OECD Issue Paper: “The Fiscal Implications of the Low Carbon Transition”

Senior Economist at the World Bank Håvard Halland has co-authored a paper titled “The Fiscal Implications of the Low Carbon Transition” with co-authors Assia Elgouacem, Enrico Botta, and Gurtegh Singh as a part of the OECD’s Green Growth and Sustainable Development Forum (GGSD). The GGSD Forum is a multidisciplinary OECD initiative aimed at providing a dedicated space for dialogue on green growth and sustainable development.

This OECD Issue Paper reviews the evidence on the role of fossil fuels in government budget and the best practices for the management of resource revenues, including the roles of sovereign wealth funds and strategic investment funds. Some of the major key points of the paper include:

1. The low-carbon transition, in combination with technological advancements in fossil fuel extraction, is likely to generate long-term downward pressure on fossil fuel demand and prices. Resource-rich countries would need to build productive capacity in non-resource sectors to mitigate the risk of lower oil prices.
2. Well-designed strategies for sustainable economic diversification, fiscal discipline, mobilization of private capital, and public support would be critical for fossil fuel exporting countries and regions to adapt to the low-carbon transition.
3. A large uptake of electric vehicles may erode the tax-base provided by fossil fuels use in transport, thus suggesting that the low-carbon transition may create fiscal challenges also for importing countries.
4. Gradually increasing the taxation of negative environmental externalities would help prepare tax system to the low-carbon transition and, potentially, boost growth.