Green Fiscal Reform from Ecological Sustainability Perspective: Need of Paradigm Shift Beyond Environmental Efficiency Improvement

Environmental taxes primarily aim to improve environmental efficiency of the economy. Internalisation of environmental externalities is the core of environmental economics and it is understandable that most environmental tax discussion including green fiscal reform discussion has focused on the environmental efficiency improvement effect. Transformation of social and economic systems into ecological sustainable ones is, however, requiring more than that. Empirical evidence suggests that the total material consumption, as well as its major components such as energy consumption and metal consumption, has been steadily increased despite of significant efficiency improvements, even in technologically advanced countries, due to rebound effects. The current social and economic systems are designed dependent on economic growth and “robust enough” growth of gross domestic product (GDP) is necessary to avert system collapse such as recessions. Faster GDP growth is a must and a virtue for society and consequently the fruits from environmental efficiency improvement are used for faster GDP growth rather than for reducing resource consumption and/or environmental impacts. On the other hand, ecological economics literatures, such as ecological footprint and planetary boundaries literatures, point out that the ecological impacts of human activities may exceed the carrying capacity of the Earth. We are facing the dilemma of growth, that is, the economic growth that developed countries have achieved may be unsustainable given environmental constraints while degrowth (not increasing GDP) may destabilise the social and economic system. In this context it is necessary to widen the scope of green fiscal reform beyond environmental efficiency improvement. Rather, green fiscal reform can be an important tool to redesign the social and economic system such that sustainable degrowth without causing system collapse is a valid option for sustainable development. This paper illustrates the image of green fiscal reform towards sustainable degrowth.