Once countries have recovered from the economic crisis caused by the pandemic, more government revenue will be required to help with debt sustainability while also "supporting climate change mitigation," according to the OECD's latest economic outlook report. The Paris-based organization recommended that countries increase carbon taxes and reduce fossil fuel subsidies, noting that "care should be taken" regarding how the impact of this shift is distributed.
"This would not only address serious market failures, helping to bring about urgent changes in the economy to mitigate climate change, but would also provide revenues to compensate households and small businesses hardest hit by the measure," the OECD said in its report.
Economies around the globe have struggled after businesses closed in an effort to contain the spread of the virus, which causes the respiratory disease COVID-19. According to the OECD's report, the projected high level of budget deficits and public debt in 2021 will exacerbate pre-crisis public finance challenges and "may increase fiscal vulnerabilities" for countries that belong to the organization.
As countries review their tax systems to deal with high public debt in the longer term, they should consider economic growth in addition to "inclusiveness and sustainability, which may have a greater weight in fiscal policymaking after the crisis," the OECD said in its report.
In addition to environmental measures, the OECD recommended that countries consider more progressive tax systems in some cases while coordinating to address the tax challenges of the digital economy. On the latter front, the OECD announced in May that a key meeting to iron out a policy agreement between different countries — originally planned for July — had been pushed to October because of the pandemic.
The environmental measures recommended in Wednesday's report come after the European Commission included environmental taxation among its recent proposals to help countries recover from the economic shock caused by the pandemic.
The commission, the European Union's executive branch, discussed "unlocking investment in clean technologies and value chains" as part of a widely awaited €750 billion ($853.6 billion) economic recovery program, released May 27. To help with funding, the commission proposed a so-called carbon border adjustment mechanism, which is intended to make it more expensive for companies to import items from countries with weaker environmental rules, according to the plan.
The program followed a separate document, released May 20, in which the commission suggested countries could help support medium-term economic recovery with a shift from labor to environmental taxation.
Meanwhile, specialists have said that while the economic fallout from the pandemic could provide an opportunity for EU countries to expand environmental taxation to help rebuild government coffers, those measures also could trigger a backlash from a public that is already struggling financially.
An OECD spokeperson said the organization had no comment on the report.
--Additional reporting by Todd Buell. Editing by Neil Cohen.
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