activity mix in association with magnitude and direction of price elasticities. Policy quest of achieving economic effectiveness may demand tailored design of fiscal instruments that can increase development institutional financing, increase private capital, and enhance the flow of domestic resources (Roy et al., 2013), which could finance green transition. Instruments designed with high green and cost effectiveness may be rendered less effective if the instrument base is small and requires a vast administrative edifice to collect instrument revenue from sources spread over a large geography. A theoretical representation of the effectiveness of fiscal instruments on environmental, economic, and administrative aspects is presented in table 2. The table groups fiscal instruments from Annexure I into four categories. The first category refers to direct or indirect government transfers aimed at achieving high green effectiveness. Price-based instruments are grouped into the second and third categories, followed by quantity-based instruments in the

last category. Cost effectiveness of tax or any other fiscal instrument refers to the ability of the instrument to facilitate a shift to emission abatement without questioning the efficiency of goal setting. Assessing the green effectiveness of taxes and levies in relation to the environment, under certainty framework, essentially means evaluating the extent to which these taxes lead to environmental improvement. Different environmental fiscal incidences create different impacts on interest groups, income groups, and social groups. This has potential to challenge and alter the political equilibrium calibrated around multiple constituencies. Also required for better implementation is political and administrative effectiveness. This should be embedded in larger social networks including interests from, participation of, and cooperation among government, private sector, and civil societies that favor the new alternative equilibrium.

Table 2: Theoretical effectiveness of Fiscal Instruments Fiscal Instrument

Green Effectiveness (Gain in Environmental health)

Budgetary transfers, R&D subsidy; investment subsidy Pure Price based instruments (GHG tax such as carbon tax, emission pricing levied on the pollution generated) Second best price instruments (tax on inputs/outputs associated with pollution) Quantity based instruments (tradable permit, emission quota).

High

Cost Effectiveness (Economic effectiveness) Low

Administrative Effectiveness (Institutional and Political)

Low-Medium

High

Low in developing countries due to lack of budgetary reforms Low

Low-Medium

Low

Medium

Medium-High

High

Low

Source: Prepared based on UNEP 2007; Acemoglu et al. 2014; Marley 2010; Chaturvedi et al. 2014; Goulder 2013 Following their implementation, evaluation of such instruments to measure their environmental effectiveness brings many conceptual and practical difficulties (Goulder & Parry, 2008). Time inconsistency, arising out of short-term costs and long-term benefits of a number of fiscal instruments, has the potential to distort policy design, process, and outcome. The evaluation of an instrument’s effectiveness becomes even more difficult when multiple fiscal instruments are deployed under multiple externality situations and preexisting institutional, market, or technological distortions (Heine et al., 2012). The key challenges include lack of credible data availability, resource and time consumption, and the sequestration of an instrument’s effect out of a portfolio of instruments. Studies on the effectiveness of environmental taxes in the European Union suggest that environmental taxes are effective in terms of improvement environmental quality by controlling pollution; but their effectiveness is limited in reducing energy consumption, implying the growing role of clean technologies. What makes such instruments effective is the level at which such instruments are priced. The effectiveness of such taxes is also found to be significantly dependent upon incidence and structure of other taxes in these economies (Marley, 2010). One way to describe various environmental taxes and compare their economic and environmental effectiveness is by identifying and defining the environmental tax base-tax for a base that has significant adverse impact on environment. What falls under tax base is critical for tax pricing, price elasticity of taxed good, revenue sharing among aggregate environmental tax collection, and burden sharing of tax among producers, consumers, and government; hence, it is very important when assessing tax effectiveness. In many cases, environmental tax

implementation may have trade-off between theoretical efficiency and administrative feasibility—while theoretically tax base should be closely and directly targeted to the harm rendered by pollution itself, it may be more feasible to take the source of pollution itself as the tax base, necessitating a proxy tax base. A broad analysis of the effectiveness of tax provisioning in Asian countries presents a heterogeneous picture. In India, strict enforcement and a carefully designed collection mechanism of carbon tax on domestic and imported coal and its variants helps the state collect large amount of tax; however, its economic effectiveness is questioned around the collected taxes and whether they support clean energy and environment research and development (R&D) and facilitate the financing of clean energy and other green investment in the country. This brings up the problem of designing and implementing fiscal instruments that support green growth—the first component of carbon tax scheme, i.e., design and collection, works in India while the second component, i.e., revenue recycling to promote green growth does not (see table 1), resulting in the pile up of $2.85 billion worth of unproductive carbon tax. Notably, the tax coverage of India’s carbon tax system is geographically dispersed, yet the tax collection is administered centrally through the excise duty system, which leads to marginal administrative cost for tax collection and reasonable administrative effectiveness. The tax regime, however, does not seem to be designed to instill large scale behavioral green responses by firms and households to strictly shift their focus away from coal, thus reducing coal induced pollution. Inefficient recycling of collected revenue not only violates principle of tax hypothecation but also undermines overall effectiveness of carbon tax. Carbon tax has the tremendous potential to lower carbon emissions and bring about positive welfare changes if collected revenue is recycled properly to actually reach the poor. Carbon tax policy as a revenue generator has distinct superiority over income taxes, which causes distortionary effects. Despite having different mechanisms, "carbon tax" and "cap and trade" have the same economic goal-raising carbon prices. Both of these instruments are much more cost-effective than direct subsidies; the choice between the two is less important than implementing one of them. Indonesia, on the other hand, maintains a politically cautious stance on the implementation of carbon or emission tax of any form (GIZ, 2011). Emission taxes in Indonesia are seen as negative fiscal instruments—implementation of which can potentially deteriorate the international competitiveness for domestic industries in Indonesia. Indonesia prefers to use subsidies through bank or non-bank based financing channels and tax system when controlling GHGs and promoting green economy. Many concessional loan programs sponsored by governments of developed countries have been implemented in Indonesia. The primary objectives of such programs are the reduction of GHGs emission and the advancement of environmentally friendly industry practices by improving waste management practices and supporting investment in environmentally friendly technologies. Long term economic effectiveness and sustainability of such subsidy program is questioned as capital transfers in said programs are primarily from foreign donor countries. Subsidy in the tax system is routed through custom duty, sales tax, breaks in import duty, and capital subsidy. In 2010, the Government of Indonesia initiated allocation of capital subsidy for promoting research and enhancing the penetration of climate

mitigation technologies; the allocation has, however, declined because of poor absorption of capital and weaker institutional capacity, both in design and enforcement. In the presence of a well-functioning institutional environment, such subsidies could be taken up by public or private sector firms to augment the supply of climate-benign technologies. China is also mulling over a plan to introduce a tax on carbon—although China’s position on carbon tax seems to adulate by growing domestic concerns on local pollution. The renewed interest in curbing local pollution in China has resulted in a plethora of local environmental taxes and levies, which may present obstacles to the country’s implementing carbon tax plan, particularly in the current economic scenario. Furthermore, fossil fuel subsidy rationalization, feed in tariff, and tax incentives for promoting clean energy are constrained by weak administrative and political effectiveness (Ming et al. 2013; Zhang et al. 2014). Asian countries in general operate at very high interest rates. Small and Medium Enterprises (SMEs) which contribute a significant portion of GDP in these countries, find it prohibitively expensive to experiment with clean production. Concessional loans and financing help SMEs access newer forms of cleaner production and encourage a transition to a green economy. A key requirement for a successful soft lending program is careful selection of program design parameters and availability of well-functioning institutions that can set up, disburse, and monitor concessional loans. Concessional lending programs targeted at green economic transition have been instituted through three arrangements: pure government channel, government support to commercial lending institutions by through subsidized monetary resources, and the creation of an independent entity mandated with discounted lending provisioning to green technology and production system. The Indian Renewable Development Agency (IREDA), a financial assistance body created by the Government of India, arranges borrowings from market and multilateral institutions backed by Indian Government guarantees. It provides direct concessional lending and co-lending with other financial institutions to renewable and energy efficiency projects. A quick look at administrative and management performance of Indian Renewable Energy Development Agency (IREDA) shows that the Agency could disburse only about 60% of total sanctioned loans in 2012-2013. The administration of soft loans by IREDA at state-level agencies does not necessarily trickle down to rural areas, which require far more innovative energy solutions. The absorption of such concessional financing becomes constrained due to complex administrative project approval procedures and other related transaction costs. This drastically and adversely affects the net effectiveness of concessional finance incentives and support measures instituted in these countries. Lack of administrative and management capacity impairs the outreach and effectiveness of such initiatives. The investment and research subsidies for the promotion of green technology have favorable effects on the adoption of and investment in environmentally friendly technology. Azomahou et al. (2008) builds on how energy and resource saving and implementation cost influence the switch to clean technologies and claims that investment subsidies have a positive impact on the scale and speed of clean technology adoption. This makes investment subsidies, grants, and tax-breaks related to green capital assets both environmentally and economically effective.

Many of fiscal and policy incentives in Asian countries, such as investment subsidies and incentives in renewable, are implemented to induce a switch to available clean production or renewable at current prices. Such initiatives lack ability to direct resources from existing technologies to clean innovations, which may seem expensive in the short term but not in the long-run. For example, initiatives like the renewable purchase obligation in India (renewable portfolio standard in China) often lead to uptake of existing cheapest renewable options and not the clean technology that has the highest potential to innovate and reduce cost in the coming years. Such renewable and clean technology policy initiatives effectively provide subsidy to existing technologies and thus act as a disincentive for the economy to direct resources towards alternative technologies. In other words, once the standard requirement of renewable purchase is met by a firm, marginal incentive to switch or innovate approaches zero. This policy shortsightedness does not bring about any effect that can help reduce the price of other clean technologies. Investigation on the role of a research subsidy on the successful transition to clean technology indicates that these subsidies are effective from in terms of the environment and cost. A microeconomic modeling study in the US shows that a research subsidy to clean innovation is optimal policy in the early period and, hence, more effective in encouraging clean technology production in the short to medium run (Acemoglu et al. 2014).

4. Barriers towards the use of fiscal Instruments Despite of all the promises associated with the adoption and implementation of fiscal instruments, there are considerable barriers (see table 2) that need to be addressed for fiscal instruments to achieve their fullest potential and help Asian countries transition to a green economy. A thorough understanding of all the aspects of fiscal instruments along with a deeper knowledge of socio-technique regime and political economy of the host nation are required for successful implementation of the fiscal instruments.

4.1.

Distributional effects

Policy makers should be well aware of possible adverse distributional consequences of the use of fiscal instruments and brainstorm ways to adequately address adverse distributional impacts. Quality and distributional impact of green transition, induced by fiscal instrument, matter from a social welfare point of view. The transition is not an end in itself but an alternative means to provide opportunities to everyone to enhance their own subjective well-beings. Some of the fiscal instruments, such as tax on energy or removal of harmful fossil fuel subsidy, are often considered to be regressive in nature because these taxes impose higher additional burden to the low income households than any other income group. Removing fuel subsidies results in an increase in energy price and induces greater hardship for poorer households. Hence, even though fossil-fuel subsidies are an inefficient means of protecting the incomes of the poor, their removal will have to be replaced by targeted pro-poor policies that can contribute to poor households’ consumption and essential expenditures. Fiscal instruments-induced adverse welfare impacts can and should be offset through some carefully designed adjustments in fiscal policies or instruments. Conditional cash transfers, refundable tax rebates, income-based user

charge, revenue recycling, reduced consumption volatility, skill development, and job creation can alleviate hardship on poor households (Timilsina & Dulal, 2011). Indonesia has been successful in removing harmful subsidy in energy through a well-informed targeted cash transfer program to compensate the poor for fuel price hikes. The program was well publicized on public television and radio to inform the target group. It was designed in such a way that payments were made to the female household heads that agreed to use the fund for health and education (GIZ, 2013; Hutagalung et al., 2009). The Netherlands uses carbon tax revenue to reduce the general burden to consumers and businesses (Koowattanatianchal, et al., 2009).

Table 3. Fiscal Instruments Implementation Barriers Distributional Effects

Policy Coordination

Political Barriers

Institutional Barriers

Technical & Market

Policy Discovery

Income/ Geography inequality

Lack of coherent policy

Political pressure groups

Weak enforcement

Lack of technical knowhow

Excessive policy overlaps

Corruption

Poor property rights

Possibility of strategic capture of government by private business

Rent-seeking investments

Low accountability

Reliance on natural resource

Lack of standards and certification

Disjointed policy goals Resource vulnerability Mandated spending

Wrong signaling to market

Lack of infrastruture Coordination between tax systems (federal, state, substates)

Political economy Financing availability Distorted prirce signals

Effective targeting Conditional cash transfers Refundable tax & rebates Income based user charges Attempt to keep taxneutral (i.e. revenue recycling)

Administrative capacity building

Tax and non-tax revenue reforms

Improve shared understanding of policy priority

On-budget and off-budget Spending reforms

Improve inter and intra institutional communication

Clearly articulated objectives and deliverables

Government budget transparency on planned green spending

Effective use of revenue earmarking for promotion of greens

Clear definition of environmental tax base

Improving communication among ministries Clearly defined mandate and responsibility of associated ministries

Skill development and Job creation

Institution building

Compliance enforcement Enhance flexibility and adaptability

Barrier heads cited in the paper Categorization and explanation of barriers Options and approaches to mitigate/remove barriers

Investment in technical know–how, research and development Concessional banklending to green business Clean infrastructure investment Tax incentives to capital markets instruments (i.e. green bonds) Improve private financing Consumer financing

Information sharing Induce behavioral changes Green Innovation policy Policy informed by science Efficiency dividend Green industry policy

4.2.

Policy Coordination

In many Asian countries, lack of policy coordination is one of the major barriers in the transition to a green economy. For instance, even in emerging economies like Thailand, policy coordination remains a key challenge to achieve greater energy efficiency (World Bank, 2011). Horizontal policy integration also suffers from a lack of coordination across India’s highly fragmented ministerial structure (Planning Commission, 2007). Fiscal instruments do not work best in isolation. Lack of coherent policy, excessive policy overlaps, disjointed policy goals, and coordination between tax systems (federal, state, substates) could adversely impact the effectiveness of fiscal instruments and their contribution toward green economy transition. A complementary mix of fiscal instruments is more likely to work than “stand alone” tools. For example, an increase in the cost of environmentally harmful goods as a result of environmental tax may reduce the supply of labor (Goulder, 1995). Thus, it warrants more cautious use of fiscal instruments, particularly in developing countries where the fiscal framework is highly distortionary in nature. Another problem that needs to be addressed is institutional myopia. Even in countries with relatively robust institutions, institutions are largely defined by syncretism. Institutions are given additional responsibilities and goals increased as opposed to thoroughly redefining the problem and its solutions. The need for supporting institutional capacity building and new institutional structures are often overlooked, which often end up resulting in institutional myopia. The governance arrangements for reducing emissions, including GHGs have evolved institutionally in closed silos. As a result, institutions responsible for addressing rising emissions and environmental degradation are unable to manage growing complexity and interrelated nature of risk associated with rapidly growing emissions. Depending on the institutional capacity, lack of policy coordination can be resolved by initiating administrative capacity building, improving shared understanding of policy priority, effective communication among ministries, clearly defined mandate and responsibility of associated ministries, etc. The aforementioned measures will work best in countries where institutional and human capital are relatively robust. In least developed countries in Asia where institutional and human capital is low or have regressed over the years, the policy coordination may have to be supported by concrete institutional and operating arrangements like monetary and fiscal coordination board (Hanif and Arby, 2007). In the region’s least developed countries, the concept of such policy coordination might have to be introduced through policy reforms. 4.3.

Political Barriers

The transition for many Asian countries to a green economy is stalled because of the lack of political unwillingness to walk away from fossil fuel dependency, carbon-intensive infrastructure development, energy-intensive industrialization, and highly inefficient urban development. Political pressure, corruption, and rent-seeking investments have led to political indecisiveness when it comes to dealing with the removal of harmful fossil fuel subsidies and promoting renewables, which are prerequisites for transitioning to a green economy. For example, in several countries across the region (see table 1, annex 1), instead implementing a variety of government interventions (e.g., zero interest loans, rebates, tax credits to speed up the installation and use of renewables and energy saving measures), perverse incentives that

promote the use of fossil fuel continue unabated. Subsidies on energies and other resource intensive goods and services are common in Asian countries. Subsidies on fossil fuels exceed 5% of GDP in many Asian countries. In 2011, fossil fuel subsidies amounted to 28%, 23%, 19%, and 17% of GDP in Uzbekistan, Turkmenistan, Iraq, and Iran (Bruvoll & Vennemo, 2014) respectively. China, India, and Indonesia each have energy subsidies in excess of $10 billion per year. The total cost of liquid petroleum gas (LPG) subsidy to the state oil companies and the government amounted to almost $1.7 billion in the first half of 2007/08 fiscal year. An estimated 76% of this subsidy is allocated in the urban areas, where LPG subsidies end up benefiting richer households (UNEP, 2008). Fossil fuel subsidies are a costly approach to protecting the poor due to substantial benefit leakage to higher income groups. In absolute terms, the top income quintile captures six times more in subsidies than the bottom (del Granado et al., 2012). Removal of environmentally harmful subsidies is politically unpopular, particularly in Asia. Subsidies are so entrenched or disguised within countries' political and economic systems that people often feel entitled to cheap fuel. Subsidies are highly politicized and protests against fuel price hikes are frequent in Asia. The backlash as a result of subsidy removal could result in the overthrow of the government in power. This could happen through riots in protests or replacement of rulers through elections. It will take some time and a great deal of political will to identify and implement the appropriate multilateral disciplines necessary to root all of them out. The prevailing burden of harmful subsidies can be relieved if the governments in the region make an effort to devise ways that can adequately address concerns of social groups that are most impacted by the removal of fossil fuel subsidies. Tax and non-tax revenue reforms, onbudget and off-budget spending reforms, clearly articulated objectives and deliverables, effective use of revenue earmarking for promotion of green initiatives can ease existing political barriers that stifle efficient and adequate pricing of energy in the region. Evidence suggests that carefully designed targeted programs with bold political actions can make the reform possible. In December 2010, the Iranian Government successfully implemented bold economic reforms to phase out subsidies to energy products and replace them with targeted cash transfer as compensation for rising energy prices (Hassanzadeh, 2012). Similar program are instituted in Indonesia as well (Beato and Lonton, 2010). Cash-based compensation, like those administered in Indonesia and Iran, could work in least developed countries in the region. Emerging economies with a relatively robust taxation system may use the progressive income tax schedule for redistribution. A marginal tax of 0% for low-income groups and up to a maximum 50% for rich families could alleviate the adverse effects resulting from higher fuel taxes or removal of subsidies on fossil fuels.

4.4.

Institutional Barriers

Weak enforcement, poor property-rights regime, and low accountability have all contributed to poor adoption and widespread use of fiscal instruments in the region. In many countries, environmental legislations are often poorly developed, inconsistent, and overlap with other sector-based legislations. For example, the institutional framework for environmental governance remains fairly weak, making policy implementation a particular challenge. For

instance, in China, the Ministry of Environmental Protection’s (MEP) mandate remains relatively weak and overlaps with those of other sector ministries (Qiu & Li, 2009). In India, commandand-control approach no longer matches the complexity of the Indian economy and multiple sources of environmental pollution are yet to be replaced by fiscal instruments. Likewise, despite the transition from a socialist command economy to a market-driven model, the new environmental policy framework in Vietnam still remains dominated by a highly centralized “command-and-control” structure (Mitchell, 2006). As a command-and-control approach still dominates environmental governance, fiscal and market-based instruments have a limited role to play. The charges for environmentally harmful activities are too low to provide any relevant incentive to reduce emissions in China, India, and Vietnam (Quitzow et al., 2011). For instance, a 25% rebate on water cess is provided to firms that meet the required standards for regulating water use in India (OECD, 2006b). Plus, the tax rebate is not enough to provide any significant incentive for additional investments (Kumar & Managi, 2009). Countries in the region need to invest in institutional capacity building, improve inter- and intra-institutional communication, ensure budget transparency on planned green spending, clarify environmental tax base definition, improve compliance enforcement, and enhance institutional flexibility and adaptability. A clear governance structure operating under clearly laid out rules and conditions, accountability framework, and political independence are required for monitoring, efficient functioning of fiscal instruments, and the timely disbursement of tax revenue for promotion of green economic activities. The biggest governance risk in the green fiscal space is the possibility of tax revenues being treated as a political device to achieve short term political gains at the expense of achieving the original objective of the tax. Opaque institutional functioning, decision-making entrenched in politics, and complicated and convoluted flow of communication and monetary resources undermine the performance of fiscal instruments and adversely impact revenue collection and recycling.

4.5.

Technical and Market

Lack of technical know-how, standard and certification, and infrastructure are hindering the adoption and use of fiscal instruments in Asia. In addition, there are market barriers, such as lack of financing and distorted price signals that add another layer of complexity to the wider use of these instruments. Given the comparatively low technical know-how, it is difficult for countries to choose the right instruments, determine correct tax rate, and understand how market imperfections could potentially affect the implementation of chosen fiscal instruments. Administration of fiscal instruments across multiple jurisdictions–with differing procedures, rules, definitions, and levels of corruption, competence, and willing (or unwilling) compliance– further complicates the problem. Investment in human capital, concessional bank-lending to green business, clean infrastructure investment, tax incentives to capital markets instruments (i.e., green bonds), and improvement in private and consumer financing can help ease the aforementioned technical and market barriers. Technical, financial, and organizational intermediation may be needed to facilitate large scale diffusion of renewable technologies, excepting hydro-power; other renewable energy technology is relatively new to the region.

Technical intermediation would include improving the technical options and capacity through research and development activities and importing the technology and know-how. Financial intermediation, in particular commercial banking, has a significant positive effect on the amount of renewable energy produced. The impact is especially large when considering nonhydropower renewable energy such as wind, solar, geothermal and biomass. Organization intermediation puts in place the necessary infrastructure and finds the right incentives to encourage owners, contractors, and financiers of renewable energy (Brunnschweiler, 2010). In order to support renewable energy, for example, South Korea promotes feed in tariff tax exemptions for dividends in combination with long-term loans for manufacturing facilities. In many countries, especially the least developed ones in the region, removing supply side constraints is not enough. Households, especially poor ones, will need some type of support to actually benefit from fiscal instruments. For example, many fiscal instruments, such as tax credits or exemptions, focus on achieving energy efficiency (Gunningham, 2014), which may not help the vast majority of the poor who are outside the tax umbrella. Like in the case of LPG subsidy in India, it will again be the well-off households that benefit from such tax credits or exemptions. High-income households will benefit from tax credit for purchases of energy efficient appliances. Periodic support for the purchase of energy efficient appliances (e.g., bulb, fan, iron) that most poor households use, in addition to subsidized energy or cash transfer, would help them cover energy costs; this is necessary if large-scale energy efficiency gains are to be achieved in the region.

4.6.

Lack of Policy Discovery and Discipline

Possibility of strategic capture of government by private business, wrong signaling to the market, and political economy could all jeopardize the effective use of fiscal instruments. An appropriate green fiscal policy needs to make room for learnings by public officials and institutions to accommodate quality and flow of information, uncertainty associated with green innovation and technologies, and significant amount of interaction between public authorities and private sector. Such approach views fiscal policy and products as a process of discovery, by the government itself, no less than private businesses and households. This shifts attention to learning where constraints and opportunities lie and respond together, rather than to whether national budget should employ a specific set of predetermined fiscal instruments such as concessional loan, subsidies, tax concessions, etc. (Rodrick, 2014). Lack of principled discipline with utmost clarity in objective of a specific green fiscal policy is also an obstacle to successful implementation of effective green fiscal system. Many times, ex-ante specification of a policy objective is not stated, which in turn makes the ex-post evaluation of the fiscal instrument highly arbitrary and does not correctly inform policymakers whether the policy is working or needs to be rethought. Political functionaries may use the arbitrary evaluation to their advantage by striking multiple objectives in the policy program that make the policy evaluation more difficult or arbitrary.

5. Conclusion Adoption and use of fiscal instruments in Asia is happening, but at a slower pace and not at a sufficiently large scale necessary to facilitate transition to a green economy. If the entire region is considered, the current pace of transition to a green economy is highly concentrated and slow-moving. With ongoing pace, the actual transition of the region as a whole to a green economy may not happen anytime soon. There are several things that need to be done before green economy could become a reality in the region, where resources extraction and use and GHG emissions are increasing at an unprecedented pace. High GHG emitting countries in the region, namely India, China, and Indonesia, which are also the focus of this paper need to enhance economic effectiveness of the revenue collected through adoption of fiscal instruments. These countries have proved to be extremely good in design and collection of revenue through adoption of fiscal instruments, but their revenue recycling schemes for fiscal instruments designed to reduce CO2 emissions are poor. For example, India, which has so far proved to be extremely good when it comes to collection of carbon tax on domestic and imported coal and its variants, needs to come up with ways to support clean energy and environment research and development (R&D) and facilitate financing of clean energy and other green investment in the country. Lack of effective revenue recycling has resulted into piling up of unproductive carbon tax worth $2.85 billion. Like India, China is also mulling over a plan to introduce tax on carbon, even though China’s position on carbon tax seems to be largely driven by growing domestic concerns on local pollution. Irrespective of motivation, China, too, will face with the piling up of unproductive carbon tax if well thought out and effective revenue recycling plan is not put in place from the very beginning. Carbon tax is the most potent arsenal in the fight against and absolutely necessary to contain rising emissions in rapidly industrializing economies like India, China, Indonesia, Malaysia, and Thailand. It is important to have a price on carbon to have the long-term harm from carbon pollution reflected in the short-term cost of fossil fuel-based energy (Jacquet et al., 2013). Acceptability of carbon tax as a fiscal instrument will, however, only grow and get bigger if countries implementing it get smarter in revenue recycling. The money collected from a carbon tax needs to be recycled back to individuals and businesses, so that those reducing their carbon footprint have an economic incentive to do so. Unlike India and China, Indonesia prefers subsidies over taxes. Many concessional loan programs, whose primary objectives are to reduce GHGs emission and improve environmental friendly industry practices, sponsored by governments have been implemented. However, the problem with the subsidies introduced in Indonesia is that, unlike in India, where revenue is generated domestically through taxation, capital transfers in such programs are primarily from foreign donor countries. Hence, long term economic effectiveness and sustainability of such subsidy program is highly questionable. Besides that, given the rate at which emissions are growing, heavy reliance on concessional loan programs and subsidies may be short sighted. More aggressive measures may be required to contain rising emissions. If the tax payers are unwilling to be taxed and make sacrifices for the benefit of future generations, the climate change externality could be corrected without such a sacrifice. Indonesia can take a ‘carbon certificates’ route rather instead of a carbon tax. Setting a carbon value, and using it to create ‘carbon certificates’ that can be accepted as part

of commercial banks’ legal reserves could be another option. Carbon certificates can be distributed to low-carbon projects. They can be exchanged by investors against concessional loans, reducing capital costs for low-carbon projects. As a result, Low-carbon projects will thus have access to cheaper loans. Carbon certificate route is not as efficient as a carbon tax but is politically easier to implement and represents an interesting step in the trajectory towards a low-carbon economy (Rozenberg et al., 2013). In addition to figuring out ways to better utilize revenues collected through use of fiscal instruments, countries in the region, even the ones with the relatively robust policy and regulatory frameworks need to address host of implementation barriers. For example, it is extremely important to be mindful of the fact that there could possible adverse distributional consequences resulting from the use of fiscal instruments and come up with ways to adequately address adverse distributional impacts. Carefully designed adjustments in fiscal policies or instruments can offset fiscal instruments-induced adverse welfare impacts. Like distributional effects, Policy makers need to acknowledge the fact that implementation of fiscal instruments does not occur in vacuum. Policy coordination, which is grossly lacking in the region, is one of the major barriers to a transition to green economy. Policy coordination is crucial for the successful implementation of fiscal instruments, because these instruments do not work best in isolation. Administrative capacity building, improving shared understanding of policy priority, and effective communication among ministries are needed to solve policy coordination problems, which could be a major stumbling block towards large-scale implementation of these instruments in the region. Lack of political will is by far the most important barriers that need to be addressed if largescale implementation of fiscal instruments is to happen in Asia. Currently, there is no political willingness to walk away from fossil fuel dependency, carbon-intensive infrastructure development, and energy-intensive industrialization, and highly inefficient urban development. Given the possibility that subsidy removal may even result in overthrow of the government in power, there is simply no appetite among the ruling parties to remove fossil fuel subsidies. The fear of political repercussions has scared politicians from even making an effort towards devising possible ways that can adequately address concerns of social groups that are most impacted by the removal of fossil fuel subsidies. For example, introduction of targeted cash transfer as compensation for rising energy prices can go hand in hand with bold economic reforms to phase out subsidies to fossil fuels. Targeted cash transfer can minimize both adverse welfare affects and political backlash resulting from economic reforms to phase out subsidies to fossil fuels. Lack of political will has hindered much needed institutional reforms. Countries are yet to replace command-and-control approach with fiscal instruments even the former no longer matches the complexity of the economy and the multiple sources of environmental. Lack of much needed policy reforms has resulted in institutional paralysis, causing weak enforcement of fiscal instruments in use. Property-rights regime and institutional accountability, which are already weak, will continue to deteriorate if policy and institutional reforms are further delayed.

It is important to address lack of technical know-how, standard and certification, and infrastructure issues that are hindering the widespread adoption and use of fiscal instruments in Asia. Equally important is to address market barriers such as lack of financing and distorted price signals that add another layer of complexity to the wider use of these instruments. The governments in the region need to heavily invest in human capital, provide concessional banklending to green business, increase clean infrastructure investment, provide tax incentives to capital markets instruments (i.e. green bonds), improve private and consumer financing so that technical and market barriers are sufficiently eased. It is important to be mindful of the fact that mere removal of supply side constraints is not enough. Households, especially the poor ones, will need some sort of support to actually benefit from fiscal instruments. Lack of policy discovery and discipline is another important barrier that needs to be addressed in order for green fiscal instruments to gain grounds. In Asia, where the collusion between political parties and business houses is so entrenches, the possibility of strategic capture of government, wrong signaling to market and political economy could very well hinder the effective implementation of fiscal instruments. In order to effectively address these barriers, fiscal instruments needs to make room for learnings by public officials and institutions to accommodate quality and flow of information, reduce uncertainty associated with green innovation and technologies to an acceptable level, and enhance interaction between public authorities and private sector.

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Annex-I Table 1. Comparison of Fiscal Instruments in Asia Instrument

China

India

Emission tax

Announcement of carbon tax to be implemented in 2015

Renewable incentives

National yet differential feed-in tariff for solar, wind, and biomass ; renewable portfolio standards,; land concessions; National renewable energy fund

Taxes on Natural Resources extraction (excluding taxes such as royalties)

Fossil fuel subsidies rationalization

Nepal

Thailand

Indonesia

Vietnam

Cambodia

Carbon tax in the form of Clean energy cess on coal at national level State level feed in tariff for each energy source; state-wise renewable purchase obligation; tradable renewable energy credit;; biofuel blending target

Proposed CO2 tax on vehicles in 2016

-

-

-

Feed in tariff; Feed in premium; direct fund transfer for small projects

Feed in tariff; funds for bio fuels and development credits for agriculture; biofuel consumption mandate

Feed in tariff for wind; biofuel blending policy

A plan to announce taxes on carbon including resource extraction tax during the 12th Five Year Guideline.

-

Land taxes for mining as per the size of mined area

Environment protection fee by charging mining activities

China reports not having any inefficient fossil fuel subsidy;

Massive fossil fuel subsidy bill; Fossil fuel subsidy

Eco-tax that provides incentives for an efficient use of natural resources and pollution reduction, taxes regulating land use, and PES (Payment for Ecosystem Services) and BPP (Beneficiaries Pay Principle) tools for improved biodiversity management. Gradual plan to rationalize fossil fuel subsidies

Implemented subsidy rationalization

Reduced subsidies; subsidies on

Japan

Singapore

Korea

Clean stimulus 1

1

extant literature shows lack of detailed data on fossil fuel subsidies in China for an exhaustive assessment; officially, china remains committed to complete rationalization of fossil fuel subsidies

phasing out; limited progress so far

including electricity

Over 30% of total fiscal stimulus

About 7% of total stimulus, fiscal stimulus size very small though

Negligible

Between 2008 and 2009

programs; compensation packages including unconditional cash transfers for managing distributional impacts; fossil fuel subsidies still massive; highly subsidized electricity sector About 7% of total stimulus

coal, oil & gasdeclining; electricitygradual and slow decline

-

A US$30.7 billion stimulus package to support the government's efforts to various environmenta l projects including development of renewable energy resources, energy efficient buildings, low carbon vehicles, expansion of railways, and water and waste management.

User fees

Levys on water discharges, solid waste, and radioactive waste; levy on oil, natural gas, coal and other fuels

Solid waste charges; property taxes; consent fess on polluting effluents; differential water tariff for different users; sewerage charge; Environmental cess on the price of nonbiodegradable materials entering the State of Sikkim.

wastewater charges, garbage fees

Municipal and water charges; wastewater fee; solid waste collection fees

Municipal and water charges;

Environmental levy on oil and coal; Charges on plastic bags, pesticides etc; environment protection fee for wastewater/ solid waste

Taxes on harmful substances

Water conservation fees: Water conservation tax for domestic and nondomestic water users; Water-Borne Fee is levied to offset the cost of treating used water and finance the maintenance and extension of the public sewerage system; Sanitary Appliance Fee (SAF) is also levied per sanitary fitting per month.

Concessional finance

Concessional rate borrowing by state owned enterprises for solar and wind projects; preferential lending to manufacturer of renewable plants

Low cost financing for greens; dedicated financing institutions and structures for renewable; statewise concessional loans

Concessional financing available for anti-pollution equipments; low cost debt available for renewable and clean energy; credit guarantee

Low interest rate loans for biofuel and renewable; government guarantee for green infrastructure; concessional grants and loans from Trust Fund to greens

Preferential financing to State owned energy enterprises

Tax incentive for energy efficiency; import duty waiver for clean machinery; Corporate income tax exemption upto certain period

Production tax breaks for low emission cars or green cars; Import duty and VAT exemption; Income tax reduction for renewable; income tax reduction to attract FDI in renewable; cap on dividend withholding tax

Tax incentives for biofuels through import duty and land rents; import tax duty exemption for clean development mechanism projects

Capital subsidy for solar roof top

Price subsidies for biodiesel

-

Revolving Fund provides capital to banks that is made available to borrowers deploying low carbon technologies at concessional rates, with the repayments from existing borrowers financing new projects. Tax incentive including tax breaks

Subsidies

Corporate Income Tax concessions to advanced renewable; Corporate income tax waiver for part of revenues from clean development mechanism projects; Refundable and waiver of value added tax on sale of clean products; Preferential tax treatment for renewable and clean energy projects in less developed geography; Tax credits Taxable financial subsidies by central

Tax holidays for renewable; exemption from excise and custom charges for certain components of renewable capital assets; state-wise tax incentive in value added tax; proposed Goods and Service Tax Code to bring tax incentives to greens; tax incentives for R&D; tax-free green bond planned Grants and capital subsidies by

Subsidies to promote

Nationwide environme

and provincial governments; Capital subsidies for energy efficiency and renewable over US$ 10 billion in 2012; municipal subsidies on electric vehicle;

central and state governments for clean energy project development;

Accelerated depreciation

Available for clean energy assets

Applicable for fixed assets in clean energy including renewable

Regulatory concessions

Relaxed regulatory norms under special cases

Relaxed Foreign Borrowings norms for clean energy

Fuel taxes

Special oil gain levy(for price of crude oil sold higher than $55 per barrel); Royalties up to 12.5% ; resource tax(5% of the sales price); mineral resources and compensation fee (1% of sales revenue from oil and gas production)

Royalties: Land areas-12.5% for crude oil, 10% for natural gas. Shallow water offshore areas10% for crude oil and natural gas. Deepwater offshore areas (beyond 400m isobath) 5% for the first five years of commercial production and a 10% rate thereafter. Higher VAT for petroleum

Corporate income tax (25% of taxable income for petroleum companies)

renewable energy and rural electrificatio n (decentralize d mini- and microhydropower, biogas technologies , solar home System and white-LED and PV based solar lights)

and solar water heating projects ; energy saving subsidies

and bioethanol;

-

Applicable for capital and fixed assets in renewable including biofuels Guarantee to ensure contract enforcement Corporate income tax(CIT): tax rate depends upon the year the contract was entered into, current rate 25%. Branch profits tax(BPT): current rate 20%

Royalties: 5% -15% based on petroleum concessions granted under different regimes. Production sharing contract(PSC) : petroleum income tax of 50% of annual profits(applies only to contractors operating in the MalaysiaThailand Joint

ntallyfriendly economic stimulus package including subsidies and tax breaks.

Applicable for fixed assets in clean energy including renewable R&D incentives

Corporate income tax(CIT): based on production volume. Corporate income tax:32%-50% Resource tax: Crude oil, 7% 29%, natural gas, 1%-10%.

Petroleum and Coal tax: crude petroleum or petroleum products (per kl)2,040 JPY; Natural gas or petroleum gas etc(per ton)-1,080 JPY; Coal(per ton)700JPY. Liquefied

Corporate income tax (CIT): the headline CIT is 17% and it is applicable across all industries , no separate fiscal regime associated with energy industries.

Emission trading schemes

Approved pilot tests of carbon trading in seven provinces and cities-Beijing, Chongqing, Guangdong, Hunan, Shanghai, Shenzhen and Tianjin. Some of the pilot regions have started trading since 2013/2014 and a national trading scheme is expected by 2016(the 12th FYG)

products(5% -33% depending upon the nature of product and the state where they are sold)

Development area). Income tax rate 50% of annual profits.

Trading scheme slated to start from 2014 and a mandatory energy efficiency trading scheme targeted on 8 energy sectors.

A voluntary emission reduction certificates expected from 2015-a trading scheme for energy efficiency certificates in an Energy Performance Certificate Scheme (EPC)

petroleum gas tax : 17.5 JPY per kg. Gasoline tax: 48,600 JPY per Kilolitre A voluntary emission reduction certificates expected to be launched by late 2015.

Has a plan to start emission trading from 2015 that will cover about 470 companies that emit more than 25,000 metric tons of CO2 annually.

Source: Comprehensive Handbook of Japanese Taxes 2010; Global oil and gas tax guide 2013, Carbon trading schemes around the world, Reuters (2011)