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Global Tax Program

Environmental Tax

  • Climate change threatens to erode decades of development progress. As a response, 196 countries adopted the Paris Agreement to transition to “net-zero” global emissions by mid-century and, thereby, limit global warming to well below 2 degrees Celsius compared to pre-industrial levels. However, with GHG emissions continuing to increase, countries are not yet on track (IPCC, 2023).

    Large gaps in environmental taxation persist globally. In 2022 governments spent a record USD 1 trillion, or 1% of global GDP on fossil fuel subsidies and tax expenditures. Furthermore, when accounting for implicit subsidies (i.e., when the retail price fails to include external costs), the IMF estimates that the tax gap represents 6.8 percent of GDP in the average country (Parry et al., 2021).  While 23% of global greenhouse gas (GHG) emissions are now covered by 68 explicit carbon pricing instruments, most carbon prices remain inefficiently low (World Bank, 2022). 60% of carbon emissions from energy use in 44 OECD and G20 countries are neither covered by fuel taxes nor by carbon pricing instruments (OECD, 2021).  However, not only do direct carbon prices remain below their desired range to internalize the social costs of carbon but also global fossil fuel subsidies continue to place a negative indirect price on carbon emissions (World Bank, forthcoming) and are far from decreasing. According to joint OECD-IEA estimates, support for fossil fuels in 51 countries worldwide almost doubled to 697.2 USD billion in 2021 from 362.4 USD billion in 2020 (OECD and IEA, 2022).

    Green taxes or fossil fuel subsidy reforms are urgent and can help countries raise revenues at lower cost than other conventional taxes (see, for example, Schoder, 2022), while accelerating investments in renewables. However, the misleading idea that decarbonization conflicts with economic growth and the lack of knowledge for best-practice policy design have resulted in insufficient action on climate.

    Nonetheless, co-benefits resulting from timely taxation reforms overweight the cost of inaction (see, for example, Scovronick et al 2019; Markandya et al 2019; Weitzel et al 2019; Rauner et al 2020; Vandyck et al 2018b) . In particular, to induce this transformation while safeguarding economic development, most economists point to tax reforms as a key policy instrument:

    • Environmental taxation can contribute to multiple Sustainable Developing Goals (SDGs). Environmental tax reforms can have multiple co-benefits beyond climate (Heine and Black, 2019). For example, the reduction in fossil fuel consumption induced by excise taxes on fuels or carbon reduces local air pollution, contributing to SDG3 (Good Health and Well-Being and SDG15 on Life and Land). Similarly, there is evidence of the effectiveness of gasoline taxes in controlling the growth of motor transport, reducing road congestion and road accidents; thus, supporting SDG11 (Sustainable Cities and Communities). There is increasing evidence, too, that environmental taxes can raise revenue at lower costs to the economy than some conventional taxes. For example, using taxes on carbon and fuel instead of payroll taxes can reduce the shadow economy and support formal employment, influencing SDG8 (Decent work and Economic Growth).
    • Environmental taxes improve the efficiency of domestic resource mobilization. Countries pioneering these reforms have found that environmental taxes can generate substantial revenues, even in the medium term. They can do so while increasing economic efficiency: they incorporate social costs into product prices, using the power of the private market for reducing these problems. There is also rising evidence that environmental taxes contract output and employment less than conventional ones – especially in developing countries (Schroder, 2022Burns et al, 2021Timilsina et al, 2021). Another factor is the interplay with expenditure policy. In many countries, rising environmental problems exacerbate the need for additional government expenditures. Spending on environmental clean-up is important but over-relying on public expenditures in addressing social costs can worsen already strained fiscal space and put further pressure on raising conventional taxes. This is where environmental taxes help mobilize private-sector solutions.  Environmental taxes, thus, create a triple win for fiscal policy: the revenue generated, the efficiency improvements to the tax system, and the reduction in the need for raising conventional taxes to finance public expenditures for addressing the same social costs.
    • Environmental taxes can help developing countries cost-effectively achieve low-carbon transformation while supporting an inclusive and equitable growth pathway. Particularly in lower-income countries, environmental fiscal reforms can be pro-poor and improve equality (SDG1 & SDG 10). Firstly, this is because richer, urban households tend to have more energy-intensive lifestyles (Dorband et al, 2019) and, secondly, because the structural change induced by environmental taxes can increase the labor intensity of production (Wiebe and Malerba 2021ILO and IDB, 2020) raising the relative return to labor (Goulder et al 2019Timilsina et al 2021). If revenues are used to improve access to core infrastructure, this progressivity can be further strengthened, particularly benefitting poor, rural households (Dorband et al, 2022).


  • The Global Tax Program’s Environmental Tax Workstream provides critical insights to countries considering tax reforms that enhance growth and steer their economies onto a green, resilient, and inclusive development path. Through this workstream, GTP fosters substantive collaboration and coordination with internal and external partners on environmental taxation, climate change mitigation, and sustainable development. The workstream supports the development of tools, knowledge activities and country engagements on environmental taxation so that developing countries are enabled to design evidence-based green tax reforms and make informed fiscal decisions concerning environmental tax reforms. Some of the main tools developed within the GTP are as follows:

    Climate Policy Assessment Tool (CPAT):

    The Climate Policy Assessment Tool (CPAT) is jointly developed by the World Bank Group (WBG) and the International Monetary Fund (IMF). CPAT enables countries to design evidence-based green tax reforms and take informed fiscal decisions.

    CPAT allows the rapid estimation of macro-level impacts of carbon pricing and fossil fuel subsidy reforms. This includes 1) effects on GDP and revenues; 2) energy consumption and greenhouse gas emissions; 3) local pollutants (particulate matter, nitrogen oxides, sulfur dioxide, non-methane volatile organic compounds); 4) equity impacts between income groups and the rural/urban divide, including from revenue uses; and 5) development of climate co-benefits, such as reduction in mortality and morbidity from improved air quality, road safety and road congestion.

    CPAT helps compare a wide range of policies, including carbon taxes, emissions trading systems, coal excise taxes, road fuels taxes, power feebate, electricity excises, electricity emissions tax and renewable subsidies.

    CPAT seeks to improve the accessibility of advanced analyses in a topic area which is new to most Finance Ministries. The tool is being produced for up to 200 countries. Runs without installing new software and has a user-friendly interface (it can be run by generalist economists without requiring specialized training in modeling or new software), easily shareable (in a moderately-sized Excel spreadsheet), and modular (to be expanded or narrowed to include specific focus areas).

    Figure 1. CPAT Interface: Example

    interface screenshot from the CPAT tool

    All these features reduce the barriers for policymakers to design and compare green fiscal reforms, helping them achieve their climate mitigation goals and development objectives jointly.

    MINDSET - Model of innovation in dynamic low-carbon structural economic and employment transformations

    Understanding the sectoral employment and distributional outcomes is a prerequisite for successful environmental tax adoption. While often justified on social grounds, such unsustainable tax regimes, such as large fossil fuel subsidies, often increase inequality and pose risks to economies’ competitiveness, employment, and growth prospects. Environmental taxes, by contrast, have been shown to be less harmful to national economies than income or consumption-based taxes; recent studies also suggest that they are typically progressive when considering wage effects and can create jobs across the economy through induced structural change. However, especially in developing countries, employment and distributional outcomes of different tax instruments remain poorly understood, despite being a key political concern. Addressing the question of jobs is paramount for public buy-in but requires advanced analytical capabilities. This is precisely where MINDSET steps in.

    The flexible global diagnostics tool, MINDSET, brings cutting-edge analytics into actionable policy advice and enables WBG teams and governments to better understand the opportunities of environmental fiscal reforms towards inclusive, low-carbon development. The WBG plays a central role in guiding governments towards more sustainable tax regimes while ensuring equitable labor market and distributional outcomes. In the same spirit as CPAT, MINDSET’s flexible analytical approach, global scope, and wide range of policy options in the model allow for immediate and relatively low-cost, rapid application in WBG country operations and government interactions.

    The model estimates long- and short-term economic effects of a wide range tax reform scenarios, and provides a high level of detail on sectoral and labor market outcomes. Coverage is disaggregated into 120 sectors, including 10 energy sectors, across 164 countries and regions. Taking into account indirect and supply-chain impacts, as well as tax-induced changes in international trade, the model predicts policy-induced shifts across all sectors and across all countries or regions. On equity, MINDSET complements CPAT’s focus on consumption incidence analysis by additionally quantifying the distribution of income changes from tax-induced structural change across occupations and skills, income strata, gender, and provinces, providing relevant information for active labor market and reskilling interventions, as well as sectoral or regional government support funds.

    Examples of country engagements:

    • The CPAT tool and related diagnostics have been deployed at the WBG to inform country engagements regarding the macroeconomic, health and distributional effects of climate fiscal policies. CPAT has been piloted in more than 30 countries[1] (see CPAT engagements in the map below), especially for the new flagship Country Climate & Development Reports (CCDRs). The following CCDRs benefitted from the CPAT analysis: Argentina, Bangladesh, Bulgaria, China, Côte d’Ivoire, Croatia, Ghana, Honduras, India, Nepal, Peru, Poland, Romania, Sri Lanka, Türkiye. Currently, the tool is contributing to CCDRs in 17 countries[2]. CPAT is also contributing to other reports in about 18 countries, including Public Finance Reviews, fiscal incidence analyses, a green fiscal report, and policy lending (DPFs). The demand for this tool from other countries is growing.

    Figure 2. CPAT Engagements Worldwide

    Map of the world showing countries that use the CPAT tool

    • MINDSET has been piloted in over 20 countries and demand is further growing. The tool supported published flagship studies, such as the CCDRs in the Philippines, Peru, Pakistan, Bangladesh, and (jointly) Bulgaria, Croatia, Poland and Romania in the EU RER 7. MINDSET also contributed the core macro analysis of the forthcoming Jobs Group Flagship, covering Brazil, Colombia, Egypt, Indonesia, India, Mexico, Pakistan, Philippines, Thailand, Turkey, South Africa. Support is ongoing for Cambodia and Morocco CCDRs, and the Bosnia Herzegovina SCD. MINDSET is also contributing to several other country and global WBG knowledge products as well as to policy lending (DPFs).

    [1] Albania, Argentina, Bangladesh, Brazil, Bosnia and Herzegovina, Bulgaria, China, Colombia, Côte d’Ivoire, Croatia, Egypt, Ghana, Honduras, India, Indonesia, Kazakhstan, Madagascar, Malaysia, Mexico, Moldova, Morocco, North Macedonia, Nepal, Pakistan, Peru, Philippines, Poland, Romania, Serbia, Sri Lanka, Türkiye, Thailand, Romania, and Vietnam.

    [2] Albania, Armenia, Bosnia and Herzegovina, Democratic Republic of Congo, Dominican Republic, Ecuador, Georgia, Kenya, Kosovo, Montenegro, North Macedonia, Paraguay, Romania, Serbia, Tunisia, Uganda and Uzbekistan.

  • CPAT Documentation & Dashboard:



               Presentations: Miria Pigato | Dirk Heine Lorenzo Forni | Goran Dominioni | Ekaterina Vostroknutova


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