MAPS Provocateur Briefing Report Forum on Development and Mitigation - Public Financial Management

Subsidisation is not the only or even main form of climate finance. Currently a large share of such flows is private investment in commercially viable renewable energy projects and the like. But such investments are also closely related to subsidisation. Commercial investment only becomes attractive, after all, where a regulatory framework is in place, or is expected to be put in place, that in effect imposes a fiscal cost in order to make renewable energy competitive with fossil fuel based energy sources. Regulatory mechanisms aimed at levelling costs, such as a carbon tax, may impose adjustment costs on society over the short-­ and medium-term that put additional pressure on the fiscus, particularly in countries such as South Africa that have an established fossil fuel based energy sector. Over a transitional period of ten to twenty years the imposition of a carbon tax will generate both increased energy prices and a shift to renewables, with the latter, more desirable supply side response coming to dominate over time. Initial higher energy costs, and their impact on poorer households in particular, can and should be compensated for through recycling carbon tax revenues.